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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-QSB



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QUARTERLY REPORT UNDER SECTION 13 OR
15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2005



Commission File Number: 000-23017



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SONTRA MEDICAL CORPORATION

(Exact name of small business issuer as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|MINNESOTA                                                      |  | 41-1649949                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|10 Forge Parkway, Franklin, MA           |  | 02038     
|(Address of principal executive offices) |  | (Zip Code)



(508) 553-8850

(Issuers telephone number, including area code)



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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ̈



As of May 6, 2005, the Registrant had 22,193,329 shares of Common Stock outstanding.



Transitional Small Business Disclosure Format (Check
one):    Yes ̈No  x



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##### Table of Contents

FORM 10-QSB INDEX



|                               |  |                                                                                                      |  |           
|------------------------------ |  | ---------------------------------------------------------------------------------------------------- |  | ----------
|                               |  |                                                                                                      |  | PageNumber
|Part I - Financial Information |  |                                                                                                     
|                               |  |                                                                                                     
|Item 1.                        |  | Consolidated Financial Statements                                                                    |  |           
|                               |  |                                                                                                     
|                               |  | Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004                   |  | 3         
|                               |  |                                                                                                     
|                               |  | Consolidated Statements of Loss for the three months ended March 31, 2005 and 2004 (Unaudited)       |  | 4         
|                               |  |                                                                                                     
|                               |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (Unaudited) |  | 5         
|                               |  |                                                                                                     
|                               |  | Notes to Consolidated Financial Statements (Unaudited)                                               |  | 6         
|                               |  |                                                                                                     
|Item 2.                        |  | Managements Discussion and Analysis or Plan of Operation                                            |  | 11        
|                               |  |                                                                                                     
|Item 3.                        |  | Controls and Procedures                                                                              |  | 18        
|                               | 
|Part II - Other Information    |  |                                                                                                     
|                               |  |                                                                                                     
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                          |  | 19        
|                               |  |                                                                                                     
|Item 5.                        |  | Other Information                                                                                    |  | 19        
|                               |  |                                                                                                     
|Item 6.                        |  | Exhibits                                                                                             |  | 19        
|                               |  |                                                                                                     
|                               |  | Signatures                                                                                           |  | 20        



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##### Table of Contents

SONTRA MEDICAL CORPORATION

Consolidated Balance Sheets



|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                                                        |  | As of          |            
|                                                                                                                                                                                                        |  | March 31, 2005 |             |   | December 31,2004 |  
|                                                                                                                                                                                                        |  | (Unaudited)    |             |   |                  |  
|Assets:                                                                                                                                                                                                 |  |                |             |   |                  |   |             |  
|Current Assets:                                                                                                                                                                                         |  |                |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                                               |  | $              | 941,696     |   |                  | $ | 2,565,244   |  
|Short term investments                                                                                                                                                                                  |  |                | 6,950,000   |   |                  |   | 6,950,000   |  
|Accounts receivable                                                                                                                                                                                     |  |                | 95,843      |   |                  |   | 16,821      |  
|Legal settlement receivable                                                                                                                                                                             |  |                |            |   |                  |   | 250,000     |  
|Inventory, net of reserve for obsolescence                                                                                                                                                              |  |                | 121,451     |   |                  |   | 152,642     |  
|Prepaid expenses and other current assets                                                                                                                                                               |  |                | 138,001     |   |                  |   | 69,492      |  
|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  
|Total current assets                                                                                                                                                                                    |  |                | 8,246,991   |   |                  |   | 10,004,199  |  
|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  
|Property and Equipment, at cost                                                                                                                                                                         |  |                |             |   |                  |   |             |  
|Computer equipment                                                                                                                                                                                      |  |                | 228,102     |   |                  |   | 206,970     |  
|Office and laboratory equipment                                                                                                                                                                         |  |                | 580,696     |   |                  |   | 492,377     |  
|Furniture and fixtures                                                                                                                                                                                  |  |                | 14,288      |   |                  |   | 14,288      |  
|Manufacturing equipment                                                                                                                                                                                 |  |                | 182,210     |   |                  |   | 182,210     |  
|Leasehold improvements                                                                                                                                                                                  |  |                | 177,768     |   |                  |   | 174,698     |  
|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  
|                                                                                                                                                                                                        |  |                | 1,183,064   |   |                  |   | 1,070,543   |  
|Less-Accumulated depreciation and amortization                                                                                                                                                          |  |                | (696,656    | ) |                  |   | (655,242    | )
|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  
|Net property and equipment                                                                                                                                                                              |  |                | 486,408     |   |                  |   | 415,301     |  
|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  
|Restricted Cash                                                                                                                                                                                         |  |                | 38,997      |   |                  |   | 38,997      |  
|Other Assets                                                                                                                                                                                            |  |                | 2,000       |   |                  |   | 2,000       |  
|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  
|Total assets                                                                                                                                                                                            |  | $              | 8,774,396   |   |                  | $ | 10,460,497  |  
|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                    |  |                |             |   |                  |   |             |  
|                                                                                                                                                                                                        |  |               
|Current Liabilities:                                                                                                                                                                                    |  |                |             |   |                  |   |             |  
|Accounts payable                                                                                                                                                                                        |  | $              | 278,821     |   |                  | $ | 358,530     |  
|Accrued expenses                                                                                                                                                                                        |  |                | 275,882     |   |                  |   | 759,051     |  
|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                                               |  |                | 554,703     |   |                  |   | 1,117,581   |  
|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  
|Commitments                                                                                                                                                                                             |  |                |             |   |                  |   |             |  
|                                                                                                                                                                                                        |  |               
|Stockholders Equity                                                                                                                                                                                    |  |                |             |   |                  |   |             |  
|Series A Convertible Preferred Stock, $0.01 par value, authorized 7,000,000 shares, issued and outstanding 73,334 shares at March 31, 2005 and
December 31, 2004 (preference in liquidation of $77,738) |  |                | 77,738      |   |                  |   | 76,291      |  
|                                                                                                                                                                                                        |  |               
|Common stock, $0.01 par value, authorized 40,000,000 shares, issued and outstanding 22,179,904 shares at March 31, 2005 and 21,935,732 shares
at December 31, 2004                                      |  |                | 221,799     |   |                  |   | 219,358     |  
|Additional paid-in capital                                                                                                                                                                              |  |                | 32,674,264  |   |                  |   | 32,674,740  |  
|Deferred stock-based compensation                                                                                                                                                                       |  |                | (80,367     | ) |                  |   | (244,912    | )
|Accumulated deficit                                                                                                                                                                                     |  |                | (24,673,741 | ) |                  |   | (23,382,561 | )
|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  
|Total stockholders equity                                                                                                                                                                              |  |                | 8,219,693   |   |                  |   | 9,342,916   |  
|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                              |  | $              | 8,774,396   |   |                  | $ | 10,460,497  |  
|                                                                                                                                                                                                        |  |                |             |   |                  |   |             |  



