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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, 2004



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 ofincorporation or organization) |  | (I.R.S. EmployerIdentification 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 3, 2004, the Registrant had 15,276,761 shares of Common Stock outstanding.



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



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##### Table of Contents

SONTRA MEDICAL CORPORATION



FORM
10-QSB INDEX



|                               |  |                                                                                                      |  |            
|------------------------------ |  | ---------------------------------------------------------------------------------------------------- |  | -----------
|                               |  |                                                                                                      |  | Page Number
|Part I - Financial Information |  |                                                                                                     
|                               |  |                                                                                                     
|Item 1.                        |  | Consolidated Financial Statements                                                                    |  |            
|                               |  |                                                                                                     
|                               |  | Consolidated Balance Sheets as of March 31, 2004 (Unaudited) and December 31, 2003                   |  | 3          
|                               |  |                                                                                                     
|                               |  | Consolidated Statements of Loss for the three months ended March 31, 2004 and 2003 (Unaudited)       |  | 4          
|                               |  |                                                                                                     
|                               |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (Unaudited) |  | 5          
|                               |  |                                                                                                     
|                               |  | Notes to Consolidated Financial Statements (Unaudited)                                               |  | 6          
|                               |  |                                                                                                     
|Item 2.                        |  | Managements Discussion and Analysis or Plan of Operation                                            |  | 10         
|                               |  |                                                                                                     
|Item 3.                        |  | Controls and Procedures                                                                              |  | 17         
|                               | 
|Part II - Other Information    |  |                                                                                                     
|                               |  |                                                                                                     
|Item 2.                        |  | Changes in Securities                                                                                |  | 18         
|                               |  |                                                                                                     
|Item 5.                        |  | Other Information                                                                                    |  | 18         
|                               |  |                                                                                                     
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                                     |  | 18         
|                               |  |                                                                                                     
|                               |  | Signatures                                                                                           |  | 19         



