UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-15360

BIOJECT MEDICAL TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

Oregon		93-1099680
(State or other jurisdiction of incorporation		(I.R.S. Employer Identification No.)
or organization)

20245 SW 95^th Avenue
Tualatin, Oregon		97062
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (503) 692-8001

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock without par value		14,273,939
(Class)		(Outstanding at May 11, 2006)

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 31,			December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	2,403,347		$	1,045,442
Short-term marketable securities	1,500,000			1,500,000
Accounts receivable, net of allowance for doubtful accounts of $12,474 and $12,310	496,617			2,390,275
Inventories	1,943,733			1,497,874
Assets held for sale	1,104,375			1,104,375
Other current assets	985,022			425,965
Total current assets	8,433,094			7,963,931

Property and equipment, net of accumulated depreciation of $4,717,047 and $4,519,138	4,445,865			4,559,079
Goodwill	94,075			94,074
Other assets, net	1,270,022			1,329,338
Total assets	$	14,243,056		$	13,946,422

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term note payable	$	3,417,209		$	961,015
Current portion of long-term debt	1,750,005			1,083,333
Accounts payable	909,455			1,257,358
Accrued payroll	568,379			404,342
Other accrued liabilities	874,712			204,289
Deferred revenue	1,501,429			1,907,842
Total current liabilities	9,021,189			5,818,179

Long-term liabilities:
Long-term debt	—			916,671
Deferred revenue	292,931			318,266
Other long-term liabilities	345,725			350,239

Commitments

Shareholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized; issued and outstanding:
Series D Convertible - 2,086,957 shares at March 31, 2006 and December 31, 2005, no stated value, liquidation preference of $1.15 per share	1,878,768			1,878,768
Common stock, no par, 100,000,000 shares authorized; issued and outstanding 14,157,954 shares and 13,968,563 shares at March 31, 2006 and December 31, 2005	111,341,085			110,704,560
Accumulated deficit	(108,636,642		)	(106,040,261		)
Total shareholders’ equity	4,583,211			6,543,067
Total liabilities and shareholders’ equity	$	14,243,056		$	13,946,422

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

BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended March 31,
	2006			2005

Revenue:
Net sales of products	$	1,259,268		$	2,867,292
License and technology fees	434,771			385,634
	1,694,039			3,252,926

Operating expenses:
Manufacturing	1,435,691			2,441,995
Research and development	1,033,316			1,746,332
Selling, general and administrative	1,688,195			986,386
Total operating expenses	4,157,202			5,174,713
Operating loss	(2,463,163		)	(1,921,787		)

Interest income	45,081			38,981
Interest expense	(178,299		)	(133,589		)
	(133,218		)	(94,608		)
Net loss	$	(2,596,381	)	$	(2,016,395	)

Basic and diluted net loss per common share	$	(0.18	)	$	(0.15	)

Shares used in per share calculations	14,051,395			13,740,141

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

BIOJECT MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Three Months Ended March 31,
	2006			2005
Cash flows from operating activities:
Net loss	$	(2,596,381	)	$	(2,016,395	)
Adjustments to reconcile net loss to net cash used in operating activities:
Compensation expenses related to fair value of stock-based awards	233,074			8,023
Stock contributed to 401(k) plan	20,851			21,100
Contributed capital for services	5,130			—
Depreciation and amortization	307,999			296,670
Change in deferred rent	5,115			—
Changes in operating assets and liabilities:
Accounts receivable, net	1,893,658			(602,052		)
Inventories	(445,859		)	(54,096		)
Other current assets	(16,053		)	8,934
Accounts payable	(343,586		)	204,770
Accrued payroll	164,037			230,916
Other accrued liabilities	587,423			(95,728		)
Deferred revenue	(431,748		)	(41,092		)
Net cash used in operating activities	(616,340		)	(2,038,950		)

Cash flows from investing activities:
Maturity of marketable securities	—			—
Capital expenditures	(84,696		)	(80,008		)
Other assets	(37,725		)	(16,320		)
Net cash used in investing activities	(122,421		)	(96,328		)

Cash flows from financing activities:
Proceeds from short-term note payable	2,750,000			—
Debt Issuance cost	(95,582		)	(333,332		)
Principal payments on notes payable	(293,806		)	—
Principal payments made on term loan	(249,999		)	—
Payments made on capital lease obligations	(13,947		)	(11,887		)
Net cash provided by (used in) financing activities	2,096,666			(345,219		)

Increase (decrease) in cash and cash equivalents	1,357,905			(2,480,497		)

Cash and cash equivalents:
Beginning of period	1,045,442			3,848,502
End of period	$	2,403,347		$	1,368,005

Supplemental disclosure of cash flow information:
Cash paid for interest	$	91,097		$	75,663

Supplemental disclosure of non-cash information:
Warrant issued in connection with debt financing	$	460,470		$	—

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

BIOJECT MEDICAL TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The financial information included herein for the three month periods ended March 31, 2006 and 2005 is unaudited; however, such information reflects all adjustments consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2005 is derived from Bioject Medical Technologies Inc.’s 2005 Annual Report on Form 10-K for the year ended December 31, 2005. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Bioject’s 2005 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2. Stock-Based Compensation

Adoption of SFAS No. 123R

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS 123R, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Prior to January 1, 2006, we accounted for share-based compensation to employees in accordance with Accounting Principles Board Option No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations. We also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.”

We have elected to adopt the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing stock-based compensation. Under this method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption is recognized in periods after the date of adoption using the Black-Scholes valuation method over the remainder the requisite service period. The cumulative effect of the change in accounting principle from APB 25 to SFAS No. 123R was not material.

We provided disclosures of net income and earnings per share as if the method prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied in measuring compensation expense as follows (in thousands, except per share amounts):

Three Months Ended March 31,	2005
Net loss, as reported	$	(2,016,395	)
Add - stock-based employee compensation expense included in reported net loss	8,023
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards	(173,230		)
Net loss, pro forma	$	(2,181,602	)
Basic and diluted net loss per share:
As reported	$	(0.15	)
Pro forma	$	(0.16	)

Certain information regarding our stock-based compensation was as follows:

Three Months Ended March 31,	2006		2005
Weighted average grant-date fair value of share options granted	$	68,759	$	248,475
Total intrinsic value of share options exercised	—		—
Stock-based compensation recognized in results of operations	233,074		8,023
Tax benefit recognized in statement of operations	—		—
Cash received from options exercised and shares purchased under all share-based arrangements	—		—
Tax deduction realized related to stock options exercised	—		—

There was no stock-based compensation capitalized in fixed assets, inventory or other assets during the first quarter of 2006 or 2005.

The stock-based compensation was included in our statement of operations as follows:

Three Months Ended March 31,	2006		2005
Manufacturing	$	29,328	$	653
Research and development	31,064		363
Selling, general and administrative	172,682		7,007
	$	233,074	$	8,023

To determine the fair value of stock-based awards granted during the periods presented, we used the Black-Scholes option pricing model and the following weighted average assumptions:

Three Months Ended March 31,	2006		2005
*Stock Incentive Plan*
Risk-free interest rate	4.5	%	3.9	%
Expected dividend yield	0.0	%	0.0	%
Expected term	5 years		5 years
Expected volatility	75.36	%	79.70	%
Discount for post vesting restrictions	0.0	%	n/a

We did not issue any stock pursuant to our Employee Stock Purchase Plan (“ESPP”) during the quarters ended March 31, 2006 or 2005. The expense related to our ESPP is recognized based on a fair value calculation. The expense is immaterial and is included in the stock-based compensation expense.

The risk-free rate used in based on the U.S. Treasury yield over the estimated term of the options granted. Our option pricing model utilizes the simplified method accepted under Staff Accounting Bulletin No. 107 to estimate the expected term. The expected volatility is calculated based on the actual volatility of our common stock over a 5 year period. The option pricing model assumes no dividend payments will be made through the expected term.

