**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        DC 20549**
    **FORM
        10-KSB**
 (Mark
        One)
  **x**  **ANNUAL
        REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
  For
        the
        fiscal year ended: December 31, 2005
  ** ̈**  **TRANSITION
        REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
  For
        the
        transition period from
                    
to
  COMMISSION
        FILE NUMBER 000-23017
 **SONTRA
        MEDICAL CORPORATION**
 **(Name
        of small business issuer in its charter)**
  **MINNESOTA**
              **41-1649949*****(State
                  or other jurisdiction of***
                ***incorporation
                  or organization)***
              ***(I.R.S.
                  Employer***
                ***Identification
                  Number)*****10
                  Forge Parkway, Franklin, Massachusetts**
              **02038*****(Address
                  of principal executive offices)***
              ***(Zip
                  Code)***
  **Issuer’s
        Telephone Number: (508) 553-8850**
  **Securities
        registered under Section 12(b) of the Exchange Act: None**
 **Securities
        registered under Section 12(g) of the Exchange Act: Common Stock, $.01 par
        value
        per share**
 
 Check
        whether the issuer is not required to file reports pursuant to Section 13
        or
        15(d) of the Exchange Act.  ̈
  Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90
        days.    Yes x No  ̈
  Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this form, and no disclosure will be contained,
        to
        the best of registrant’s knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB. x
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes  ̈ No x
 
 Issuer’s
        revenues for its most recent fiscal year: $176,000.
  The
        approximate aggregate market value of the voting and non-voting common equity
        held by non-affiliates of the issuer as of February 28, 2006, based upon
        the
        closing price of such stock on that date was $11,548,000.
  The
        number of shares of the issuer’s common stock outstanding as of February 28,
        2006 was 22,647,137.
  **DOCUMENTS
        INCORPORATED BY REFERENCE**
  Portions
        of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed
        with the Securities and Exchange Commission relative to the issuer’s 2006 Annual
        Meeting of Shareholders are incorporated by reference into Part III of this
        Form
        10-KSB.
 Transitional
        Small Business Disclosure Format (Check
        one):    Yes  ̈ No x
 
 
 
 **ANNUAL
          REPORT ON FORM 10-KSB**
  **YEAR
          ENDED DECEMBER 31, 2005**
  **TABLE
          OF CONTENTS**
  **Item**
                    
                    **Page****PART
                        I**1.
                    Description
                        of Business
                    
                    22.
                    Description
                        of Property
                    103.
                    Legal
                        Proceedings
                    104.
                    Submission
                        of Matters to a Vote of Security
                        Holders
                    10**PART
                        II**5.
                    Market
                        for Common Equity and Related
                        Stockholder Matters
                    116.
                    Management’s
                        Discussion and Analysis or Plan of
                        Operation
                    127.
                    Financial
                        Statements
                    228.
                    Changes
                        in and Disagreements with
                        Accountants on Accounting and Financial Disclosure
                    418A.
                    Controls
                        and Procedures
                    418B.
                    Other
                        Information
                    41**PART
                        III**9.
                    Directors,
                        Executive Officers, Promoters and Control
                        Persons; Compliance with Section 16(a) of the Exchange
                        Act
                    4210.
                    Executive
                        Compensation
                    4211.
                    Security
                        Ownership of Certain Beneficial Owners and
                        Management and Related Stockholder Matters
                    4212.
                    Certain
                        Relationships and Related
                        Transactions
                    4213.
                    Exhibits
                    4314.
                    Principal
                        Accountant Fees and Services
                    43
   This
          Annual Report on Form 10-KSB contains forward-looking statements within
          the
          meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
          and
          Section 27A of the Securities Act of 1933, as amended. For this purpose,
          any
          statements contained herein that are not statements of historical fact
          may be
          deemed to be forward-looking statements. Without limiting the foregoing,
          the
          words “believes,” “anticipates,” “plans,” “expects” and similar expressions are
          intended to identify forward-looking statements. The important factors
          discussed
          under the caption “Factors That May Affect Future Results” in Item 6 of this
          report, among others, could cause actual results to differ materially from
          those
          indicated by forward-looking statements made herein and presented elsewhere
          by
          management. Such forward-looking statements represent management’s current
          expectations and are inherently uncertain. Investors are warned that actual
          results may differ from management’s expectations. Sontra does not undertake any
          obligation to update forward-looking statements.
 1


**PART
      I**




**ITEM 1.****DESCRIPTION
      OF BUSINESS**




**Overview**




Sontra
      Medical Corporation is the pioneer of SonoPrep ® ,
      a
      non-invasive ultrasonic skin permeation technology for medical and therapeutic
      applications including transdermal diagnostics and the enhanced delivery of
      drugs through the skin. 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.




Our
      strategy is to combine our ultrasonic skin permeation technology together with
      synergistic biosensor and transdermal drug delivery technologies to develop
      a
      diversified product pipeline with opportunities for short-term commercialization
      and long-term strategic partnerships. Our vision is for painless and continuous
      transdermal diagnosis and drug delivery that will improve patient outcomes
      and
      reduce health care costs. We believe these benefits will be realized with
      improved patient compliance to treatment, continuous diagnosis and data
      collection, and new routes for continuous drug delivery.




To
      date,
      we have tested the feasibility of our SonoPrep technology for various
      applications, including glucose monitoring, transdermal drug delivery,
      vaccination and topical lidocaine delivery. We have received 510(k) marketing
      clearance from the FDA for our SonoPrep device for the transdermal delivery
      of
      4% topical lidocaine and in electrophysiology applications.





Our
      product development programs based on our SonoPrep technology include:




•  Continuous
      transdermal blood glucose monitoring.


•  Enhanced
      transdermal delivery of topically applied drugs.


•  Transdermal
      vaccination.


•  Transdermal
      drug delivery of large molecules and biopharmaceuticals.


•  Skin
      preparation prior to electrophysiology tests to improve electrical signals.





We
      expect
      to develop additional products, which will require substantial expenditures,
      including for feasibility studies, pre-clinical studies, prototype development
      and clinical testing. In addition, the establishment of collaborative
      partnerships and regulatory, manufacturing, sales and marketing activities
      by
      collaborative partners will be necessary for successful commercial production
      of
      our technologies or their incorporation into third-party products.





Our
      ultrasonic skin permeation technology was developed by our co-founders Dr.
      Joseph Kost and Dr. Robert Langer at the Massachusetts Institute of
      Technology’s Chemical and Bioengineering Laboratory. Sontra licensed the MIT
      technology and Sontra engineers and scientists reduced the technology to
      practice. We have an exclusive worldwide license from the Massachusetts
      Institute of Technology (MIT) under certain licensed patents to develop and
      commercialize ultrasonic skin permeation products. These licensed patents,
      which
      include eight issued patents in the United States, three issued foreign patents,
      two pending U.S. patents and three pending foreign patent applications, comprise
      a substantial portion of our patent portfolio relating to our
      technology.




We
      recently received ISO 13485 certification for our quality management system.
      In
      order to receive such certification, a company must implement a quality
      management system that encompasses all company functions including the design
      and development of products, the purchasing of materials and services and the
      delivery of the products and services, with all aspects of medical device,
      regulatory and industry requirements being addressed. ISO 13485 status is
      required before products can be marketed in Canada, the European Union, and
      several other countries.








**Company
      Information**




Sontra
      Medical Corporation, a Minnesota corporation, was formed through the merger
      of
      Sontra Medical, Inc. (“SMI”) and ChoiceTel Communications, Inc. (“ChoiceTel”) in
      June 2002 (the “Merger”). Following the Merger, ChoiceTel changed its name to
      Sontra Medical Corporation and began operating in SMI’s line of business.
      ChoiceTel was incorporated in Minnesota in 1989.




Our
      principal executive offices are located at 10 Forge Parkway, Franklin,
      Massachusetts 02038, and our telephone number is (508) 553-8850. Unless the
      context otherwise requires, the terms “Sontra,” “the Company,” “we,” “us” and
“our” refer to Sontra Medical Corporation. We make our annual reports on Form
      10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K and
      amendments to those reports available through our website, free of charge,
      as
      soon as reasonably practicable after we file such material with, or furnish
      it
      to the Securities and Exchange Commission. Our internet address is
      http://www.sontra.com. The contents of our website are not part of this annual
      report on Form 10-KSB, and our internet address is included in this document
      as
      an inactive textual reference only.








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**Recent
      Developments**





*2006
      Financing*





During
      the first quarter of fiscal 2006, the Company completed a financing (the
“Financing”) with selected qualified purchasers that provided the Company with
      net proceeds of approximately $1.6 million pursuant to the terms of a Common
      Stock and Warrant Purchase Agreement, dated as of March  7, 2006
      (the “Purchase Agreement”). Under the terms of the Purchase Agreement, at
      the initial closing of the Financing on March 7, 2006, investors
      purchased 4,390,995 shares of the Company’s Common Stock in a private
      placement at a per share purchase price of $0.40. The investors also received
      warrants (the “Warrants”) to purchase up to 4,390,995 shares of Common Stock.
      The Warrants are exercisable beginning six months from the issue date at a
      per
      share price of $0.58 and will expire no later than the fifth anniversary of
      the
      issue date. In addition, the Company shall have the right to terminate the
      Warrants, upon thirty days notice, in the event that the closing price of the
      Company’s common stock for twenty consecutive trading days is equal to or
      greater than $1.16 per share. Additional closings of the Financing at which
      the Company may issue up to 65,359 additional shares of Common Stock and
      additional warrants to purchase up to 65,359 shares of Common Stock on the
      same
      terms as the initial closing may be held through March 17,
      2006.





The
      Company agreed to pay to the placement agent for the Financing for its services:
      (a) a cash fee equal to 7% of the aggregate capital raised by the Company from
      investors introduced to the Company by the placement agent, excluding the
      proceeds from any Warrant exercises; (b) warrants to purchase a number of shares
      of Common Stock of the Company equal to 7% of the total number of shares of
      Common Stock issued to investors introduced to the Company by the placement
      agent, excluding shares of Common Stock to be issued upon Warrant exercises
      or
      in connection with the payment of dividends or interest, on the identical terms
      and conditions (including exercise price) with the Warrants issued to the
      investors in the Financing; and (c) a $25,000 legal expense
      allowance.




**SonoPrep** **®** **Skin Permeation Device**




The
      skin
      is the body’s barrier to the outside environment that prevents body fluids from
      escaping and prevents protein contaminants (pyrogens), microorganisms (viruses
      and bacteria) and other irritating substances from entering the body. The outer
      layer of the skin, the stratum corneum, is a relatively thin layer of
      brick-shaped keratinocytes which creates the skin barrier. The interstitial
      space between these keratinocytes contains a highly ordered lipid bi-layer
      that
      repels water and compounds that are water-soluble, including the body fluids
      and
      vital analytes such as electrolytes, proteins and glucose. An application of
      ultrasonic energy disorganizes the lipid bi-layer of the stratum corneum,
      thereby creating reversible channels in the skin through which fluids and
      analytes can be extracted and small and large molecules can be delivered. The
      transport properties of the protective stratum corneum are increased
      approximately 100-fold after ultrasonic skin permeation.




Our
      proprietary SonoPrep 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. Sontra developed the
      SonoPrep skin permeation device that makes the skin permeable for up to 24
      hours
      by applying ultrasonic energy to the skin for approximately 15 seconds.




The
      SonoPrep device consists of a battery-operated power and control unit, an
      ultrasonic applicator hand piece and a single use disposable coupling medium
      cartridge. The SonoPrep device applies relatively low frequency (compared to
      diagnostic imaging) ultrasonic energy to the skin. The ultrasonic horn in the
      device vibrates at 55,000 times per second (55KHz) and applies the energy to
      the
      skin through a liquid coupling medium to create cavitational bubbles that expand
      and contract in the coupling medium and the ordered lipid bilayer of the stratum
      corneum. Ultrasonic cavitation disorganizes the lipid bi-layer of the stratum
      corneum and creates reversible channels through which fluids and analytes can
      be
      extracted. High and low molecular weight molecules can also be delivered through
      the skin.







The
      Company’s SonoPrep device is easy to use and the treatment can be
      self-administered by the patient. The application is designed for safe use
      with
      an on-line feedback mechanism to detect permeation based on the reduction in
      electrical impedance and automatically shut off the ultrasonic energy when
      the
      effect is optimized. Most importantly, the permeability is reversible and the
      skin goes back to its normal state after approximately 24 hours. The SonoPrep
      device has each of the following attributes:




•  Non-invasive


•  Increases
      skin permeability approximately 100-fold


•  Well
      controlled and long-lasting skin permeability (up to 24 hours)


•  Painless
      and non-irritating


•  Fast
      and
      easy to use


•  Reversible


•  Safe


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Sontra
      has identified several target markets for products utilizing the SonoPrep
      technology, including glucose monitoring, topical lidocaine delivery,
      transdermal delivery of large molecules and transdermal vaccination. Sontra
      received its first FDA 510(k) marketing clearance for its SonoPrep device in
      February 2004 for enhancing electrophysiology signals. In August 2004, we
      received 510(k) marketing clearance from the FDA for the SonoPrep device and
      procedure tray for use with topical lidocaine. We will need to obtain additional
      510(k) marketing clearances, or PMA or NDA approvals, from the FDA in order
      to
      market other products and applications.





Sontra
      has completed product development of its second generation SonoPrep device.
      The
      device has improved ergonomics, portability, a digital display and iontophoresis
      capability. The device will also be more economical to manufacture than the
      first generation SonoPrep. The Company plans to introduce the second generation
      device during 2006 and plans to file for CE Mark clearance in Europe under
      the
      European Medical Device Directive.





***SonoPrep*** ***®*** ***Topical Anesthetic System for Rapid Skin Anesthesia***




In
      August
      2004, Sontra received 510(k) marketing clearance from the FDA to market the
      SonoPrep device and procedure tray for use with over-the-counter (OTC) 4%
      topical lidocaine for dermal anesthesia prior to the insertion of needles or
      intravenous catheters. In September 2004, the Company launched its SonoPrep
      Topical Anesthetic System for usage with OTC 4% topical lidocaine. The system
      consists of the SonoPrep device and a topical anesthetic procedure tray
      containing a SonoPrep coupling medium, cleaning cartridge and a locator ring. The
      product has been marketed through independent medical device distributors.
      However, the required selling effort and lengthy sales cycle for this product
      have caused us to reevaluate our distribution strategy. We are currently
      exploring additional sales and marketing channels, including potentially
      licensing the product to a larger medical products company.




To
      achieve
      rapid skin anesthesia, a patient’s skin is first permeated with the SonoPrep
      device and then topical lidocaine is applied to the permeated skin site. Sontra
      has demonstrated that SonoPrep can achieve skin analgesia in five minutes or
      less, versus the thirty to sixty minutes recommended for the existing topical
      anesthetics. The topical anesthetic products are used in dermatology and
      pediatrics procedures to numb the skin before IV insertions, blood draws and
      other needle sticks.




Although
      Sontra received this clearance, OTC 4% topical lidocaine has not been approved
      by the FDA for the indications covered by the Company’s 510(k) marketing
      clearance, namely needle sticks or venipuncture. Under federal law, the
      marketing of OTC 4% topical lidocaine for dermal anesthesia prior to the
      insertion of needles or intravenous catheters requires the FDA to approve a
      new
      drug application (NDA) with respect thereto. The Company intends to continue
      to
      market the SonoPrep Topical Anesthetic System pursuant to its 510(k) marketing
      clearance.




***Continuous
      Transdermal Glucose Monitoring System***





*Strategic
      Partnership with Bayer Diagnostics*





On
      July
      28, 2003, the Company and Bayer Diagnostics Division of Bayer Healthcare LLC
      (“Bayer”) executed a definitive license agreement pursuant to which the Company
      granted to Bayer an exclusive worldwide right and license of the Company’s
      intellectual property rights to make, have made, use, import and sell the
      continuous transdermal glucose monitoring system utilizing ultrasonic
      techniques. In consideration of the license and the Company’s delivery of all
      information, materials and know-how related to the licensed technology in 2003,
      Bayer paid the Company a one-time, non-refundable license fee of $1.5 million
      in
      January 2004. On December 14, 2005, the parties amended the license agreement,
      pursuant to which the Company reacquired the co-exclusive rights to make, have
      made, use, import and sell the continuous transdermal glucose monitoring system
      utilizing ultrasonic techniques in the worldwide hospital intensive care unit
      (ICU) market, and the Company granted Bayer a right of first refusal to market
      any hospital ICU product(s) that we may develop. If Bayer does not market
      Sontra’s hospital ICU product(s), then Sontra shall pay Bayer a royalty equal to
      1% of Sontra’s net product sales. In addition, upon Bayer’s completion of the
      first phase of its development of the continuous glucose monitoring system,
      Bayer shall pay a $2.0 million milestone payment to Sontra. Such milestone
      payment shall be paid no later than December 31, 2007, otherwise Bayer’s
      exclusive license rights under the amended license agreement shall become
      co-exclusive and Bayer’s marketing rights to Sontra’s hospital ICU product(s)
      shall terminate. The parties are no longer obligated under the amended license
      agreement to enter into one or more joint development agreements related to
      the
      continuous transdermal glucose monitoring system; however, in the second phase
      of Bayer’s product development process, the parties will agree upon reasonable
      royalty rates to be paid to Sontra for product sales by Bayer and the parties
      may also negotiate a commercially reasonable manufacturing agreement pursuant
      to
      which Sontra would supply Bayer with the SonoPrep ultrasonic skin permeation
      component of the continuous transdermal glucose monitoring system.


4
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*Hospital
      Critical Care*





A
      primary
      cause of infection in critically ill patients is hyperglycemia which is a result
      of insulin resistance and total parenteral nutrition. Numerous clinical studies
      have demonstrated that intensive insulin therapy to maintain tight glycemic
      control significantly reduces patient mortality, complications and infection
      rates in the ICU, as well as reduce hospital stays, services and costs. As
      a
      result, intensive insulin administration with frequent blood glucose testing
      to
      maintain tight glycemic control is a recent trend in critical care medicine
      for
      patients with and without diabetes.





Today,
      standard practice by ICU nurses is to measure blood glucose at the bedside
      hourly and to note, not only the absolute value, but the rate of change. We
      believe that a continuous transdermal glucose monitor will not only save
      valuable nursing time by avoiding the requirement for frequent needle stick
      glucose measurements but will provide the information needed to develop better
      control algorithms for insulin administration.





In
      2005,
      the Company established a Clinical Advisory Board to provide product and
      clinical guidance to the Company for our continuous non-invasive glucose
      monitoring system for the critical care market. The members of the Clinical
      Advisory Board include:





**Bruce
                R. Bistrian, M.D., Ph.D.**
            Chief
                of Clinical Nutrition, Beth Israel Deaconess Medical Center, and
                Professor, Harvard Medical School**Peter
                A. Burke, M.D.**
            Chief
                of Critical Care Section, Surgery, Boston Medical Center, and Associate
                Professor of Surgery, Boston University School of
                Medicine**Mitchell
                M.****Levy,
                M.D.**
            Medical
                Director, Medical Intensive Care Unit, Rhode Island
                Hospital**Stanley
                A. Nasraway, M.D.**
            Chief
                of Surgical Critical Care, Tufts-New England Medical Center, and
                Associate
                Professor, Tufts Medical School**Richard
                J. Shemin, M.D.**
            Chief
                of the Department of Cardiothoracic Surgery, Boston Medical Center,
                and
                Professor and Chairman of the Department of Cardiothoracic Surgery,
                Boston
                University School of Medicine





We
      have
      completed the designs of a new telemetry-based sensor and meter for our
      transdermal glucose monitoring system and have completed the development of
      fully operational prototypes. We expect to commence validation clinical studies
      in critical care in early 2006 at Tufts-New England Medical Center, the Boston
      Medical Center, Beth Israel Deaconess Hospital and Rhode Island Hospital.
      Members of our Clinical Advisory Board will be the principal investigators.
      We
      expect the results of these studies to prepare us to meet with the FDA to
      discuss further clinical studies and the path to regulatory approval and product
      commercialization.