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



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##### Table of Contents

SONTRA MEDICAL CORPORATION

Consolidated Statements of Loss

(Unaudited)



|                                                                                                |  |                              |            |   |      |   |            |  
|----------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                |  | Three Months Ended March 31, |           
|                                                                                                |  | 2005                         |            |   | 2004 |  
|Product revenues                                                                                |  | $                            | 116,053    |   |      | $ |           |  
|Cost of product sales                                                                           |  |                              | 80,154     |   |      |   |           |  
|                                                                                                |  |                              |            |   |      |   |            |  
|Gross margin                                                                                    |  |                              | 35,899     |   |      |   |           |  
|                                                                                                |  |                              |            |   |      |   |            |  
|Operating Expenses:                                                                             |  |                              |            |   |      |   |            |  
|Research and development                                                                        |  |                              | 906,300    |   |      |   | 675,907    |  
|Selling, general and administrative                                                             |  |                              | 473,809    |   |      |   | 527,494    |  
|                                                                                                |  |                              |            |   |      |   |            |  
|Total operating expenses                                                                        |  |                              | 1,380,109  |   |      |   | 1,203,401  |  
|                                                                                                |  |                              |            |   |      |   |            |  
|Loss from operations                                                                            |  |                              | (1,344,210 | ) |      |   | (1,203,401 | )
|                                                                                                |  |                             
|Interest income                                                                                 |  |                              | 53,030     |   |      |   | 14,229     |  
|                                                                                                |  |                              |            |   |      |   |            |  
|Net loss                                                                                        |  |                              | (1,291,180 | ) |      |   | (1,189,172 | )
|                                                                                                |  |                             
|Accretion of dividend and beneficial conversion feature on Series A Convertible Preferred Stock |  |                              | (1,447     | ) |      |   | (213,434   | )
|                                                                                                |  |                              |            |   |      |   |            |  
|Net loss applicable to common stockholders                                                      |  | $                            | (1,292,627 | ) |      | $ | (1,402,606 | )
|                                                                                                |  |                              |            |   |      |   |            |  
|Net loss per common share, basic and diluted                                                    |  | $                            | (0.06      | ) |      | $ | (0.11      | )
|                                                                                                |  |                              |            |   |      |   |            |  
|Basis and diluted weighted average common shares outstanding                                    |  |                              | 22,131,657 |   |      |   | 12,711,051 |  
|                                                                                                |  |                              |            |   |      |   |            |  



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



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Sontra Medical Corporation

Consolidated Statements of Cash Flows

(Unaudited)



|                                                                                          |  |                              |            |   |      |   |            |  
|----------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                          |  | Three Months Ended March 31, |           
|                                                                                          |  | 2005                         |            |   | 2004 |  
|Cash Flows From Operating Activities:                                                     |  |                              |            |   |      |   |            |  
|Net loss                                                                                  |  | $                            | (1,291,180 | ) |      | $ | (1,189,172 | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |  |                              |            |   |      |   |            |  
|Depreciation and amortization                                                             |  |                              | 41,414     |   |      |   | 36,494     |  
|Stock-based compensation expense (benefit)                                                |  |                              | (207,795   | ) |      |   | 108,171    |  
|Stock issued to 401(k) plan                                                               |  |                              | 243,910    |   |      |   | 180,913    |  
|Changes in assets and liabilities:                                                        |  |                              |            |   |      |   |            |  
|Accounts receivable                                                                       |  |                              | (79,022    | ) |      |   | 1,500,000  |  
|Legal settlement receivable                                                               |  |                              | 250,000    |   |      |   |           |  
|Inventory                                                                                 |  |                              | 31,191     |   |      |   |           |  
|Prepaid expenses and other current assets                                                 |  |                              | (68,509    | ) |      |   | (48,653    | )
|Accounts payable                                                                          |  |                              | (79,709    | ) |      |   | (10,809    | )
|Accrued expenses                                                                          |  |                              | (483,169   | ) |      |   | (187,917   | )
|                                                                                          |  |                              |            |   |      |   |            |  
|Net cash (used in) provided by operating activities                                       |  |                              | (1,642,869 | ) |      |   | 389,027    |  
|                                                                                          |  |                              |            |   |      |   |            |  
|Cash Flows from Investing Activities:                                                     |  |                              |            |   |      |   |            |  
|Purchase of property and equipment                                                        |  |                              | (112,521   | ) |      |   | (41,938    | )
|Purchases of short term investments                                                       |  |                              | (2,950,000 | ) |      |   | (500,000   | )
|Sales of short term investments                                                           |  |                              | 2,950,000  |   |      |   | 500,000    |  
|                                                                                          |  |                              |            |   |      |   |            |  
|Net cash used in investing activities                                                     |  |                              | (112,521   | ) |      |   | (41,938    | )
|                                                                                          |  |                              |            |   |      |   |            |  
|Cash Flows From Financing Activities                                                      |  |                              |            |   |      |   |            |  
|Stock issuance costs                                                                      |  |                              | (15,658    | ) |      |   |           |  
|Proceeds from the exercise of warrants                                                    |  |                              | 127,500    |   |      |   | 1,036,489  |  
|Proceeds from the exercise of stock options                                               |  |                              | 20,000     |   |      |   | 20,139     |  
|                                                                                          |  |                              |            |   |      |   |            |  
|Net cash provided by financing activities                                                 |  |                              | 131,842    |   |      |   | 1,056,628  |  
|                                                                                          |  |                              |            |   |      |   |            |  
|Net (Decrease) Increase in Cash and Cash Equivalents                                      |  |                              | (1,623,548 | ) |      |   | 1,403,717  |  
|Cash and Cash Equivalents, beginning of period                                            |  |                              | 2,565,244  |   |      |   | 1,868,933  |  
|                                                                                          |  |                              |            |   |      |   |            |  
|Cash and Cash Equivalents, end of period                                                  |  | $                            | 941,696    |   |      | $ | 3,272,650  |  
|                                                                                          |  |                              |            |   |      |   |            |  
|Supplemental Disclosure of Non Cash Financing Transactions:                               |  |                              |            |   |      |   |            |  
|Accretion of dividend on Series A Convertible Preferred Stock                             |  | $                            | 1,447      |   |      | $ | 82,813     |  
|                                                                                          |  |                              |            |   |      |   |            |  
|Conversion of Series A Convertible Preferred Stock into common stock                      |  | $                            |           |   |      |   | 3,507,500  |  
|                                                                                          |  |                              |            |   |      |   |            |  
|Common stock issued for dividends on converted Series A Convertible Preferred Stock       |  | $                            |           |   |      | $ | 99,007     |  
|                                                                                          |  |                              |            |   |      |   |            |  



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



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##### Table of Contents

SONTRA MEDICAL CORPORATION

Notes to Consolidated Financial Statements

March 31, 2005

(Unaudited)



(1) ORGANIZATION AND BASIS OF PRESENTATION



On June 20, 2002, the Company (previously operating under the name ChoiceTel
Communications, Inc. (ChoiceTel)) consummated a merger with Sontra Medical, Inc. (SMI), pursuant to which SMI merged with and into a wholly owned subsidiary of the Company (the Merger). Subsequent to the
consummation of the Merger, the Company changed its name to Sontra Medical Corporation and began operating in SMIs line of business. For accounting purposes, the Merger was treated as a capital transaction and a recapitalization, whereby the
historical financial statements of SMI became the historical financial statements of the Company. Accordingly, from an historical accounting perspective, the Companys inception begins on January 29, 1996, upon the inception of SMI. The
accounting treatment for the recapitalization is similar to that resulting from a business combination, except that goodwill and other intangible assets were not recorded. Because the financial statements of the Company only reflect the historical
results of SMI prior to the Merger, and of the combined entities following the Merger, they do not include the historical financial results of ChoiceTel prior to the consummation of the Merger on June 20, 2002.



The accompanying consolidated financial statements include the accounts of
Sontra Medical Corporation (the Company) and its wholly-owned subsidiary, SMI. All significant inter-company balances and transactions have been eliminated in consolidation.



The Company is a medical company engaged in the development of transdermal diagnostic and drug delivery products based on
its SonoPrep® ultrasonic skin permeation
technology. On an historical basis since its inception, the Company has devoted substantially all of its efforts toward product research and development, raising capital and marketing products. The Company has incurred significant losses from
operations since its inception and has primarily funded these losses through issuances of equity and convertible promissory notes.