We amortize stock-based compensation on a straight-line basis over the vesting period of the individual award with estimated forfeitures considered. Shares to be issued upon the exercise of stock options will come from newly issued shares.

The following indicates what certain operating results would have been without the effects of applying SFAS No. 123R in the first quarter of 2006:

	As reported			Pro Forma without effects of applying SFAS No. 123R
Net loss	$	(2,596,381	)	$	(2,516,402	)
Basic and diluted net loss per share	(0.18		)	(0.18		)

Included in stock-based compensation expense in the first quarter of 2006 was approximately $153,000 related to restricted shares, which would have also been recognized pursuant to APB 25.

1992 Stock Incentive Plan

Options may be granted to our directors, officers and employees by the Board of Directors under terms of the Bioject Medical Technologies Inc. 1992 Stock Incentive Plan (the “Plan”). Under the terms of the Plan, eligible employees may receive statutory and nonstatutory stock options, stock bonuses, stock appreciation rights and restricted stock for purchase of shares of our common stock at prices and vesting as determined by a committee of the Board. As amended, a total of up to 3,900,000 shares of our common stock, including options outstanding at the date of initial shareholder approval of the Plan, may be granted under the Plan, as amended. At March 31, 2006, we had options covering 629,181 shares of our common stock available for grant and a total of 3,271,391 shares of common stock reserved for issuance.

Stock option activity for the three-month period ended March 31, 2006 was as follows:

	Options Outstanding		Weighted Average Exercise Price
Outstanding at December 31, 2005	2,163,110		$	5.29
Granted	66,245		1.61
Exercised	—		—
Forfeited	(31,992	)	2.33
Outstanding at March 31, 2006	2,197,363		5.22

Certain information regarding options outstanding as of March 31, 2006 was as follows:

	Options Outstanding		Options Exercisable
Number	2,197,363		1,985,314
Weighted average exercise price	$	5.22	$	5.58
Aggregate intrinsic value	$	31,533	$	11,591
Weighted average remaining contractual term	3.94 years		3.48 years

Restricted stock activity was as follows:

	Restricted Shares		Weighted Average Per Share Grant Date Fair Value
Balances, December 31, 2005	508,752		$	1.64
Granted	193,450		1.61
Issued	(173,100	)	1.69
Forfeited	(84,255	)	2.06
Balances, March 31, 2006	444,847		1.53

As of March 31, 2006, unrecognized stock-based compensation related to outstanding, but unvested options and restricted shares was $601,670, which will be recognized over the weighted average remaining vesting period of 2.05 years.

Employee Stock Purchase Plan

Our 2000 Employee Stock Purchase Plan, as amended (the “ESPP”), allows for the issuance of 750,000 shares of our common stock. The ESPP is intended to qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code of 1986, as amended, and is administered by our Board of Directors. The purchase price for shares purchased under the ESPP is 85% of the lesser of the fair market value at the beginning or end of the purchase period. No shares were issued pursuant to the ESPP in the first quarter of 2006 and, at March 31, 2006, 350,399 shares remained available for purchase under the ESPP.

Note 3. Inventories

Inventories are stated at the lower of cost or market. Cost is determined in a manner which approximates the first-in, first out (FIFO) method. Costs utilized for inventory valuation purposes include labor, materials and manufacturing overhead. Net inventories consisted of the following:

	March 31, 2006		December 31, 2005
Raw materials and components	$	1,058,949	$	838,719
Work in process	97,118		33,683
Finished goods	787,666		625,472
	$	1,943,733	$	1,497,874

Note 4. Net Loss Per Common Share

The following common stock equivalents were excluded from the diluted loss per share calculations, as their effect would have been antidilutive:

	Three Months Ended March 31,
	2006	2005
Stock options and warrants	5,326,123	4,850,237
Convertible preferred stock	2,086,957	2,086,957
Total	7,413,080	6,937,194

Note 5. Debt and Equity Financing Arrangements

On March 8, 2006, we entered into an agreement with respect to $1.5 million of convertible debt financing (the “Agreement”) with Life Sciences Opportunity Fund II (Institutional), L.P. (“LOF”) and several of its affiliates. Under the terms of the Agreement, we received $1.5 million of debt financing on March 8, 2006. Interest on debt outstanding under the Agreement is 10% per annum. The maturity date of the debt issued pursuant to the Agreement is the earliest of i) April 1, 2007; ii) the time of closing of our offering and sale of at least $4.5 million of our Series E preferred stock; and iii) the occurrence of an Event of Default, as defined in the Agreement.

In connection with the Agreement, we issued warrants to purchase an aggregate of 656,934 shares of our common stock at $1.37 per share to the lenders. The warrants expire in September 2010. The warrants were valued at $664,440 using the Black-Scholes valuation model utilizing the following assumptions:

Risk-free interest rate	4.5	%
Expected dividend yield	0.0	%
Contractual term (years)	4.5
Expected volatility	76.11	%
Discount for post vesting restrictions	0.0	%

The value of the warrants, along with other direct costs, was recorded as debt issuance costs and is being amortized to interest expense over the term of the Agreement.

Also on March 8, 2006, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with LOF and its affiliates (collectively, the “LOF Affiliates”). Under the Securities Purchase Agreement, upon receiving shareholder approval at our annual meeting, which is expected to be held in May 2006, and subject to customary and other closing conditions, the LOF Affiliates will purchase approximately $4.5 million of our Series E preferred stock at $1.37 per share (including the conversion of the $1.5 million of convertible debt financing and related accrued interest). Each share of Series E preferred stock will be convertible into one share of Bioject common stock. The Series E preferred stock will include an 8% annual payment-in-kind dividend for 24 months.

In addition, on March 29, 2006, we entered into a term loan agreement with Partners for Growth, L.P. (“PFG”) for a $1.25 million convertible debt financing (the “Debt Financing”). We have two other loans outstanding with PFG with a combined total of approximately $2.4 million outstanding as of March 31, 2006. Under the terms of the Debt Financing, we received $1.25 million. This loan will be due in March 2011. The loan bears interest at the prime rate and will be convertible, subject to shareholder approval, at any time, by PFG into our common stock at $1.37 per share. In addition, if our common stock trades at a price of $4.11 per share or higher for 20 consecutive trading days, we can force PFG to convert the debt to common stock, subject to certain limitations on trading volume. Shareholders will also be asked to approve the conversion feature of this transaction at our annual meeting, which is expected to be held in May 2006. If shareholders do not approve the conversion feature of this transaction at the earlier of the annual meeting or July 31, 2006, the loan will be due upon demand by PFG. If we prepay this loan, we will issue PFG a warrant to purchase a number of shares of common stock equal to what it would have received upon conversion at a price of $1.37 per share.

We also entered into an amendment to our Rights Agreement with American Stock Transfer & Trust Company. The amendment exempts shareholders affiliated with the LOF Affiliates, which are affiliates of Sanders Morris Harris (“SMH”), from the definition of “Acquiring Person” under the Rights Agreement.

Note 6. Restructuring

On March 3, 2006, our Board of Directors approved a plan of restructuring, which includes reorganizing our corporate organization, closing our New Jersey administrative office and reducing operations headcount and research and development costs at our Portland, Oregon facility. In addition, Jim O’Shea, our President and Chief Executive Officer, will be based out of our Portland, Oregon location. Also, John Gandolfo, our Chief Financial Officer, ceased to be employed by us effective May 3, 2006. During the first quarter of 2006, we recognized a charge of approximately $720,000 associated with severance costs for terminated employees and non-cash charges for stock-based compensation related to the acceleration of certain restricted stock awards as part of the restructuring. The cash portion of the charge will be paid out over a 14 month period. The liability for the acceleration of vesting will be settled through issuance of common stock in the second quarter of 2006. Going forward, we anticipate annual cost savings in excess of $1.2 million in 2006 and $1.4 million in 2007 in connection with these expense reductions.

