UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549



FORM 10-Q



QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended June 30,
2012



Commission file number 0-13092



SPECTRASCIENCE, INC.



(Exact name of registrant

as specified in its charter)



|Minnesota                                                              |  | 41-1448837                             
|---------------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction
        of incorporation or organization) |  | (I.R.S. Employer Identification Number)



11568 Sorrento Valley Rd., Suite 11

San Diego, California 92121

(Address of principal executive offices,
including zip code)

(858) 847-0200

(Registrant's telephone number, including
area code)



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 x     NO o



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registration
was required to submit and post such files). YES  x    NO o



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



|Large accelerated filer        o  | Accelerated filer                  o
|--------------------------------- | ------------------------------------
|                                  |                                     
|Non-accelerated filer           o | Smaller reporting company        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



The number of shares of the registrant’s common stock,
par value $0.01 per share, outstanding on August 10, 2012 was 119,609,409.













SPECTRASCIENCE, INC.



FORM 10-Q

For the Quarterly Period Ended June 30,
2012



TABLE OF CONTENTS



|PART I     | FINANCIAL INFORMATION:                                                                |    |   
|---------- | ------------------------------------------------------------------------------------- | -- | --
|           |                                                                                       |    |   
|Item 1.    | Financial Statements (Unaudited)                                                      |    | 3 
|           |                                                                                       |    |   
|Item 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations |    | 14
|           |                                                                                       |    |   
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk                            |    | 17
|           |                                                                                       |    |   
|Item 4.    | Controls and Procedures                                                               |    | 17
|           |                                                                                       |    |   
|PART II    | OTHER INFORMATION                                                                     |    |   
|           |                                                                                       |    |   
|Item 1.    | Legal Proceedings                                                                     |    | 17
|           |                                                                                       |    |   
|Item 1A.   | Risk Factors                                                                          |    | 17
|           |                                                                                       |    |   
|Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds                           |    | 17
|           |                                                                                       |    |   
|Item 3.    | Defaults Upon Senior Securities                                                       |    | 17
|           |                                                                                       |    |   
|Item 4.    | Mine Safety Disclosures                                                               |    | 17
|           |                                                                                       |    |   
|Item 5.    | Other Information                                                                     |    | 17
|           |                                                                                       |    |   
|Item 6.    | Exhibits                                                                              |    | 17
|           |                                                                                       |    |   
|SIGNATURES |                                                                                       | 19





2









PART I     FINANCIAL INFORMATION:



Item 1. Financial Statements (Unaudited)



SpectraScience, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                                                                                                                                                                                                                  |  | June 30, 2012 |             |   | December 31, 2011 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ----------------- | -
|                                                                                                                                                                                                                                                  |  |               |             |   |                   |  
|ASSETS                                                                                                                                                                                                                                            |  |               |             |   |                   |  
|Current assets:                                                                                                                                                                                                                                   |  |               |             |   |                   |  
|Cash and cash equivalents                                                                                                                                                                                                                         |  | $             | 185,292     |   |                   | $
|Accounts receivable, net                                                                                                                                                                                                                          |  |               | 312,822     |   |                   |  
|Inventories                                                                                                                                                                                                                                       |  |               | 342,380     |   |                   |  
|Deferred debt issuance costs                                                                                                                                                                                                                      |  |               | 287,321     |   |                   |  
|Prepaid expenses and other current assets                                                                                                                                                                                                         |  |               | 11,579      |   |                   |  
|Total current assets                                                                                                                                                                                                                              |  |               | 1,139,394   |   |                   |  
|                                                                                                                                                                                                                                                  |  |               |             |   |                   |  
|Fixed assets, net                                                                                                                                                                                                                                 |  |               | 167,570     |   |                   |  
|Patents, net                                                                                                                                                                                                                                      |  |               | 2,323,743   |   |                   |  
|TOTAL ASSETS                                                                                                                                                                                                                                      |  | $             | 3,630,707   |   |                   | $
|                                                                                                                                                                                                                                                  |  |               |             |   |                   |  
|LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                                                              |  |               |             |   |                   |  
|Current liabilities:                                                                                                                                                                                                                              |  |               |             |   |                   |  
|Accounts payable                                                                                                                                                                                                                                  |  | $             | 717,137     |   |                   | $
|Convertible debt                                                                                                                                                                                                                                  |  |               | 2,350,526   |   |                   |  
|Discount                                                                                                                                                                                                                                          |  |               | (807,600    | ) |                   |  
|Convertible debt, net                                                                                                                                                                                                                             |  |               | 1,542,926   |   |                   |  
|Derivative liability                                                                                                                                                                                                                              |  |               | 3,829,325   |   |                   |  
|Accrued expenses                                                                                                                                                                                                                                  |  |               | 231,306     |   |                   |  
|Total current liabilities                                                                                                                                                                                                                         |  |               | 6,320,694   |   |                   |  
|                                                                                                                                                                                                                                                  |  |               |             |   |                   |  
|Warrant liability                                                                                                                                                                                                                                 |  |               | 3,291,354   |   |                   |  
|TOTAL LIABILITIES                                                                                                                                                                                                                                 |  |               | 9,612,048   |   |                   |  
|                                                                                                                                                                                                                                                  |  |               |             |   |                   |  
|COMMITMENTS                                                                                                                                                                                                                                       |  |               |             |   |                   |  
|                                                                                                                                                                                                                                                  |  |               |             |   |                   |  
|SHAREHOLDERS’ EQUITY (DEFICIT)                                                                                                                                                                                                                    |  |               |             |   |                   |  
|Series B Convertible Preferred Stock, $.01 par value:                                                                                                                                                                                             |  |               |             |   |                   |  
|Authorized – 2,585,000 shares; shares issued and outstanding – 2,585,000 shares at June 30, 2012 and December 31, 2011, liquidation value of $517,000 plus accumulated and unpaid dividends of $106,931 as of June 30, 2012 and December 31, 2011 |  |               | 25,850      |   |                   |  
|Series C Convertible Preferred Stock, $.01 par value:                                                                                                                                                                                             |  |               |             |   |                   |  
|Authorized – 1,000,000 shares; shares issued and outstanding -1,000,000 shares at June 30, 2012 and December 31, 2011, $200,000 liquidation value                                                                                                 |  |               | 10,000      |   |                   |  
|Common stock, $.01 par value:                                                                                                                                                                                                                     |  |               |             |   |                   |  
|Authorized — 175,000,000 shares; shares issued and outstanding—108,041,084 shares at June 30, 2012 and December 31, 2011                                                                                                                          |  |               | 1,080,411   |   |                   |  
|Additional paid-in capital                                                                                                                                                                                                                        |  |               | 31,115,867  |   |                   |  
|Accumulated deficit                                                                                                                                                                                                                               |  |               | (38,213,469 | ) |                   |  
|TOTAL SHAREHOLDERS’ EQUITY (DEFICIT)                                                                                                                                                                                                              |  |               | (5,981,341  | ) |                   |  
|TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)                                                                                                                                                                                              |  | $             | 3,630,707   |   |                   | $