(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The accompanying financial statements reflect the application of certain accounting policies as described in this note and elsewhere in the accompanying
financial statements.



(a) Use of Estimates



The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the amounts of revenues and expenses recorded during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near
term relate to the collectibility of accounts receivable, valuation of inventory, the recoverability of long-lived assets, the realizability of deferred tax assets and the fair value of equity instruments issued.



(b) Cash Equivalents and Short Term Investments



The Company considers all highly liquid investments with maturities of ninety days or
less to be cash equivalents. Cash equivalents consist of money market funds as of March 31, 2005 and December 31, 2004. Short-term investments consist of auction rate preferred shares and are classified as available for sale under
the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, these investments are carried at fair value which approximates cost.
Restricted cash at March 31, 2005 and December 31, 2004 represents a deposit on the Companys leased offices.



(c) Accounts Receivable



The Company provides credit terms to customers in connection with purchases of the Companys products. Credit terms, for approved customers, are
generally on a net 30-day basis.



Management periodically
reviews customer account activity in order to assess the adequacy of the allowance provided for potential losses. Factors considered include economic conditions and each customers payment history and credit worthiness. Adjustments, if any, are
made to reserve balances following the completion of these reviews to reflect managements best estimate of potential losses. No allowance for doubtful accounts was considered necessary at March 31, 2005 and December 31, 2004.



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##### Table of Contents

SONTRA MEDICAL CORPORATION

Notes to Consolidated Financial Statements

March 31, 2005

(Unaudited)



(d) Inventory



Inventory is valued at the lower of average cost or market on a first-in first-out (FIFO) method. There was no change in the reserve for obsolescence in
the quarter ended March 31, 2005.



(e)
Depreciation and Amortization



The Company provides for
depreciation and amortization by charges to operations for the cost of assets using the straight-line method based on the estimated useful lives of the related assets, as follows:



|                                |  |                                                   
|------------------------------- |  | --------------------------------------------------
|Asset Classification            |  | Estimated Useful Life                             
|Computer equipment              |  | 3 years                                           
|Office and laboratory equipment |  | 3-5 years                                         
|Furniture and fixtures          |  | 7 years                                           
|Manufacturing equipment         |  | 5 years                                           
|Leasehold improvements          |  | Shorter of life of lease and estimated useful life



(f) Stock-Based Compensation



Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based
on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other
measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Companys stock option plans generally have no intrinsic value at the grant date, and under APB No. 25 no compensation cost is
recognized for them.



The Company applies APB No. 25 and
related interpretations in accounting for stock options issued to employees and directors. Had compensation cost for the Companys stock options issued to employees and directors been determined based on the fair value at the grant dates
consistent with SFAS No. 123, the Companys net loss and net loss per share would have been adjusted to the pro forma amounts indicated below:



|                                                                                           |  |                              |            |   |      |   |            |  
|------------------------------------------------------------------------------------------ |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                           |  | Three Months Ended March 31, |           
|                                                                                           |  | 2005                         |            |   | 2004 |  
|Net lossas reported                                                                       |  | $                            | (1,291,180 | ) |      | $ | (1,189,172 | )
|                                                                                           |  |                             
|Add: stock-based employee compensation expense (benefit) under APB No. 25                  |  |                              | (213,429   | ) |      |   | 76,575     |  
|Deduct: stock-based employee compensation determined under SFAS No. 123                    |  |                              | (311,752   | ) |      |   | (255,686   | )
|                                                                                           |  |                              |            |   |      |   |            |  
|Pro forma net loss applicable to common stockholders                                       |  |                              | (1,816,361 | ) |      |   | (1,368,283 | )
|Accretion of preferred stock dividend and beneficial conversion feature of preferred stock |  |                              | (1,447     | ) |      |   | (213,434   | )
|                                                                                           |  |                              |            |   |      |   |            |  
|Pro forma net loss                                                                         |  | $                            | (1,817,808 | ) |      | $ | (1,581,717 | )
|                                                                                           |  |                              |            |   |      |   |            |  
|Basic and diluted loss per share, as reported                                              |  | $                            | (0.06      | ) |      | $ | (0.11      | )
|                                                                                           |  |                              |            |   |      |   |            |  
|Basic and diluted loss per share, pro forma                                                |  | $                            | (0.08      | ) |      | $ | (0.12      | )
|                                                                                           |  |                              |            |   |      |   |            |  



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##### Table of Contents

SONTRA MEDICAL CORPORATION

Notes to Consolidated Financial Statements

March 31, 2005

(Unaudited)



On July 24, 2002 the Company granted under the 1997 Long-term Incentive and Stock Option Plan an option to purchase 50,000 shares to a member of the
Scientific Advisory Board with a four year vesting schedule. On May 21, 2003 the Company granted under the 2003 Stock Option and Incentive Plan an option to purchase 50,000 shares to a member of the Scientific Advisory Board with a four year vesting
schedule. The Company re-measures the fair value of these options each quarter using the Black-Scholes option pricing model and records the corresponding non-cash expense throughout the vesting period of these options. As a result, for the quarter
ended March 31, 2005, the Company increased additional paid-in capital by $39,000 and decreased deferred compensation by $44,000, respectively, and recorded a non-cash compensation expense of $5,000 in the Statement of Loss.



On September 23, 2002, the Company repriced and/or exchanged certain options
previously granted, pursuant to the Plans, to the Chief Executive Officer and Chief Financial Officer, which relate to a total of 850,000 shares of the Companys Common Stock. The new exercise prices for these options are between $.5189 and
$2.55 per share. The Company records the compensation expense over the vesting period and re-measures the intrinsic value each period throughout the life of these options. As a result, for the quarter ended March 31, 2005, the Company decreased
additional paid-in capital by $333,000 and deferred compensation by $119,000, respectively, and recorded a non-cash compensation benefit of $214,000 in the Statement of Loss. This re-measurement may result in unpredictable charges or credits to the
Statement of Loss, which will depend on the fair value of the Companys Common Stock.



During the quarter ended September 30, 2003, one employee received an option with intrinsic value on the grant date of $12,000. As a result, for the three months ended March 31, 2005, the Company decreased deferred
compensation by $1,000 and recorded a non-cash compensation expense of $1,000 in the Statement of Loss.



During the quarter ended March 31, 2005, the Company granted options to purchase 90,000 shares of the Companys common stock at exercise prices
ranging from $1.68 to $2.15 to certain employees. During the quarter ended March 31, 2005, an option was exercised to purchase 38,543 shares and the Company received $20,000 in proceeds. During the quarter ended March 31, 2005, a total of 120,629
shares of common stock with a fair value of $243,910 were issued to the Companys 401(k) plan.



(g) Net Loss per Common Share



Basic and diluted net loss per share of the Companys common stock is presented in conformity with SFAS No. 128, Earnings per Share, for all periods presented. For the periods presented, options, warrants and convertible
securities were anti-dilutive and excluded from diluted loss per share calculations. Accordingly, basic and diluted net loss per share of common stock has been computed by dividing the net loss applicable to common stockholders in each period by the
weighted average number of shares of common stock outstanding during such period.



(h) Research and Development Expenses



The Company
charges research and development expenses to operations as incurred. Research and development expenses primarily consist of salaries and related expenses for personnel and consulting services. Other research and development expenses include fees
paid to consultants and outside service providers, the costs of materials used in research and development, prototype manufacturing, information technology and facilities costs.