The following table summarizes the charges and expenditures related to our restructuring in the first quarter of 2006:

Quarter Ended March 31, 2006	Beginning Accrued Liability		Charged to Expense		Expend- itures		Ending Accrued Liability
Severance and related benefits for terminated employees	$	—	$	637,394	$	44,793	$	592,601
Acceleration of vesting to be settled in common stock	—		83,000		—		83,000
	$	—	$	720,394	$	44,793	$	675,601

Note 7. Changes to Board of Directors

On March 3, 2006, our Board of Directors appointed Mr. Jerald S. Cobbs, Managing Director of SMH, as a Director effective upon the closing of the convertible debt financing with LOF and several of its affiliates. Mr. Cobbs will serve as chairman of the nominating committee and as a member of the compensation committee. Mr. Cobbs’ appointment to the Board was a closing condition to the convertible debt financing with LOF and several of its affiliates.

On March 13, 2006, Mr. Eric T. Herfindal resigned from our Board of Directors.

Note 8. Product Sales and Concentrations

Product sales to customers accounting for 10% or more of our product sales were as follows:

	Three Months Ended March 31,
	2006			2005
Amgen	$	42	%	$	23	%
Chronimed	16		%	5		%
Ferring	13		%	—
Serono	6		%	37		%
Merial	—			31		%

At March 31, 2006, accounts receivable from these customers accounted for approximately 67% of total accounts receivable. No other customers accounted for 10% or more of our accounts receivable as of March 31, 2006.

Note 9. Subsequent Event

Sale of New Jersey Headquarters Building

In January 2006, we contracted to sell our New Jersey headquarters building to an unrelated third party for $1.125 million. The purchaser also purchased the furniture located in the building for an additional $12,500. This sale closed on April 13, 2006. As required by the loan agreement, the proceeds from this sale must be used to pay down the outstanding balance of $1.8 million as of March 31, 2006 on our $3.0 million term loan, with the proceeds first applied to the scheduled principal payments on the loan in the inverse order of maturity. As a result, the outstanding balance of the term loan is recorded as current at March 31, 2006. Following the application of these payments, the remaining balance outstanding on this term loan was approximately $702,000, which will be repaid in the regularly scheduled monthly installments through November 2006.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements concerning payments to be received under agreements with strategic partners, capital expenditures and cash requirements. Such forward looking statements (often, but not always, using words or phrases such as “expects” or “does not expect,” “is expected,” “anticipates” or “does not anticipate,” “plans,” “estimates” or “intends,” or stating that certain actions, events or results “may,” “could,” “would,” “should,” “might” or “will” be taken, occur or be achieved) involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward looking statements. Such risks, uncertainties and other factors include, without limitation, the risk that we may not achieve the milestones necessary for us to receive payments under our development agreements, the risk that our products will not be accepted by the market, the risk that we will be unable to obtain needed debt or equity financing on satisfactory terms, or at all, or receive the necessary shareholder approvals for our debt and equity financings, uncertainties related to our dependence on the continued performance of strategic partners and technology and uncertainties related to the time required for us or our strategic partners to complete research and development and obtain necessary clinical data and government clearances. See also Part II, Item 1A, Risk Factors.

Forward-looking statements are based on the estimates and opinions of management on the date the statements are made. We assume no obligation to update forward-looking statements if conditions or management’s estimates or opinions should change, even if new information becomes available or other events occur in the future.

Overview

We develop needle-free injection systems that improve the way patients receive medications and vaccines.

Our long-term goal is to become the leading supplier of needle-free injection systems to the pharmaceutical and biotechnology industries. In 2006, we will continue to focus our business development efforts on new and existing licensing and supply agreements with leading pharmaceutical and biotechnology companies.

By bundling customized needle-free delivery systems with partners’ injectable medications and vaccines, we can enhance demand for these products in the healthcare provider and end user markets.

In 2006, our clinical research efforts will continue to be aimed primarily at collaborations in the areas of vaccines and drug delivery. Currently, we are involved in collaborations with approximately 20 institutions.

In 2006, our research and development efforts will focus on the Iject^® single use disposable product. In addition, we will continue to work on product improvements to existing devices and development of products for our strategic partners.

Revenues and results of operations have fluctuated and can be expected to continue to fluctuate significantly from quarter to quarter and from year to year. Various factors may affect quarterly and yearly operating results including: i) the length of time to close product sales; ii) customer budget cycles; iii) the implementation of cost reduction measures; iv) uncertainties and changes in product sales due to third party payer policies and proposals relating to healthcare cost containment; v) the timing and amount of payments under licensing and technology development agreements; and vi) the timing of new product introductions by us and our competitors.

We do not expect to report net income in 2006.

Cash Requirements for Next Twelve Months

Anticipated requirements for cash for the next twelve months from March 31, 2006, assuming approval of the issuance of Series E stock and the conversion features of the $1.5 million convertible debt and the $1.25 million term loan by our shareholders at our annual meeting, are estimated to total approximately $4.8 million as shown in the following table. If these proposals are not approved at our annual meeting, cash requirements for the next twelve-month period would also include the repayment of the $1.5 million convertible debt and the $1.25 million term loan and would total approximately $7.6 million.

Estimated cash required for operations	$	3,000,000
Short-term note payable	667,000
Proceeds from sale of headquarters building	(1,125,000		)
Portion of long-term debt to be repaid with proceeds from sale of headquarters building	1,125,000
Current portion of long-term debt	625,000
Current portion of capital leases	47,000
Estimated cash capital expenditures	500,000
	$	4,839,000
Cash, cash equivalents and marketable securities at March 31, 2006	$	3,900,000

In addition to our current cash resources, we entered into an agreement with an unrelated third party to sell our New Jersey headquarters building for $1.125 million, net of anticipated selling costs. This sale closed on April 13, 2006. As indicated above, the proceeds from this sale must be used to pay down our term loan with proceeds first applied to the scheduled principal payments on the loan in the inverse order of maturity, as required by the term loan agreement.

With our current cash, cash equivalents, and short-term marketable securities of $3.9 million at March 31, 2006, we believe that we will have the financial resources to fund our operations and anticipated cash expenditures through at least July 31, 2006. By that time, subject to shareholder approval and customary and other closing conditions, we anticipate that we will receive an additional $3 million of equity financing in the form of Series E convertible preferred stock from the LOF Affiliates, as discussed in Note 5 of Notes to Consolidated Financial Statements, which we believe will allow us to fund our operations and anticipated cash capital expenditures through at least March 31, 2007. If we do not receive the required shareholder approval in connection with the proposed equity financing and the equity component of the debt financing with PFG as discussed in Note 5 of Notes to Consolidated Financial Statements, we might not be able to fund our continuing operations. In addition, there can be no assurances that we will be successful in closing the Series E convertible preferred stock financing, even if shareholder approval is obtained. In either such case, we will be forced to explore alternative plans, which could include a further curtailment of operations and alternative financing from other sources.