*Diabetes
      Care*





Diabetes
      is a
      serious metabolic disorder and is the sixth leading cause of death in the United
      States, and those individuals afflicted with the disease are at serious risk
      of
      developing complications, such as coronary and vascular disease, retinopathy
      and
      neuropathy. The immediate and long-term effects of inadequate blood glucose
      control are devastating. Diabetes is the leading cause of kidney failure, adult
      blindness, non-traumatic amputations and nerve damage. When patients monitor
      their blood glucose frequently they can schedule their insulin injections to
      properly control their glucose levels. Clinical studies have proven that tighter
      glucose control through precise insulin dosing significantly reduces diabetes
      related complications. The Company believes that continuous transdermal
      monitoring of blood glucose will greatly improve a patient’s compliance to
      frequent testing, which has been shown to significantly reduce severe
      complications related to diabetes and lead to reduced health care costs.





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Pursuant
      to our strategic partnership with Bayer, we are developing a transdermal glucose
      monitoring system that continuously measures glucose levels in patients with
      diabetes and addresses the unmet need in the home testing market for a truly
      continuous and non-invasive glucose monitor. The glucose monitoring system
      consists of the SonoPrep skin permeation device and a glucose flux biosensor
      placed over the permeated skin site that continuously measures the glucose
      as it
      flows into the sensor. Because SonoPrep can permeate many different skin
      locations a patient will be able to place the biosensor on skin areas that
      are
      out of sight such as the abdomen, so the patient can maintain an active
      lifestyle. The glucose biosensor is designed to continuously measure glucose
      levels and transmit readings wirelessly to a glucose meter that will be designed
      as a watch or beeper capable of transmitting data to a night stand alarm
      monitor.




The
      glucose biosensor contains an electrochemical sensor and an osmotic extraction
      gel that couples with the skin and continuously draws the glucose into the
      sensor. The glucose that flows through the skin is consumed by the biosensor
      as
      it reacts with glucose oxidase that is contained in the biosensor. This chemical
      reaction produces a constant electrical signal, which is recorded by the glucose
      meter. Due to the enhanced permeation created with SonoPrep, the constant
      glucose flux detected by the glucose biosensor provides continuous glucose
      measurements that are analyzed every second.




Sontra
      completed its first clinical study in patients with diabetes in April 2003.
      The
      study was conducted using a prototype of the first generation SonoPrep skin
      permeation system and Sontra’s first glucose flux biosensor and meter
      prototypes. Twenty glucose flux biosensors (2 per patient) were placed over
      ten
      SonoPrep treated skin sites of ten adult subjects with Type 1 or Type 2
      diabetes. Data was collected for eight to nine hours. Over 5,000 data points
      were collected and analyzed per sensor. As a control, blood glucose was measured
      from an intravenous catheter or finger stick blood withdrawn every twenty
      minutes. Data sets comparing blood glucose measurements to data from the glucose
      flux biosensor had an 84 percent (r=.84) correlation to glucose measurements.
      The accuracy of the data from this study demonstrated the clinical feasibility
      of our system. In November 2004, Sontra completed a second clinical study that
      included twelve adult participants with either Type 1 or Type 2 diabetes. Each
      participant had three glucose flux biosensors placed on their skin, allowing
      over 2,000 glucose measurements to be collected over an eight-hour period at
      five-second intervals. Completed data showed a 90 percent (r=.90) correlation
      to
      reference blood glucose measurements.




Bayer
      is
      continuing to develop and verify the technology for the diabetes care market
      segment. Our SonoPrep skin permeation and glucose sensing technology being
      developed for our hospital ICU product will complement Bayer’s development of a
      product for the diabetes home testing market. For example, we have recently
      made
      technology advances that will help Bayer overcome market barriers for the home
      use continuous transdermal glucose monitor, including simplification of the
      sensor application and warm up process and advances in SonoPrep technology
      that
      will significantly reduce costs as required by reimbursement constraints in
      blood glucose self-testing.




***Transdermal
        Vaccine Delivery***




SonoPrep
      disrupts the stratum corneum and has the potential to precisely deliver vaccines
      to the viable epidermis to activate the dendritic Langerhan cells which invoke
      a
      powerful immune response. The Company is developing a universal patch/reservoir
      delivery system for the transdermal delivery of vaccines. In October 2004,
      the
      Company completed a twenty patient human clinical study conducted at the
      University of Massachusetts that demonstrated that SonoPrep facilitated the
      transdermal delivery of large molecular weight antigenic proteins; tetanus
      toxoid and candida albicans (yeast) to induce a skin immune response. Building
      on this study, in 2005 the Company completed additional studies at the
      University of Massachusetts and St. Louis University using SonoPrep to deliver
      the hepatitis A and influenza vaccines through the skin. In both the hepatitis
      A
      and influenza studies, there were no serious adverse events in the
      SonoPrep-treated groups; however the subjects that received the SonoPrep
      treatment did not demonstrate the desired immune response. The knowledge gained
      in those studies is helping the Company optimize the formulation and delivery
      of
      vaccines through ultrasonically permeated skin.





The
      Company has formed a research collaboration with Epivax, Inc. to investigate
      the
      topical delivery of Epivax’s therapeutic HIV vaccine and other DNA vaccines with
      the SonoPrep skin permeation device. The companies will first seek to optimize
      the immune response of the HIV vaccine in animal studies by controlling such
      variables as dosage, skin area treated, and the vaccine exposure time. Epivax
      has developed sophisticated proprietary tools that combine bioinformatics with
      immunology to sequence proteins and identify specific epitopes responsible
      for
      creating an immune response.





In
      addition, the Company has received a $70,000 Phase 1 U.S. Army SBIR grant to
      investigate the transdermal delivery of a dengue vaccine with the SonoPrep
      skin
      permeation device. The U.S. Army is developing a vaccine for the dengue virus,
      a
      mosquito-born viral disease found in tropical regions of the world and
      afflicting tens of millions of people.





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***Transderma*** ***l
      Drug*** ***Delivery*** ******


The
        existing worldwide transdermal drug market consists of low molecular weight
        drugs. The formidable challenge of effectively permeating the skin and
        delivering a therapeutic dosage within the required onset time of action
        has
        currently limited the transdermal drug delivery market to low molecular weight
        drugs. The following drugs are being marketed in transdermal formulations:
  **Drug**
                **Indication**Lidocaine
                Topical
                    AnesthesiaFentanyl
                PainNitroglycerine
                Anti-anginaEstradiol
                Hormone
                    ReplacementEstradiol/Norethindrone Acetate
                Hormone
                    ReplacementTestosterone
                HypogonadismOxybutinin
                Overactive
                    BladderClonidine
                HypertensionScopolamine
                Motion
                    SicknessNicotine
                Smoking
                    Cessation
     Sontra
        believes that its SonoPrep skin permeation technology can be positioned in
        the
        transdermal drug delivery market based on the following product attributes:
 •  An
          application of SonoPrep can significantly accelerate the onset time of
          action,
          thereby expanding the clinical indications for existing transdermal systemic
          drugs and topically applied local drugs where current onset times limit
          the
          clinical indications for these drugs.
  •  An
          application of SonoPrep increases skin permeation 100 times greater than
          untreated skin, thereby making it possible to deliver large molecule drugs.


***HortResearch
        Collaboration Agreement***
 
 On
        November 14, 2005, the Company entered into a License Option and Research
        Collaboration Agreement with The Horticulture and Food Research Institute
        of New
        Zealand Limited (“HortResearch”) to evaluate the use of the SonoPrep skin
        permeation device for the transdermal measuring, extracting and diagnosis
        of
        analytes that are biochemical indicators of sports performance and recovery.
        Sontra granted HortResearch a one-year option to obtain an exclusive, worldwide
        license to the SonoPrep skin permeation technology for the sports performance
        field.
 
 The
        license option, for which HortResearch paid Sontra $50,000, may be extended
        for
        one year upon the payment of an additional option fee of $50,000. If
        HortResearch elects to license the technology, the parties will execute a
        license agreement and Sontra will receive a license fee consisting of a $500,000
        cash payment and equity worth $500,000 in a new company that HortResearch
        is
        forming to develop and commercialize the technology.
 
 ***Electrophysiology
        Preparation***
  Electro-cardiograms
        (EKG), electro-encephalograms (EEG) and electro-myelograms (EMG) are common
        electrophysiology modalities used in medical diagnosis. Three principal elements
        of successful tests are:
  •  Electrode
        adhesion
 •  Conductivity
        (low impedance) between the electrode and the skin
 •  Motion
        artifact and electrical interference reduction
  The
        most
        important variable that needs to be controlled in order to obtain an accurate
        electrophysiology test result is a reduced level of skin impedance. Lower
        impedance means higher signals and lower signal-to-noise ratios. The standard
        impedance level desired in most electrophysiology measurements is 5000 Ohms.
        In
        order to achieve this level, technicians prepare the skin site by shaving,
        cleaning and de-fatting with alcohol and, in some applications, dermabrasion
        with sandpaper or tape stripping. These procedures are time consuming, often
        painful and not always effective.
 The
        SonoPrep
        device has been demonstrated through an internal human feasibility study
        to
        reduce skin impedance consistently to 1000 Ohms. The Company believes the
        SonoPrep device will add value to applications where low impedance is critical
        to enhance signal strength and motion artifact is a concern. In February
        2004,
        Sontra received 510(k) marketing clearance
        from the FDA for its SonoPrep device for use in electrophysiology applications.
        The Company is currently evaluating the commercial market opportunity and
        methods of distribution for electrophysiology applications.


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**Government
        Regulation**
  Sontra’s
        SonoPrep device and procedure tray for use with topical lidocaine, and its
        continuous glucose monitoring product in development, are regulated as medical
        devices and are subject to extensive regulation by the Food and Drug
        Administration (FDA) and other regulatory authorities in the United States.
        The
        Federal Food, Drug, and Cosmetic Act (the “FD&C Act”) and other federal and
        state statutes and regulations govern the research, design, development,
        manufacturing, preclinical and clinical testing, storage, packaging,
        recordkeeping, servicing, labeling, distribution and promotion of medical
        devices in the United States. Failure to comply with these requirements can
        lead
        to stringent sanctions, including withdrawal or recalls of products from
        the
        market, refusal to authorize government contracts, civil monetary penalties
        and
        criminal prosecution.
  Generally,
        medical devices require FDA approval or clearance before they may be marketed.
        There are two review procedures by which a product may receive such approval
        or
        clearance. Some products may qualify for clearance under a pre-market
        notification, or 510(k) procedure, in which the manufacturer provides to
        the FDA
        a pre-market notification that it intends to begin marketing the product,
        and
        demonstrates to the FDA’s satisfaction that the product is substantially
        equivalent to a legally marketed device. A product is considered substantially
        equivalent if it has the same intended use, and also has either the same
        technological characteristics (as defined in the FD&C Act), or if the
        product has different technological characteristics, the information submitted
        in the pre-market notification demonstrates that the product is as safe and
        effective, as a legally marketed device and does not raise different questions
        of safety and effectiveness than a legally marketed device. Marketing may
        commence when the FDA issues a clearance letter. If a medical device does
        not
        qualify for the 510(k) procedure, the FDA must approve a pre-market approval
        application, or PMA, before marketing can begin. PMA applications must
        demonstrate, among other matters, that the medical device is safe and effective.
        The PMA process is typically more comprehensive than the 510(k) process,
        and
        usually requires pre-clinical and extensive clinical studies. Further, before
        the FDA will approve a PMA, the manufacturer must pass an inspection
        demonstrating its compliance with the requirements of the FDA’s quality system
        regulations. FDA requests for additional studies during the review period
        are
        not uncommon, and can significantly delay approvals.
 
 In
        addition, a number of other FDA requirements apply to medical device
        manufacturers and distributors. Device manufacturers must be registered and
        their products listed with the FDA, and certain adverse events and product
        malfunctions must be reported to the FDA. The FDA also prohibits an approved
        or
        cleared device from being marketing for unapproved or uncleared uses. Our
        product labeling, promotion and advertising are subject to continuing FDA
        regulation. Manufacturers must comply with the FDA’s quality system regulation,
        which establishes extensive requirements for quality control and manufacturing
        procedures. The FDA periodically inspects facilities to ascertain compliance
        with these and other requirements. Thus, manufacturers and distributors must
        continue to spend time, money and effort to maintain compliance. Failure
        to
        comply with the applicable regulatory requirements may subject us to a variety
        of administrative and judicially imposed sanctions, including withdrawal
        of an
        approval or clearance, warning letters, product recalls, product seizures,
        total
        or partial suspension of production or distribution, injunctions, and civil
        and
        criminal penalties against the Company or its officers, directors or employees.
        Failure to comply with regulatory requirements could have a material adverse
        effect on our business, financial condition and results of operations.
  In
        February 2004, Sontra received 510(k) marketing clearance from the FDA for
        its
        SonoPrep device for use in electrophysiology applications. In August 2004,
        Sontra received 510(k) marketing clearance from the FDA to market the SonoPrep
        device and procedure tray for use with over-the-counter (OTC) 4% topical
        lidocaine for dermal anesthesia prior to the insertion of needles or intravenous
        catheters. In September 2004, the Company launched its SonoPrep Topical
        Anesthetic System, which consists of the SonoPrep device and a topical
        anesthetic procedure tray for usage with OTC 4% topical lidocaine. Although
        Sontra received this clearance, OTC 4% topical lidocaine has not been approved
        by the FDA for the indications covered by the Company’s 510(k) marketing
        clearance, namely pain relief associated with needle sticks or venipuncture.
        Under federal law, the marketing of OTC 4% topical lidocaine for dermal
        anesthesia prior to the insertion of needles or intravenous catheters requires
        the approval of the FDA of a new drug application (NDA) with respect thereto.
        The FDA may require the Company to submit an NDA seeking approval of OTC
        4%
        topical lidocaine for dermal anesthesia prior to the insertion of needles
        or
        intravenous catheters. The Company intends to continue to market the SonoPrep
        Topical Anesthetic System pursuant to its 510(k) marketing clearance and
        the FDA
        may determine to limit, restrict or delay our ability to market the system.
        If
        the FDA determines that an NDA is required, it is likely that our 510(k)
        marketing clearance would be rescinded, which would have a material adverse
        effect on our business and results of operations.
  In
        order
        to obtain marketing clearance for its continuous transdermal glucose monitoring
        system, Sontra will be required to file a PMA application that demonstrates
        the
        safety and effectiveness of the product. In addition, applications of the
        SonoPrep device in conjunction with drugs or vaccines will require FDA approval
        for each drug or vaccine for the
 specific
        indication if such approval does not already exist. The NDA process is
        comprehensive and includes the results of pre-clinical and extensive clinical
        studies before approval may be obtained, similar to the PMA process.
 8
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  **Research
        and Development**
  To
        date,
        our research and development efforts have been aimed at the development and
        commercialization of our SonoPrep technology for transdermal diagnostic and
        drug
        delivery applications. We are also developing complete transdermal product
        solutions that combine our ultrasonic skin permeation technology together
        with
        synergistic biosensor and transdermal drug delivery technologies. For all
        of our
        products we will conduct human clinical trials to demonstrate the benefits
        of
        our SonoPrep device and our transdermal products.
  For
        the
        years ended December 31, 2005 and 2004, our research and development expenses
        were approximately $3,795,000 and $3,039,000, respectively.
  **Sales
        and Marketing**
  We
        market
        the SonoPrep device and procedure tray for use with topical lidocaine through
        independent medical device distributors. However, the required selling effort
        and lengthy sales cycle for this product have caused us to reevaluate our
        distribution strategy. We are currently exploring additional sales and marketing
        channels, including potentially licensing the product to a larger medical
        products company. For our other potential products such as transdermal
        vaccination, drug delivery and glucose monitoring, we expect to use multiple
        sales and distribution channels, including direct sales, independent
        distributors and partnerships with large pharmaceutical companies.
  **Manufacturing**
  We
        currently perform manufacturing of certain critical components and final
        assembly and testing of the SonoPrep device at our Franklin, Massachusetts
        facilities. As volumes increase, we may decide to outsource the manufacturing
        of
        the entire device.
  **Competition**
  The
        medical device industry in general, and the market for glucose monitoring
        in
        particular, is intensely competitive. Sontra’s continuous transdermal glucose
        monitoring system will compete directly with glucose monitoring products
        manufactured by Roche Diagnostics, LifeScan, Inc., a division of Johnson
&
Johnson, Bayer Corporation, MediSense, a division of Abbott Laboratories,
        Medtronic, Inc., Dexcom, SpectRx and TheraSense, Inc. The Company’s SonoPrep
        device will also compete with numerous companies developing drug delivery
        products such as Nektar Therapeutics, Alkermes, Inc., Bioject, Inc., PowderJect
        Pharmaceuticals PLC, Antares Pharma, Inc., Becton Dickinson & Co., Aerogen,
        Inc., ALZA Corporation, a division of Johnson & Johnson, Norwood Abbey
        Limited, Vyteris, Iomed and 3M Company. In the topical lidocaine market,
        Sontra
        competes with the existing topical lidocaine products manufactured by Astra
        and
        others, and also competes with Norwood Abbey, who has received clearance
        from
        the FDA to market a laser poration device and Vyteris, who has received FDA
        approval to market an iontophoretic device.
  The
        first
        product to reach the market in a therapeutic area often has a significant
        competitive advantage relative to later entrants to the market. Competitive
        products have either been approved or are being developed for most of the
        products in Sontra’s pipeline. Many pharmaceutical and medical device companies
        have the financial resources to acquire the skills necessary to develop
        transdermal systems. Additionally, many competitors or potential competitors
        of
        Sontra are larger than Sontra and able to commit significantly greater financial
        and other resources to all aspects of their business, including development,
        marketing, sales and distribution, and may have substantially greater experience
        in developing products, in obtaining regulatory approvals and in manufacturing
        and marketing products. In addition, other technologies or products may be
        developed that have an entirely different approach or means of accomplishing
        the
        intended purposes of Sontra’s product concepts that are more commercially
        attractive than Sontra’s product concepts, or that could render Sontra’s
        technology uncompetitive or obsolete. Any transdermal drug delivery products
        that Sontra may develop will also compete with drugs marketed in traditional
        dosage forms, including oral doses, injections and continuous infusion. New
        drugs, new therapeutic approaches or further developments or innovations
        in
        alternative drug delivery methods, such as time release capsules, liposomes
        and
        implants, may provide greater therapeutic benefits for a specific indication
        or
        may offer comparable performance at lower cost, than those that could be
        offered
        by Sontra’s current transdermal drug delivery technology.
  Sontra
        expects that any products that it develops will compete primarily on the
        basis
        of product efficiency, safety, patient convenience, reliability, availability
        and price. However, there can be no assurance that Sontra will successfully
        develop technologies and products that are more effective, safer, more
        convenient, more reliable, more available or more affordable than those being
        developed by its current and future competitors.