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##### Table of Contents

SONTRA MEDICAL CORPORATION



Consolidated Balance Sheets



|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                                                                                  |  | As of         |            
|                                                                                                                                                                                                                                  |  | March 31,2004 |             |   | December 31,2003 |  
|                                                                                                                                                                                                                                  |  | (Unaudited)   |             |   |                  |  
|Assets:                                                                                                                                                                                                                           |  |               |             |   |                  |   |             |  
|Current Assets:                                                                                                                                                                                                                   |  |               |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                                                                         |  | $             | 6,272,650   |   |                  | $ | 4,868,933   |  
|Accounts receivable                                                                                                                                                                                                               |  |               |            |   |                  |   | 1,500,000   |  
|Prepaid expenses and other current assets                                                                                                                                                                                         |  |               | 114,728     |   |                  |   | 66,075      |  
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|Total current assets                                                                                                                                                                                                              |  |               | 6,387,378   |   |                  |   | 6,435,008   |  
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|Property and Equipment, at cost                                                                                                                                                                                                   |  |               |             |   |                  |   |             |  
|Computer equipment                                                                                                                                                                                                                |  |               | 174,847     |   |                  |   | 171,272     |  
|Office and laboratory equipment                                                                                                                                                                                                   |  |               | 407,735     |   |                  |   | 405,285     |  
|Furniture and fixtures                                                                                                                                                                                                            |  |               | 14,288      |   |                  |   | 14,288      |  
|Manufacturing equipment                                                                                                                                                                                                           |  |               | 180,608     |   |                  |   | 144,695     |  
|Leasehold improvements                                                                                                                                                                                                            |  |               | 166,289     |   |                  |   | 166,289     |  
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|                                                                                                                                                                                                                                  |  |               | 943,767     |   |                  |   | 901,829     |  
|Less-Accumulated depreciation and amortization                                                                                                                                                                                    |  |               | (534,835    | ) |                  |   | (498,341    | )
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|Net property and equipment                                                                                                                                                                                                        |  |               | 408,932     |   |                  |   | 403,488     |  
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|Other Assets:                                                                                                                                                                                                                     |  |               |             |   |                  |   |             |  
|Restricted cash                                                                                                                                                                                                                   |  |               | 48,746      |   |                  |   | 48,746      |  
|Other assets                                                                                                                                                                                                                      |  |               | 2,000       |   |                  |   | 2,000       |  
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|Total other assets                                                                                                                                                                                                                |  |               | 50,746      |   |                  |   | 50,746      |  
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|Total assets                                                                                                                                                                                                                      |  | $             | 6,847,056   |   |                  | $ | 6,889,242   |  
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|Liabilities and Stockholders Equity                                                                                                                                                                                              |  |               |             |   |                  |   |             |  
|                                                                                                                                                                                                                                  |  |              
|Current Liabilities:                                                                                                                                                                                                              |  |               |             |   |                  |   |             |  
|Accounts payable                                                                                                                                                                                                                  |  | $             | 126,001     |   |                  | $ | 136,810     |  
|Accrued expenses                                                                                                                                                                                                                  |  |               | 283,600     |   |                  |   | 465,092     |  
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                                                                         |  |               | 409,601     |   |                  |   | 601,902     |  
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|Commitments                                                                                                                                                                                                                       |  |               |             |   |                  |   |             |  
|                                                                                                                                                                                                                                  |  |              
|Stockholders Equity:                                                                                                                                                                                                             |  |               |             |   |                  |   |             |  
|Series A Convertible Preferred Stock, $0.01 par value, authorized 7,000,000 shares, issued and outstanding 2,987,500 shares at March 31, 2004
and 6,495,000 shares at December 31, 2003 (preference in liquidation of $3,105,148) |  |               | 3,105,148   |   |                  |   | 6,628,842   |  
|Common stock, $0.01 par value, authorized 40,000,000 shares, issued and outstanding 14,521,635 shares at March 31, 2004 and 10,102,992 shares
at December 31, 2003                                                                |  |               | 145,216     |   |                  |   | 101,030     |  
|Additional paid-in capital                                                                                                                                                                                                        |  |               | 22,802,718  |   |                  |   | 17,952,721  |  
|Deferred stock-based compensation                                                                                                                                                                                                 |  |               | (404,076    | ) |                  |   | (372,874    | )
|Accumulated deficit                                                                                                                                                                                                               |  |               | (19,211,551 | ) |                  |   | (18,022,379 | )
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|Total stockholders equity                                                                                                                                                                                                        |  |               | 6,437,455   |   |                  |   | 6,287,340   |  
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                                                        |  | $             | 6,847,056   |   |                  | $ | 6,889,242   |  
|                                                                                                                                                                                                                                  |  |               |             |   |                  |   |             |  



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)



|                                                                                                |  |                                      |            |   |      |   |           |  
|----------------------------------------------------------------------------------------------- |  | ------------------------------------ | ---------- | - | ---- | - | --------- | -
|                                                                                                |  | For the Three Months Ended March 31, |           
|                                                                                                |  | 2004                                 |            |   | 2003 |  
|Revenues                                                                                        |  | $                                    |           |   |      | $ |          |  
|                                                                                                |  |                                     
|Operating Expenses:                                                                             |  |                                      |            |   |      |   |           |  
|Research and development                                                                        |  |                                      | 675,907    |   |      |   | 541,352   |  
|General and administrative                                                                      |  |                                      | 527,494    |   |      |   | 418,433   |  
|                                                                                                |  |                                      |            |   |      |   |           |  
|Total operating expenses                                                                        |  |                                      | 1,203,401  |   |      |   | 959,785   |  
|                                                                                                |  |                                      |            |   |      |   |           |  
|Loss from operations                                                                            |  |                                      | (1,203,401 | ) |      |   | (959,785  | )
|                                                                                                |  |                                     
|Interest income                                                                                 |  |                                      | 14,229     |   |      |   | 9,106     |  
|                                                                                                |  |                                      |            |   |      |   |           |  
|Net loss                                                                                        |  |                                      | (1,189,172 | ) |      |   | (950,679  | )
|                                                                                                |  |                                     
|Accretion of dividend and beneficial conversion feature on Series A Convertible Preferred Stock |  |                                      | (213,434   | ) |      |   |          |  
|                                                                                                |  |                                      |            |   |      |   |           |  
|Net loss applicable to common shareholders                                                      |  | $                                    | (1,402,606 | ) |      | $ | (950,679  | )
|                                                                                                |  |                                      |            |   |      |   |           |  
|Net loss per common share, basic and diluted                                                    |  | $                                    | (0.11      | ) |      | $ | (0.10     | )
|                                                                                                |  |                                      |            |   |      |   |           |  
|Basis and diluted weighted average common shares outstanding                                    |  |                                      | 12,711,051 |   |      |   | 9,360,938 |  
|                                                                                                |  |                                      |            |   |      |   |           |  