Results of Operations

The consolidated financial data for the three-month periods ended March 31, 2006 and 2005 are presented in the following table:

Three Months Ended March 31,	2006			2005
Revenue:
Net sales of products	$	1,259,268		$	2,867,292
Licensing and technology fees	434,771			385,634
	1,694,039			3,252,926
Operating expenses:
Manufacturing	1,435,691			2,441,995
Research and development	1,033,316			1,746,332
Selling, general and administrative	1,688,195			986,386
Total operating expenses	4,157,202			5,174,713
Operating loss	(2,463,163		)	(1,921,787		)

Interest income	45,081			38,981
Interest expense	(178,299		)	(133,589		)
Net loss allocable to common shareholders	$	(2,596,381	)	$	(2,016,395	)
Basic and diluted net loss per common share	$	(0.18	)	$	(0.15	)
Shares used in per share calculations	14,051,395			13,740,141

Revenue

The $1.6 million, or 56%, decrease in product sales in the first quarter of 2006 compared to the first quarter of 2005 was due to an $887,000 reduction in sales to Merial resulting from Merial’s lower forecasted sales in 2006 and its build-up of inventory in the first quarter of 2005. In addition, $975,000 of the decrease relates to a decrease in sales to Serono due to a reduction in its forecasted demand, offset by a $171,000 increase in sales to Chronimed and related Fuzeon customers and a $160,000 increase in vial adapter sales to Ferring in connection with its supply agreement.

We anticipate increased product sales to Merial and Serono in the remaining quarters of 2006 compared to the first quarter of 2006.

License and technology fees increased $49,000, or 13%, in the first quarter of 2006 compared to the first quarter of 2005.

We currently have active licensing and/or development agreements, which often include commercial product supply provisions, with Serono, Merial, an undisclosed Japanese pharmaceutical firm, an undisclosed European biotechnology company and an undisclosed pharmaceutical company. We currently have active product supply agreements with Amgen, Ferring and Chronimed.

Manufacturing Expense

Manufacturing expense is made up of the cost of products sold and manufacturing overhead expense related to excess manufacturing capacity.

The $1.0 million, or 41%, decrease in our manufacturing costs in the first quarter of 2006 compared to the first quarter of 2005 was primarily due to the $1.6 million decrease in product sales mentioned above, offset by $108,000 in severance costs recorded in the first quarter of 2006 compared to none in the first quarter of 2005 and $29,000 of stock-based compensation in the first quarter of 2006 compared to $653 in the first quarter of 2005.

Research and Development

Research and development costs include labor, materials and costs associated with clinical studies incurred in the research and development of new products and modifications to existing products.

The $713,000, or 41%, decrease in research and development expense in the first quarter of 2006 compared to the first quarter of 2005 was primarily due reduced clinical expenses of $44,000 and lower projects costs of $730,000 related to the Iject^® and production and companion animal projects, offset by $30,000 of severance cost recorded in the first quarter of 2006 compared to none in the first quarter of 2005 and $31,000 of stock-based compensation in the first quarter of 2006 compared to $363 in the first quarter of 2005.

Current significant projects include the Iject^® needle-free injection device for undisclosed companies, the gas-powered drug delivery system utilizing our B2000 technology for an undisclosed company, the next generation Vetjet^® spring-powered device, as well as gas-powered devices for production animal and poultry markets, for Merial and the needle-free, auto-disable, spring-powered device for mass immunizations in collaboration with Path and the Centers for Disease Control.

Selling, General and Administrative

Selling, general and administrative costs include labor, travel, outside services and overhead incurred in our sales, marketing, management and administrative support functions.

The $702,000, or 71%, increase in selling, general and administrative expenses in the first quarter of 2006 compared to the first quarter of 2005 was primarily due to $582,000 in severance cost recorded in the first quarter of 2006 compared to none in the first quarter of 2005 and $90,000 of stock-based compensation in the first quarter of 2006 compared to $7,000 in the first quarter of 2005. Other non-severance labor expenses increased $66,000 due to increases in incentive compensation and contract nurses, which was offset in part by $37,000 in reduced travel and miscellaneous expenses.

Restructuring

The following table summarizes the charges and expenditures related to our restructuring in the first quarter of 2006:

Quarter Ended March 31, 2006	Beginning Accrued Liability		Charged to Expense		Expend- itures		Ending Accrued Liability
Severance and related benefits for terminated employees	$	—	$	637,394	$	44,793	$	592,601
Acceleration of vesting to be settled in common stock	—		83,000		—		83,000
	$	—	$	720,394	$	44,793	$	675,601

Interest Income

Interest income increased to $45,000 in the first quarter of 2006 compared to $39,000 in the first quarter of 2005 primarily due to higher short-term interest rates in the first quarter of 2006 compared to the first quarter of 2005.

Interest Expense

Interest expense increased to $178,000 in the first quarter of 2006 compared to $134,000 in the first quarter of 2005 due to higher outstanding debt balances in the first quarter of 2006 than in the first quarter of 2005. Interest expense in the first quarter of 2006 includes $112,000 of interest expense related to the amortization of debt issuance costs compared to $70,000 of such charges in the first quarter of 2005. With the addition of the $1.5 million convertible debt and the $1.25 million term loan in March 2006 and the write-off of debt issuance costs related to the repayment of $1.1 million of our other term loan in April 2006, we expect that interest expense will significantly increase in the second quarter of 2006 compared to the first quarter of 2006. This increase will be offset in part by a decrease in interest expense related to the repayment of $1.1 million of our other term loan in April 2006.

Liquidity and Capital Resources

Since our inception in 1985, we have financed our operations, working capital needs and capital expenditures primarily from private placements of securities, the exercise of warrants, loans, proceeds received from our initial public offering in 1986, proceeds received from a public offering of common stock in 1993, licensing and technology revenues and revenues from sales of products. We anticipate funding our cash commitments for the next twelve-month period ending March 31, 2007 out of existing cash, cash equivalents, marketable securities, license and development fees, borrowings under loan agreements, the sale of assets and equity and/or debt financings. We currently have a line of credit agreement for up to $2.0 million of borrowings. As of March 31, 2006, $667,000 was outstanding under the line of credit and, based on borrowing limitations, there were no amounts available for borrowing.

Total cash, cash equivalents and short-term marketable securities at March 31, 2006 were $3.9 million compared to $2.5 million at December 31, 2005. We had a working capital deficit of $588,000 at March 31, 2006 compared to working capital of $2.1 million at December 31, 2005.

The overall increase in cash, cash equivalents and short-term marketable securities during the first quarter of 2006 resulted from $2.7 million of net proceeds received in connection with our first quarter 2006 debt financings described below, offset by $616,000 used in operations, $122,000 used for capital expenditures and other investing activities, primarily patent applications, and $558,000 used for principal payments on long-term debt, short-term notes payable and capital leases.

Net accounts receivable decreased to $497,000 at March 31, 2006 from $2.4 million at December 31, 2005. Included in the balance at March 31, 2006, was $145,000 due from Amgen, $112,000 due from Ferring and $83,000 due from Chronimed. Of the amounts due from these customers at March 31, 2006, $175,000 was collected prior to the filing of this Form 10-Q. The balance at December 31, 2005 included $1.1 million of deferred revenue, all of which was collected in the first quarter of 2006. Historically, we have not had collection problems related to our accounts receivable.

Inventories were $1.9 million at March 31, 2006 compared to $1.5 million at December 31, 2005 and primarily included raw materials and finished goods for the Vial Adapter and the spring-powered product lines for forecasted production in the second quarter.

Assets held for sale of $1.1 million as of March 31, 2006 and December 31, 2005 represented the estimated fair market value, less selling costs, for our New Jersey headquarters building, which we sold for $1.125 million on April 13, 2006.

Included in other current assets and other assets, net at March 31, 2006 were $990,000, net of accumulated amortization, of debt issuance costs relating to our $3.0 million term loan, our $1.5 million convertible loan and our $1.25 million term loan. These costs are being amortized over the terms of the

loans at a current rate of approximately $307,000 per quarter. If our shareholders approve the Securities Purchase Agreement, and our outstanding $1.5 million convertible loan converts to equity, we will recognize all unamortized debt issuance costs and related beneficial conversion expense as additional interest expense in the second quarter of 2006. We estimate the total amount of the costs will be approximately $1.0 million.