(i) Revenue Recognition



For product revenue, revenues are recognized when persuasive evidence of an arrangement exists in the form of a signed non-cancelable purchase order, the
product is shipped, the selling price is fixed and determinable, and collection is reasonably assured.



(j) Reclassifications



Certain
reclassifications have been made to the prior financial statements to conform with the 2005 presentation.



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SONTRA MEDICAL CORPORATION

Notes to Consolidated Financial Statements

March 31, 2005

(Unaudited)



(3) COMMITMENTS



Operating lease



The Company leases 12,999 square feet of office, laboratory and manufacturing space in Franklin, Massachusetts under a lease expiring March 10, 2008.
Future minimum rental payments under this operating lease are approximately as follows:



|                                 |  |        |        
|-------------------------------- |  | ------ | -------
|                                 |  | Amount
|For the years ended December 31, |  |        |        
|2005                             |  | $      | 161,000
|2006                             |  |        | 163,000
|2007                             |  |        | 171,000
|2008                             |  |        | 33,000 
|                                 |  |        |        
|Total                            |  | $      | 528,000
|                                 |  |        |        



(4) SERIES A CONVERTIBLE PREFERRED
STOCK FINANCING



In 2003, the Company completed a $7
million private placement to selected qualified purchasers of units consisting of shares of the Companys Series A Convertible Preferred Stock and warrants to purchase shares of the Companys Common Stock (the Private
Placement). Individual investors, institutions and certain members of the Board of Directors purchased 7,000,000 shares of the Companys Series A Convertible Preferred Stock, at a per share purchase price of $1.00. The investors also
received warrants to purchase up to 7,000,000 shares of Common Stock.



Each share of Series A Preferred Stock is initially convertible into one share of Common Stock, subject to adjustment in certain events. The holders of shares of Series A Preferred Stock are entitled to receive annual 8% dividends, payable
in cash or shares of Common Stock. The Company has the right to convert the shares of Series A Preferred Stock in the event that the closing price of the Common Stock for twenty consecutive trading days is equal to or greater than $3.00 per share.
The warrants issued to the purchasers in the Private Placement are exercisable at a per share price of $1.50 and expire no later than the fifth anniversary of their issuance date. In addition, the Company has the right to terminate the warrants,
upon thirty days notice, in the event that the closing price of the Common Stock for twenty consecutive trading days is equal to or greater than $4.00 per share. The warrants shall be exercisable during such thirty-day notice period.



In connection with the Private Placement, the placement agent received
warrants to purchase an aggregate of 800,000 shares of Common Stock. Such placement agent warrants are exercisable at a per share price of $1.20 and expire no later than the fifth anniversary of their issuance date. In addition, the Company has the
right to terminate the placement agent warrants, upon thirty days notice, in the event that the closing price of the Common Stock for twenty consecutive trading days is equal to or greater than $4.00 per share. The warrants shall be exercisable
during such thirty-day notice period.



In conjunction with the
8% dividend on the Series A Preferred Stock, the Company accreted dividends of $1,447 for the three months ended March 31, 2005. As of March 31, 2005, there were 73,334 shares of Series A Convertible Preferred Stock outstanding.



During the quarter ended March 31, 2005, warrants to purchase 85,000 shares
of common stock were exercised and the Company received $127,500 in net cash proceeds.



(5) COMMON STOCK



In December 2004, the
Company issued 2,636,000 shares of Common Stock upon the closing of a private placement of stock that raised proceeds of $4,152,695 net of placement fee and other offering costs. In connection with the financing, the Company issued warrants to the
investors to purchase 1,054,400 shares of common stock. In addition, the Company issued warrants to the placement agent to purchase 131,800 shares of Common Stock. The warrants have a five-year term and are exercisable at $2.45 per share. The
Company has the right to terminate the warrants, upon thirty days notice, in the event that the closing price of the Companys common stock for twenty consecutive trading days is equal or greater than $4.90 per share.



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SONTRA MEDICAL CORPORATION

Notes to Consolidated Financial Statements

March 31, 2005

(Unaudited)



(6) BAYER LICENSE AGREEMENT



On July 28, 2003, the Company and Bayer Diagnostics Division of Bayer Healthcare LLC (Bayer) executed a definitive license agreement pursuant
to which the Company granted to Bayer an exclusive worldwide right and license of the Companys intellectual property rights to make, have made, use, import and sell the continuous non-invasive glucose monitoring system. In consideration of the
license and the Companys delivery of all information, materials and know-how in 2003 related to the licensed technology in 2003, Bayer agreed to pay the Company no later than January 15, 2004, a one-time, non-refundable license fee of $1.5
million. The Company recorded the $1.5 million license payment as accounts receivable and licensing revenue for year ended December 31, 2003. In January 2004, the Company collected the $1,500,000 receivable from Bayer.



Pursuant to the terms of the license agreement, the Company and Bayer may
enter into one or more additional agreements to continue the joint development of the continuous non-invasive glucose monitoring system. Such agreements may include, among other things, a $3.0 million milestone payment to the Company after the first
phase of development of the product, a royalty agreement providing for the payment by Bayer to the Company of royalties based on net sales of the product and a manufacturing and supply agreement providing Sontra with the exclusive manufacturing
rights of the SonoPrep device. In the event that Bayer does not complete the development of the product necessary to obtain FDA approval, the license shall convert to a non-exclusive license. Bayer has the right to terminate the agreement at any
time following the payment of the license fee. In the event that Bayer terminates the agreement following the payment of the license fee, the license shall cease to be an exclusive license and shall become a co-exclusive license pursuant to which
the Company will receive royalties based on net sales of the product.



(7)
LITIGATION



Based on the Companys activities in the
public payphone market in Puerto Rico, commencing in August 2002, the Company had been participating in a lawsuit against GTE International Telecommunications, Inc. and Puerto Rico Telephone Company in the United States District Court for the
District of Puerto Rico for violations of federal and Commonwealth antitrust laws, among others. The Companys lawsuit was joined by two other Puerto Rican payphone providers, Pan American Telephone Co., Inc. and In Touch Telecommunications,
Inc. The lawsuit alleged that Puerto Rico Telephone Company and its operating company, GTE International Telecommunications, Inc., engaged in a pattern of unlawful exclusionary acts in order to maintain its monopoly position in the market for the
provision of payphones to payphone location owners in Puerto Rico. In November 2003, the Company filed a notice of voluntary dismissal without prejudice with the Court, thereby withdrawing from the suit.



In December 2004, the Company entered into an agreement with the Puerto Rican
Telephone Company (PRTC) regarding alleged rate overcharges by PRTC related to the activity of ChoiceTel prior to the Merger. Pursuant to the agreement, the Company agreed to waive certain legal claims against PRTC in exchange for
$250,000. The Company recorded the $250,000 payment as an adjustment to increase the net assets of ChoiceTel as it related to the resolution of a pre-acquisition contingency and consequently the Company recorded a receivable and additional paid in
capital of $250,000 in 2004. The Company subsequently received the $250,000 settlement payment during the first quarter of fiscal 2005.



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Item 2. Managements Discussion and Analysis or Plan of Operation



Forward-Looking Statements



The following discussion of the consolidated financial condition and results of operations of the Company should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included
elsewhere in this Form 10-QSB. Except for the historical information contained herein, the following discussion, as well as other information in this report, contain 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, and are subject to the safe harbor created by those sections. Some of the forward-looking statements can be identified by the use of forward-looking
terms such as believes, expects, may, will, should, could, seek, intends, plans, estimates, anticipates or other
comparable terms. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. We urge you to consider the risks and
uncertainties described in Factors That May Affect Future Results in this report. We undertake no obligation to update our forward-looking statements to reflect events or circumstances after the date of this report. We caution readers
not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.