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, |           
|                                                                                          |  | 2004                         |            |   | 2003 |  
|Cash Flows From Operating Activities:                                                     |  |                              |            |   |      |   |           |  
|Net loss                                                                                  |  | $                            | (1,189,172 | ) |      | $ | (950,679  | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                              |            |   |      |   |           |  
|Depreciation and amortization                                                             |  |                              | 36,494     |   |      |   | 55,696    |  
|Stock based compensation                                                                  |  |                              | 108,171    |   |      |   | (151,154  | )
|Stock issued to 401(k) plan                                                               |  |                              | 180,913    |   |      |   | 13,000    |  
|Changes in operating assets and liabilities:                                              |  |                              |            |   |      |   |           |  
|Accounts receivable                                                                       |  |                              | 1,500,000  |   |      |   |          |  
|Prepaid expenses and other current assets                                                 |  |                              | (48,653    | ) |      |   | 30,651    |  
|Accounts payable                                                                          |  |                              | (10,809    | ) |      |   | 230,717   |  
|Accrued expenses                                                                          |  |                              | (187,917   | ) |      |   | 42,402    |  
|                                                                                          |  |                              |            |   |      |   |           |  
|Net cash provided by (used in) operating activities                                       |  |                              | 389,027    |   |      |   | (729,367  | )
|                                                                                          |  |                              |            |   |      |   |           |  
|Cash Flows from Investing Activities:                                                     |  |                              |            |   |      |   |           |  
|Purchase of property and equipment                                                        |  |                              | (41,938    | ) |      |   | (196,021  | )
|Increase in restricted cash                                                               |  |                              |           |   |      |   | (48,746   | )
|Decrease in other assets                                                                  |  |                              |           |   |      |   | 31,675    |  
|                                                                                          |  |                              |            |   |      |   |           |  
|Net cash used in investing activities                                                     |  |                              | (41,938    | ) |      |   | (213,092  | )
|                                                                                          |  |                              |            |   |      |   |           |  
|Cash Flows From Financing Activities:                                                     |  |                              |            |   |      |   |           |  
|Proceeds from the exercise of warrants                                                    |  |                              | 1,036,489  |   |      |   |          |  
|Proceeds from the exercise of stock options                                               |  |                              | 20,139     |   |      |   | 2,995     |  
|                                                                                          |  |                              |            |   |      |   |           |  
|Net cash provided by financing activities                                                 |  |                              | 1,056,628  |   |      |   | 2,995     |  
|                                                                                          |  |                              |            |   |      |   |           |  
|Net Increase (Decrease) in Cash and Cash Equivalents                                      |  |                              | 1,403,717  |   |      |   | (939,464  | )
|Cash and Cash Equivalents, beginning of period                                            |  |                              | 4,868,933  |   |      |   | 2,231,104 |  
|                                                                                          |  |                              |            |   |      |   |           |  
|Cash and Cash Equivalents, end of period                                                  |  | $                            | 6,272,650  |   |      | $ | 1,291,640 |  
|                                                                                          |  |                              |            |   |      |   |           |  
|Supplemental Disclosure of Non Cash Financing Transactions:                               |  |                              |            |   |      |   |           |  
|Accretion of dividend on Series A Convertible Preferred Stock                             |  | $                            | 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, 2004

(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. 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.