Capital expenditures of $85,000 in the first quarter of 2006 were primarily for the purchase of manufacturing equipment. We anticipate spending up to a total of $500,000 in 2006 for production molds and manufacturing capabilities.

Other accrued liabilities increased to $875,000 at March 31, 2006 from $204,000 at December 31, 2005 due primarily to accrued severance costs of $676,000 at March 31, 2006 compared to none at December 31, 2005.

Deferred revenue totaled $1.8 million at March 31, 2006 compared to $2.2 million at December 31, 2005. The balance at March 31, 2006 included $101,000 received from Serono, $578,000 received from Merial, $211,000 received from an undisclosed pharmaceutical company, $294,000 received from a Japanese pharmaceutical company, $241,000 received from Trimeris and $370,000 received from a European biotechnology firm.

On December 15, 2004, we entered into a $3.0 million Term Loan and Security Agreement (the “Term Loan”) with Partners for Growth, L.P. (“PFG”). The Term Loan had an original maturity date of December 14, 2007, which was payable in 36 equal monthly installments, and bears interests at (i) the greater of 4.5% or the prime rate of Silicon Valley Bank, (ii) plus 3%. Pursuant to the Term Loan, we granted a security interest in substantially all of our assets to PFG to secure our obligations under the Term Loan. Accordingly, upon sale of our New Jersey headquarters building in April 2006, as required by the Term Loan, we used the proceeds to pay down the outstanding balance on the Term Loan, with the proceeds first applied to the scheduled principal payments on the loan in the inverse order of maturity. As a result, approximately $667,000 of the proceeds was applied to the long-term portion of the outstanding balance of the Term Loan and the remaining approximately $381,000 was applied to the current portion. Following the application of these proceeds, the remaining balance outstanding on this term loan was approximately $702,000, which will be repaid in the regularly scheduled monthly installments through November 2006. At March 31, 2006, the Term Loan bore interest at the rate of 10.75%.

Also on December 15, 2004, we entered into a Loan and Security Agreement (the “Credit Agreement”) with PFG, pursuant to which we may borrow an amount equal to the sum of 75% of our eligible accounts receivable plus 30% of our eligible inventory, up to a maximum of $2 million. The Credit Agreement matures on December 15, 2006 and bears interest at (i) the greater of 4.5% or the prime rate of Silicon Valley Bank, (ii) plus 2%. Under the Credit Agreement, we are obligated to pay PFG a collateral handling fee of 0.55% per month on the average amount borrowed during that month. If the closing price of our common stock is between $2.00 and $4.00 per share for 30 consecutive trading days, the fee will be reduced to 0.38% per month. If the closing price of our common stock is at or above $4.00 per share for 30 consecutive trading days, the fee will be reduced to 0.22% per month. Under the Credit Agreement, we granted a security interest in substantially all of our assets to PFG to secure their obligations under the Credit Agreement. At March 31, 2006, we had $667,000 outstanding under the Credit Agreement at an interest rate of 9.75% and, based on borrowing limitations, there were no amounts available for borrowing.

Both the Term Loan and Credit Agreement restrict our ability to incur additional debt and prohibit us from paying dividends, repurchasing stock and engaging in other transactions outside the ordinary course of business, among other things. Our obligations under the Term Loan and Credit Agreement accelerate upon certain events, including a sale or change of control of Bioject.

On March 8, 2006, we entered into an agreement with respect to $1.5 million of convertible debt financing (the “Agreement”) with Life Sciences Opportunities Fund II (Institutional), L.P. (“LOF”) and several of its affiliates. Under the terms of the Agreement, we received $1.5 million of debt financing on March 8, 2006. Interest on debt outstanding under the Agreement is 10% per annum. The maturity date of the debt issued

pursuant to the Agreement is the earliest of i) April 1, 2007; ii) the time of closing of our offering and sale of at least $4.5 million of our Series E preferred stock; and iii) the occurrence of an Event of Default, as defined in the Agreement. In connection with the Agreement, we issued warrants to purchase an aggregate of 656,934 shares of our common stock at $1.37 per share to the lenders. The warrants expire in September 2010.

Also on March 8, 2006, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with LOF and its affiliates (collectively “the LOF Affiliates”). Under the Securities Purchase Agreement, upon receiving shareholder approval at our annual meeting, which is expected to be held in May 2006, and subject to customary closing and other conditions, the LOF Affiliates will purchase approximately $4.5 million of our Series E preferred stock at $1.37 per share (including the conversion of the $1.5 million of convertible debt financing and related accrued interest).

In addition, on March 29, 2006, we entered into a new term loan agreement with PFG for a $1.25 million convertible debt financing (the “Debt Financing”). Under the terms of the Debt Financing, we received $1.25 million. This loan will be due in March 2011. The loan bears interest at the prime rate and will be convertible, subject to shareholder approval, at any time, by PFG into our common stock at $1.37 per share. In addition, if our common stock trades at a price of $4.11 per share or higher for 20 consecutive trading days, we can force PFG to convert the debt to common stock, subject to certain limitations on trading volume. Shareholders will also be asked to approve the conversion feature of this transaction at our annual meeting, which is expected to be held in May 2006. If shareholders do not approve the conversion feature of this transaction at the earlier of the annual meeting or July 31, 2006, the loan will be payable upon demand by PFG. If we prepay this loan, we will issue PFG a warrant to purchase a number of shares of common stock equal to what it would have received upon conversion.

Due to our limited amount of additional committed capital, recurring losses, negative cash flows and accumulated deficit, the report of our independent registered public accounting firm for the year ended December 31, 2005 expressed substantial doubt about our ability to continue as a going concern. As noted above, our ability to fund continuing operations is dependent on our ability to close our Series E convertible preferred stock financing and obtain shareholder approval of the conversion feature of our debt financing with PFG. If the shareholder approvals are received and closing conditions are satisfied, we believe that we will have sufficient capital resources to fund our operations through March 2007. There can be no assurance, however, that we will obtain the necessary shareholder approvals for our proposed Series E convertible preferred stock financing or the conversion feature of the PFG loan transaction, or that, if shareholder approval is obtained, we will be able to close the Series E convertible preferred stock financing.

Contractual Payment Obligations

A summary of our contractual commitments and obligations as of March 31, 2006 was as follows:

	Payments Due By Period
Contractual Obligation	Total		Remainder of 2006		2007 and 2008		2009 and 2010		2011 and beyond
Short-term note payable	$	667,209	$	667,209	$	—	$	—	$	—
$3.0 million term loan	1,750,005		1,750,005				—		—
$1.5 million convertible debt(1)	1,500,000		—		1,500,000		—		—
$1.25 million term loan(2)	1,250,000		—		—		—		1,250,000
Operating leases	3,428,756		266,324		733,047		770,148		1,659,237
Capital leases	149,401		46,224		82,996		20,181		—
Purchase order commitments	803,856		803,856		—		—		—
	$	9,549,227	$	3,533,618	$	2,316,043	$	790,329	$	2,909,237

(1) Subject to approval of the conversion feature by our shareholders at our Annual Meeting in May 2006, this will convert to equity in the second quarter of 2006.

(2) If shareholders do not approve the conversion feature, this loan will become due upon demand by PFG.

Purchase order commitments relate to future raw material inventory purchases, research and development projects and other operating expenses.

Critical Accounting Policies and Estimates

Except for the addition of the Stock-Based Compensation information below, we reaffirm the critical accounting policies and estimates as reported in our Form 10-K for the year ended December 31, 2005, which was filed with the Securities and Exchange Commission on March 31, 2006.

Stock-Based Compensation

On January 1, 2006, we adopted SFAS No. 123R which requires the measurement and recognition of compensation expense for all share based payment awards granted to our employees and directors, including employee stock options, restricted stock and stock purchases related to our ESPP based on the estimated fair value of the award on the grant date. Upon the adoption of SFAS No. 123R, we maintained our method of valuation for stock option awards using the Black-Scholes valuation model, which has historically been used for the purpose of providing pro-forma financial disclosures in accordance with SFAS No. 123.