Overview



On June 20, 2002, the Company (previously operating under the name ChoiceTel Communications, Inc.) consummated a merger with Sontra Medical, Inc.
(SMI), pursuant to which SMI merged with and into a wholly owned subsidiary of the Company (the Merger). Subsequent to the consummation of the Merger, the Company changed its name to Sontra Medical Corporation and began
operating in SMIs line of business.



Sontra Medical
Corporation is the pioneer of SonoPrep®, a
non-invasive ultrasonic skin permeation technology for medical and therapeutic applications. Our proprietary ultrasound mediated skin permeation technology is a non-invasive and painless method of enhancing the flow of fluids and molecules across
the protective membrane of the stratum corneum, the outer layer of the skin.



A significant portion of the Companys research and development expenses include salaries paid to personnel and outside consultants and service providers, as well as the cost of materials used in research and
development, and information technology and facilities costs. The Company expects that its research and development expenses will continue to increase as it works to complete the development of its products, obtain regulatory clearances or
approvals, and conduct further research and development.



Selling, general and administrative expenses consist primarily of non-research personnel salaries and related expenses, facilities costs and professional fees. The Company expects selling, general and administrative expenses to increase as
it hires additional personnel and builds its infrastructure to support future growth.



Stock-based compensation expense, a non-cash expense, represents the fair value or intrinsic value (the difference between the exercise price and fair value of common stock) of the option on the grant date. Certain
stock-based compensation expense is remeasured each period and amortized over the vesting period of the applicable options, which is generally 42 months.



Results of Operations



Comparison of the three months ended March 31, 2005 and 2004



Gross Profit



Sontra commenced the marketing launch of the SonoPrep device and procedure kit for topical lidocaine delivery in September 2004. For the quarter ended
March 31, 2005, the Company recorded revenue of $116,000 and a gross profit of $36,000, or 31% of revenue. The Company expects to continue to expand its manufacturing capacity and refine its product costing and, accordingly, gross profit on future
sales may differ.



Research and Development Expenses



Research and development expenses increased by $230,000 to $906,000 for
the quarter ended March 31, 2005 from $676,000 for the quarter ended March 31, 2004. The increase was primarily attributable to an increase in staffing costs of $165,000 and an increase in legal costs of $63,000 to pursue patents.



Selling, General and Administrative Expenses



Selling, general and administrative expenses decreased by $53,000 to
$474,000 for the quarter ended March 31, 2005 from $527,000 for the quarter ended March 31, 2004. The decrease was primarily attributable to a decrease in stock compensation expense of $316,000, partially offset by an increase in selling and
marketing costs of $267,000 associated with hiring personnel and marketing launch costs.



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Interest Income



Interest income was $53,000 for the quarter ended March 31, 2005 compared to interest income of $14,000 for the quarter
ended March 31, 2004. The increase in interest income is attributable to higher interest rates and a higher average balance invested.



Liquidity and Capital Resources



The Company has financed its operations since inception primarily through private sales of its common and preferred stock, the issuance of convertible
promissory notes, and the cash it received in connection with the Merger. As of March 31, 2005, the Company had $7,892,000 of cash and cash equivalents and short-term investments.



Net cash used in operating activities was $1,643,000 for the quarter ended March 31, 2005. The net loss for the quarter
ended March 31, 2005 was $1,291,000 and included in this loss were non-cash expenses of $41,000 for depreciation and amortization, $244,000 for common stock contributed to the 401(k) plan and a non-cash stock compensation benefit of $208,000. A
payment received from a legal settlement provided $250,000 in cash, an increase in accounts receivable used $79,000 of cash and an increase in prepaid expenses used $69,000 of cash. Decreases in accounts payable and accrued expenses used $563,000 of
cash.



Net cash used in investing activities was $113,000 for
the quarter ended March 31, 2005, resulting from the purchase of property and equipment.



Net cash provided by financing activities was $132,000 for the quarter ended March 31, 2005. The exercise of stock options and warrants provided $148,000 of cash and expenses associated with the issuance of common
stock used $16,000.



The Company expects that the cash and
short term investments of $7,892,000 at March 31, 2005 will be sufficient to meet its cash requirements through June 2006. The Company will be required to raise a substantial amount of capital in the future to complete the commercialization of its
products.



At March 31, 2005, the Company had outstanding
warrants to purchase 6,635,292 shares of common stock at exercise prices ranging from $1.20-$2.45. If all these warrants were exercised for cash the Company would received cash proceeds of $10,954,000.



The Company will be required to raise a substantial amount of capital in the
future to execute in accordance with its product development, commercialization and marketing strategies. The Companys ability to fund its future capital requirements will depend on many factors, including the following:



| |  |  | its ability to obtain funding from third parties, including any future collaborative partners;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | its progress on research and development programs and pre-clinical and clinical trials;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | the time and costs required to gain regulatory approvals;
| | - |  | ---------------------------------------------------------



| |  |  | the costs of manufacturing, marketing and distributing its products, if successfully developed and approved;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | the costs of filing, prosecuting and enforcing patents, patent applications, patent claims and trademarks;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the status of competing products; and
| | - |  | -------------------------------------



| |  |  | the market acceptance and third-party reimbursement of its products, if successfully developed and approved.
| | - |  | ------------------------------------------------------------------------------------------------------------



Factors That May Affect Future Results



We operate in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. Forward-looking statements in this document and those made from time to time by us through our senior management are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements concerning the expected future revenues or earnings or concerning projected plans, performance, or development of products and services, as well as other estimates related to future operations are necessarily
only estimates of future results and there can be no assurance that actual results will not materially differ from expectations. Forward-looking statements represent managements current expectations and are inherently uncertain. We do not
undertake any obligation to update forward-looking statements. Factors that could cause actual results to differ materially from results anticipated in forward-looking statements include, but are not limited to, the following:



We have a history of operating losses, and we expect our operating losses to continue for
the foreseeable future.



We have generated limited revenue
and have had operating losses since our inception. Our historical accumulated deficit was approximately $24,674,000 as of March 31, 2005. It is possible that the Company will never generate enough additional revenue to achieve and sustain
profitability. Even if the Company reaches profitability, it may not be able to sustain or increase profitability. We expect our operating losses to continue for the foreseeable future as we continue to expend substantial resources to conduct
research and development, feasibility and clinical studies, obtain regulatory approvals for specific use applications of our SonoPrep® technology, identify and secure collaborative partnerships, and manage and execute our obligations in strategic collaborations.



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If we fail to raise additional capital, we will be unable to continue our development efforts and operations.



The Company has generated limited revenue since
inception, and does not expect to generate sufficient revenues to earn a profit in the near future. Our development efforts to date have consumed and will continue to require substantial amounts of capital to complete the development of our
SonoPrep® technology and to meet other cash
requirements in the future. Our product development programs require substantial capital outlays in order to reach product commercialization. As we enter into more advanced product development of our SonoPrep device and our continuous non-invasive
glucose monitoring system, we will need significant funding to pursue our product commercialization plans. Our ability to continue our research, development and testing activities and commercialize our products in development is highly dependent on
our ability to obtain additional sources of financing, including by entering into and maintaining collaborative arrangements with third parties who have the resources to fund such activities. Any future equity financing, if available, may result in
substantial dilution to existing shareholders, and debt financing, if available, may include restrictive covenants or may require us to grant a lender a security interest in our assets. To the extent that we attempt to raise additional funds through
third party collaborations and/or licensing arrangements, we may be required to relinquish some rights to our technologies or products currently in various stages of development, or grant licenses on terms that are not favorable to the Company. Any
failure by the Company to timely procure additional financing or investment adequate to fund the Companys ongoing operations, including planned product development initiatives and clinical studies, will have material adverse consequences on
the Companys business operations and as a result, on our consolidated financial condition, results of operations and cash flows.