The condensed consolidated financial
statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). These consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, SMI. All significant inter-company balances and transactions have been eliminated in consolidation. These financial statements should be read in conjunction with the Companys audited financial
statements and related footnotes for the fiscal year ended December 31, 2003, which are included in the Companys Annual Report on Form 10-KSB filed with the SEC on March 16, 2004. In the opinion of the Companys management, the unaudited
condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments (consisting only of normal recurring accruals) necessary to present fairly the
Companys financial position as of March 31, 2004 and the results of operations and cash flows for the three months ended March 31, 2004 and 2003. Certain information and footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the relevant SEC rules and regulations. However, the Company believes that its disclosures are adequate to make the information presented
not misleading. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full fiscal year or any other interim period.



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 under development. 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.



As of September 30, 2003, the Company recognized $1,500,000 of license revenue under a license agreement with Bayer Diagnostics Division of Bayer
Healthcare LLC entered into on July 28, 2003. As a result, the Company is no longer considered a development stage company for financial reporting purposes.



(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 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 reported amounts of expenses 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 realizability
of deferred tax assets.



(b) Cash and Cash Equivalents



The Company considers all highly liquid investments with maturities of
ninety days or less to be cash equivalents. Cash equivalents consist primarily of commercial paper and money market funds as of March 31, 2004 and December 31, 2003.



(c) 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            
|Manufacturing equipment         |  | 5 years              
|Furniture and fixtures          |  | 7 years              
|Leasehold improvements          |  | Life of lease        



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##### Table of Contents

SONTRA MEDICAL CORPORATION

Notes to Consolidated Financial Statements

March 31, 2004

(Unaudited)



(d) 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 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 Opinion No. 25 no compensation cost is recognized for them. The Company does not plan to adopt the fair value accounting model for stock-based employee compensation under SFAS No.
123.



The Company applies Opinion 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, |           
|                                                                                                |  | 2004                         |            |   | 2003        |  
|                                                                                                |  | (unaudited)                  |            |   | (unaudited) |  
|Net lossas reported                                                                            |  | $                            | (1,189,172 | ) |             | $ | (950,679   | )
|                                                                                                |  |                             
|Add: stock-based employee compensation under APB No. 25                                         |  |                              | 76,565     |   |             |   |           |  
|                                                                                                |  |                             
|Deduct: stock-based employee compensation under SFAS No. 123                                    |  |                              | (255,686   | ) |             |   | (571,179   | )
|                                                                                                |  |                              |            |   |             |   |            |  
|Pro forma net loss                                                                              |  |                              | (1,368,293 | ) |             |   | (1,521,858 | )
|                                                                                                |  |                             
|Accretion of dividend and beneficial conversion feature on Series A Convertible Preferred Stock |  |                              | (213,434   | ) |             |   |           |  
|                                                                                                |  |                              |            |   |             |   |            |  
|Pro forma net loss                                                                              |  | $                            | (1,581,727 | ) |             | $ | (1,521,858 | )
|                                                                                                |  |                              |            |   |             |   |            |  
|Basic loss per share, as reported                                                               |  | $                            | (0.11      | ) |             | $ | (0.10      | )
|                                                                                                |  |                              |            |   |             |   |            |  
|Basic loss per share, pro forma                                                                 |  | $                            | (0.12      | ) |             | $ | (0.16      | )
|                                                                                                |  |                              |            |   |             |   |            |  



On July 24, 2002, the
Company granted 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 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 three months ended March 31, 2004, the Company increased additional paid-in capital and deferred compensation by $23,644 and $9,142, respectively, and recorded a non-cash compensation expense of $14,502 in the Statement of Loss.