The use of the Black-Scholes valuation model to estimate the fair value of stock option awards requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of expense could be materially different in the future.

Compensation expense is only recognized on awards that ultimately vest. Therefore, for both stock option awards and restricted stock awards, we have reduced the compensation expense to be recognized over the vesting period for anticipated future forfeitures. Forfeiture estimates are based on historical forfeiture patterns. We update our forfeiture estimates annually and recognize any changes to accumulated compensation expense in the period of change. If actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our reported market risks or risk management policies since the filing of our 2005 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 31, 2006.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our President and Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our President and Chief Executive Officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our President and Chief Executive Officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1A. RISK FACTORS

In addition to the other information contained in this Form 10-Q, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, or results of operations could be materially adversely affected by any of these risks. Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.

If our products are not accepted by the market, our business could fail. Our success will depend on market acceptance of our needle-free injection drug delivery systems, the Biojector^® 2000 system and the Vitajet^® system and on market acceptance of other products under development. If our products do not achieve market acceptance, our business could fail. Currently, the dominant technology used for intramuscular and subcutaneous injections is the hollow-needle syringe, which have a cost per injection that is significantly lower than those of our products. The Biojector^® 2000, the Iject^®system, the Vitajet^® system or any of our products under development may be unable to compete successfully with needle-syringes.

We may be unable to enter into additional strategic corporate licensing and distribution agreements or maintain existing agreements, which could cause our business to suffer. A key component of our sales and marketing strategy is to enter into licensing and supply arrangements with leading pharmaceutical and biotechnology companies for whose products our technology provides either increased medical effectiveness or a higher degree of market acceptance. If we cannot enter into these agreements on terms favorable to us or at all, our business may suffer.

In prior years, several agreements, including those with Hoffman La Roche Pharmaceuticals, Merck & Co. and Amgen, have been canceled by our partners prior to completion. These agreements were canceled for various reasons, including costs related to obtaining regulatory approval, unsuccessful pre-clinical vaccine studies, changes in vaccine development and changes in business development strategies. These agreements resulted in significant short-term revenue. However, none of these agreements developed into the long-term revenue stream anticipated by our strategic partnering strategy. No revenue resulted from any of the canceled agreements in 2005, 2004 or 2003.

We may be unable to enter into future licensing or supply agreements with major pharmaceutical or biotechnology companies. Even if we enter into these agreements, they may not result in sustainable long-term revenues which, when combined with revenues from product sales, could be sufficient for us to operate profitably.

We have a history of losses and may never be profitable. Since our formation in 1985, we have incurred significant annual operating losses and negative cash flow. At March 31, 2006, we had an accumulated deficit of $108.6 million. We may never be profitable, which could have a negative effect on our stock price. Our revenues are derived from licensing and technology fees and from product sales. We sell our products to strategic partners, who market our products under their brand name and to end-users such as public health clinics for vaccinations and nursing organizations for flu immunizations. We have not attained profitability at these sales levels. We may never be able to generate significant revenues or achieve profitability. In the future, we are likely to require substantial additional financing. Such financing may not be available on terms acceptable to us, or at all, which would have a material adverse effect on our business. Any future equity financing could result in significant dilution to shareholders.

We will need additional funding to support our operations during 2006; sufficient funding is subject to conditions and may not be available to us, and the unavailability of funding could adversely affect our business. As of March 31, 2006, we had a net working capital deficit of $588,000. Due to our limited amount of additional committed capital, recurring losses, negative cash flows and accumulated deficit, the report of our independent registered public accounting firm dated March 13, 2006 expressed substantial doubt about our ability to continue as a going concern. Our ability to continue operations through 2006 is dependent on our obtaining additional debt and/or equity financing. While we

believe our proposed $4.5 million Series E preferred stock financing and our $1.25 million convertible debt financing will enable us to continue operations until at least March 2007, the Series E preferred stock financing is subject to customary and other closing conditions, including shareholder approval. Similarly, our $1.25 million convertible debt financing will be payable upon demand by the lender if shareholders do not approve the conversion feature. These two transactions are described in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Accordingly, we cannot assure you that we will receive the funds we anticipate or that we may not have to repay the $1.25 million debt sooner than would otherwise be the case, either of which will have a material adverse effect on our ability to fund our continuing operations during 2006 and beyond.

We have a small sales force and may be unable to penetrate targeted market segments. We have a small sales force and may be unable to penetrate targeted market segments. Our sales force consists of a Vice President of Customer Relations who is focused on specifically targeted market segments. Our small sales force may not have sufficient resources to adequately penetrate one or more of the targeted market segments. Further, if the sales force is successful in penetrating one or more of the targeted market segments, we are unable to assure that our products will be accepted in those segments or that product acceptance will result in product revenues which, together with revenues from corporate licensing and supply agreements, will be sufficient for us to operate profitably.

We have limited manufacturing experience, and may be unable to produce our products at the unit costs necessary for the products to be competitive in the market, which could cause our financial condition to suffer. We have limited experience manufacturing our products in commercially viable quantities. We have increased our production capacity for the Biojector^® 2000 system and the Vitajet^® product line through automation of, and changes in, production methods, in order to achieve savings through higher volumes of production. If we are unable to achieve these savings, our results of operations and financial condition could suffer. The current cost per injection of the Biojector^® 2000 system and Vitajet^® product line is substantially higher than that of traditional needle-syringes, our principal competition. In order to reduce costs, a key element of our business strategy has been to reduce the overall manufacturing cost through automating production and packaging. There can be no assurance that we will achieve sales and manufacturing volumes necessary to realize cost savings from volume production at levels necessary to result in significant unit manufacturing cost reductions. Failure to do so will continue to make competing with needle-syringes on the basis of cost very difficult and will adversely affect our financial condition and results of operations. We may be unable to successfully manufacture devices at a unit cost that will allow the product to be sold profitably. Failure to do so would adversely affect our financial condition and results of operations.

We are subject to extensive government regulation and must continue to comply with these regulations or our business could suffer. Our products and manufacturing operations are subject to extensive government regulation in both the U.S. and abroad. If we cannot comply with these regulations, we may be unable to distribute our products, which could cause our business to suffer or fail. In the U.S., the development, manufacture, marketing and promotion of medical devices are regulated by the Food and Drug Administration (“FDA”) under the Federal Food, Drug, and Cosmetic Act (“FFDCA”). In 1987, we received clearance from the FDA under Section 510(k) of the FFDCA to market a hand-held CO2-powered needle-free injection system. The FFDCA provides that new pre-market notifications under Section 510(k) of the FFDCA are required to be filed when, among other things, there is a major change or modification in the intended use of a device or a change or modification to a legally marketed device that could significantly affect its safety or effectiveness. A device manufacturer is expected to make the initial determination as to whether the change to its device or its intended use is of a kind that would necessitate the filing of a new 510(k) notification. Although the Biojector® 2000 system incorporates changes from the system with respect to which our 1987 510(k) marketing clearance was received and expands its intended use, we made the determination that these were not major changes or modifications in intended use or changes in the device that could significantly affect the safety or effectiveness of the device. Accordingly, we further concluded that the 1987 510(k) clearance permitted us to market the Biojector® 2000 system in the U.S. In June 1994, we received clearance from the FDA under 510(k) to market a version of our Biojector® 2000 system in a configuration targeted at high volume injection applications. In October 1996, we received 510(k) clearance for a needle-free disposable Vial Adapter

device. In March 1997, we received additional 510(k) clearance for certain enhancements to our Biojector® 2000 system. In June 2000, we received 510(k) clearance for the cool.click™, a modified Vitajet®. In March 2001, we received 510(k) clearance for the SeroJet™, also a modified Vitajet®. In April 2001, we received 510(k) clearance to market a Reconstitution Kit and Vial Adapter. In July 2004, we received 510(k) clearance to market the Q-Cap™ Needle-Free Reconstitution 13mm Vial Adapter. The FDA may not concur with our determination that our current and future products can be qualified by means of a 510(k) submission.