We have limited publicly available historical financial information, which makes it difficult to evaluate our business.



Because limited publicly available historical financial information is
available on our business, it may be difficult to evaluate our business and prospects. Our business and prospects must be considered in light of the substantial risks, expenses, uncertainties and difficulties encountered by entrants into the medical
device industry, which is characterized by increasingly intense competition and a high failure rate. To date, we have engaged primarily in research and development efforts, prototype development and testing, and human clinical feasibility studies.
Our results of operations will depend on, among other things, the following factors:



| |  |  | research and development activities and outcomes;
| | - |  | -------------------------------------------------



| |  |  | results of feasibility and pre-clinical studies;
| | - |  | ------------------------------------------------



| |  |  | the ability to enter into collaborative agreements;
| | - |  | ---------------------------------------------------



| |  |  | the timing of payments, if any, under future collaborative agreements; and
| | - |  | --------------------------------------------------------------------------



| |  |  | costs related to obtaining, defending and enforcing patents.
| | - |  | ------------------------------------------------------------



Our future success is dependent upon successful collaborations with strategic partners.



Our future success is dependent upon our ability to selectively enter into and maintain collaborative arrangements with
leading medical device and pharmaceutical companies, such as Bayer Healthcare LLC (Bayer). On July 28, 2003, Sontra and Bayer executed a definitive license agreement pursuant to which Sontra granted to Bayer an exclusive worldwide right
and license of Sontras intellectual property rights to make, have made, use, import and sell a continuous non-invasive glucose monitoring system. Pursuant to the terms of the license agreement, Sontra and Bayer may also enter into one or more
additional agreements to continue the joint development of the continuous non-invasive glucose monitoring system. To date, we have not entered into any additional agreements with Bayer, and we may not be able to enter into any additional development
agreements or collaborative arrangements with Bayer or any other strategic partners on acceptable terms, if at all. If we are not able to collaborate with Bayer or additional partners, the business, financial condition and results of operations of
the Company could be materially adversely affected.



Even if we
were to enter into a collaborative arrangement, there can be no assurance that the financial condition or results of operations of the Company will significantly improve. The risks involved with collaborating with strategic partners include, but are
not limited to, the following:



| |  |  | such collaborative arrangements could terminate upon the expiration of certain notice periods;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | collaboration partners may insist on and obtain significant interest in our intellectual property rights;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | funding by collaborative partners may be dependent upon the satisfaction of certain goals or milestones by certain specified dates, the realization or satisfaction of
which may be outside of our control;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | collaborative partners may retain a significant degree of discretion regarding the timing of these activities and the amount and quality of financial, personnel and other resources
that they devote to these activities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | disputes may arise between the Company and any future collaborative partner regarding their respective rights and obligations under the collaborative arrangements, which may be
costly; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any future collaborative partner may not be able to satisfy its obligations under its arrangement with the Company or may intentionally or unintentionally breach its obligations
under the arrangement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Most of our products are in early
stages of development, and we face risks of failure inherent in developing products based on new technologies.



Most of our products under development have a high risk of failure because they are in the early stages of development. To date, we have tested the
feasibility of our SonoPrep® technology for various
applications, including glucose monitoring, transdermal drug delivery and certain anesthetic applications. The Company has received 510(k) marketing clearance from the FDA for our SonoPrep® device for the transdermal delivery of 4% topical lidocaine and in electrophysiology
applications. However, to develop additional products or additional uses, substantial expenditures will be required, including for feasibility studies, pre-clinical studies and clinical testing. Projected costs for such development are difficult to
estimate and they may change frequently.



Our future prospects
are substantially dependent on forming collaborative partnerships, further developing our products and obtaining favorable results from pre-clinical studies and clinical trials and satisfying regulatory standards and approvals required for the
market introduction of the SonoPrep® device and a
continuous non-invasive glucose monitoring system. There can be no assurance that the Company or any strategic partner of the Company will not encounter unforeseen problems in the development of the SonoPrep® technology, or that we or any such strategic partner will be able to successfully
address the problems that do arise. In addition, there can be no assurance that any of our potential products will be successfully developed, proven safe and efficacious in clinical trials, meet applicable regulatory standards, be capable of being
produced in commercial quantities at acceptable costs, be eligible for third-party reimbursement from governmental or private insurers, be successfully marketed or achieve market acceptance. If any of our development programs are not successfully
completed, required regulatory approvals or clearances are not obtained, or potential products for which approvals or clearances are obtained are not commercially successful, our business, financial condition and results of operations would be
materially adversely affected.



Failure to obtain necessary regulatory
clearances or approvals will prevent the Company or our collaborators from commercializing our products under development.



The design, manufacturing, labeling, distribution and marketing of our potential products will be subject to extensive and rigorous government regulation
in the United States and certain other countries. The process of obtaining and maintaining required regulatory clearances and approvals in the United States is lengthy, expensive and uncertain. In order for us to market our potential products in the
United States, we must obtain clearance by means of a 510(k) pre-market notification, or approval by means of a pre-market approval (PMA) application, or a new drug application (NDA), from the United States Food and Drug
Administration (FDA). In February 2004, we received 510(k) marketing clearance from the FDA for our SonoPrep® device for use in electrophysiology applications. In August 2004, we received 510(k) marketing clearance from the FDA for the SonoPrep device and
procedure tray for use with topical lidocaine. We will need to obtain additional marketing clearances or approvals from the FDA in order to market new products and new uses of existing products. In order to obtain marketing approval for our
continuous non-invasive glucose monitoring system, we will be required to file a PMA application that demonstrates the safety and effectiveness of the product. If the SonoPrep device is used for the transdermal delivery of a drug for an indication
for which the drug has not already been approved, an NDA would be required to be filed and approved by the FDA for such drug before marketing. The PMA and the NDA processes are more rigorous and more comprehensive than the 510(k) clearance process
and can take several years from initial filing and require the submission of extensive supporting data and clinical information.



Even if we receive 510(k) clearance or PMA or NDA approval, there can be no assurance that the FDA will not impose strict labeling or other requirements
as a condition of our clearance or approval, any of which could limit our ability to market our products under development. Further, if we wish to modify a product after FDA clearance or approval, including changes in indications or other
modifications that could affect safety and efficacy, additional clearances or approvals could be required from the FDA. No assurance can be given that such clearances or approvals will be granted by the FDA on a timely basis, or at all. Further, we
may be required to submit extensive pre-clinical and clinical data depending on the nature of the changes. Any request by the FDA for additional data or any requirement by the FDA that we conduct additional clinical studies could significantly delay
the commercialization of our products and require us to make substantial additional research, development and other expenditures by the Company. Similarly, any labeling or other conditions or restrictions imposed by the FDA on the marketing of our
potential products could hinder the Companys ability to effectively market these products.



From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the approval,
manufacturing and marketing of drug products and medical devices. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. It is impossible to
predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.



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We must maintain our regulatory clearances and approvals in order to continue marketing our products.



Regulatory authorities subject a marketed product, its manufacturer and
the manufacturing facilities to continual review and periodic inspections. We will be subject to ongoing FDA requirements, including required submissions of safety and other post-market information and reports, registration requirements, Quality
Systems regulations, and recordkeeping requirements. The Quality Systems regulations include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. Our distributors,
depending on their activities, are also subject to certain requirements under the Federal Food, Drug, and Cosmetic Act and the regulations promulgated thereunder, and state laws and registration requirements covering the distribution of our
products. Regulatory agencies may change existing requirements or adopt new requirements or policies that could affect our regulatory responsibilities or the regulatory responsibilities of our distributors. We may not be able to adapt to these
changes or new requirements on a timely basis, or at all.