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**Intellectual
        Property**
  Currently,
        Sontra maintains a comprehensive portfolio of intellectual property. Sontra
        has
        pursued a course of developing and acquiring patents and patent rights and
        licensing technology. Sontra’s success depends primarily on its ability to
        establish and maintain the proprietary nature of its technology through the
        patent process and to license third-party patents and patent applications
        necessary to develop its products. In order to protect its proprietary
        technologies, Sontra also relies on a combination of trademark, copyright
        and
        trade secret protection, as well as confidentiality agreements with employees,
        consultants and third parties.
  Sontra
        owns or exclusively licenses patents and patent applications that are very
        broad
        in scope, including ultrasound-enhanced transdermal drug delivery and
        ultrasound-enhanced transdermal analyte extraction and measurement (i.e.
        transdermal diagnostics), and provide significant protection from new entrants.
        Sontra has also patented specific elements of the technology that are keys
        to
        successful skin permeation enhancement and to establish our position in the
        area
        of ultrasound-enhanced skin permeation. Sontra has not sought patent protection
        for all of its technology. Sontra seeks patent coverage in the United States
        and
        in foreign countries only on aspects of its transdermal technologies that
        it
        believes will be significant and that could provide barriers to entry for
        its
        competition. 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 December 31, 2005, we
        owned
        four issued patents and six pending patent applications in the United States
        and
        two foreign patent and fifteen pending foreign applications. Sontra’s success
        depends to a significant degree upon its ability to develop proprietary products
        and technologies and to obtain patent coverage for such products and
        technologies. Sontra intends to file patent applications covering any newly
        developed products or technologies.
  Pursuant
        to a license agreement entered into with MIT in June 1998, Sontra has an
        exclusive, worldwide license to certain patent rights related to the use
        of
        ultrasound to enhance skin permeability for applications in transdermal
        diagnostics and drug delivery. The term of this license extends until 2018,
        the
        expiration date of the last to expire of the patents licensed under the
        agreement. Under the agreement, Sontra is obligated to pay MIT annual license
        maintenance fees of $25,000 per year and running royalties based on the net
        sales of any products that are covered by the licensed patent
        rights. Sontra
        also has the right to grant sublicenses under the agreement, for which Sontra
        must also pay royalties to MIT for products sold by such sub licensees. MIT
        may
        terminate this license upon 90 days written notice if we fail to pay the
        annual
        license maintenance fees or running royalties, or otherwise upon an uncured
        material breach of the agreement.
  **Employees**
  As
        of
        February 1, 2006, Sontra had 21 full time employees, 13 of whom are engaged
        in
        research and development activities, three of whom are engaged in sales and
        marketing, two of whom are engaged in manufacturing activities, and three
        of
        whom are engaged in administration, finance and business development. All
        of
        Sontra’s employees are covered by confidentiality agreements. No employees are
        covered by collective bargaining agreements.
 
 **ITEM 2.****DESCRIPTION
        OF PROPERTY**
  Sontra
        leases approximately 13,000 square feet of manufacturing, laboratory and
        office
        space in a single facility located in Franklin, Massachusetts under a lease
        expiring in March 2008. We have never engaged in real estate investment
        activities and we have no current plans to do so.
  **ITEM 3.****LEGAL
        PROCEEDINGS**
  From
        time
        to time, we may be involved in litigation relating to claims arising out
        of our
        operations in the normal course of business. We currently are not a party
        to any
        legal proceedings, the adverse outcome of which, in management’s opinion,
        individually or in the aggregate, would have a material adverse effect on
        our
        results of operations or financial position.
 
 **ITEM 4.****SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  There
        were no matters submitted to a vote of security holders during the quarter
        ended
        December 31, 2005.
 
 10
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  **PART
          II**
 **ITEM 5.****MARKET
          FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**
  Our
          common stock is traded on the Nasdaq Capital Market under the symbol “SONT.” The
          following table sets forth the range of high and low sale prices for our
          common
          stock for the periods indicated as reported by Nasdaq. The number of common
          shareholders of record of Sontra Medical Corporation as of February 3,
          2006 was
          approximately 108.
     **HIGH**
                
                **LOW**Fiscal
                    Year Ended
                    December 31, 2004First Quarter
                $3.45
                
                $1.70Second
                      Quarter
                $2.80
                
                $1.80Third 
                      Quarter
                $2.63
                
                $1.22Fourth
                      Quarter
                $2.39
                
                $1.65Fiscal
                      Year
                      Ended December 31, 2005First
                      Quarter
                $2.24
                
                $1.07Second
                      Quarter
                $1.59
                
                $1.00Third Quarter
                $2.00
                
                $1.01Fourth Quarter
                $1.25
                
                $0.42
 We
            have
            never paid or declared any cash or other dividends on our common stock.
            We have
            no current plans to pay dividends on our common stock. We intend to retain
            earnings, if any, for working capital purposes. Any future determination
            as to
            the payment of dividends will depend upon our results of operations,
            and on our
            capital requirements, financial condition and other relevant factors
            which are
            in effect at that time.
  Information
            regarding our equity compensation plans and the securities authorized
            for
            issuance thereunder is set forth in Item 11 below.
  We
            did
            not repurchase any shares of common stock during the fourth quarter of
            fiscal
            2005.
  *Nasdaq
            Delisting Notice*
  On
            November 23, 2005, the Company received a Nasdaq Staff deficiency letter
            (the “Letter”), indicating that the Company is not in compliance with the $1.00
            minimum closing bid price requirement for continued listing on the Nasdaq
            Capital Market as set forth in Marketplace Rule 4310(c)(4) (the “Rule”). We
            received the Letter because the bid price of our Common Stock closed
            below $1.00
            per share for 30 consecutive business days. The Letter also stated that,
            in
            accordance with Marketplace Rule 4310(c)(8)(D), Sontra will be provided
            180
            calendar days, or until May 22, 2006, to regain compliance. In accordance
            with Marketplace Rule 4310(c)(8)(E), if at any time before May 22, 2006,
            the bid price of the Company’s common stock closes at or above $1.00 per share
            for a minimum of ten consecutive business days, the Company will be provided
            written notice that it complies under the Rule.  If
            compliance with the Rule cannot be demonstrated by May 22, 2006, the Staff
            will determine whether Sontra meets the Nasdaq Capital Market initial
            listing
            criteria set forth in Marketplace Rule 4310(c), except for the bid price
            requirement. If the Company meets the initial listing criteria, the Company
            will
            be granted an additional 180 calendar-day period to comply with the Rule.
            If it
            is determined that the Company is not eligible for this additional compliance
            period, the Company will be provided written notice that its securities
            will be
            delisted. At that time, the Company may appeal to a Listing Qualifications
            Panel
            the Staff’s determination to delist its securities.  We
            intend
            to monitor the closing bid price of our Common Stock between now and
            May 22, 2006, and to consider available options if our Common Stock does
            not trade at a level likely to result in regaining compliance with the
            Nasdaq
            minimum closing bid price requirement.
 11
 **ITEM 6.****MANAGEMENT’S
          DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**




*The
      following discussion of our consolidated financial condition and results of
      operations should be read in conjunction with the financial statements and
      the
      related notes thereto included elsewhere in this Form 10-KSB. The matters
      discussed herein contain forward-looking statements within the meaning of
      Section 21E of the Securities Exchange Act of 1934, as amended, and Section
      27A
      of the Securities Act of 1933, as amended, which involve risks and
      uncertainties. All statements other than statements of historical information
      provided herein may be deemed to be forward-looking statements. Without limiting
      the foregoing, the words “believes”, “anticipates”, “plans”, “expects” and
      similar expressions are intended to identify forward-looking statements. Factors
      that could cause actual results to differ materially from those reflected in
      the
      forward-looking statements include, but are not limited to, those discussed
      in
“Risk Factors” and elsewhere in this report and the risks discussed in our other
      filings with the SEC. Readers are cautioned not to place undue reliance on
      these
      forward-looking statements, which reflect management’s analysis, judgment,
      belief or expectation only as of the date hereof. We undertake no obligation
      to
      publicly revise these forward-looking statements to reflect events or
      circumstances that arise after the date hereof.*




**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. To date, we have tested the feasibility of our SonoPrep technology for
      various applications, including glucose monitoring, transdermal drug delivery,
      vaccination and topical lidocaine delivery. The Company has received 510(k)
      marketing clearance from the FDA for our SonoPrep device for the transdermal
      delivery of 4% topical lidocaine and in electrophysiology applications. In
      September 2004, we launched our SonoPrep Topical Anesthetic System, which
      consists of the SonoPrep device and a topical anesthetic procedure tray for
      usage with OTC 4% topical lidocaine. During the fiscal year ended December
      31,
      2005, we recorded product revenue of $171,000.




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




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




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




**Critical
      Accounting Policies and Estimates**




Management’s
      Discussion and Analysis or Plan of Operation discusses our consolidated
      financial statements, which have been prepared in accordance with accounting
      principles generally accepted in the United States of America. The preparation
      of these financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      the
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period.




On
      an
      ongoing basis, management evaluates its estimates and judgments, including
      those
      related to inventory valuation, revenue recognition and stock-based
      compensation. Management bases its estimates and judgments on historical
      experience, current economic and industry conditions and on various other
      factors that are believed to be reasonable under the circumstances. This forms
      the basis for making judgments about the carrying values of assets and
      liabilities that are not readily apparent from other sources. Actual results
      may
      differ from these estimates under different assumptions or conditions.
      Management believes the following critical accounting policies affect its more
      significant judgments and estimates used in the preparation of its consolidated
      financial statements.


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*Inventory
      Valuation.* Inventories
      are stated at the lower of cost (first in, first out) or market. Work-in-process
      and finished goods consist of material, labor and overhead. Finished goods
      consist of completed SonoPrep units and procedure trays. Demo inventory consists
      of SonoPrep units owned by Sontra in use by customers as well as units used
      for
      demonstration purposes. The cost of SonoPrep demo units is amortized to cost
      of
      sales over a one year period. The reserve for obsolescence represents inventory
      that may become obsolete as a result of possible design changes and product
      enhancements as well as inventory that the Company may use in prototype
      manufacturing. With our first product sales in the quarter ended September
      30,
      2004, we began capitalizing inventory based on our manufacturing experience.
      During 2005, the Company increased its inventory obsolescence reserve by
      $172,000 and recorded a charge in the Statement of Loss of $172,000. The Company
      wrote off $132,000 of expired and obsolete inventory during 2005 against the
      reserve for inventory obsolescence. We expect to continue to adjust our reserve
      based on additional manufacturing experience, production levels and possible
      design changes and enhancements in the SonoPrep units.




*Revenue
      Recognition.* For
      product sales, revenues are recognized when persuasive evidence of an
      arrangement exists in the form of a signed non-cancelable purchase order, the
      product is shipped, the selling price is fixed and determinable, and collection
      is reasonably assured. We currently sell primarily through distributors and
      have
      contracts with all such distributors. We have established credit policies that
      we believe allow us to determine when collectibility is reasonably assured.
      There are also reporting procedures in place to allow us to monitor the
      inventory levels at our distributors and to determine the end-user of our
      products. Licensing revenue is generally recognized ratably over the license
      period.




*Stock-based
      Compensation.* We
      record stock-based compensation to non-employees at fair value. We do not record
      expense relating to stock options granted to employees with an exercise price
      greater than or equal to market price at the time of grant. We report pro forma
      net loss and loss per share in accordance with the requirements of Statement
      of
      Financial Accounting Standard (“SFAS”) No. 148. This disclosure shows net loss
      and loss per share as if we had accounted for our employee stock options under
      the fair value method. The fair value of options granted to non-employees and
      the pro forma information discussed above is calculated using the Black-Scholes
      option pricing model. This option valuation model requires input of assumptions
      including the volatility of our stock price, the expected life of the option
      and
      the risk-free interest rate. Because our stock options have characteristics
      significantly different from those of traded options, and because changes in
      the
      input assumptions can materially affect the fair value estimate, the existing
      model may not necessarily provide a reliable single measure of fair value of
      our
      stock options.




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 years ended December 31, 2005 and 2004***





*Gross
      (Loss) Profit*




The
      Company recorded product revenue of $171,000 and a gross loss of $76,000 for
      the
      year ended December 31, 2005. For the year ended December 31, 2004, the Company
      recorded product revenue of $34,000 and a gross profit of $17,000. The Company
      launched its topical lidocaine delivery system in the fourth quarter of 2004.
      Due to the expiration or obsolescence of certain inventory and the low level
      of
      sales experienced to date that might result in future obsolescence, the Company
      increased its inventory obsolescence reserve during 2005 by $172,000 and
      recorded a charge in the Statement of Loss of $172,000. During 2005, the Company
      wrote off $132,000 of expired and obsolete inventory against the reserve for
      inventory obsolescence.




Licensing
      revenue of $5,000 for the year ended December 31, 2005 represents the earned
      portion of the $50,000 licensing payment received from HortResearch in
      conjunction with a license and collaboration agreement which is being recognized
      over the one-year term of the agreement.




*Research
      and Development Expenses*




Research
      and development expenses increased by $755,000 to $3,795,000 for the year ended
      December 31, 2005 from $3,039,000 for the year ended December 31, 2004. The
      increase was primarily attributable to an increase in non-cash stock
      compensation expense of $72,000, an increase in clinical trial costs of $46,000,
      an increase in staffing costs of $143,000, and an increase of $446,00 for costs
      incurred in the development and manufacturing of prototypes for the SonoPrep
      device and the glucose biosensor.





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*Selling,
      General and Administrative Expenses*




Selling,
      general and administrative expenses decreased by $368,000 to $2,056,000 for
      the
      year ended December 31, 2005 from $2,424,000 for the year ended December 31,
      2004. The decrease was primarily attributable to decreases in administrative
      staffing costs of $117,000, non-cash stock compensation expense of $635,000,
      consulting expenses of $53,000, and investor relations and public company
      expenses of $85,000. These decreases were partially offset by increases in
      selling and marketing staffing costs of $327,000 and marketing promotional
      costs
      of $200,000.




*Interest
      Income and Interest Expense*




Interest
      income was $208,000 for the year ended December 31, 2005 compared to interest
      income of $86,000 for the year ended December 31, 2004. The increase in interest
      income is attributable to higher interest rates and a higher average balance
      invested.





Interest
      expense of $18,000 for the year ended December 31, 2005 was related to the
      new
      note payable.




**Liquidity
      and Capital Resources**




The
      Company has financed its operations since inception primarily through private
      sales of its common and preferred stock, the issuance of convertible promissory
      notes, and the cash it received in connection with the Merger. As of December
      31, 2005 the Company had $4,017,000 of cash and short-term investments on hand.




Net
      cash
      used in operating activities was $5,494,000 for the year ended December 31,
      2005. The net loss for the year ended December 31, 2005 was $5,737,000 and
      included in this loss was a non-cash benefit for stock-based compensation
      expense of $253,000, non-cash expenses of $239,000 for depreciation and
      amortization, $172,000 for a provision for excess or obsolete inventory and
      $311,000 for common stock contributed to the 401(k) plan. A payment received
      from a legal settlement provided $250,000 and a decrease in accounts payable
      and
      accrued expenses used $490,000 of cash.




Net
      cash
      provided by investing activities was $3,573,000 for the year ended December
      31,
      2005. The net proceeds from the sales and purchases of short term investments
      provided $3,950,000. Purchases of property and equipment used $181,000, an
      increase in other assets used $205,000, and a decrease in restricted cash
      provided $10,000.





Net
      cash
      provided by financing activities was $372,000 for the year ended December 31,
      2005. The exercise of stock options and warrants provided $185,000 of cash
      and
      expenses associated with the prior year issuance of common stock used $16,000.
      Proceeds from a note payable provided $238,000 and principal payments on the
      note payable used $35,000.





At
      December 31, 2005, the Company had outstanding warrants to purchase 6,758,792
      shares of common stock at exercise prices ranging from $1.20-$5.00. If all
      these
      warrants were exercised for cash the Company would received cash proceeds of
      approximately $11,667,000.




The
      Company expects that the cash and short term investments of $4,017,000 at
      December 31, 2005 plus the net proceeds of  approximately $1.6 million
 from the private placement completed in March  2006 will be
      sufficient to meet its cash requirements at least through December 2006. In
      March 2006, the Company completed a private placement of shares of Common Stock
      and Common Stock Purchase Warrants that provided the Company with net proceeds
      of approximately $1.6 million. The Company will be required to raise a
      substantial amount of capital in the future to complete the commercialization
      of
      its products. If we fail to raise additional capital, we will be likely
      be
      unable to continue product development and operations as currently
      planned.




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




•  its
      ability to obtain funding from third parties, including any future collaborative
      partners;




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




•  the
      time
      and costs required to gain regulatory approvals;




•  the
      costs
      of manufacturing, marketing and distributing its products, if successfully
      developed and approved;




•  the
      costs
      of filing, prosecuting and enforcing patents, patent applications, patent claims
      and trademarks;




•  the
      status of competing products; and





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





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**Off-Balance
      Sheet Arrangements**




We
      have
      no significant off-balance sheet arrangements, including derivative instruments
      that have or are reasonably likely to have a current or future material effect
      on our financial condition, changes in financial condition, revenues or
      expenses, results of operations, liquidity, capital expenditures or capital
      resources. The Company has certain warrants and options outstanding but does
      not
      expect to receive any material proceeds from the exercise of these instruments unless
      and until
      the
      Company’s stock price is greater than
      the
      applicable exercise prices of the options and warrants .




**Effect
      Of Inflation and Changes In Prices**




Management
      does not believe that inflation and changes in price will have a material effect
      on the Company’s operations.




**Factors
      That May Affect Future Results**




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




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




We
      have
      generated limited revenue and have had operating losses since our inception.
      Our
      historical accumulated deficit was approximately $29,120,000 as of December
      31,
      2005. It is possible that the Company will never generate sufficient 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.**




Our
      development efforts to date have consumed and will continue to require
      substantial amounts of capital in connection with our SonoPrep ® technology. Our product development programs require substantial capital outlays
      in order to reach product commercialization. As we enter into more advanced
      product development of our SonoPrep device and our continuous transdermal
      glucose monitoring system, we will need significant funding to pursue our
      product commercialization plans. Our ability to continue our research,
      development and testing activities and commercialize our products in development
      is highly dependent on our ability to obtain additional sources of financing,
      including by entering into and maintaining collaborative arrangements with
      third
      parties who have the resources to fund such activities. Any future equity
      financing, if available, may result in substantial dilution to existing
      shareholders, and future 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 or other rights 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, clinical studies
      and commercialization efforts, 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.





**Our
      products are based on new technologies and are in early stages of development,
      and may not be successfully developed or achieve market acceptance.**




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




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Our
      success
      is dependent on further developing new and existing products and obtaining
      favorable results from pre-clinical studies and clinical trials and satisfying
      regulatory standards and approvals required for the market introduction of
      such
      products, including our continuous transdermal glucose monitoring system. There
      can be no assurance that the Company will not encounter unforeseen problems
      in
      the development of the SonoPrep ® technology, or that we will be able to successfully address the problems that
      do
      arise. The SonoPrep technology may not prove effective in connection with
      diagnostics, vaccine delivery, glucose monitoring and/or transdermal drug
      delivery. 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, or be eligible for third-party reimbursement
      from governmental or private insurers. Even if we successfully develop new
      products, there can be no assurance
      that such products will be successfully marketed or achieve market acceptance,
      or that expected markets will develop for such products. 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.





In
      addition, because our products are based on new technologies, they are subject
      to lengthy sales cycles and may take substantial time and effort to achieve
      market acceptance, especially at hospitals, which typically have a lengthy
      and
      rigorous approval process for adopting new technologies.  For
      example, our SonoPrep Topical Anesthetic System, which consists of the SonoPrep
      device and a topical anesthetic procedure tray for usage with OTC 4% topical
      lidocaine, has been marketed through independent medical device distributors.
      However, the required selling effort and lengthy sales cycle for this product
      have caused us to reevaluate our distribution strategy. We are currently
      exploring additional sales and marketing channels, including potentially
      licensing the product to a larger medical products company. There can be no
      assurance that we will establish successful sales and marketing methods for
      our
      products or that any independent distributors will actively promote our products
      or be successful in generating sales.