On September 23, 2002, the Company repriced and/or exchanged
certain options previously granted 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 three months ended March 31, 2004, the Company increased
additional paid-in capital and deferred compensation by $98,625 and $22,808, respectively, and recorded a non-cash compensation expense of $75,817 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, 2004, the Company decreased deferred
compensation by $748 and recorded a non-cash compensation expense of $748 in the Statement of Loss.



During the quarter ended March 31, 2004, the Company granted options to purchase 20,000 shares of the Companys common stock at a price of $2.35 to
certain employees. In addition, on February 4, 2004, the Company granted an option to purchase 10,000 shares of the Companys common stock at a price of $1.88 to a consultant. This option was fully vested and the fair value of $17,104 was
recorded as additional paid in capital and non-cash compensation in the Statement of Loss.



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##### Table of Contents

SONTRA MEDICAL CORPORATION

Notes to Consolidated Financial Statements

March 31, 2004

(Unaudited)



During the quarter ended March 31, 2004, a total of 25,270 shares of common stock were issued for proceeds of $20,139 in conjunction with the exercise of
stock options. In addition, 91,866 shares of common stock with a fair value of $180,912 were issued to the Companys 401(k) plan.



(e) Net Loss per Common Share



Basic and diluted net loss per share of the Companys common stock are 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.



(f) 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, information technology and
facilities costs.



(3) COMMITMENTS



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 lease are approximately as follows:



|                                 |  |        |        
|-------------------------------- |  | ------ | -------
|                                 |  | Amount
|For the year ending December 31, |  |        |        
|2004                             |  | $      | 142,000
|2005                             |  |        | 163,000
|2006                             |  |        | 164,000
|2007                             |  |        | 172,000
|2008                             |  |        | 33,000 
|                                 |  |        |        
|Total                            |  | $      | 674,000
|                                 |  |        |        



(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 $82,813 for the three months ended March 31, 2004.



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SONTRA MEDICAL CORPORATION

Notes to Consolidated Financial Statements

March 31, 2004

(Unaudited)



During the quarter ended March 31, 2004, a total of 3,507,500 shares of Series A Preferred Stock converted into common shares and there was a preferred
dividend paid on such converted shares of $99,007 in the form of 99,007 shares of Common Stock. On the date of issuance, the 99,007 shares of Common Stock had a fair value of approximately $229,628. The excess of the fair value of the Common Stock
over the amount of the accrued dividend payable of $130,621 was recorded as additional beneficial conversion for purposes of determining Net Income Applicable to Common Shareholders. As of March 31, 2004, there were 2,987,500 shares of Series A
Convertible Preferred Stock outstanding.



During the quarter
ended March 31, 2004, warrants to purchase 695,000 shares of common stock were exercised at $1.50 per share, and the Company received $1,036,489 in net cash proceeds.



(5) 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 a continuous non-invasive glucose monitoring system. In consideration of the
license and the Companys delivery of all information, materials and know-how related to the licensed technology, on January 15, 2004, Bayer paid the Company a one-time, non-refundable license fee of $1.5 million. The Company had recorded the
$1.5 million license payment as accounts receivable and licensing revenue for year ended December 31, 2003.



The Company and Bayer may also 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. There can be no assurance that the Company and Bayer will enter into any
additional agreements or that Bayer will make any further payments to the Company. 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.



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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.



General and administrative expenses consist primarily of non-research personnel salaries and related expenses, facilities costs and professional fees. The Company expects 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 difference between the exercise price and fair value of common stock on the date of grant. Certain stock-based compensation expense is remeasured
each period and amortized over the vesting period of the applicable options, which is generally 42 months.



Financial Reporting Release No. 60, which was recently issued by the SEC, requires all registrants to discuss critical accounting policies or methods used
in the preparation of the financial statements. We do not believe that any of our current accounting policies or estimates reaches the level of being critical. However, we have made a number of estimates and assumptions that affect reported amounts
of assets, liabilities, revenues and expenses, and actual results may differ from those estimates. The areas that require the greatest degree of management judgment are the assessment of the recoverability of long-lived assets, primarily
intellectual property, and the realization, if any, of our net deferred tax assets.