Future changes to manufacturing procedures could require that we file a new 510(k) notification. Also, future products, product enhancements or changes, or changes in product use may require clearance under Section 510(k), or they may require FDA pre-market approval (“PMA”) or other regulatory clearances. PMAs and regulatory clearances other than 510(k) clearance generally involve more extensive prefiling testing than a 510(k) clearance and a longer FDA review process. It is current FDA policy that such pre-filled syringes are evaluated by the FDA by submitting a Request for Designation (“RFD”) to the Office of Combination Products (“OCP”). The pharmaceutical or biotechnology company with which we partner is responsible for the submission to the OCP. A pre-filled syringe meets the FDA’s definition of a combination product, or a product comprised of two or more regulated components, i.e. drug/device. The OCP will assign a center with primary jurisdiction for a combination product (CDER, CDRH) to ensure the timely and effective pre-market review of the product. Depending on the circumstances, drug and combination drug/device regulation can be much more extensive and time consuming than device regulation.

FDA regulatory processes are time consuming and expensive. Product applications submitted by us may not be cleared or approved by the FDA. In addition, our products must be manufactured in compliance with Good Manufacturing Practices, as specified in regulations under the FFDCA. The FDA has broad discretion in enforcing the FFDCA, and noncompliance with the FFDCA could result in a variety of regulatory actions ranging from product detentions, device alerts or field corrections, to mandatory recalls, seizures, injunctive actions and civil or criminal penalties.

Sales of our Iject^® pre-filled syringe product are dependent on regulatory approval being obtained for the product’s use with a given drug to treat a specific condition. It is the responsibility of the strategic partner producing the drug to obtain this approval. The failure of a partner to obtain regulatory approval or to comply with government regulations after approval has been received could harm our business. In order for a strategic partner to sell our Iject^® pre-filled device for delivery of its drug to treat a specific condition, the partner must first obtain government approval. This process is subject to extensive government regulation both in the U.S. and abroad. As a result, sales of the Iject^® product to any strategic partner are dependent on that partner’s ability to obtain regulatory approval. Accordingly, failure of a partner to obtain that approval could cause our financial results to suffer. In addition, if a partner fails to comply with governmental regulations after initial regulatory approval has been obtained, sales of Iject^® product to that partner may cease, which could cause our financial results to suffer. The Iject^® is still in development and has not yet been sold commercially.

If we cannot meet international product standards, we will be unable to distribute our products outside of the United States, which could cause our business to suffer. Distribution of our products in countries other than the U.S. may be subject to regulation in those countries. Failure to satisfy these regulations would impact our ability to sell our products in these countries and could cause our business to suffer. Bioject has received the following certifications from Underwriters Laboratories or TÜV Product Services that products and quality system meet the applicable requirements which allows us to label our products with the CE Mark and sell them in the European Community and non European countries.

Certificate		Dated
ISO 13485:2003 and CMDCAS (Underwriters Laboratories)		February 2006

Annex V of the Directive 93/42/EEC on Medical Devices (TUV)		October 2004 Re-certification Audit February 2006

Annex II, section 3 of the Directive 93/42/EEC on Medical Devices (TUV)		October 2004 Re-certification Audit February 2006

We may be unable to continue to meet the standards of ISO 9001 or CE Mark certification, which could have a material adverse effect on our business and cause our financial results to suffer.

If the healthcare industry limits coverage or reimbursement levels, the acceptance of our products could suffer. The price of our products exceeds the price of needle-syringes and, if coverage or reimbursement levels are reduced, market acceptance of our products could be harmed. The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare facilities. During the past several years, the healthcare industry has been subject to increased government regulation of reimbursement rates and capital expenditures. Among other things, third party payers are increasingly attempting to contain or reduce healthcare costs by limiting both coverage and levels of reimbursement for healthcare products and procedures. Because the price of the Biojector^® 2000 system and Vitajet^® product line exceeds the price of a needle-syringe, cost control policies of third party payers, including government agencies, may adversely affect acceptance and use of the Biojector^® 2000 system and Vitajet^® product line.

We depend on outside suppliers for manufacturing. Our current manufacturing processes for the Biojector^® 2000 jet injector and disposable syringes as well as manufacturing processes to produce the Vitajet^® consist primarily of assembling component parts supplied by outside suppliers. Some of these components are currently obtained from single sources, with some components requiring significant production lead times. In the past, we have experienced delays in the delivery of certain components. To date, such delays have not had a material adverse effect on our operations. We may experience delays in the future, and these delays could have a material adverse effect on our financial condition and results of operations.

If we are unable to manage our growth, our results of operations could suffer. If our products achieve market acceptance or if we are successful in entering into product supply agreements with major pharmaceutical or biotechnology companies, we expect to experience rapid growth. Such growth would require expanded customer service and support, increased personnel, expanded operational and financial systems, and implementing new and expanded control procedures. We may be unable to attract sufficient qualified personnel or successfully manage expanded operations. As we expand, we may periodically experience constraints that would adversely affect our ability to satisfy customer demand in a timely fashion. Failure to manage growth effectively could adversely affect our financial condition and results of operations.

We may be unable to compete in the medical equipment field, which could cause our business to fail. The medical equipment market is highly competitive and competition is likely to intensify. If we cannot compete, our business will fail. Our products compete primarily with traditional needle-syringes, “safety syringes” and also with other alternative drug delivery systems. In addition, manufacturers of needle-syringes, as well as other companies, may develop new products that compete directly or indirectly with our products. There can be no assurance that we will be able to compete successfully in this market. A variety of new technologies (for example, transdermal patches) are being developed as alternatives to injection for drug delivery. While we do not believe such technologies have significantly affected the use of injection for drug delivery to date, there can be no assurance that they will not do so in the future. Many of our competitors have longer operating histories as well as substantially greater financial, technical, marketing and customer support resources.

We are dependent on a single technology, and if it cannot compete or find market acceptance, our business will suffer. Our strategy has been to focus our development and marketing efforts on our needle-free injection technology. Focus on this single technology leaves us vulnerable to competing products and alternative drug delivery systems. If our technology cannot find market acceptance or cannot compete against other technologies, business will suffer. We perceive that healthcare providers’ desire to minimize the use of the traditional needle-syringe has stimulated development of a variety of alternative drug delivery systems such as “safety syringes,” jet injection systems, nasal delivery systems and transdermal diffusion “patches.” In addition, pharmaceutical companies frequently attempt to develop drugs for oral delivery instead of injection. While we believe that for the foreseeable future there will

continue to be a significant need for injections, alternative drug delivery methods may be developed which are preferable to injection.

We rely on patents and proprietary rights to protect our proprietary technology. We rely on a combination of trade secrets, confidentiality agreements and procedures and patents to protect our proprietary technologies. We have been granted a number of patents in the U.S. and several patents in other countries covering certain technology embodied in our current jet injection system and certain manufacturing processes. Additional patent applications are pending in the U.S. and certain foreign countries. The claims contained in any patent application may not be allowed, or any patent or our patents collectively may not provide adequate protection for our products and technology. In the absence of patent protection, we may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know-how. In addition, the laws of foreign countries may not protect our proprietary rights to this technology to the same extent as the laws of the U.S. We believe we have independently developed our technology and attempt to ensure that our products do not infringe the proprietary rights of others. We know of no such infringement claims. However, any claims could have a material adverse effect on our financial condition and results of operations.