**Our
      future success is dependent upon successful development of our continuous
      glucose monitor for the hospital intensive care unit market.**





We
      recently amended our license agreement with the Diabetes Care Division of Bayer
      Healthcare LLC (“Bayer”) and reacquired the worldwide co-exclusive rights to
      develop and market our continuous transdermal glucose monitoring system
      utilizing the SonoPrep ultrasonic skin permeation technology for the hospital
      intensive care unit (ICU) market. The Company has completed the first prototypes
      and expects to begin human clinical studies in early 2006 at leading Boston-area
      hospitals, with members of our Clinical Advisory Board serving as principal
      investigators. Although we believe the clinical rationale exists for our
      continuous transdermal glucose monitoring system for the ICU market, there
      can
      be no assurance that such a market will be established, or that we will be
      able
      to successfully develop a product that will prove effective for the ICU market
      or gain market acceptance should such a market develop. The product development
      process may take several years and will require substantial capital outlays.
      If
      the ICU market does not develop as we expect, or if we are unable to
      successfully develop a product for such market on a timely basis and within
      cost
      constraints, then our business and financial results will be materially
      adversely affected. In addition, under the terms of our license agreement,
      Bayer
      has rights to our technology and has retained co-exclusive rights to the
      hospital ICU market and may compete with the Company in such market. If Bayer
      determines to compete with the Company in the ICU market, our financial results
      will be adversely affected.




**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 third parties for technology research
      and development, clinical testing, product development and sales and marketing.
      If we are unable to enter into any additional development agreements or
      collaborative arrangements with strategic partners, we will be required to
      internally fund all of our product development activities, significantly
      increasing business risk and capital requirements in the development, clinical
      testing, manufacturing, marketing and commercialization of new products. 
The Company could also encounter significant delays in introducing products
      into
      markets or find that the development, manufacture or sale of proposed products
      in such markets is adversely affected by the absence of those collaborative
      arrangements.




The
      process of establishing collaborative partners is difficult, time-consuming
      and
      involves significant uncertainty. Discussions with potential collaborators
      may
      not lead to the establishment of new collaborative relationships on favorable
      terms, if at all.  If successful in establishing a collaborative agreement,
      such agreement may never result in the successful development of products or
      the
      generation of significant revenue.  Any such agreements could limit the
      Company’s flexibility in pursuing alternatives for the development or
      commercialization of its products. Even if we were to enter into additional
      collaborative arrangements with third parties, there can be no assurance that
      the financial condition or results of operations of the Company will
      significantly improve.














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The
      risks
      involved with collaborating with strategic partners include, but are not limited
      to, the following:




•
            
            such
                strategic partners are likely to be larger, better capitalized companies
                and therefore have significant leverage in negotiating terms of such
                collaborative arrangements;




•
            
            such
                collaborative arrangements could terminate upon the expiration of
                certain
                notice periods;




•
            
            collaboration
                partners may insist on and obtain significant interests in our
                intellectual property rights, for example, Bayer received an exclusive
                worldwide right and license of Sontra’s intellectual property rights to
                make, have made, use, import and sell a continuous transdermal glucose
                monitoring system utilizing ultrasonic techniques;




•
            
            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, for example,
                our
                receipt of future milestone payments from Bayer is dependent on Bayer’s
                successful product development efforts, which may not occur on a
                timely
                basis, if at all;




•
            
            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.




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




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




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




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











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We
          must
          maintain our regulatory clearances and approvals in order to continue marketing
          our products.
  Regulatory
          authorities subject a marketed product, its manufacturer and the manufacturing
          facilities to continual review and periodic inspections. We will be subject
          to
          ongoing FDA requirements, including required submissions of safety and
          other
          post-market information and reports, registration requirements, Quality
          Systems
          regulations, and recordkeeping requirements. The Quality Systems regulations
          include requirements relating to quality control and quality assurance,
          as well
          as the corresponding maintenance of records and documentation. Our distributors,
          depending on their activities, are also subject to certain requirements
          under
          the Federal Food, Drug, and Cosmetic Act and the regulations promulgated
          thereunder, and state laws and registration requirements covering the
          distribution of our products. Regulatory agencies may change existing
          requirements or adopt new requirements or policies that could affect our
          regulatory responsibilities or the regulatory responsibilities of our
          distributors. We may not be able to adapt to these changes or new requirements
          on a timely basis, or at all.
  Later
          discovery of previously unknown problems with our products, manufacturing
          processes, or our failure to comply with applicable regulatory requirements
          may
          result in enforcement actions by the FDA including, but not limited to:
          warning
          letters; patient or physician notification; restrictions on our products
          or
          manufacturing processes; product recalls or seizures; refusal to approve
          pending
          applications or supplements to approved applications that we submit; suspension
          or withdrawal of marketing approvals or clearances; and civil and criminal
          injunctions, fines and penalties.
  **We
          may need to obtain further regulatory approval in connection with the usage
          of
          4% topical lidocaine with our SonoPrep Topical Anesthetic System.**
  In
          August
          2004, we received 510(k) marketing clearance from the FDA to market our
          SonoPrep
          device and procedure tray for use with over-the-counter (OTC) 4% topical
          lidocaine for dermal anesthesia prior to the insertion of needles or intravenous
          catheters. In September 2004, we launched our SonoPrep Topical Anesthetic
          System, which consists of the SonoPrep device and a topical anesthetic
          procedure
          tray for usage with OTC 4% topical lidocaine. However, OTC 4% topical lidocaine
          has not yet been approved by the FDA for the indications covered by the
          Company’s 510(k) marketing clearance, namely needle sticks or venipuncture. The
          FDA may require an NDA in order for Sontra to continue to market OTC 4%
          topical
          lidocaine for dermal anesthesia prior to the insertion of needles or intravenous
          catheters.
  The
          Company intends to continue to market the SonoPrep Topical Anesthetic System
          pursuant to its 510(k) marketing clearance; however if the FDA determines
          that
          approval of the NDA is required, the FDA may determine to limit, restrict
          or
          delay our ability to market the system, or may rescind our 510(k) marketing
          clearance. If the FDA determines that an NDA is required, it is likely
          that our
          510(k) marketing clearance would be rescinded, which would have a material
          adverse effect on our business and results of operations.
  **We
          must regain compliance with the listing requirements of Nasdaq or we will
          be
          delisted.**
  Our
          Common Stock is currently listed for trading on the Nasdaq Capital Market.
          We
          must continue to satisfy Nasdaq’s continued listing requirements, including the
          minimum $2.5 million shareholder equity requirement and the $1 minimum
          closing
          bid price requirement, or risk delisting which would have an adverse effect
          on
          the Company’s business.
 
 On
          November 23, 2005, we received notice from Nasdaq that the Company is not
          in compliance with the $1 minimum closing bid price requirement for continued
          listing on the Nasdaq Capital Market, as the bid price of our Common Stock
          closed below $1 per share for 30 consecutive business days.  In
          accordance with Nasdaq rules, if at any time before May 22, 2006 the bid
          price of our Common Stock closes at or above $1 per share for a minimum
          of ten
          consecutive business days, the Company will be provided written notice
          that it
          has regained compliance with the minimum bid price requirement. If compliance
          cannot be demonstrated by May 22, 2006, we may be granted an additional 180
          calendar-day period if we then meet the Nasdaq Capital Market initial listing
          criteria, except for the bid price requirement. If we are not eligible
          for this
          additional compliance period, our Common Stock will be delisted. We intend
          to
          monitor the closing bid price of our Common Stock between now and May 22,
          2006, and to consider available options if our Common Stock does not trade
          at a
          level likely to result in regaining compliance with the Nasdaq minimum
          bid price
          requirement.
  If
          the
          Company’s Common Stock is delisted from the Nasdaq Capital Market, it may trade
          on the over-the-counter market, which may be a less liquid market. In such
          case,
          our shareholders’ ability to trade, or obtain quotations of the market value of,
          shares of Sontra’s Common Stock would be severely limited because of lower
          trading volumes and transaction delays. These factors could contribute
          to lower
          prices and larger spreads in the bid and ask prices for our Common Stock.
          In
          addition, the delisting of the Common Stock from the Nasdaq Capital Market
          would
          significantly impair our ability to raise capital in the public markets
          in the
          future.
  18
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  **Our
        potential markets are highly competitive and most participants are larger,
        better capitalized, and more experienced than Sontra.**
  The
        markets in which our products are and may be marketed and sold are intensely
        competitive, subject to rapid change and significantly affected by new product
        introductions. Our continuous transdermal glucose monitoring system will
        compete
        directly with glucose monitoring products from Roche Diagnostics, LifeScan,
        Inc., a division of Johnson & Johnson, Bayer Corporation, MediSense, a
        division of Abbott Laboratories, Medtronic, Inc., Dexcom, SpectRx and
        TheraSense, Inc. The Company’s SonoPrep ® device
        will also compete with numerous companies developing drug delivery products
        such
        as Nektar Therapeutics, Alkermes, Inc., Bioject, Inc., PowderJect
        Pharmaceuticals PLC, Antares Pharma, Inc., Becton Dickinson & Co., Aerogen,
        Inc., ALZA Corporation, a division of Johnson & Johnson, Norwood Abbey
        Limited, Vyteris, Iomed and 3M Company. In the topical lidocaine market,
        Sontra
        competes with the existing topical lidocaine products manufactured by Astra
        and
        others, and also competes with Norwood Abbey, who has received clearance
        from
        the FDA to market a laser poration device and Vyteris, who has received FDA
        approval to market an iontophoretic device.
  Most
        of
        these companies are already producing and marketing glucose monitoring or
        drug
        delivery products, are either publicly traded or a division of a publicly
        traded
        company, and enjoy several competitive advantages over the Company. In addition,
        several of our competitors have products in various stages of development
        and
        commercialization similar to our SonoPrep ® device
        and our continuous transdermal glucose monitoring system. At any time, these
        companies and others may develop products that compete directly with our
        proposed product concepts. In addition, Bayer has retained co-exclusive rights
        to the hospital ICU market and may compete with the Company in such market.
        Many
        of our competitors have resources allowing them to spend significantly greater
        funds for the research, development, marketing and sale of new or existing
        products, thereby allowing them to respond more quickly to new or emerging
        technologies and changes in customer requirements. For all of the foregoing
        reasons, we may not be able to compete successfully against our current and
        future competitors. If any of our competitors succeeds in developing a
        commercially viable product and obtaining government approval, our competitive
        position may be materially adversely affected.
 
 **A
        substantial portion of the intellectual property used by the Company is owned
        by
        the Massachusetts Institute of Technology.**
  We
        have
        an exclusive worldwide license from the Massachusetts Institute of Technology
        (MIT) under certain licensed patents to practice our ultrasound-mediated
        skin
        permeation technology. These licensed patents, which include eight issued
        patents in the United States, three issued foreign patents, two pending U.S.
        patents and three pending foreign patent applications, comprises a substantial
        portion of our patent portfolio relating to our technology.
  While,
        under the license agreement, we have the right to advise and cooperate with
        MIT
        in the prosecution and maintenance of the foregoing patents, we do not control
        the prosecution of such patents. Instead, the Company relies upon MIT to
        determine the appropriate strategy for prosecuting these patents. If MIT
        does
        not adequately protect our patent rights, our ability to manufacture and
        market
        our products, currently in various stages of development, would be adversely
        affected.
  **We
        will need to protect the proprietary information on which our
        SonoPrep** **®** **technology relies.**
  In
        addition to the exclusive license from MIT, as of December 31, 2005 we owned
        four issued patents and six pending patent applications in the United States
        and
        two foreign patent and fifteen pending foreign applications. We can provide
        no
        assurance that patents will be issued from the patent applications, or, if
        issued, that they will be issued in a form that will be advantageous to the
        Company.
  There
        can
        be no assurance that one or more of the patents owned or licensed by the
        Company
        will not be successfully challenged, invalidated or circumvented or that
        we will
        otherwise be able to rely on such patents for any reason. If any of our patents
        or any patents licensed from MIT are successfully challenged or our right
        or
        ability to manufacture our products or future products (if successfully
        developed and commercialized) were to be limited, our ability to manufacture
        and
        market these products could be adversely affected, which would have a material
        adverse effect upon our business, financial condition and results of operations.
  In
        addition to patent protection, we rely on a combination of copyright, trade
        secret and trademark laws, and nondisclosure, confidentiality agreements
        and
        other contractual restrictions to protect our proprietary technology. However,
        these legal means afford only limited protection and may not adequately protect
        the rights or competitive advantage of the Company. We may not be able to
        prevent the unauthorized disclosure or use of our technical knowledge or
        other
        trade secrets by our employees. Nondisclosure and confidentiality agreements
        with third parties may be breached, and there is no assurance that the Company
        would have adequate remedies for any such breach.
   19
 Table
            of Contents
  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 products
        either in the United States or in foreign markets. Furthermore, if our
        intellectual property is not adequately protected, our competitors may be
        able
        to use our intellectual property to enhance their products and compete more
        directly with the Company, which could prevent us from entering our products
        into the market or result in a decrease in our eventual market share.
  **We
        have limited manufacturing experience, which could limit our growth.**
  To
        successfully commercialize our SonoPrep skin permeation technology we will
        have
        to manufacture or engage others to manufacture the particular device in
        compliance with regulatory requirements. We have limited manufacturing
        experience and resources 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. There are technical challenges to increasing manufacturing
        capacity, including equipment design, materials procurement, problems with
        production yields, quality control and assurance and compliance with
        environmental regulations. Developing and scaling manufacturing facilities
        will
        require the investment of substantial additional funds and is subject to
        risks
        and uncertainties, including suitability of facility space, design, installation
        and maintenance of equipment and increased management responsibility.
        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.
  **We
        may be subject to litigation or other proceedings relating to our intellectual
        property rights.**
  The
        medical device industry has experienced extensive litigation regarding patents
        and other intellectual property rights. Third parties could assert infringement
        or misappropriation claims against us with respect to our products. 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 in certain markets, or at all, which would have
        a
        material adverse effect on our reputation, business, financial condition
        and
        results of operations.
  **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, sale and usage of human diagnostic
        and
        ultrasonic transdermal drug delivery products. Claims may be made by patients,
        healthcare providers or distributors of our products. Although we have product
        liability insurance that we believe is appropriate, this insurance is subject
        to
        deductibles and coverage limitations and may not be adequate to protect us
        against all product liability claims. If we are unable to maintain insurance
        at
        an acceptable cost or on acceptable terms with adequate coverage or otherwise
        protect against potential product liability claims, we will be exposed to
        significant liabilities, which may harm our business. A product liability
        claim,
        recall or other claim with respect to uninsured liabilities or for amounts
        in
        excess of insured liabilities could result in significant costs and significant
        harm to our business. 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. In addition, defending a suit, regardless of merit,
        could be costly, could divert management attention and might result in adverse
        publicity, which would adversely affect our business and financial condition.
  20
 Table
            of Contents
  **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
                  financial condition, performance and prospects;
  •
              
              the
                  depth and liquidity of the market for our Common Stock;
  •
              
              our
                  ability to enter into successful collaborative arrangements with
                  strategic
                  partners for research and development, clinical testing, and sales
                  and
                  marketing;
  •
              
              sales
                  by selling shareholders of shares issued and issuable in connection
                  with
                  our private placements in 2003 and 2004;
  •
              
              investor
                  perception of us and the industry in which we operate;
  •
              
              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.
  **Securities
        we issue to fund our operations could dilute or otherwise adversely affect
        our
        shareholders.**
  We
        will
        likely need to raise additional funds through public or private debt or equity
        financings to fund our operations. If we raise funds by issuing equity
        securities, the percentage ownership of current shareholders will be
        significantly reduced and the new equity securities may have rights senior
        to
        those of the shares of our Common Stock. If we raise funds by issuing debt
        securities, we may be required to agree to covenants that substantially restrict
        our ability to operate our business. We may not obtain sufficient financing
        on
        terms that are favorable to investors or us. We may delay, limit or eliminate
        some or all of our proposed operations if adequate funds are not available.
  In
        addition, upon issuance of the shares of Common Stock issuable upon conversion
        of the outstanding shares of Series A Preferred Stock and the exercise of
        outstanding warrants, the percentage ownership of current shareholders will
        be
        diluted substantially.
  **The
        availability of preferred stock for issuance may adversely affect our
        shareholders.**
  Our
        Articles of Incorporation, as amended, authorize our Board of Directors to
        fix
        the rights, preferences and privileges of, and issue up to 10,000,000 shares
        of,
        preferred stock with voting, conversion, dividend and other rights and
        preferences that could adversely affect the voting power or other rights
        of our
        shareholders. An aggregate of 7,000,000 shares of Series A Preferred Stock
        were
        issued in our private placement in 2003, of which 73,334 shares were issued
        and
        outstanding as of December 31, 2005. The issuance of additional preferred
        stock
        or rights to purchase preferred stock may have the effect of delaying or
        preventing a change in control of the Company. In addition, the possible
        issuance of additional preferred stock could discourage a proxy contest,
        make
        more difficult the acquisition of a substantial block of the Company’s Common
        Stock or limit the price that investors might be willing to pay for shares
        of
        the Company’s Common Stock.
  **Anti-takeover
        effects of Minnesota law could discourage, delay or prevent a change in control.**
  As
        a
        publicly traded company, we are prohibited by the Minnesota Business Corporation
        Act, except under certain specified circumstances, from engaging in any merger,
        significant sale of stock or assets or business combination with any shareholder
        or group of shareholders who own at least 10% of our Common Stock.
  21
 Table
            of Contents
  
 
 **ITEM 7.****FINANCIAL
        STATEMENTS**
  **INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **Page****Sontra
                    Medical Corporation Consolidated Financial
                    Statements**Report
                  of Independent Registered
                  Public Accounting Firm
              23Consolidated
                  Balance Sheets as of
                  December 31, 2005 and 2004
              24Consolidated
                  Statements of Loss for
                  the years ended December 31, 2005 and 2004
              25Consolidated
                  Statements of Changes in
                  Stockholders’ Equity for the years ended December 31, 2005 and
                  2004
              26Consolidated
                  Statements of Cash Flows for the years ended
                  December 31, 2005 and 2004
              27Notes
                  to Consolidated Financial
                  Statements
              28
    22
 Table
              of Contents
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  To
        the
        Board of Directors of
 Sontra
        Medical Corporation
 Franklin,
        Massachusetts
  We
        have
        audited the accompanying consolidated balance sheets of Sontra Medical
        Corporation and Subsidiary as of December 31, 2005 and 2004, and the related
        consolidated statements of loss, changes in stockholders’ equity and cash flows
        for the years then ended. These consolidated financial statements are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these consolidated financial statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements. An audit also includes
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall consolidated financial statement
        presentation. We believe that our audits provide a reasonable basis for our
        opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Sontra Medical Corporation
        and Subsidiary as of December 31, 2005 and 2004, and the results of its
        operations and its cash flows for the years then ended in conformity with
        accounting principles generally accepted in the United States of America.
  /s/
        WOLF
& COMPANY, P.C.
  Boston,
        Massachusetts
 January
        25, 2006, except for Note 15 as to which the date is March 9, 2006
  23
 Table
            of Contents


**SONTRA
                MEDICAL CORPORATION****Consolidated
                Balance
                Sheets****As
                of December 31,****2005**
            