Later discovery of previously unknown problems with our products, manufacturing processes, or our failure to comply with applicable regulatory requirements may result in enforcement actions by the FDA including, but not limited to: warning
letters; patient or physician notification; restrictions on our products or manufacturing processes; product recalls or seizures; refusal to approve pending applications or supplements to approved applications that we submit; suspension or
withdrawal of marketing approvals or clearances; and civil and criminal injunctions, fines and penalties.



We may need to obtain further regulatory approval in connection with the usage of 4% topical lidocaine with our SonoPrep Topical Anesthetic System.



In August 2004, we received 510(k) marketing clearance from the FDA to market our SonoPrep device and procedure tray for use
with over-the-counter (OTC) 4% topical lidocaine for dermal anesthesia prior to the insertion of needles or intravenous catheters. In September 2004, we launched our SonoPrep Topical Anesthetic System, which consists of the SonoPrep device and a
topical anesthetic procedure tray for usage with OTC 4% topical lidocaine, and we are marketing the system through independent medical device distributors. However, OTC 4% topical lidocaine has not yet been approved by the FDA for the indications
covered by the Companys 510(k) marketing clearance, namely needle sticks or venipuncture. The FDA may require the Company to submit an NDA seeking approval of OTC 4% topical lidocaine for dermal anesthesia prior to the insertion of needles or
intravenous catheters.



The Company intends to continue to
market the SonoPrep Topical Anesthetic System pursuant to its 510(k) marketing clearance; however if the FDA determines that approval of the NDA is required, the FDA may determine to limit, restrict or delay our ability to market the system, or may
rescind our 510(k) marketing clearance. If the FDA determines that an NDA is required and ultimately does not approve the NDA, it is likely that our 510(k) marketing clearance would be rescinded, which would have a material adverse effect on our
business and results of operations.



We must continue to meet the listing
requirements of Nasdaq or we risk delisting.



Our Common
Stock is currently listed for trading on the Nasdaq SmallCap Market. We must continue to satisfy Nasdaqs continued listing requirements, including the minimum $2.5 million shareholder equity requirement and the $1 minimum per share bid price,
or risk delisting which would have an adverse effect on the Companys business.



If the Companys Common Stock is delisted from the Nasdaq SmallCap Market, it may trade on the over-the-counter market, which may be a less liquid market. In such case, our shareholders ability to trade, or
obtain quotations of the market value of, shares of Sontras Common Stock would be severely limited because of lower trading volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask
prices for our Common Stock. In addition, the delisting of the Common Stock from the Nasdaq SmallCap Market would significantly impair our ability to raise capital in the public markets in the future.



A substantial portion of the intellectual property used by the Company is owned by the
Massachusetts Institute of Technology.



We have an
exclusive worldwide license from the Massachusetts Institute of Technology (MIT) under certain licensed patents to practice our ultrasound-mediated skin permeation technology. These licensed patents, which include eight issued patents in the United
States, three issued foreign patents, two pending U.S. patents and three pending foreign patent applications, comprises a substantial portion of our patent portfolio relating to our technology.



While, under the license agreement, we have the right to advise and cooperate
with MIT in the prosecution and maintenance of the foregoing patents, we do not control the prosecution of such patents. Instead, the Company relies upon MIT to determine the appropriate strategy for prosecuting these patents. If MIT does not
adequately protect our patent rights, our ability to manufacture and market our products, currently in various stages of development, would be adversely affected.



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We will need to protect the proprietary information on which our SonoPrep® technology relies.



In addition to the exclusive license from MIT, as of March 31, 2005 we owned four issued patents and six pending patent
applications in the United States and two foreign patent and fifteen pending foreign applications. We can provide no assurance that patents will be issued from the patent applications, or, if issued, that they will be issued in a form that will be
advantageous to the Company.



There can be no assurance that
one or more of the patents owned or licensed by the Company will not be successfully challenged, invalidated or circumvented or that we will otherwise be able to rely on such patents for any reason. If any of our patents or any patents licensed from
MIT are successfully challenged or our right or ability to manufacture our future products (if successfully developed and commercialized) were to be limited, our ability to manufacture and market these products could be adversely affected, which
would have a material adverse effect upon our business, financial condition and results of operations.



In addition to patent protection, we rely on a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality agreements
and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect the rights or competitive advantage of the Company. We may not be able to prevent the
unauthorized disclosure or use of our technical knowledge or other trade secrets by our employees. Nondisclosure and confidentiality agreements with third parties may be breached, and there is no assurance that the Company would have adequate
remedies for any such breach.



If we fail to protect our
intellectual property rights, our competitors may take advantage of our ideas and compete directly against the Company. There can be no assurance that competitors, many of whom have substantial resources and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents that limit our ability to make, use and sell our potential products either in the United States or in foreign markets. Furthermore, if our intellectual property is not adequately
protected, our competitors may be able to use our intellectual property to enhance their products and compete more directly with the Company, which could prevent us from entering our products into the market or result in a decrease in our eventual
market share.



We have limited manufacturing experience, which could limit
our growth.



To successfully commercialize our SonoPrep
skin permeation technology we will have to manufacture or engage others to manufacture the particular device in compliance with regulatory requirements. We have limited manufacturing experience that would enable us to make products in the volumes
that would be necessary for us to achieve significant commercial sales, and there can be no assurance that we will be able to establish and maintain reliable, efficient, full scale manufacturing at commercially reasonable costs, in a timely fashion.
Difficulties we encounter in manufacturing scale-up, or our failure to implement and subsequently maintain our manufacturing facilities in accordance with good manufacturing practice regulations, international quality standards or other regulatory
requirements, could result in a delay or termination of production. Companies, and especially small companies in the medical device field, often encounter these types of difficulties in scaling up production, including problems involving production
yield, quality control and assurance, and shortages of qualified personnel.



We may be subject to litigation or other proceedings relating to our patent rights.



The medical device industry has experienced extensive litigation regarding patents and other intellectual property rights. In addition, the United States
Patent and Trademark Office may institute litigation or interference proceedings against the Company. The defense and prosecution of intellectual property proceedings are both costly and time consuming.



Litigation may be necessary to enforce patents issued to the Company, to
protect trade secrets or know how owned by or licensed to the Company or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation or interference proceedings involving the Company may require us to
incur substantial legal and other fees and expenses. Such proceedings would also be time consuming and can be a significant distraction for employees and management, resulting in slower product development and delays in commercialization. In
addition, an adverse determination in litigation or interference proceedings could subject the Company to significant liabilities to third parties, require us to obtain licenses from third parties or prevent us from selling our products, once
developed, in certain markets, or at all, which would have a material adverse effect on our business, financial condition and results of operations.



Our potential markets are highly competitive and most participants are larger, better capitalized, and more experienced than Sontra.