We believe that full consideration has been given to all relevant circumstances that Sontra may be subject to, and the financial statements accurately reflect Sontras best estimate of the results of operations,
financial position and cash flows for the periods presented.



Results of
Operations



Comparison of the three months ended March 31, 2004 and
2003



Research and Development Expenses.



Research and development expenses increased by $135,000 to $676,000 for the
quarter ended March 31, 2004 from $541,000 for the quarter ended March 31, 2003. This increase was primarily attributable to costs incurred to build additional SonoPrep prototype skin permeation devices and human clinical trial expenses for the
transdermal delivery of lidocaine with SonoPrep.



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General and Administrative Expenses.



General and administrative expenses increased by $109,000 to $527,000 for the quarter ended March 31, 2004 from $418,000 for
the quarter ended March 31, 2003. The increase was primarily attributable to an increase in stock-based compensation expenses.



Interest Income.



Interest income was $14,000 for the quarter ended March 31, 2004 compared to interest income of $9,000 for the quarter ended March 31, 2003. This increase
in interest income is attributable to the Company having a higher average cash balance in 2004 compared to 2003.



Liquidity and Capital Resources



The Company has financed its operations since inception primarily through private sales of its preferred stock, the issuance of convertible promissory
notes, and the cash it received in connection with the Merger. As of March 31, 2004, the Company had $6,273,000 of cash and cash equivalents on hand.



Net cash provided by operating activities totaled $389,000 for the three months ended March 31, 2004. The net loss for the three months ended March 31,
2004 was $1,189,000 and included in this loss were non-cash expenses of $36,000 for depreciation and amortization, $108,000 for stock-based compensation and $181,000 for common stock contributed to the 401(k) plan. A decrease in accounts receivable
provided $1,500,000 of cash and a decrease in accounts payable and accrued expenses used $199,000.



Net cash used in investing activities was $42,000 for the three months ended March 31, 2004, resulting from the purchase of property and equipment.



Net cash provided by financing activities was $1,057,000 for
the three months ended March 31, 2004, as a result of the exercise of warrants and options to purchase common stock.



The Company expects that the cash and cash equivalents of $6,273,000 at March 31, 2004 will be sufficient to meet its cash requirements through June 2005.
In addition, as of March 31, 2004, the Company has outstanding warrants to purchase an aggregate of 6,305,000 shares of common stock at an exercise price of $1.50 per share and warrants to purchase an aggregate of 800,000 shares of common stock at
an exercise price of $1.20 per share. Upon any exercise of the warrants, the Company will receive the aggregate exercise price. The Company will be required to raise a substantial amount of capital in the future to complete the commercialization of
its products.



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.
| | - | ------------------------------------------------------------------------------------------------------------



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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
revenues and have had operating losses since our inception. Our historical accumulated deficit was approximately $19,212,000 as of March 31, 2004. It is possible that the Company will never generate any additional revenue or 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.



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 (from an historical accounting perspective), 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 will require substantial additional clinical trials to demonstrate the efficacy of our
products before we can begin to commercialize our products under development. 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. We have not begun to market or generate revenues from our products under development. 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. Raising capital has become
increasingly difficult for many companies. 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.
If the Company is unable to raise sufficient additional financing we will not be able to continue our operations.



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.
| | - | ------------------------------------------------------------



The development and commercialization of our potential products, including the SonoPrep® device and the continuous non-invasive glucose monitoring system, will require the
formation of strategic partnerships with third parties, as well as substantial capital expenditures either by the Company or the strategic partner of the Company on research, regulatory compliance, sales and marketing and manufacturing.