            **2004****ASSETS**Current
                Assets:Cash
                and cash equivalents
            
            $
            1,016,792
            
            $
            2,565,244Short
                term investments
            
            
            3,000,000
            
            
            6,950,000Accounts
                receivable
            
            
            1,129
            
            
            16,821Legal
                settlement receivable
            
            
            -
            
            
            250,000Inventory,
                net
                of reserve for obsolescence
            
            
            31,250
            
            
            152,642Prepaid
                expenses and other current assets
            
            
            65,468
            
            
            69,492Total
                current assets
            
            
            4,114,639
            
            
            10,004,199Property
                and Equipment, at cost:Computer
                equipment
            
            
            241,324
            
            
            206,970Office
                and laboratory equipment
            
            
            593,576
            
            
            492,377Furniture
                and
                fixtures
            
            
            14,288
            
            
            14,288Manufacturing
                equipment
            
            
            224,888
            
            
            182,210Leasehold
                improvements
            
            
            177,768
            
            
            174,6981,251,844
            
            
            1,070,543Less-accumulated
                depreciation and amortization
            
            
            (894,658
            )
            
            (655,242
            )Net
                property
                and equipment
            
            
            357,186
            
            
            415,301Other
                Assets:Restricted
                cash
            
            
            29,248
            
            
            38,997Deposits
                and
                other assets
            
            
            207,012
            
            
            2,000Total
                other assets
            
            
            236,260
            
            
            40,997Total
                assets
            
            $
            4,708,085
            
            $
            10,460,497**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                Liabilities:Accounts
                payable
            
            $
            210,208
            
            $
            358,530Deferred
                revenue
            
            
            45,000
            
            
            -Current
                portion of note payable
            
            
            53,653
            
            
            -Accrued
                expenses
            
            
            416,936
            
            
            759,051Total
                current liabilities
            
            
            725,797
            
            
            1,117,581Note
                Payable, net of current portion
            
            
            149,043
            
            
            -CommitmentsStockholders'
                Equity:Series
                A Convertible Preferred Stock, $0.01 par value, authorized 7,000,000
                shares,issued
                and outstanding 73,334 shares at December 31, 2005 and
                2004(preference
                in
                liquidation of $76,291)
            
            
            76,291
            
            
            76,291Common
                stock, $0.01 par value, authorized 60,000,000 shares, issued and
                outstanding22,261,830
                shares at December 31, 2005 and 21,935,732 shares at December 31,
                2004
            
            
            222,618
            
            
            219,358Additional
                paid-in capital
            
            
            32,658,192
            
            
            32,674,740Deferred
                stock-based compensation
            
            
            (4,159
            )
            
            (244,912
            )Accumulated
                deficit
            
            
            (29,119,697
            )
            
            (23,382,561
            )Total
                stockholders' equity
            
            
            3,833,245
            
            
            9,342,916Total
                liabilities and stockholders' equity
            
            $
            4,708,085
            
            $
            10,460,497*The
                accompanying notes are an integral part of these consolidated financial
                statements.*


24
 Table
          of Contents


**SONTRA
                MEDICAL
                CORPORATION****Consolidated
                Statements of
                Loss****For
                the Years Ended****December
                31,****2005**
            
            **2004**Revenue:Product
                revenue
            
            $
            170,660
            
            $
            33,565Licensing
                revenue
            
            
            5,000
            
            
            -Total
                revenue
            
            
            175,660
            
            
            33,565Cost
                of product revenue
            
            
            251,482
            
            
            16,680Gross
                (loss) profit
            
            
            (75,822
            )
            
            16,885Operating
                Expenses:Research
                and
                development
            
            
            3,794,888
            
            
            3,039,450Selling,
                general and administrative
            
            
            2,055,833
            
            
            2,423,806Total
                operating expenses
            
            
            5,850,721
            
            
            5,463,256Loss
                from operations
            
            
            (5,926,543
            )
            
            (5,446,371
            )Other
                income (expense), netInterest
                income
            
            
            207,699
            
            
            86,189Interest
                expense
            
            
            (18,292
            )
            
            -Other
                income, net
            
            
            189,407
            
            
            86,189Net
                loss
            
            
            (5,737,136
            )
            
            (5,360,182
            )Accretion
                of dividend and beneficial conversion featureon
                Series A
                Convertible Preferred Stock
            
            
            (5,867
            )
            
            (413,901
            )Net
                loss applicable to common shareholders
            
            $
            (5,743,003
            )
            $
            (5,774,083
            )Net
                loss per common share, basic and diluted
            
            $
            (0.26
            )
            $
            (0.34
            )Basic
                and diluted weighted average common shares outstanding
            
            
            22,205,025
            
            
            16,763,798*The
                accompanying notes are an integral part of these consolidated financial
                statements.*


25
 Table
            of Contents
 **SONTRA
                          MEDICAL CORPORATION****Consolidated
                          Statements of Changes in
                          Stockholders' Equity**Series A 
                          Convertible**Preferred
                          Stock**
                      
                      **Common
                          Stock**
                      
                      **Additional**
                      
                      **Deferred**
                      
                      
                      
                      **Total****Number
                          of**
                      
                      **Carrying**
                      
                      **Number
                          of**
                      
                      **Carrying**
                      
                      **Paid-in**
                      
                      **Stock-Based**
                      
                      **Accumulated**
                      
                      **Stockholders'****Shares**
                      
                      **Value**
                      
                      **Shares**
                      
                      **Value**
                      
                      **Capital**
                      
                      **Compensation**
                      
                      **Deficit**
                      
                      **Equity**Balance
                          December 31,2003
                      
                      
                      6,495,000
                      
                      $
                      6,628,842
                      
                      
                      10,102,992
                      
                      $
                      101,030
                      
                      $
                      17,952,721
                      
                      $
                      (372,874
                      )
                      $
                      (18,022,379
                      )
                      $
                      6,287,340Conversion
                          of Series A preferred stock into common stock
                      
                      
                      (6,421,666
                      )
                      
                      (6,421,666
                      )
                      
                      6,421,666
                      
                      
                      64,217
                      
                      
                      6,357,449
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Dividend
                          paid on converted Series A preferred stock
                      
                      
                      -
                      
                      
                      (250,737
                      )
                      
                      248,371
                      
                      
                      2,484
                      
                      
                      248,253
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Accretion
                          of Series A preferred stock dividend
                      
                      
                      -
                      
                      
                      119,852
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (119,852
                      )
                      
                      -
                      
                      
                      -
                      
                      
                      -Post
                          merger Choicetel adjustments
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      286,607
                      
                      
                      -
                      
                      
                      -
                      
                      
                      286,607Exercise
                          of common stock options
                      
                      
                      -
                      
                      
                      -
                      
                      
                      147,532
                      
                      
                      1,475
                      
                      
                      155,661
                      
                      
                      -
                      
                      
                      -
                      
                      
                      157,136Stock
                          issued to 401(k) plan
                      
                      
                      -
                      
                      
                      -
                      
                      
                      113,263
                      
                      
                      1,133
                      
                      
                      224,189
                      
                      
                      -
                      
                      
                      -
                      
                      
                      225,322Options
                          issued for services
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      23,832
                      
                      
                      -
                      
                      
                      -
                      
                      
                      23,832Amortization
                          and remeasurement of options
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      157,614
                      
                      
                      127,962
                      
                      
                      -
                      
                      
                      285,576Stock
                          issued upon exercise of warrants
                      
                      
                      -
                      
                      
                      -
                      
                      
                      2,265,908
                      
                      
                      22,659
                      
                      
                      3,261,931
                      
                      
                      -
                      
                      
                      -
                      
                      
                      3,284,590Stock
                          issued from sale of common stock
                      
                      
                      -
                      
                      
                      -
                      
                      
                      2,636,000
                      
                      
                      26,360
                      
                      
                      4,126,335
                      
                      
                      -
                      
                      
                      -
                      
                      
                      4,152,695Net
                          loss
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (5,360,182
                      )
                      
                      (5,360,182
                      )Balance
                          December 31, 2004
                      
                      
                      73,334
                      
                      
                      76,291
                      
                      
                      21,935,732
                      
                      
                      219,358
                      
                      
                      32,674,740
                      
                      
                      (244,912
                      )
                      
                      (23,382,561
                      )
                      
                      9,342,916Dividend
                          paid on Series A preferred stock
                      
                      
                      
                      
                      
                      (5,867
                      )
                      
                      3,262
                      
                      
                      33
                      
                      
                      5,834
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Accretion
                          of Series A preferred stock dividend
                      
                      
                      -
                      
                      
                      5,867
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (5,867
                      )
                      
                      -
                      
                      
                      -
                      
                      
                      -Exercise
                          of common stock options
                      
                      
                      -
                      
                      
                      -
                      
                      
                      38,543
                      
                      
                      385
                      
                      
                      19,615
                      
                      
                      -
                      
                      
                      -
                      
                      
                      20,000Stock
                          issued to 401(k) plan
                      
                      
                      -
                      
                      
                      -
                      
                      
                      172,793
                      
                      
                      1,728
                      
                      
                      309,275
                      
                      
                      -
                      
                      
                      -
                      
                      
                      311,003Options
                          issued for services
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      82,639
                      
                      
                      -
                      
                      
                      -
                      
                      
                      82,639Amortization
                          and remeasurement of options
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (575,972
                      )
                      
                      240,753
                      
                      
                      -
                      
                      
                      (335,219
                      )Stock
                          issued upon exercise of warrants
                      
                      
                      -
                      
                      
                      -
                      
                      
                      111,500
                      
                      
                      1,114
                      
                      
                      163,586
                      
                      
                      -
                      
                      
                      -
                      
                      
                      164,700Expenses
                          from issuance of common stock
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (15,658
                      )
                      
                      -
                      
                      
                      -
                      
                      
                      (15,658
                      )Net
                          loss
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (5,737,136
                      )
                      
                      (5,737,136
                      )Balance
                          December 31, 2005
                      
                      
                      73,334
                      
                      $
                      76,291
                      
                      
                      22,261,830
                      
                      $
                      222,618
                      
                      $
                      32,658,192
                      
                      $
                      (4,159
                      )
                      $
                      (29,119,697
                      )
                      $
                      3,833,245**The
                        accompanying notes are an integral part of these consolidated
                         financial
                        statements.
 26


**Sontra
                Medical Corporation****Consolidated
                Statements of Cash Flows****Years
                Ended December 31,****2005**
            
            **2004****Cash
                Flows From Operating Activities:**Net
                loss
            
            $
            (5,737,136
            )
            $
            (5,360,182
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            239,416
            
            
            156,901Stock-based
                compensation
            
            
            (252,580
            )
            
            309,408Stock
                issued to 401(k) plan
            
            
            311,003
            
            
            225,322Provision
                for
                excess or obsolete inventory
            
            
            172,000
            
            
            100,000Changes
                in operating
                assets and liabilities:Accounts
                receivable
            
            
            15,692
            
            
            1,483,179Legal
                settlement receivable
            
            
            250,000
            
            
            -Inventory
            
            
            (50,608
            )
            
            (252,642
            )Prepaid
                expenses and other current assets
            
            
            4,024
            
            
            (3,417
            )Accounts
                payable
            
            
            (148,322
            )
            
            221,720Deferred
                revenue
            
            
            45,000
            
            
            -Accrued
                expenses
            
            
            (342,115
            )
            
            293,959Net
                cash used in operating activities
            
            
            (5,493,626
            )
            
            (2,825,752
            )**Cash
                Flows from Investing Activities:**Purchase
                of
                property and equipment
            
            
            (181,301
            )
            
            (168,714
            )Increase
                in
                deposits and other assets
            
            
            (205,012
            )
            
            -Decrease
                in
                restricted cash
            
            
            9,749
            
            
            9,749Purchases
                of
                short term investments
            
            
            (5,575,000
            )
            
            (4,450,000
            )Sales
                of short term investments
            
            
            9,525,000
            
            
            500,000Net
                cash provided by (used in) investing activities
            
            
            3,573,436
            
            
            (4,108,965
            )**Cash
                Flows From Financing Activities:**Cash
                received and adjustments to net assets related to ChoiceTel
                merger
            
            
            -
            
            
            36,607Proceeds
                from
                the sale of common stock, net of expenses
            
            
            (15,658
            )
            
            4,152,695Proceeds
                from
                note payable
            
            
            237,541
            
            
            -Principal
                payments on note payable
            
            
            (34,845
            )
            
            -Proceeds
                from
                exercise of warrants
            
            
            164,700
            
            
            3,284,590Proceeds
                from
                exercise of stock options
            
            
            20,000
            
            
            157,136Net
                cash
                provided by financing activities
            
            
            371,738
            
            
            7,631,028Net
                (Decrease) Increase in Cash and Cash Equivalents
            
            
            (1,548,452
            )
            
            696,311Cash
                and Cash Equivalents, beginning of period
            
            
            2,565,244
            
            
            1,868,933Cash
                and Cash Equivalents, end of period
            
            $
            1,016,792
            
            $
            2,565,244Supplemental
                Disclosures of Cash Flow Information:Cash
                paid for interest
            
            $
            18,292
            
            $
            -Supplemental
                Disclosure of Non Cash Financing Transactions:Accretion
                of
                dividend on Series A Convertible Preferred Stock
            
            $
            5,867
            
            $
            119,852Conversion
                of
                Series A Convertible Preferred Stock into common stock
            
            $
            -
            
            $
            6,421,666Legal
                settlement receivable included in adjustments to net assets related
                to  ChoiceTel merger
            
            $
            -
            
            $
            250,000Common
                stock issued for dividends on converted Series A Convertible Preferred
                Stock
            
            $
            5,867
            
            $
            250,737The
              accompanying notes are an integral part of these consolidated financials
              statements.




27


**SONTRA
          MEDICAL CORPORATION**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS**
 
 **Years
          Ended December 31, 2005 and 2004**
 
 **(1)
          ORGANIZATION AND BASIS OF PRESENTATION**
  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.
  The
          accompanying consolidated financial statements include the accounts of
          Sontra
          Medical Corporation (the “Company”) and its wholly-owned subsidiary, Sontra
          Medical, Inc. ("SMI") All significant inter-company balances and
          transactions have been eliminated in consolidation.
  **(2)
          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
  The
          accompanying financial statements reflect the application of certain accounting
          policies as described in this note and elsewhere in the accompanying financial
          statements.
  (a)
          Use
          of Estimates
  The
          preparation of financial statements in conformity with accounting principles
          generally accepted in the United States of America requires management
          to make
          estimates and assumptions that affect the reported amounts of assets and
          liabilities and disclosures of contingent assets and liabilities at the
          date of
          the financial statements and the amounts of revenues and expenses recorded
          during the reporting period. Actual results could differ from those estimates.
          Material estimates that are particularly susceptible to significant changes
          in
          the near term relate to the valuation of inventory, the recoverability
          of
          long-lived assets, the realizability of deferred tax assets and the fair
          value
          of equity instruments issued.
  (b)
          Cash
          and Cash Equivalents
 
 The
          Company considers all highly liquid investments with maturities of ninety
          days
          or less to be cash equivalents. Cash equivalents consist of money market
          funds
          as of December 31, 2005 and 2004. The Company maintains its cash in bank
          deposit
          accounts which, at times, may exceed the federally insured limits. Restricted
          cash represents a security deposit on the Company’s leased offices.
 
 (c)
          Short
          Term Investments
 
 Short
          term investments consist of auction rate preferred shares and are classified
          as
“available for sale” under the provisions of Statement of Financial Accounting
          Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and
          Equity Securities. Accordingly, these investments are carried at fair value
          which approximates cost. The auction rate preferred shares have maturities
          up to
          90 days.
  (d)
          Accounts Receivable
  The
          Company provides credit terms to customers in connection with sales of
          the
          Company’s products. Credit terms, for approved customers, are generally on a net
          30-day basis. Management periodically reviews customer account activity
          in order
          to assess the adequacy of the allowances provided for potential losses.
          Factors
          considered include economic conditions and each customer’s payment history and
          credit worthiness. Adjustments, if any, are made to reserve balances following
          the completion of these reviews to reflect management’s best estimate of
          potential losses. No allowance for doubtful accounts was considered necessary
          at
          December 31, 2005 and 2004.
    28
 Table
                of Contents
  **SO** **NTRA
            MEDICAL CORPORATION**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Years
            Ended December 31, 2005 and 2004-(Continued)**
  (e)
            Inventory
  Inventories
            are stated at the lower of cost (first in, first out) or market and consist
            of
            the following at December 31, 2005 and 2004:
 Category
                      
                      2005
                      
                      2004Raw
                          materials and work-in-process
                      
                      $
                      157,911
                      
                      $
                      221,701Demo
                          inventory
                      
                      
                      11,872
                      
                      
                      9,205Finished
                          goods
                      
                      
                      1,467
                      
                      
                      21,736Less:
                          reserve for obsolescence
                      
                      
                      (140,000)
                      
                      
                      (100,000
                      )Inventory,
                          net
                      
                      $
                      31,250
                      
                      $
                      152,642
  Work-in-process
              and finished goods consist of material, labor and overhead. Finished
              goods
              consist of completed SonoPrep units and procedure trays. Demo inventory
              consists
              of SonoPrep units owned by Sontra in use by customers as well as units
              used for
              demonstration purposes. The cost of SonoPrep demo units is amortized
              to cost of
              sales over a one year period. The reserve for obsolescence represents
              inventory
              that may become obsolete as a result of possible design changes and
              product
              enhancements as well as inventory that the Company may use in prototype
              manufacturing as well as anticipated design changes and product enhancements
              that will make certain inventory obsolete.
 (f)
              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 yearsOffice
                            and
                            laboratory equipment
                        3-5 yearsFurniture and fixtures
                        7
                            yearsManufacturing equipment
                        5
                            yearsLeasehold improvements
                        Life of lease
  (g)
                Long-Lived Assets
  In
                accordance with the SFAS No. 144, *Accounting
                for the Impairment and Disposal of Long-Lived Assets* ,
                the
                Company at least annually evaluates whether events or circumstances
                have
                occurred that indicate that the carrying value of these assets may
                be impaired.
                The Company believes there has been no significant impairment of
                its long-lived
                assets as of each of the balance sheet dates presented.
  29
 Table
                    of Contents
  **SONTRA
                MEDICAL CORPORATION**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Years
                Ended December 31, 2005 and 2004-(Continued)**
 (h)
                Stock-Based Compensation
  SFAS
                No.
                123, *Accounting
                for Stock-Based Compensation* encourages all entities to adopt a fair value based method of accounting
                for
                employee stock compensation plans, whereby compensation cost is measured
                at the
                grant date based on the value of the award and is recognized over
                the service
                period, which is usually the vesting period. However, it also allows
                an entity
                to continue to measure compensation cost for those plans using the
                intrinsic
                value based method of accounting prescribed by Accounting Principles
                Board
                (“APB”) Opinion No. 25, *Accounting
                for Stock Issued to Employees* ,
                whereby
                compensation cost is the excess, if any, of the quoted market price
                of the stock
                at the grant date (or other measurement date) over the amount an
                employee must
                pay to acquire the stock. Stock options issued under the Company’s stock option
                plans generally have no intrinsic value at the grant date, and under
                APB No. 25
                no compensation cost is recognized for them. For fixed awards with
                graded
                vesting, the Company’s policy is to recognize the expense on a straight-line
                basis.
  The
                Company applies APB No. 25 and related interpretations in accounting
                for stock
                options issued to employees and directors as more fully described
                in Note 8. 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:
  **Year
                            Ended**
                          **December
                            31,****2005**
                        