The industries in which our potential products may eventually be marketed
are intensely competitive, subject to rapid change and significantly affected by new product introductions. Our continuous non-invasive glucose monitoring system will compete directly with glucose monitoring products manufactured by Roche
Diagnostics, LifeScan, Inc., a division of Johnson & Johnson, Bayer Corporation, MediSense, a division of Abbott Laboratories, Medtronic, Inc., Dexcom, SpectRx and TheraSense, Inc. The Companys SonoPrep® device will also compete with numerous companies developing drug delivery products such
as Nektar Therapeutics, Alkermes, Inc., Bioject, Inc., PowderJect Pharmaceuticals PLC, Antares Pharma, Inc., Becton Dickinson & Co., Aerogen, Inc., ALZA Corporation, a division of Johnson & Johnson, Norwood Abbey Limited, Vyteris, Iomed and
3M Company. In the topical lidocaine market, Sontra competes with the existing topical lidocaine products manufactured by Astra and others, and also competes with Norwood Abbey, who has received clearance from the FDA to market a laser poration
device.



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Most of these companies are already producing and marketing glucose monitoring or drug delivery products,
are either publicly traded or a division of a publicly traded company, and enjoy several competitive advantages over the Company. In addition, several of our competitors have products in various stages of development and commercialization similar to
our SonoPrep® device and our continuous
non-invasive glucose monitoring system. At any time, these companies and others may develop products that compete directly with our proposed product concepts. In addition, many of our competitors have resources allowing them to spend significantly
greater funds for the research, development, promotion and sale of new or existing products, thereby allowing them to respond more quickly to new or emerging technologies and changes in customer requirements. For all of the foregoing reasons, we may
not be able to compete successfully against our current and future competitors. If any of our competitors succeeds in developing a commercially viable product and obtaining government approval, the business, financial condition and results of
operations of the Company would be materially adversely affected.



We
operate in an industry with significant product liability risk.



Our business will expose us to potential product liability claims that are inherent in the testing, production, marketing and sale of human diagnostic and ultrasonic transdermal drug delivery products. While we intend to take steps to
insure against these risks, there can be no assurance that we will be able to obtain insurance in amounts or scope sufficient to provide us with adequate coverage against all potential liabilities. Our current product liability insurance provides
for coverage in the amount of $2,000,000. A product liability claim in excess of our product liability insurance would have to be paid out of our cash reserves, if any, and would harm our reputation in the industry and adversely affect our ability
to raise additional capital.



If we are unable to retain or hire additional
key personnel, we may not be able to sustain or grow our business.



Our future success will depend upon our ability to successfully attract and retain key scientists, engineers and other highly skilled personnel. Our employees are at-will and not subject to employment contracts and may terminate their
employment with the Company at any time. In addition, our current management team has limited experience managing a public company subject to the Securities and Exchange Commissions periodic reporting obligations. Hiring qualified management
and technical personnel will be difficult due to the limited number of qualified professionals in the work force in general and the intense competition for these types of employees in the medical device industry, in particular. We have in the past
experienced difficulty in recruiting qualified personnel and there can be no assurance that we will be successful in attracting and retaining additional members of management. Failure to attract and retain personnel, particularly management and
technical personnel, would materially harm our business, financial condition and results of operations.



Our stock price has been volatile and may fluctuate in the future.



The trading price of our Common Stock may fluctuate significantly. This price may be influenced by many factors, including:



| |  |  | our performance and prospects;
| | - |  | ------------------------------



| |  |  | the depth and liquidity of the market for our Common Stock;
| | - |  | -----------------------------------------------------------



| |  |  | sales by selling shareholders of shares issued and issuable in connection with our private placements in 2003 and 2004;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | investor perception of us and the industry in which we operate;
| | - |  | ---------------------------------------------------------------



| |  |  | changes in earnings estimates or buy/sell recommendations by analysts;
| | - |  | ----------------------------------------------------------------------



| |  |  | general financial and other market conditions; and
| | - |  | --------------------------------------------------



| |  |  | domestic and international economic conditions.
| | - |  | -----------------------------------------------



Public stock markets have experienced, and are currently experiencing, extreme price and trading volume volatility, particularly in the technology and
life sciences sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these
companies. These broad market fluctuations may adversely affect the market price of our Common Stock. In addition, fluctuations in our stock price may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds
into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly when viewed on a quarterly basis.



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Securities we issue to fund our operations could dilute or otherwise adversely affect our shareholders.



We will likely need to raise additional funds through
public or private debt or equity financings to fund our operations. If we raise funds by issuing equity securities, the percentage ownership of current shareholders will be reduced and the new equity securities may have rights senior to those of the
shares of our Common Stock. If we raise funds by issuing debt securities, we may be required to agree to covenants that substantially restrict our ability to operate our business. We may not obtain sufficient financing on terms that are favorable to
investors or us. We may delay, limit or eliminate some or all of our proposed operations if adequate funds are not available.



In addition, upon issuance of the shares of Common Stock issuable upon conversion of the outstanding shares of Series A Preferred Stock and the exercise
of outstanding warrants, the percentage ownership of current shareholders will be diluted substantially.



The availability of preferred stock for issuance may adversely affect our shareholders.



Our Articles of Incorporation, as amended, authorize our Board of Directors to fix the rights, preferences and privileges of, and issue up to 10,000,000
shares of, preferred stock with voting, conversion, dividend and other rights and preferences that could adversely affect the voting power or other rights of our shareholders. An aggregate of 7,000,000 shares of Series A Preferred Stock were issued
in our private placement in 2003, of which 73,334 were issued and outstanding as of March 31, 2005. The issuance of additional preferred stock or rights to purchase preferred stock may have the effect of delaying or preventing a change in control of
the Company. In addition, the possible issuance of additional preferred stock could discourage a proxy contest, make more difficult the acquisition of a substantial block of the Companys Common Stock or limit the price that investors might be
willing to pay for shares of the Companys Common Stock.



Anti-takeover
effects of Minnesota law could discourage, delay or prevent a change in control.



As a publicly traded company, we are prohibited by the Minnesota Business Corporation Act, except under certain specified circumstances, from engaging in any merger, significant sale of stock or assets or business
combination with any shareholder or group of shareholders who own at least 10% of our Common Stock.



Item 3. Controls and Procedures



Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period
covered by this report were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms.



Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fiscal quarter to which this report
relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II: OTHER INFORMATION



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



During the first quarter of fiscal 2005, we issued and sold an aggregate of 85,000 shares of common stock pursuant to the exercise of outstanding Common
Stock Purchase Warrants. Pursuant to the terms of the warrants, the warrant holders paid an exercise price of $1.50 per share to us in connection with such exercises, for an aggregate purchase price of $127,500. The shares of common stock were
issued and sold to the warrant holders in reliance on Section 4(2) of the Securities Act of 1933, as amended, as a sale by the issuer not involving a public offering. No underwriters were involved with the issuance and sale of the shares of common
stock.



We did not repurchase any shares of common stock during
the first quarter of fiscal 2005.



Item 5. Other Information



During
the quarter ended March 31, 2005, we made no material changes to the procedures by which shareholders may recommend nominees to our Board of Directors, as described in our most recent proxy statement.



Item 6. Exhibits



The Exhibits
listed in the Exhibit Index immediately preceding such Exhibits are filed with or incorporated by reference in this report.



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SIGNATURES



In accordance with the
requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                   |  |                            |  |                                      
|------------------ |  | -------------------------- |  | -------------------------------------
|                   |  | SONTRA MEDICAL CORPORATION
|                   |  |                           
|Date: May 10, 2005 |  | By:                        |  | /s/ THOMAS W. DAVISON                
|                   |  |                            |  | Thomas W. Davison                    
|                   |  |                            |  | President and Chief Executive Officer
|                   |  |                           
|Date: May 10, 2005 |  | By:                        |  | /s/ SEAN F. MORAN                    
|                   |  |                            |  | Sean F. Moran                        
|                   |  |                            |  | Chief Financial Officer              



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EXHIBIT INDEX



|     |  |                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|     | 
|31.2 |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|     | 
|32.1 |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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