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



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of Sontras intellectual property rights to make, have made, use, import and sell a continuous non-invasive glucose monitoring system. 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. We may not be able to enter into any additional collaborative arrangements 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;
| | - | ----------------------------------------------------------------------------------------------



| |  | 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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Our products under development have a high risk of failure because they are in the early stages of development. To date, we have only tested the
feasibility of our SonoPrep® technology for various
applications, including glucose monitoring, transdermal drug delivery and certain anesthetic applications. Although the Company has received 510(k) marketing clearance from the FDA for our SonoPrep® device for use in electrophysiology applications, none of the other products currently
being developed by the Company have received regulatory approval or clearance for commercial sale. Substantial expenditures for additional research and development, including feasibility studies, pre-clinical studies and clinical testing, the
establishment of collaborative partnerships and regulatory, manufacturing, sales and marketing activities by collaborative partners will be necessary before commercial production of any of our technologies or their incorporation into products of
third parties. 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
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 clearance 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, 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. We will need to obtain additional 510(k) marketing clearances from the FDA in order to market other products and applications. In order to obtain marketing clearance
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. The PMA process is more rigorous and lengthier 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.



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Even if we receive 510(k) clearance or PMA 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. 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.



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. On June 18, 2003, we received a letter from Nasdaq stating that Sontra had failed to comply with the minimum $2.5 million stockholders equity requirement for continued listing set forth in Marketplace Rule 4310(c)(2)(B) and that as a
result, our Common Stock was subject to delisting from the Nasdaq SmallCap Market. On July 31, 2003, we had a hearing with the Nasdaq Listing Qualifications Panel and on August 25, 2003, the Nasdaq Listings Qualifications Panel granted Sontra a
conditional exception from Nasdaqs minimum $2.5 million stockholders equity requirement for continued listing set forth in Marketplace Rule 4310(c)(2)(B). The exception received from Nasdaq is subject to certain conditions. As required,
we filed with the Securities and Exchange Commission, on October 14, 2003, a balance sheet no older than 45 days prior to the filing evidencing stockholders equity of at least $2.5 million. In addition, we timely filed our Form 10-QSB for the
third quarter of 2003 showing stockholders equity of at least $2.5 million as of September 30, 2003. We also submitted to Nasdaq on a timely basis an unaudited balance sheet and income statement for the fiscal year ending December 31, 2003
evidencing stockholders equity of at least $2.5 million. Finally, we timely filed our Form 10-KSB for fiscal 2003 showing stockholders equity of at least $2.5 million as of December 31, 2003. Having met each of the conditions on a timely
basis, our Common Stock will remain listed on the Nasdaq SmallCap Market.



We must continue to satisfy Nasdaqs continued listing requirements 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 stockholders 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 world-wide license to use and sell certain technology
owned by the Massachusetts Institute of Technology (MIT) related to our ultrasound-mediated skin permeation technology. This license, which includes 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 or the strategy for determining when such licensed patents should be enforced. Instead, the Company relies upon MIT to determine the appropriate strategy for prosecuting and enforcing these patents. If MIT
does not adequately protect or enforce our patent rights, our ability to manufacture and market our products, currently in various stages of development, would be adversely affected.



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



We have an exclusive license from MIT on eight issued patents in the United States, three issued foreign patents, two pending U.S. patents and three
pending foreign patent applications, and as of March 31, 2004, we owned four issued patents and four pending patent applications in the United States and one foreign patent and sixteen 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.



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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® device and our continuous non-invasive glucose monitoring system, 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, Cygnus, Inc., SpectRx and TheraSense, Inc. The Companys SonoPrep® device will also compete with numerous companies
developing drug delivery products such as Nektar Therapeutic Systems, Inc., 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 and 3M Company.



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,



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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 and upon successful development and commercialization of our products, we intend to obtain product liability insurance in
the amount of $5,000,000. 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.



Our management has significant influence over the
control of Sontra.



Our officers and directors
beneficially own a significant percentage of the outstanding shares of our Common Stock. Accordingly, our officers and directors currently have significant influence over the outcome of any corporate transaction or other matters submitted to the
shareholders for approval, including mergers, consolidations and the sale of all or substantially all of the Companys assets, and also could prevent or cause a change in control. Third parties may be discouraged from making a tender offer or
bid to acquire the Company because of this concentration of ownership.