                        **2004**Net
                            loss—as
                            reported
                        $
                        (5,737,136
                        )
                        $
                        (5,360,182
                        )Add:
                            stock-based employee
                            compensation under APB No. 25
                        
                        (378,334
                        )
                        
                        230,334Deduct:
                            stock-based
                            employee compensation determined under SFAS No. 123
                        
                        (2,039,109
                        )
                        
                        (1,170,474
                        )Pro
                            forma net
                            loss
                        
                        (8,154,579
                        )
                        
                        (6,300,322
                        )Accretion
                            of preferred stock dividend and beneficial conversion
                            feature
                            ofpreferred
                            stock
                        
                        (5,867
                        )
                        
                        (413,901
                        )Net
                            loss applicable to common stockholders - pro forma
                        $
                        (8,160,446
                        )
                        $
                        (6,714,223
                        )Basic
                            and diluted net loss per share, as reported
                        $
                        (0.26
                        )
                        $
                        (0.34
                        )Basic
                            and diluted net loss per share, pro forma
                        $
                        (0.37
                        )
                        $
                        (0.40
                        )
 On
                  May
                  24, 2005, the Company approved the acceleration of vesting of all
                  outstanding
                  unvested stock options with exercise prices equal to or greater
                  than $1.45 per
                  share previously awarded to its employees, including its executive
                  officers, and
                  its directors under the Company’s equity compensation plans. The acceleration of
                  vesting is effective for stock options outstanding as of May 24,
                  2005. Options
                  to purchase an aggregate of 836,441 shares of common stock (of
                  which options to
                  purchase an aggregate of 481,266 shares of common stock are held
                  by executive
                  officers of the Company and options to purchase an aggregate of
                  16,900 shares of
                  common stock are held by directors of the Company) have been accelerated.
                  The
                  weighted average exercise price of the accelerated options is $1.95.
                  Under the
                  recently issued SFAS No. 123(R), *Share-Based
                  Payment* ,
                  the
                  Company will be required to apply the expense recognition provisions
                  under SFAS
                  No. 123(R) beginning January 1, 2006. The Company believes that
                  accelerating the
                  vesting of the identified stock options will reduce the Company’s compensation
                  charges in subsequent periods. There was no impact on the modification
                  date as
                  the exercise price of the modified options exceeded the fair value
                  of the common
                  stock or the Company determined that no employees will vest in
                  options that
                  would otherwise have been forfeited or become unexercisable.
 (i)
                  Concentration of Credit Risk
  SFAS
                  No.
                  105, *Disclosure
                  of Information about Financial Instruments with Off-Balance-Sheet
                  Risk and
                  Financial Instruments with Concentrations of Credit Risk* ,
                  requires disclosure of any significant off-balance-sheet risks
                  and credit risk
                  concentrations. The Company has no significant off-balance-sheet
                  risk. Financial
                  instruments, which subject the Company to credit risk, principally
                  consist of
                  cash and cash equivalents. The Company mitigates its risk by maintaining
                  the
                  majority of its cash and equivalents with high-quality financial
                  institutions.
 30
  **SONTRA
                  MEDICAL CORPORATION**
 
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Years
                  Ended December 31, 2005 and 2004-(Continued)**
 
 (j)
                  Financial Instruments
 
 SFAS
                  No.
                  107, *Disclosures
                  about Fair Value of Financial Instruments* ,
                  requires disclosure about fair value of financial instruments.
                  The estimated
                  fair market value of the Company’s financial instruments, which include cash and
                  cash equivalents, restricted cash, accounts receivable, accounts
                  payable and
                  notes payable, approximates their carrying value due to the short-term
                  nature of
                  these instruments and their market terms.
  (k)
                  Comprehensive Loss
  SFAS
                  No.
                  130, *Reporting
                  Comprehensive Income* ,
                  requires disclosure of all components of comprehensive income (loss)
                  on an
                  annual and interim basis. Comprehensive income (loss) is defined
                  as the change
                  in equity of a business enterprise during a period from transactions
                  and other
                  events and circumstances from non-owner sources. The Company’s comprehensive
                  loss is equal to net loss for all periods presented.
 
 (l)
                  Net
                  Loss per Common Share
  Basic
                  and
                  diluted net loss per share of the Company’s common stock is presented in
                  conformity with SFAS No. 128, *Earnings
                  per Share* ,
                  for all
                  periods presented. For the periods presented, options, warrants
                  and convertible
                  securities were anti-dilutive
                  and excluded from diluted loss per share calculations. Accordingly,
                  basic and
                  diluted net loss per share of common stock has been computed by
                  dividing the net
                  loss applicable to common stockholders in each period by the weighted
                  average
                  number of shares of common stock outstanding during such period.
  (m)
                  Segment Information
  SFAS
                  No.
                  131, *Disclosures
                  about Segments of an Enterprise and Related Information* ,
                  established standards for reporting information regarding operating
                  segments and
                  for related disclosures about products and services and geographical
                  areas.
                  Operating segments are identified as components of an enterprise
                  about which
                  separate discrete financial information is available for evaluation
                  by the chief
                  operating decision maker, or decision making group, in making decisions
                  regarding resource allocation and assessing performance. To date,
                  the Company
                  has viewed its operations and manages its business as principally
                  one operating
                  segment, which is development of transdermal diagnostics and drug
                  delivery
                  products for sale to the medical market. As of December 31, 2005
                  and 2004, all
                  of the Company’s assets were located in the United States.
  (n)
                  Research and Development Expenses
  The
                  Company charges research and development expenses to operations
                  as incurred.
                  Research and development expenses primarily consist of salaries
                  and related
                  expenses for personnel and consulting services. Other research
                  and development
                  expenses include fees paid to consultants and outside service providers,
                  the
                  costs of materials used in research and development, prototype
                  manufacturing,
                  information technology and facilities costs.
  (o)
                    Income Taxes
  The
                    Company accounts for federal and state income taxes in accordance
                    with SFAS No.
                    109, *Accounting
                    for Income Taxes.* Under
                    SFAS No. 109, deferred tax assets and liabilities are recognized
                    based upon
                    temporary differences between the financial statement and the
                    tax basis of
                    assets and liabilities. Deferred income taxes are based upon
                    prescribed rates
                    and enacted laws applicable to periods in which differences are
                    expected to
                    reverse. SFAS No. 109 requires that a valuation allowance be
                    recorded when it is
                    more likely than not that some portion or all of the deferred
                    tax assets will
                    not be realized. Accordingly, since the Company cannot be assured
                    of realizing
                    the deferred tax asset, a full valuation allowance has been
                    provided.
 
 31
 Table
                        of Contents
 **SONTRA
                    MEDICAL CORPORATION**
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Years
                    Ended December 31, 2005 and 2004-(Continued)**
 
 (p)
                    Deferred Revenue
 
 Deferred
                    revenue consists of the unearned portion of a $50,000 payment
                    received from The
                    Horticulture and Food Research Institute of New Zealand Limited
                    (“HortResearch”)
                    in conjunction with a license and collaboration agreement. In
                    November 2005,
                    HortResearch paid the Company $50,000 for a one year option to
                    license the
                    Company’s ultrasonic skin permeation technology. Under the agreement,
                    the
                    Company is obligated to perform certain training and consulting
                    services over
                    the one year period. Accordingly, the $50,000 payment is being
                    recognized as
                    revenue ratably over the one year service period.
 
 (q)
                    Revenue Recognition
  For
                    product revenue, revenues are recognized when persuasive evidence
                    of an
                    arrangement exists in the form of a signed non-cancelable purchase
                    order, the
                    product is shipped, the selling price is fixed and determinable,
                    and collection
                    is reasonably assured. For licensing payments the Company will
                    defer revenue if
                    a performance obligation exists and will recognize revenue in
                    the future as the
                    Company meets the obligation.
 
 (r)
                    Reclassifications
 
 Certain
                    comparative amounts have been reclassified to correspond with
                    the current year's
                    presentation.
 
 (s)
                    Recent Accounting Pronouncements
 
 In
                    December 2004, FASB issued SFAS No. 123(R) (revised 2004), *Share-Based
                    Payment* ,
                    which
                    is a revision of SFAS No. 123, *Accounting
                    for Stock Based Compensation* .
                    SFAS
                    No. 123(R) supersedes APB Opinion No. 25, *Accounting
                    for Stock Issued to Employees* and
                    amends SAS No. 95, *Statements
                    of Cash Flows* .
                    Generally the approach in SFAS No. 123(R) is similar to the approach
                    described
                    in SFAS No. 123. However, SFAS No. 123(R) requires all share-based
                    payments to
                    employees, including grants of employee stock options, to be
                    recognized in the
                    income statement based on their fair values. Pro
                    forma
                    disclosure is not an alternative. SFAS No. 123(R) must be adopted
                    no later than
                    the first interim period for fiscal years beginning after December
                    15, 2005. The
                    Company is expected to adopt SFAS No. 123(R) on January 1, 2006.
 
 SFAS
                    No.
                    123(R) permits public companies to adopt its requirements using
                    one of two
                    methods: a “modified prospective” approach or a “modified retrospective”
approach. Under the modified prospective approach, compensation
                    cost is
                    recognized beginning with the effective date based on the requirements
                    of SFAS
                    123(R) for all share-based payments granted after the effective
                    date and the
                    requirements of SFAS No. 123(R) for all awards granted to employees
                    prior to the
                    effective date of SFAS No. 123(R) that remain unvested on the
                    effective date.
                    The modified retrospective approach includes the requirements
                    of the modified
                    prospective approach but also permits entities to restate based
                    on the amounts
                    previously recognized under SFAS No. 123 for purposes of pro
                    forma disclosures
                    either for all prior periods presented or prior interim periods
                    of the year of
                    adoption. The Company expects to adopt the modified prospective
                    approach.
 
 As
                    permitted by SFAS No. 123, the Company currently accounts for
                    the share-based
                    payments to employees using APB Opinion No. 25’s intrinsic value method and, as
                    such, generally recognizes no compensation cost for employee
                    stock options.
                    However, grants of stock to employees have historically been
                    recorded at fair
                    value as required under existing accounting standards. The Company
                    expects the
                    adoption of SFAS No. 123(R) not to have a material effect on
                    its results of
                    operations. However, the Company’s results of operations could be materially
                    affected by share-based payments issued after the adoption of
                    SFAS 123(R). Had
                    the Company adopted SFAS No. 123(R) in prior periods, the impact
                    of that
                    standard would have approximated the impact of SFAS No. 123 as
                    described in Note
                    2(h) above.
 
 SFAS
                    No.
                    123(R) also requires the benefits of tax deductions in excess
                    of recognized
                    compensation cost to be reported as a financing cash flow, rather
                    than an
                    operating cash flow under current accounting literature. Since
                    the Company does
                    not have the benefit of tax deductions in excess of recognized
                    compensation
                    cost, because of its net operating loss position, the change
                    will have no
                    immediate impact on the Company’s consolidated financial statements.
   32
 Table
                        of Contents
  
 **SONTRA
                    MEDICAL CORPORATION**
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Years
                    Ended December 31, 2005 and 2004-(Continued)**
 In
                    December
                    2004, FASB issued SFAS No. 151, *Inventory
                    Costs - an Amendment of ARB No. 43, Chapter 4* .
                    SFAS
                    151 clarifies the accounting for inventory when there are abnormal
                    amounts of
                    idle facility expense, freight, handling costs, and wasted materials.
                    Under
                    existing accounting principles, items such as idle facility expense,
                    excessive
                    spoilage, double freight, and re-handling costs may be “so abnormal” as to
                    require treatment as current period charges rather than recorded
                    as adjustments
                    to the value of the inventory. SFAS No. 151 requires that those
                    items be
                    recognized as current-period charges regardless of whether they
                    meet the
                    criterion of “so abnormal.” In addition, this Statement requires that allocation
                    of fixed production overheads to the costs of conversion be based
                    on the normal
                    capacity of the production facilities. The provisions of this
                    Statement shall be
                    effective for inventory costs incurred during fiscal years beginning
                    after June
                    15, 2005. The adoption of SFAS 151 is not expected to have a
                    material impact on
                    the Company’s financial position or results of operations.
 
 In
                    December 2004, FASB issued SFAS No. 153, *Exchanges
                    of Non-monetary Assets* to amend
                    APB Opinion 29 by eliminating the exception for non-monetary
                    exchanges of
                    similar productive assets and replaces it with general exception
                    for exchanges
                    of non-monetary assets that do not have commercial substance.
 A
                    non-monetary exchange is defined to have commercial substance
                    if the future cash
                    flows of the entity are expected to change significantly as a
                    result of the
                    exchange. The provisions of this Statement shall be effective
                    for non-monetary
                    asset exchanges occurring in fiscal periods beginning after June
                    15, 2005. The
                    adoption of SFAS No. 153 is not expected to have a material effect
                    on the
                    Company’s financial position or results of operations.
  **(3)
                      MERGER AGREEMENT WITH CHOICETEL COMMUNICATIONS, INC.**
  At
                      an
                      annual meeting of ChoiceTel shareholders and a special meeting
                      of SMI
                      stockholders held on June 20, 2002, the stockholders of SMI
                      and the shareholders
                      of ChoiceTel approved and adopted the Agreement and Plan of
                      Reorganization,
                      dated as of February 27, 2002 (the “Merger Agreement”), among ChoiceTel, its
                      wholly-owned subsidiary, CC Merger Corp., and SMI. Pursuant
                      to the Merger
                      Agreement, SMI merged with and into CC Merger Corp., with SMI surviving the
                      merger as a wholly-owned subsidiary of ChoiceTel. Subsequent
                      to the consummation
                      of the Merger, ChoiceTel changed its name to Sontra Medical
                      Corporation and
                      began operating in SMI’s line of business.
  For
                      accounting purposes, the Merger transaction is treated as a
                      capital transaction
                      and a recapitalization, whereby the historical financial statements
                      of SMI
                      became the historical financial statements of the combined
                      entity. The
                      accounting treatment
                      for the recapitalization is similar to that resulting from
                      an acquisition,
                      except that goodwill and other intangible assets were not recorded.
  Pursuant
                      to the recapitalization and in consideration for the $4,794,524
                      of net assets
                      that SMI received from ChoiceTel on June 20, 2002, the shareholders
                      of ChoiceTel
                      were deemed to have received 3,035,781 shares of the Company’s common stock. SMI
                      incurred $480,500 of merger costs which was reflected as a
                      reduction in paid-in
                      capital. In addition, the preferred stockholders of SMI converted
                      their shares
                      of Series A Preferred Stock and Series B Preferred Stock into
                      common stock of
                      SMI. Thereafter, 32,227,829 shares of SMI’s common stock were exchanged at a
                      ratio of .1927 for 6,210,289 shares of the Company’s common stock. In addition,
                      all options of SMI were assumed by the Company with no modifications
                      other than
                      to reflect the exchange ratio. Upon completion of the Merger,
                      9,246,084 shares
                      of the Company’s common stock were issued and outstanding, with the former
                      ChoiceTel shareholders owning approximately 32.83% of the Company’s common stock
                      and the former SMI shareholders owning approximately 67.17%
                      of the Company’s
                      outstanding common stock. All of the per share data for periods
                      prior to the
                      merger date have been retroactively adjusted by the .1927 exchange
                      ratio to
                      reflect the recapitalization. Since the merger date, certain
                      adjustments were
                      made to the net assets of ChoiceTel. These adjustments which,
                      in the aggregate,
                      increased net assets acquired by $154,992 have been recorded
                      as an increase to
                      additional paid in capital.
  The
                      Merger was intended to be a tax-free reorganization under Section
                      368(a)(1)(A)
                      of the Internal Revenue Code of 1986, as amended.
  33
 Table
                        of Contents
 **SONTRA
                      MEDICAL CORPORATION**
 **NOTES
                        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Years
                      Ended December 31, 2005 and 2004-(Continued)**
  **(4)
                      COMMITMENTS**
  Operating
                      lease
  The
                      Company leases 12,999 square feet of office, laboratory and
                      manufacturing space
                      in Franklin, Massachusetts under a lease expiring March 10,
                      2008. Future minimum
                      rental payments under this operating lease are approximately
                      as follows:
 **Amount**For
                                    the years ended December 31,2006
                                $
                                163,0002007
                                
                                171,0002008
                                
                                33,000Total
                                $
                                367,000
  The
                      Company’s
                      rent expense was approximately $152,000 and $129,000 for the
                      years ended
                      December 31, 2005 and 2004, respectively.
 
 Other
                      Commitment
 
 The
                      Company has issued a purchase order for $289,000 of manufacturing
                      equipment. To
                      date, the Company has made payments totaling $205,000 and is
                      obligated to pay
                      the remaining balance due of $84,000 upon receipt and acceptance
                      of the
                      equipment which the Company expects to occur in March 2006.
  
 **(5)
                      PATENT LICENSE AGREEMENT**
  Effective
                      June 30, 1998, SMI entered into a patent license agreement
                      with the
                      Massachusetts Institute of Technology (MIT) that granted SMI
                      an exclusive right
                      and license to certain existing and future MIT patents that
                      relate to ultrasound
                      enhancement of transdermal drug delivery.
  The
                      Company is obligated to pay MIT a minimum annual license maintenance
                      fee of
                      $25,000 which is creditable towards the payment of royalties.
                      This license
                      maintenance fee is payable on January 1 of each year thereafter
                      to the end of
                      the term of the patent rights or until the agreement is terminated.
                      The Company
                      is obligated to pay MIT royalties up to 2% of net sales of
                      products and
                      processes using the licensed patents (the Licensed Products
                      and Licensed
                      Processes) used, leased or sold by the Company and/or its affiliates,
                      as
                      defined.
  **(6)
                      NOTE PAYABLE**
  In
                      May
                      2005, the Company entered into a note payable agreement with
                      a third-party
                      lender for financing equipment purchases in the amount of $237,541.
                      The note is
                      repayable over a four year term and the Company is obligated
                      to make monthly
                      interest and principal payments of $6,017. Interest accrues
                      at annual rate of
                      10.39% and the note is secured by certain property and equipment
                      of the Company.
                      Interest expense related to this note was $18,292 for the year
                      ended December
                      31, 2005.
 
 A
                      summary
                      of the note payable maturities at December 31, 2005 is as follows:
 **Amount**For
                                the
                                years ended December 31,2006
                            $
                            53,6532007
                            
                            59,5012008
                            
                            65,9862009
                            
                            23,556Total
                            
                            202,696Less
                                current maturities
                            
                            53,653Non-current
                                portion
                            $
                            149,043
 34
 Table
                        of Contents
  **S** **ONTRA
                    MEDICAL CORPORATION**
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Years
                    Ended December 31, 2005 and 2004-(Continued)**
 **(7)
                    SERIES A CONVERTIBLE PREFERRED STOCK**
  The
                    Company is
                    authorized in its Articles of Incorporation, as amended, to issue
                    up to
                    10,000,000 shares of preferred stock with the rights, preferences
                    and privileges
                    to be fixed by the board of directors. The board of directors
                    has authorized and
                    designated the issuance of up 7,000,000 shares of Series A Convertible
                    Preferred
                    Stock with the rights, preferences and privileges as described
                    below. At
                    December 31, 2005 and 2004, 73,334 shares of Series A Convertible
                    Preferred
                    Stock were outstanding.
  Each
                    share of Series
                    A Convertible Preferred Stock is initially convertible into one
                    share of Common
                    Stock, subject to adjustment in certain events. The holders of
                    shares of Series
                    A Convertible 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 Convertible 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 Series A Convertible Preferred
                    Stock has no
                    voting power, except as otherwise required under the Minnesota
                    Business
                    Corporations Act.
 