If our products fail or cause harm, we could be subject to substantial product liability, which could cause our business to suffer. Producers of medical devices may face substantial liability for damages in the event of product failure or if it is alleged the product caused harm. We currently maintain product liability insurance and, to date, have experienced only one product liability claim. There can be no assurance, however, that we will not be subject to a number of such claims, that our product liability insurance would cover such claims, or that adequate insurance will continue to be available to us on acceptable terms in the future. Our business could be adversely affected by product liability claims or by the cost of insuring against such claims.

We must retain qualified personnel in a competitive marketplace, or we may not be able to grow our business. Our success depends upon the personal efforts and abilities of our senior management. We may be unable to retain our key employees, namely our management team, or to attract, assimilate or retain other highly qualified employees. John Gandolfo, our Chief Financial Officer and Vice President of Finance, departed Bioject in May 2006 as part of the restructuring we announced in March 2006. Although we have implemented workforce reductions, there remains substantial competition for highly skilled employees. Our key employees are not bound by agreements that could prevent them from terminating their employment at any time. If we fail to attract and retain key employees, our business could be harmed.

There are a large number of shares eligible for sale into the public market in the near future, which may reduce the price of our common stock. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that such sales could occur. We have a large number of shares of common stock outstanding and available for resale beginning at various points in time in the future. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. 520,088 shares of our common stock currently outstanding are eligible for sale without registration pursuant to Rule 144 under the Securities Act, subject to certain conditions of Rule 144. The holder of these shares also has certain demand and piggyback registration rights enabling it to register its shares under the Securities Act for sale. We have registered approximately 15.4 million shares for resale on Form S-3 registration statements, including approximately 2.5 million shares issuable upon exercise of warrants. In addition, we have 980,000 shares of common stock reserved for future issuance under our stock incentive plan and our employee share purchase plan combined. As of March 31, 2006, options to purchase approximately 2.2 million shares of common stock were outstanding and will be eligible for sale in the public market from time to time subject to vesting. In March 2006, we issued warrants to purchase 656,934 shares of our common stock. At that time, we also agreed to sell approximately 3.3 million shares of Series E preferred stock, subject to shareholder approval. Each share of Series E preferred stock will be convertible into one share of our common stock, subject to adjustment in certain circumstances. Also in March 2006, we entered into a $1.25 million convertible note financing. Subject to shareholder approval, the principal amount of this note, plus accrued interest, will be convertible into common stock at $1.37 per share. If we

prepay this debt, we have agreed to issue the lender a warrant to purchase an equivalent number of shares to what it would receive on conversion. We have agreed to register for resale the shares of common stock underlying the warrants, the Series E preferred stock and the convertible note.

Our stock price may be highly volatile, which increases the risk of securities litigation. The market for our common stock and for the securities of other early-stage, small market-capitalization companies has been highly volatile in recent years. This increases the risk of securities litigation relating to such volatility. We believe that factors such as quarter-to-quarter fluctuations in financial results, new product introductions by us or our competition, public announcements, changing regulatory environments, sales of common stock by certain existing shareholders, substantial product orders and announcement of licensing or product supply agreements with major pharmaceutical or biotechnology companies could contribute to the volatility of the price of our common stock, causing it to fluctuate dramatically. General economic trends such as recessionary cycles and changing interest rates may also adversely affect the market price of our common stock.

We may not be able to effectively implement our restructuring activities, and our restructuring activities may not result in the expected benefits, which would negatively impact our future results of operations. In March 2006, we restructured our operations, which included reducing the size of our workforce. Despite our restructuring efforts, we cannot assure you that we will achieve all of the operating expense reductions and improvements in operating margins and cash flows currently anticipated from these restructuring activities in the periods contemplated, or at all. Our inability to realize these benefits, and our failure to appropriately structure our business to meet market conditions, could negatively impact our results of operations. As part of our recent restructuring activities, we have reduced the workforce in certain portions of our business. This reduction in staffing levels could require us to forego certain future opportunities due to resource limitations, which could negatively affect our long-term revenues. In addition, these workforce reductions could result in a lack of focus and reduced productivity by remaining employees due to changes in responsibilities or concern about future prospects, which in turn may negatively affect our future revenues. Further, we believe our future success depends, in large part, on our ability to attract and retain highly skilled personnel. Our restructuring activities could negatively affect our ability to attract such personnel as a result of perceived risk of future workforce reductions. We cannot assure you that we will not be required to implement further restructuring activities or reductions in our workforce based on changes in the markets and industries in which we compete or that any future restructuring efforts will be successful.

Concentration of ownership could delay or prevent a change in control or otherwise influence or control most matters submitted to our shareholders. Certain funds affiliated with Life Sciences Opportunities Fund II (Institutional), L.P. and its affiliates (collectively, the “LOF Funds”) currently own shares of Series D preferred stock and warrants to purchase common stock representing in aggregate approximately 19% of our outstanding voting power (assuming exercise of the warrants). At our 2006 annual meeting, shareholders will be asked to approve a proposed preferred stock financing with the LOF Funds and their affiliates. If this transaction is approved, the LOF Funds and their affiliates could own shares of preferred stock and warrants representing as much as approximately one third of our outstanding voting power (assuming exercise of all of the warrants held by the LOF Funds and their affiliates). As a result, the LOF Funds and their affiliates potentially could control matters submitted to a vote of shareholders, including a change of control transaction, which could prevent or delay such a transaction.

ITEM 6. EXHIBITS

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

4.1		Third Amendment to Rights Agreement, dated March 8, 2006, between Bioject Medical Technologies Inc. and American Stock Transfer & Trust Company. Incorporated by reference to Form 8-K dated March 3, 2006 and filed March 9, 2006.
10.1		Note and Warrant Purchase Agreement dated March 8, 2006, by and among Bioject Medical Technologies Inc. and the Purchasers Listed on Schedule I thereto. Incorporated by reference to Form 8-K dated March 3, 2006 and filed March 9, 2006.
10.2		Form of Warrant related to Note and Warrant Purchase Agreement dated March 8, 2006. Incorporated by reference to Form 8-K dated March 3, 2006 and filed March 9, 2006.
10.3		Security Agreement dated March 8, 2006, by and among Bioject Medical Technologies Inc., Bioject Inc. and the Secured Parties listed on the signature pages thereto. Incorporated by reference to Form 8-K dated March 3, 2006 and filed March 9, 2006.
10.4		Securities Purchase Agreement dated March 8, 2006, by and among Bioject Medical Technologies Inc. and the Purchasers listed on Exhibit A thereto. Incorporated by reference to Form 8-K dated March 3, 2006 and filed March 9, 2006.
10.5		2006 Term Loan and Security Agreement dated March 29, 2006 between the Company, Bioject, Inc. and Partners for Growth, L.P. Incorporated by reference to Form 8-K dated March 29, 2006 and filed with the Securities and Exchange Commission on April 3, 2006.
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2		Certification of Principal Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets – March 31, 2006 and December 31, 2005 (unaudited)

	Consolidated Statements of Operations - Three Months Ended March 31, 2006 and 2005 (unaudited)

	Consolidated Statements of Cash Flows - Three Months Ended March 31, 2006 and 2005 (unaudited)

	Notes to Consolidated Financial Statements (unaudited)

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II - OTHER INFORMATION

Item 1A.	Risk Factors

Item 6.	Exhibits

Signatures

Date: May 15, 2006	BIOJECT MEDICAL TECHNOLOGIES INC.
	(Registrant)


	/s/ JAMES O’SHEA
	James O’Shea
	Chairman of the Board, Chief Executive Officer
	and President (Principal Executive Officer)


	/s/ CHRISTINE M. FARRELL
	Christine M. Farrell
	Vice President of Finance
	(Principal Financial and Accounting Officer)