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. With the
exception of Dr. Thomas W. Davison, our President and Chief Executive Officer, and Sean Moran, our Chief Financial Officer, 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 is understaffed and has very 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 if the business begins to grow. 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 issuable in connection with the Private Placement;
| | - | ------------------------------------------------------------------------------------------



| |  | 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 stockholders 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, we recently completed a private placement of shares of Series A Preferred Stock and Common Stock Purchase Warrants. Upon issuance of the
shares of Common Stock issuable upon conversion of the shares of Series A Preferred Stock and the exercise of the Common Stock Purchase Warrants issued in the private placement, 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 2,987,500 were issued and outstanding as of March 31, 2004.
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.



The Companys management,
with the participation of the Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of such period, the Companys disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act.



Internal Control Over Financial
Reporting.



There have not been any changes in the
Companys internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the Companys first fiscal quarter that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.



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PART II: OTHER INFORMATION



Item 2. Changes in Securities



During the first quarter of fiscal 2004, we issued an aggregate of 3,606,507 shares of common stock upon the conversion of an aggregate of 3,507,500 outstanding shares of Series A Preferred Stock (and accrued dividends thereon paid in the
form of 99,007 shares of common stock). The shares of common stock were issued in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended, as a security exchanged by the issuer with its existing security holders exclusively where no
commission or other remuneration is paid or given directly or indirectly for soliciting such exchange and/or 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 of the shares of common stock.



During the first quarter of fiscal 2004, we issued and sold an aggregate of 695,000 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 $1.50 per share to us in connection with such exercises, for an aggregate purchase price of $1,042,500. 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 2004.



Item 5. Other Information



On April 23, 2004, the Securities and Exchange Commission declared effective the Companys Registration Statement on Form S-3 covering the resale of an aggregate of 800,000 shares of common stock of the Company issuable upon the
exercise of the Common Stock Purchase Warrants originally issued to the placement agent as compensation for the placement agents services in connection with the Companys Series A Preferred Stock financing and subsequently transferred to
the selling shareholders named in the Registration Statement. The selling shareholders are able to commence resales of such shares of common stock immediately under the Registration Statement. The Company will not receive any proceeds from the sales
of the shares of common stock by such selling shareholders. However, upon any exercise of such warrants by payment of cash, the Company will receive the exercise price of the warrants, which is $1.20 per share.



Item 6. Exhibits and Reports on Form 8-K



(a) Exhibits



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



(b) Reports on Form 8-K



|                        |  |            |  |                                                                                                                                                                                                                                                                                                                                                                         
|----------------------- |  | ---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date Filed or Furnished |  | Item No.   |  | Description                                                                                                                                                                                                                                                                                                                                                             
|February 6,2004         |  | Items 5, 7 |  | On February 6, 2004, the Company filed a Current Report on Form 8-K dated February 6, 2004 to report that it has received 510(k) marketing clearance from the U.S. Food and Drug Administration to
market its SonoPrep ultrasonic skin permeation device and electrode system for use in electrophysiology testing. No financial statements were filed with such report.
|                        |  |           
|March 18,2004           |  | Item 12    |  | On March 18, 2004, the Company furnished a copy of the Companys earnings release for its fiscal fourth quarter and fiscal year ended December 31, 2003. Consolidated financial statements
for such periods were furnished with such report.                                                                                                                            



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SIGNATURES



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



|                  |  |                            |  |                                                        
|----------------- |  | -------------------------- |  | -------------------------------------------------------
|                  |  | SONTRA MEDICAL CORPORATION
|                  |  |                           
|Date: May 7, 2004 |  | By:                        |  | /s/ THOMAS W. DAVISON                                  
|                  |  |                            |  | Thomas W. Davison President and Chief Executive Officer
|                  |  |                           
|Date: May 7, 2004 |  | 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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