 In
                    the event of any
                    voluntary or involuntary liquidation, dissolution or winding-up
                    of the Company,
                    the holders of shares of Series A Convertible Preferred Stock
                    are entitled to be
                    paid an amount equal to $1.00 per share plus any accrued and
                    unpaid dividends on
                    such shares prior to any payment to the holders of common stock,
                    but are not
                    entitled to any further participation in distributions of any
                    remaining net
                    assets.
 
 In
                    conjunction with the 8% dividend on the Series A Convertible
                    Preferred Stock,
                    the Company accreted dividends of $5,867 and $119,852 for the
                    years ended
                    December 31, 2005and 2004, respectively. In 2005, the Company
                    paid an annual
                    dividend of $5,867 in the form of 3,262 shares of Common Stock.
                    During the year
                    ended December 31, 2004, 6,421,666 shares of Series A Convertible
                    Preferred
                    Stock were converted into common shares and there was a preferred
                    dividend paid
                    on such converted shares of $246,283 in the form of 246,283 shares
                    of Common
                    Stock. In 2004, the Company paid an annual dividend of $4,454
                    in the form of
                    2,088 shares of Common Stock.
  Dividends
                    paid in conjunction with conversions of Series A Convertible
                    Preferred Stock are
                    paid based on a fixed common stock price of $1.00 per share.
                    As a result, there
                    is a beneficial conversion feature equal to the difference between
                    the fair
                    value of the common stock on the date the common shares are issued
                    and the $1.00
                    per share conversion price. For the year ended December 31, 2004,
                    the Company
                    recorded a beneficial conversion related to dividends paid on
                    converted Series A
                    Convertible Preferred Stock of $294,049.
  **(8)
                    COMMON STOCK**
  The
                    Company has authorized 60,000,000 shares of common stock, $0.01
                    par value per
                    share, of which 22,261,830 and 21,935,732 shares were issued
                    and outstanding, as
                    of December 31, 2005 and 2004, respectively.
  In
                    December 2004, the Company issued 2,636,000 shares of Common
                    Stock upon the
                    closing of a private placement of stock that raised proceeds
                    of $4,152,695 net
                    of placement fee and other offering costs. In 2005, the Company
                    incurred
                    additional offering costs of $15,658 related to this financing.
                    In connection
                    with the financing, the Company issued warrants to the investors
                    to purchase
                    1,054,400 shares of common stock. In addition, the Company issued
                    warrants to
                    the placement agent to purchase 131,800 shares of Common Stock.
                    The warrants
                    have a five-year term and are exercisable at $2.45 per share.
                    The Company has
                    the right to terminate the warrants, upon thirty days notice,
                    in the event that
                    the closing price of the Company’s common stock for twenty consecutive trading
                    days is equal or greater than $4.90 per share. The warrants shall
                    be exercisable
                    during the thirty day notice period.
  During
                    2005, 111,500 shares of Common Stock were issued upon the exercise
                    of warrants
                    for proceeds of $164,700, 172,793 shares were issued to the 401(k)
                    plan, 38,543
                    shares were issued upon the exercise of stock options for proceeds
                    of $20,000
                    and 3,262 shares were issued upon the payment of dividends for
                    the Series A
                    Convertible Preferred Stock.
  During
                    2004, the Company issued 2,265,908 shares of common stock upon
                    the exercise of
                    warrants issued in connection with the Series A Convertible Preferred
                    Stock
                    Financing that provided the Company with proceeds of $3,284,590.
 35
 Table
                        of Contents
  **SONTRA
                    MEDICAL CORPORATION**
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Years
                    Ended December 31, 2005 and 2004-(Continued)**
  During
                    2004, 6,421,666 shares of common stock were issued upon the conversion
                    of Series
                    A Convertible Preferred Stock, 248,371 shares of common stock
                    were issued upon
                    the payment of dividends for the Series A Convertible Preferred
                    Stock, 147,532
                    shares of common stock were issued for proceeds of $157,136 upon
                    the exercise of
                    stock options and 113,263 shares of common stock with a fair
                    value of $225,322
                    were issued to the Company’s 401(k) plan.
  As of December 31, 2005, the Company had the following reserves
                    established for
                    the future issuance of common stock as follows:
  Reserve
                                for 401(k) plan
                            604,847Reserve
                                for exercise of warrants
                            6,758,792Reserve
                                for the conversion of and dividends on Series A ConvertiblePreferred
                                Stock
                            375,050Reserve
                                for the exercise of stock options
                            4,153,177Total
                                reserves
                            11,891,866
 **(9)
                    STOCK OPTION PLANS**
  In
                    1997,
                    the Company adopted the 1997 Long-term Incentive and Stock Option
                    Plan (the
“1997 Plan”). Pursuant to the 1997 Plan, the Board of Directors (or committees
                    and/or executive officers delegated by the Board) may grant incentive
                    and
                    nonqualified stock options to the Company’s employees, officers, directors,
                    consultants and advisors. The Company has reserved an aggregate
                    of 1,500,000
                    shares of Common Stock for issuance upon exercise of options
                    granted under the
                    1997 Plan. As of December 31, 2005, there were options to purchase
                    an aggregate
                    of 1,374,457 shares of Common Stock outstanding under the 1997
                    Plan, and 41,003
                    shares available for option grants hereunder.
  In
                    connection with the Merger, the Company assumed all outstanding
                    options under
                    the 1999 Sontra Medical, Inc. Stock Option and Incentive Plan
                    (the “1999 Plan”).
                    The Company may not grant any additional options under the 1999
                    Plan. The
                    Company assumed options to purchase an aggregate of 845,172 shares
                    of Common
                    Stock under the 1999 Plan. As of December 31, 2005, there were
                    options to
                    purchase an aggregate of 440,288 shares of Common Stock outstanding
                    under the
                    1999 Plan.
  In
                    March
                    2003, the Board of Directors adopted the 2003 Stock Option and
                    Incentive Plan
                    (the “2003 Plan”). The 2003 Plan was approved by the stockholders in May 2003.
                    Pursuant to the 2003 Plan, the Board of Directors (or committees
                    and/or
                    executive officers delegated by the Board) may grant incentive
                    and nonqualified
                    stock options, restricted stock and other stock-based awards
                    to the Company’s
                    employees, officers, directors, consultants and advisors. The
                    Company has
                    reserved an aggregate of 2,377,429 shares of Common Stock for
                    issuance upon
                    exercise of options granted under the 2003 Plan. The 2003 Plan
                    provides that the
                    number of shares authorized for issuance will automatically increase
                    each
                    January 1 by the greater of 4% of the outstanding number of shares
                    of Common
                    Stock on the immediately preceding December 31 or the aggregate
                    number of shares
                    made subject to equity-based awards during the one year prior
                    to such January 1;
                    or, in either case, such lesser number as may be approved by
                    the Board. The
                    maximum aggregate number of shares that may be authorized for
                    issuance under the
                    2003 Plan for all periods is 2,500,000. As of December 31, 2005,
                    there were
                    options to purchase an aggregate of 1,319,912 shares of Common
                    Stock outstanding
                    under the 2003 Plan and 977,517 shares available for
                    option grants hereunder. On January 1, 2006, the number of shares
                    authorized for
                    issuance under the 2003 Plan automatically increased by 122,571
                    shares to
                    2,500,000.
  Options
                    granted generally vest 25% on the first anniversary of the vesting
                    start date
                    and 2.5% monthly thereafter. However, certain options granted
                    were allowed
                    accelerated vesting. Vested options expire after a ten-year period
                    from the date
                    of grant. Vesting for options under the 1997 Plan were 100% vested
                    on the date
                    of grant.
  36
 Table
                    of Contents
 
 **SONTRA
                MEDICAL CORPORATION**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Years
                Ended December 31, 2005 and 2004-(Continued)**
 
 **Stock-Based
                Compensation**
  On
                July
                24, 2002 the Company granted under the 1997 Plan an option to purchase
                50,000
                shares to a member of the Scientific Advisory Board with a four year
                vesting
                schedule. On May 21, 2003 the Company granted under the 2003 Plan
                an option to
                purchase 50,000 shares to a member of the Scientific Advisory Board
                with a four
                year vesting schedule. The Company re-measures the fair value of
                these options
                each quarter using the Black-Scholes option pricing model and records
                the
                corresponding non-cash expense throughout the vesting period of these
                options.
                As a result, for the year ended December 31, 2005, the Company decreased
                additional paid-in capital and deferred compensation by $25,000 and
                $68,000,
                respectively and recorded a non-cash compensation expense of $43,000
                in the
                Statement of Loss. For the year ended December 31, 2004, the Company
                increased
                additional paid-in capital by $4,000 and decreased deferred compensation
                by
                $51,000, respectively, and recorded a non-cash compensation expense
                of $55,000
                in the Statement of Loss. As of December 31, 2005, the fair value
                of these
                options has been fully expensed and there will be no additional charges
                in
                future periods.
  On
                September 23, 2002, the Company repriced and/or exchanged certain
                options
                previously granted, pursuant to the Plans, to the Chief Executive
                Officer and
                Chief Financial Officer, which relate to a total of 850,000 shares
                of the
                Company’s Common Stock. The new exercise prices for these options are between
                $.5189 and $2.55 per share. The Company records the compensation
                expense over
                the vesting period and re-measures the intrinsic value each period
                throughout
                the life of these options. As a result for the year ended December
                31, 2005, the
                Company decreased additional paid-in capital by $551,000 and decreased
                deferred
                compensation by $170,000, and recorded a non-cash compensation benefit
                of
                $381,000 in the Statement of Loss. For the year ended December 31,
                2004, the
                Company increased additional paid-in capital by $153,000 and decreased
                deferred
                compensation by $74,000, and recorded a non-cash compensation expense
                of
                $227,000 in the Statement of Loss.
 
 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
                years ended
                December 31, 2005 and 2004, the Company decreased deferred compensation
                by
                $3,000 and recorded non-cash compensation expense of $3,000 in the
                Statements of
                Loss.
  During
                the year ended December 31, 2005, the Company granted options to
                purchase 65,000
                shares of the Company’s common stock at an exercise price of $1.52 to
                consultants serving on the Company’s scientific advisory board. The options were
                fully vested on the grant date. The fair value of these options was
                determined
                to be $83,000 which was recorded as additional paid-in capital and
                non-cash
                compensation expense in the Statement of Loss.
 
 During
                the year ended December 31, 2004, the Company granted options to
                purchase 15,000
                shares of the Company’s common stock at prices between $1.88 and $1.99 to
                consultants. These options were fully vested and the fair value of
                $24,000 was
                recorded as additional paid-in capital and non-cash compensation
                expense in the
                Statement of Loss.
  
 Information
                with respect to all activity under the 1997, 1999 and 2003 Plans
                is as follows:
  **Number
                              of**
                            **Shares**
                          
                          **Weighted Average**
                              **Exercise
                                Price**Balance
                              December 31, 2003
                          
                          
                          2,767,454
                          
                          $
                          1.62Granted
                          
                          
                          466,333
                          
                          
                          2.16Cancelled
                          
                          
                          (138,476
                          )
                          
                          1.47Exercised
                          
                          
                          (147,532
                          )
                          
                          1.07Balance
                              December 31, 2004
                          
                          
                          2,947,779
                          
                          
                          1.74Granted
                          
                          
                          361,579
                          
                          
                          1.64Cancelled
                          
                          
                          (136,158
                          )
                          
                          2.34Exercised
                          
                          
                          (38,543
                          )
                          
                          .52Balance
                              December 31, 2005
                          
                          
                          3,134,657
                          
                          $
                          1.72Options
                              exercisable at December 31, 2005
                          
                          
                          2,956,670Options
                              available for future grant, December 31, 2005
                          
                          
                          1,018,520
 All
                of
                the options issued from the 1997, 1999 and 2003 stock option plans
                have been
                previously approved by the Company’s stockholders.
 37
 Table
                    of Contents
 **SONTRA
                  MEDICAL CORPORATION**
 
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Years
                  Ended December 31, 2005 and 2004-(Continued)**
  SFAS
                  No. 123
                  requires the measurement of the fair value of stock options, to
                  be included in
                  the statement of operations or disclosed in the notes to financial
                  statements
                  (see Note 2). For the year ended December 31, 2005 and 2004, the
                  Company
                  continued to account for stock-based compensation for employees
                  under APB
                  Opinion No. 25, *Accounting
                  for Stock Issued to Employees* ,
                  and has
                  elected the disclosure-only alternative under SFAS Nos. 123 and
                  148 using the
                  Black-Scholes option pricing model prescribed by SFAS No. 123.
                  Commencing in
                  2006, the Company will include in the statements of operations
                  the fair value of
                  stock options as required under SFAS No. 123(R).
 
 The
                  assumptions used and weighted average information for the years
                  ended December
                  31, 2005 and 2004 were as follows:
  **2005**
                        **2004**Risk-free
                            interest rate
                        4.56%
                        4.00%Expected
                            dividend yield
                        —
                        —Expected
                            lives
                        10 years
                        10 yearsExpected
                            volatility
                        104%
                        136%Weighted
                            average fair value per share of options granted
                        $1.64
                        $1.77
   A
                  summary
                  of options outstanding at December 31, 2005, is as follows:
 **Decemember
                              31, 2005****Options Outstanding**
                          
                          **Options
                              Exercisable****Exercise
                              Price**
                          
                          **Number**
                          
                          **Weighted**
                            **Average
                              Remaining**
                            **Life
                              (years)**
                          
                          **Weighted**
                            **Average**
                            **Exercise
                              Price**
                          
                          **Number**
                          
                          **Weighted**
                            **Average**
                            **Exercise
                              Price**$.10
                              - $.52
                          
                          
                          470,288
                          
                          
                          6.43
                          
                          $
                          0.49
                          
                          
                          299,801
                          
                          $
                          0.48$1.05
                              - $1.99
                          
                          
                          1,473,455
                          
                          
                          7.44
                          
                          $
                          1.54
                          
                          
                          1,465,955
                          
                          $
                          1.54$2.00
                              - $2.55
                          
                          
                          1,190,914
                          
                          
                          7.22
                          
                          $
                          2.43
                          
                          
                          1,190,914
                          
                          $
                          2.43Outstanding
                              at end of year
                          
                          
                          3,134,657
                          
                          
                          7.28
                          
                          $
                          1.72
                          
                          
                          2,956,670
                          
                          $
                          1.72
 **(10)
                  WARRANTS**
  At
                  December 31, 2005, the Company had the following outstanding warrants:
 **Number
                            of**
                          **Shares**
                          **Exercisable**
                        
                        **Exercise**
                          **Price**
                        
                        **Date
                            of Expiration**Granted
                            to investors in private placement
                        
                        
                        5,012,000
                        
                        $
                        1.50
                        
                        
                        9/15-10/15/2008Granted
                            to placement agent in private placement
                        
                        
                        410,592
                        
                        $
                        1.20
                        
                        
                        9/15-10/15/2008Granted
                            to investors and placement agent in private placement
                        
                        
                        1,186,200
                        
                        $
                        2.45
                        
                        
                        12/8-12/15/2009Granted
                            to investor in former subsidiary
                        
                        
                        150,000
                        
                        $
                        5.00
                        
                        
                        2/23/2010Total
                        
                        
                        6,758,792Weighted
                            average exercise price
                        
                        
                        
                        
                        $
                        1.73Weighted
                            average duration in years
                        
                        
                        
                        
                        
                        
                        
                        
                        3.96
 38
 Table
                        of Contents
  **S** **ONTRA
                    MEDICAL CORPORATION**
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Years
                    Ended December 31, 2005 and 2004-(Continued)**
 
 **(11)
                    BAYER LICENSE AGREEMENT**
  On
                    July
                    28, 2003, the Company and Bayer Diagnostics Division of Bayer
                    Healthcare LLC
                    (“Bayer”) executed a definitive license agreement pursuant to which the
                    Company
                    granted to Bayer an exclusive worldwide right and license of
                    the Company’s
                    intellectual property rights to make, have made, use, import
                    and sell the
                    continuous transdermal glucose monitoring system utilizing ultrasonic
                    techniques. In consideration of the license and the Company’s delivery of all
                    information, materials and know-how related to the licensed technology
                    in 2003,
                    Bayer paid the Company a one-time, non-refundable license fee
                    of $1.5 million in
                    January 2004. On December 14, 2005, the parties amended the license
                    agreement,
                    pursuant to which the Company reacquired the co-exclusive rights
                    to make, have
                    made, use, import and sell the continuous transdermal glucose
                    monitoring system
                    utilizing ultrasonic techniques in the worldwide hospital intensive
                    care unit
                    (ICU) market, and the Company granted Bayer a right of first
                    refusal to market
                    any hospital ICU product(s) that we may develop. If Bayer does
                    not market
                    Sontra’s hospital ICU product(s), then Sontra shall pay Bayer a royalty
                    equal to
                    1% of Sontra’s net product sales. In addition, upon Bayer’s completion of the
                    first phase of its development of the continuous glucose monitoring
                    system, Bayer shall pay a $2.0 million milestone payment to Sontra.
                    Such
                    milestone payment shall be paid no later than December 31, 2007,
                    otherwise
                    Bayer’s exclusive license rights under the amended license agreement
                    shall
                    become co-exclusive and Bayer’s marketing rights to Sontra’s hospital ICU
                    product(s) shall terminate. The parties are no longer obligated
                    under the
                    amended license agreement to enter into one or more joint development
                    agreements
                    related to the continuous transdermal glucose monitoring system;
                    however, in the
                    second phase of Bayer’s product development process, the parties will agree upon
                    reasonable royalty rates to be paid to Sontra for product sales
                    by Bayer and the
                    parties may also negotiate a commercially reasonable manufacturing
                    agreement
                    pursuant to which Sontra would supply Bayer with the SonoPrep
                    ultrasonic skin
                    permeation component of the continuous glucose monitoring system.
 **(12)
                    INCOME TAXES**
  No
                    provision or benefit for federal or state income taxes has been
                    recorded, as the
                    Company has incurred a net loss for all periods presented, and
                    has provided a
                    valuation allowance against its deferred tax assets.
  At
                    December 31, 2005, the Company had federal net operating loss
                    carryforwards of
                    approximately $29,017,000, which will expire in varying amounts
                    beginning in
                    2018. The Company also had research and development tax credit
                    carryforwards of
                    approximately $573,000 which will begin to expire in 2018 unless
                    previously
                    utilized. The United States Tax Reform Act of 1986 contains provisions
                    that may
                    limit the Company’s net operating loss carryforwards available to be used in any
                    given year in the event of significant changes in the ownership
                    interests of
                    significant stockholders, as defined.
  Significant
                    components of the Company’s net deferred tax asset are as follows:
 
 **December
                              31,****2005**
                          
                          **2004**Deferred
                              Tax
                              AssetsNet
                              operating loss carryforwards
                          
                          $
                          11,645,000
                          
                          $
                          8,146,000Research
                              credit
                              carryforward
                          
                          
                          573,000
                          
                          
                          465,000Other
                              temporary differences
                          
                          
                          38,000
                          
                          
                          17,000Total
                              deferred tax assets
                          
                          
                          12,256,000
                          
                          
                          8,628,000Valuation
                              allowance
                          
                          
                          (12,256,000
                          )
                          
                          (8,628,000
                          )Net
                              deferred tax asset
                          
                          $
                          —
                          
                          $
                          —
 In
                    2005 and
                    2004, the Company’s valuation allowance increased by $3,628,000 and $2,015,000,
                    respectively. SFAS No. 109 requires that a valuation allowance
                    be recorded when
                    it is more likely than not that some portion or all of the deferred
                    tax assets
                    will not be realized. Since the Company cannot be assured of
                    realizing the
                    deferred tax asset, a full valuation allowance has been provided.
 
  39
 Table
                        of Contents
 **SONTRA
                    MEDICAL CORPORATION**
 
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Years
                    Ended December 31, 2005 and 2004-(Continued)**
  **(13)
                    EMPLOYEE BENEFIT PLANS**
 
 The
                    Company sponsors a 401(k) Plan that covers all eligible employees.
                    Employees
                    must be 21 years of age or older as of the plan’s entry dates. In addition,
                    employees become eligible to participate in the 401(k) Plan on
                    the entry date
                    occurring on or immediately after meeting the eligibility requirements,
                    as long
                    as they are in a group of employees eligible to participate on
                    that entry date.
                    Participants may contribute up to 20% of their compensation,
                    not to exceed the
                    maximum allowable by Internal Revenue Service regulations. Prior
                    to June 30,
                    2002, the 401(k) Plan did not provide for employer matching contributions.
                    In
                    July 2002, the plan was amended to include a Company matching
                    contribution equal
                    to 100% of the participant’s contribution up to the first 3% of compensation and
                    50% of the next 2% of compensation. In addition the Company may
                    make profit
                    sharing contributions at its discretion. The matching contribution
                    and the
                    profit sharing contribution are payable in cash or in the Company’s common
                    stock, at the discretion of the Board. For the year ended December
                    31, 2005, the
                    Company contributed 172,793 shares of Company common stock to
                    the 401(k) plan
                    and recorded compensation expense of $311,000. For the year ended
                    December 31,
                    2004, the Company contributed 113,263 shares of Company common
                    stock to the
                    401(k) plan and recorded compensation expense of $225,000.
 
 **(14)
                    LITIGATION**
 
 In
                    December 2004, the Company entered into an agreement with the
                    Puerto Rican
                    Telephone Company (“PRTC”) regarding alleged rate overcharges by PRTC related to
                    the activity of ChoiceTel prior to the Merger (see Note 3). Pursuant
                    to the
                    agreement, the Company agreed to waive certain legal claims against
                    PRTC in
                    exchange for $250,000. The Company recorded the $250,000 payment
                    as an
                    adjustment to increase the net assets of ChoiceTel as it related
                    to the
                    resolution of a pre-acquisition contingency and consequently
                    the Company
                    recorded a receivable and additional paid in capital of $250,000
                    in 2004. The
                    Company subsequently received the $250,000 settlement payment
                    in January 2005.
 
 **(15)
                    SUBSEQUENT EVENT**
 
 *2006
                    Financing*
 
 In March
                     2006, the Company completed a financing (the “Financing”) with selected
                    qualified purchasers that provided the Company with net proceeds
                    of
                    approximately $1.6  million pursuant to the terms of a Common Stock and
                    Warrant Purchase Agreement, dated as of March 7, 2006 (the “Purchase
                    Agreement”). Under the terms of the Purchase Agreement, at the
                    initial closing of the Financing on March  7, 2006,
                    investors purchased 4,390,995 shares of the Company’s Common Stock in a
                    private placement at a per share purchase price of $0.40. The
                    investors also
                    received warrants (the “Warrants”) to purchase up to 4,390,995 shares of
                    Common Stock. The Warrants are exercisable beginning six months
                    from the issue
                    date at a per share price of $0.58 and will expire no later than
                    the fifth
                    anniversary of the issue date. In addition, the Company shall
                    have the right to
                    terminate the Warrants, upon thirty days notice, in the event
                    that the closing
                    price of the Company’s common stock for twenty consecutive trading days is equal
                    to or greater than $1.16 per share. Additional closings of the
                    Financing at
                    which the Company may issue up to 65,359 additional shares of
                    Common Stock
                    and additional warrants to purchase up to 65,359 shares of Common
                    Stock on the
                    same terms as the initial closing may be held through March 17,
                    2006.
 
 The
                    Company agreed to pay to the placement agent for the Financing
                    for its services:
                    (a) a cash fee equal to 7% of the aggregate capital raised by
                    the Company from
                    investors introduced to the Company by the placement agent, excluding
                    the
                    proceeds from any Warrant exercises; (b) warrants to purchase
                    a number of shares
                    of Common Stock of the Company equal to 7% of the total number
                    of shares of
                    Common Stock issued to investors introduced to the Company by
                    the placement
                    agent, excluding shares of Common Stock to be issued upon Warrant
                    exercises or
                    in connection with the payment of dividends or interest, on the
                    identical terms
                    and conditions (including exercise price) with the Warrants issued
                    to the
                    investors in the Financing; and (c) a $25,000 legal expense
                    allowance.
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 **ITEM 8.****CHANGES
                    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                    DISCLOSURE**
  None.
  **ITEM 8A.****CONTROLS
                    AND PROCEDURES**
  Our
                    management, with the participation of our Chief Executive Officer
                    and Chief
                    Financial Officer, evaluated the effectiveness of our disclosure
                    controls and
                    procedures (as defined in Rule 13a-15(e) of the Exchange Act)
                    as of the end of
                    the period covered by this report. Based on that evaluation,
                    our Chief Executive
                    Officer and Chief Financial Officer concluded that our disclosure
                    controls and
                    procedures as of the end of the period covered by this report
                    were effective in
                    ensuring that information required to be disclosed by us in reports
                    that we file
                    or submit under the Exchange Act is recorded, processed, summarized
                    and reported
                    within the time periods specified in the Securities and Exchange
                    Commission’s
                    rules and forms.
  There
                    was
                    no change in our internal control over financial reporting (as
                    defined in Rule
                    13a-15(f) of the Exchange Act) that occurred during our fourth
                    fiscal quarter
                    that has materially affected, or is reasonably likely to materially
                    affect, our
                    internal control over financial reporting.
  **ITEM 8B.****OTHER
                    INFORMATION**
  None.
   41
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 **PART
                    III**
  **ITEM 9.****DIRECTORS,
                    EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
                    WITH SECTION 16(A)
                    OF THE EXCHANGE ACT**
  Incorporated
                    by reference to the portions of the Definitive Proxy Statement
                    entitled
“Election of Directors,” “Directors and Executive Officers,” “The Board of
                    Directors and its Committees,” “Audit Committee Financial Expert,” “Section
                    16(a) Beneficial Ownership Reporting Compliance” and “Involvement in Legal
                    Proceedings.”
  The
                    Company has adopted a Code of Business Conduct and Ethics that
                    applies to all
                    directors, officers and employees of the Company, including the
                    Company’s
                    principal executive officer, and its senior financial officers
                    (principal
                    financial officer and controller or principal accounting officer,
                    or persons
                    performing similar functions). A copy of the Company’s Code of Business Conduct
                    and Ethics is filed with or incorporated by reference in this
                    report, and is
                    also posted to the Company’s website at www.sontra.com.
  **ITEM 10.****EXECUTIVE
                    COMPENSATION**
  Incorporated
                    by reference to the portions of the Definitive Proxy Statement
                    entitled
“Executive Compensation” and “Director Compensation.”
  **ITEM 11.****SECURITY
                    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                    STOCKHOLDER
                    MATTERS**
  Incorporated
                    by reference to the portions of the Definitive Proxy Statement
                    entitled
“Securities Ownership of Certain Beneficial Owners and Management.”
  ***Equity
                    Compensation Plan Information as of December 31, 2005***
  The
                    following table sets forth certain information regarding the
                    Company’s equity
                    compensation plans as of December 31, 2005. The Company has no
                    equity
                    compensation plans not previously approved by security holders.
 **(a)**
                            
                            **(b)**
                            
                            **(c)****Plan
                                  Category**
                            
                            **Number of securities to**
                              **be issued upon exercise**
                              **of outstanding options,**
                              **warrants and rights**
                            
                            **Weighted-average**
                              **exercise
                                  price of**
                                **outstanding options,**
                                **warrants and rights**
                            
                            **Number of securities remaining**
                                **available
                                  for future issuance**
                                **under
                                  equity compensation**
                                **plans
                                  (excluding securities**
                                **reflected
                                  in column (a))**Equity
                                compensation plans approved by security holders
                            
                            
                            3,134,657
                            
                            $
                            1.72
                            
                            
                            1,018,520(1
                            )Equity
                                compensation plans not approved by security holders
                            
                            
                            N/A
                            
                            
                            N/A
                            
                            
                            N/ATotal
                            
                            
                            3,134,657
                            
                            $
                            1.72
                            
                            
                            1,018,520
 
 (1)  Consists
                    of 41,003 shares authorized for issuance under the Company’s 1997 Long-Term
                    Incentive and Stock Option Plan and 977,517 shares authorized
                    for future
                    issuance under the Company’s 2003 Stock Option and Incentive Plan (the “2003
                    Plan”). The Company initially reserved an aggregate of 750,000 shares
                    of Common
                    Stock for issuance upon exercise of options granted under the
                    2003 Plan. The
                    2003 Plan provides that the number of shares authorized for issuance
                    will
                    automatically increase each January 1 (beginning in 2004) by
                    the greater of (i)
                    4% of the outstanding number of shares of Common Stock on the
                    immediately
                    preceding December 31, or (ii) the aggregate number of shares
                    made subject to
                    equity-based awards during the one year prior to such January
                    1; or, in either
                    case, such lesser number as may be approved by the Board. The
                    maximum aggregate
                    number of shares that may be authorized for issuance under the
                    2003 Plan for all
                    periods is 2,500,000. As of December 31, 2005, there were options
                    to purchase an
                    aggregate of 1,399,912 shares of Common Stock outstanding under
                    the 2003 Plan.
                    On January 1, 2006, the number of shares authorized for issuance
                    under the 2003
                    Plan automatically increased by 122,571 shares, reaching the
                    2,500,000 maximum
                    aggregate number of shares that may be authorized for issuance
                    thereunder.
  **ITEM 12.****CERTAIN
                    RELATIONSHIPS AND RELATED TRANSACTIONS**
  Incorporated
                    by reference to the portions of the Definitive Proxy Statement
                    entitled “Certain
                    Relationships and Related Transactions.”
  42
 Table
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  **ITEM 13.****EXHIBITS**
  The
                    Exhibits listed in the Exhibit Index immediately preceding such
                    Exhibits are
                    filed with or incorporated by reference in this report.
  **ITEM 14.****PRINCIPAL
                    ACCOUNTANT FEES AND SERVICES**
  Incorporated
                    by reference to the portions of the Definitive Proxy Statement
                    entitled
“Independent Registered Public Accounting Firm” and “Audit Committee Policy on
                    Pre-Approval of Services of Independent Registered Public Accounting
                    Firm.”
   43
 Table
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 **SIGNATURES**
  In
                    accordance with Section 13 or 15(d) of the Securities Exchange
                    Act of 1934, the
                    registrant caused this report to be signed on its behalf by the
                    undersigned,
                    thereunto duly authorized on March 15 ,
                    2006.
  **SONTRA
                                  MEDICAL CORPORATION**By:
                              /S/    THOMASW.
                                  DAVISONName:
                              **Thomas
                                  W. Davison**Title:
                              **President
                                  and Chief Executive Officer**By:
                              /S/    SEANF.
                                  MORANName:
                              **Sean
                                  F. Moran**Title:
                              **Chief
                                  Financial Officer**
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 Table
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  In
                    accordance with the Securities Exchange Act of 1934, this report
                    has been signed
                    below by the following persons on behalf of the registrant and
                    in the capacities
                    indicated on March 15 ,
                    2006.
  **Signature
                                and Title**
                          
                          **Signature
                                and Title**/S/    MICHAELR.
                              WIGLEY
                          
                          /S/    JOSEPHF.
                              AMARAL**Michael
                              R. Wigley**
                          
                          **Joseph
                              F. Amaral****Chairman
                              of the Board**
                          
                          **Director**/S/    THOMASW.
                              DAVISON
                          
                          /S/    GARYS.
                              KOHLER**Thomas
                              W. Davison**
                          
                          **Gary
                              S. Kohler****Chief
                              Executive Officer,**
                            **President
                              and Director**
                            **(Principal
                              Executive Officer)**
                          
                          **Director**/S/    SEANF.
                              MORAN
                          
                          /S/    ROBERTS.
                              LANGER**Sean
                              F. Moran**
                          
                          **Robert
                              S. Langer****Chief
                              Financial Officer**
                            **(Principal
                              Financial and Accounting Officer)**
                          
                          **Director**/S/    GERARDE.
                              PUORRO
                          
                          /S/    BRIANF.
                              SULLIVAN**Gerard
                              E. Puorro**
                          
                          **Brian
                              F. Sullivan****Director**
                          
                          **Director**
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 Table
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 **EXHIBIT
                    INDEX**
  **Exhibit**
                              **Number**
                          **Description
                                of Document**2.1
                          Agreement
                              and Plan of Reorganization by and among the Registrant,
                              SMI and CC Merger
                              Corp., dated February 27, 2002 is incorporated by reference
                              to Exhibit 2.1
                              of the Registrant’s Registration Statement on Form S-4 (File No.
                              333-86814).2.2
                          Amendment
                              No. 1 to Agreement and Plan of Reorganization by and
                              among the Registrant,
                              SMI and CC Merger Corp., dated February 27, 2002 is
                              incorporated by
                              reference to Exhibit 2.2 of the Registrant’s Registration Statement on
                              Form S-4 (File No. 333-86814).3.1
                          Second
                              Amended and Restated Articles of Incorporation of the
                              Registrant is
                              incorporated herein by reference to Exhibit 3.01 to
                              the Registrant’s
                              Annual Report on Form 10-KSB for the fiscal year ended
                              December 31, 2003
                              (File No. 000-23017).3.2
                          Statement
                              of the Powers, Designations, Preferences and Rights
                              of the Series A
                              Convertible Preferred Stock of the Registrant is incorporated
                              herein by
                              reference to Exhibit 4.2 to the Registrant’s Registration Statement on
                              Form S-3 (File No. 333-109716).3.3
                          Articles
                              of Amendment of Second Amended and Restated Articles
                              of Incorporation,
                              dated May 25, 2005 is incorporated herein by reference
                              to Exhibit 4.1 to
                              the Registrant’s Current Report on Form 8-K dated May 24, 2005 (File
                              No.
                              000-23017).3.4
                          Amended
                              and Restated Bylaws of the Registrant is incorporated
                              herein by reference
                              to Exhibit 3.03 to the Registrant’s Annual Report on Form 10-KSB for the
                              fiscal year ended December 31, 2003 (File No.
                              000-23017).4.1
                          Specimen
                              Certificate of Common Stock, $.01 par value per share,
                              of the Registrant
                              is incorporated herein by reference to Exhibit 4.02
                              to the Registrant’s
                              Annual Report on Form 10-KSB for the fiscal year ended
                              December 31, 2002
                              (File No. 000-23017).10.1*
                          2003
                              Stock Option and Incentive Plan is incorporated herein
                              by reference to
                              Exhibit 10.04 to the Registrant’s Annual Report on Form 10-KSB for the
                              fiscal year ended December 31, 2003 (File
                              No. 000-23017).10.2*
                          1997
                              Long-Term Incentive and Stock Option Plan, as amended,
                              is incorporated by
                              reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form
                              10-QSB for the period ended June 30, 2002 (File No.
                              000-23017).10.3*
                          Sontra
                              Medical, Inc. 1999 Stock Option and Incentive Plan
                              is incorporated by
                              reference to Exhibit 10.31 of the Registrant’s Registration Statement on
                              Form S-4 (File No. 333-86814).10.4*
                          Employment
                              Agreement between the Registrant and Sean Moran, dated
                              June 22, 2002, is
                              incorporated herein by reference to Exhibit 10.2 to
                              the Registrant’s
                              Quarterly Report on Form 10-QSB for the period ended
                              June 30, 2002 (File
                              No. 000-23017).10.5
                          License
                              Agreement, dated as of July 28, 2003, by and between
                              the Registrant and
                              Bayer Healthcare LLC is incorporated herein by reference
                              to Exhibit 10.1
                              to the Registrant’s Current Report on Form 8-K dated July 28, 2003 (File
                              No. 000-23017).10.6
                          Amendment
                              No. 1 to License Agreement, dated as of December 14,
                              2005, by and between
                              the Registrant and Bayer Healthcare LLC is incorporated
                              herein by
                              reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K
                              dated December 14, 2005 (File No. 000-23017).10.7
                          Lease
                              Agreement between the Registrant and Forge Park Investors
                              LLC dated
                              January 24, 2003 is incorporated herein by reference
                              to Exhibit 10.13 to
                              the Registrant’s Annual Report on Form 10-KSB for the fiscal year
                              ended
                              December 31, 2002 (File No.
                              000-23017).
 
  46
 Table
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   **Exhibit**
                            **Number**
                          **Description
                              of Document**10.8
                          Patent
                              License Agreement (Exclusive) between SMI and the Massachusetts
                              Institute
                              of Technology dated June 30, 1998 (incorporated by
                              reference to Exhibit
                              10.39 of the Registrant’s Registration Statement on Form S-4; Registration
                              No. 333-86814).10.9*
                          401(k)
                              Retirement Plan is incorporated herein by reference
                              to Exhibit 10.15 to
                              the Registrant’s Annual Report on Form 10-KSB for the fiscal year
                              ended
                              December 31, 2002 (File No. 000-23017).10.10
                          Form
                              of Subscription Agreement is incorporated herein by
                              reference to Appendix
                              C to the Registrant’s Definitive Schedule 14A filed September 8, 2003
                              (File No. 000-23017).10.11
                          Form
                              of Series A Unit Supplemental Agreement is incorporated
                              herein by
                              reference to Appendix F to the Registrant’s Definitive Schedule 14A filed
                              September 8, 2003 (File No. 000-23017).10.12
                          Pre-Emptive
                              Rights Granted to Purchasers of Series A Preferred
                              Stock of the Registrant
                              is incorporated herein by reference to Exhibit 99.2
                              to the Registrant’s
                              Current Report on Form 8-K dated October 14, 2003 (File
                              No.
                              000-23017).10.13
                          Form
                              of Common Stock Purchase Warrant is incorporated herein
                              by reference to
                              Appendix E to the Registrant’s Definitive Schedule 14A filed September 8,
                              2003 (File No. 000-23017).10.14
                          Form
                              of Placement Agent Common Stock Purchase Warrant is
                              incorporated herein by
                              reference to Exhibit 99.4 to the Registrant’s Registration Statement on
                              Form S-3 (File No. 333-109716).10.15
                          Common
                              Stock and Warrant Purchase Agreement, dated as of December
                              8, 2004, by and
                              among the Company and the investors listed on Schedule
                              1 thereto, is
                              incorporated herein by reference to Exhibit 10.1 to
                              the Registrant’s
                              Current Report on Form 8-K dated December 8, 2004 (File
                              No.
                              000-23017).10.16
                          Form
                              of Common Stock Purchase Warrant is incorporated herein
                              by reference to
                              Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated December
                              8, 2004 (File No. 000-23017).14
                          Code
                              of Business Conduct and Ethics of the Registrant is
                              incorporated herein by
                              reference to Exhibit 14 to the Registrant’s Annual Report on Form 10-KSB
                              for the fiscal year ended December 31, 2003 (File No.
                              000-23017).21
                          Subsidiaries
                              of the Registrant is incorporated herein by reference
                              to Exhibit 21 to the
                              Registrant’s Annual Report on Form 10-KSB for the fiscal year
                              ended
                              December 31, 2002 (File No. 000-23017).23.1
                          Consent
                              of Wolf & Company, P.C.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.
  *  Management
                    contract or compensatory plan or arrangement filed in response
                    to Item 13 of
                    Form 10-KSB.
 47