Note: The balance sheet at December 31, 2011 has been derived
from the audited financial statements at that date but does not include all of the information required by accounting principles
generally accepted in the United States of America for complete financial statements.



See accompanying notes to unaudited financial
statements.





3









SpectraScience, Inc.
and Subsidiary

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)





|                                                                         |  | Three Months Ended  June 30, |             |   | Six Months Ended June 30, |  
|------------------------------------------------------------------------ |  | ---------------------------- | ----------- | - | ------------------------- | -
|                                                                         |  | 2012                         |             |   | 2011                      |  
|                                                                         |  |                              |             |   |                           |  
|Revenue                                                                  |  | $                            | 310,125     |   |                           | $
|Cost of revenue                                                          |  |                              | 200,294     |   |                           |  
|Gross profit                                                             |  |                              | 109,831     |   |                           |  
|                                                                         |  |                              |             |   |                           |  
|Operating expenses:                                                      |  |                              |             |   |                           |  
|Research and development                                                 |  |                              | 289,413     |   |                           |  
|General and administrative                                               |  |                              | 652,754     |   |                           |  
|Sales and marketing                                                      |  |                              | 132,056     |   |                           |  
|Total operating expenses                                                 |  |                              | 1,074,223   |   |                           |  
|Loss from operations                                                     |  |                              | (964,392    | ) |                           |  
|                                                                         |  |                              |             |   |                           |  
|Other expense (income)                                                   |  |                              |             |   |                           |  
|Interest expense                                                         |  |                              | 116,309     |   |                           |  
|Change in fair value of derivative and warrant liabilities               |  |                              | 2,889,557   |   |                           |  
|Amortization of derivative and warrant liability discount                |  |                              | 1,094,437   |   |                           |  
|Amortization of deferred debt issuance costs and original issue discount |  |                              | 461,289     |   |                           |  
|Other expense, net                                                       |  |                              | 1,924       |   |                           |  
|                                                                         |  |                              | 4,563,516   |   |                           |  
|Net (Loss)                                                               |  |                              | (5,527,908  | ) |                           |  
|Basic and diluted net (loss) per share                                   |  | $                            | (0.05       | ) |                           | $
|Weighted average common shares outstanding                               |  |                              | 108,041,084 |   |                           |  



See accompanying notes to unaudited financial
statements.





4







SpectraScience, Inc.
and Subsidiary

CONSOLIDATED STATEMENT OF SHAREHOLDERS’
EQUITY (DEFICIT)

For the six months ended June 30, 2012

(Unaudited)



|                                       |  | Preferred Stock |           |  | Common Stock |   |        | Additional Paid-In |  |  | Accumulated |  |  | Total Shareholders’ |          
|-------------------------------------- |  | --------------- | --------- |  | ------------ | - | ------ | ------------------ |  |  | ----------- |  |  | ------------------- | ---------
|                                       |  | Shares          |           |  | Amount       |   |        | Shares             |  |  | Amount      |  |  | Capital             |          
|Balance, December 31, 2011             |  |                 | 3,585,000 |  |              | $ | 35,850 |                    |  |  | 108,041,084 |  |  | $                   | 1,080,411
|                                       |  |                 |           |  |              |   |        |                    |  |  |             |  |  |                     |          
|Stock based compensation – consultants |  |                 |           |  |              |   |        |                    |  |  |             |  |  |                     |          
|Stock based compensation – employees   |  |                 |           |  |              |   |        |                    |  |  |             |  |  |                     |          
|Net loss                               |  |                 |           |  |              |   |        |                    |  |  |             |  |  |                     |          
|Balance, June 30, 2012                 |  |                 | 3,585,000 |  |              | $ | 35,850 |                    |  |  | 108,041,084 |  |  | $                   | 1,080,411



See accompanying notes to unaudited financial
statements.



5









SpectraScience, Inc.
and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                         |  | Six Months Ended  June 30, |           
|------------------------------------------------------------------------ |  | -------------------------- | ----------
|                                                                         |  | 2012                       |           
|OPERATING ACTIVITIES:                                                    |  |                            |           
|Net loss                                                                 |  | $                          | (8,679,909
|Adjustments to reconcile net loss to cash used in operating activities:  |  |                            |           
|Depreciation and amortization                                            |  |                            | 189,864   
|Amortization of derivative and warrant liabilities discount              |  |                            | 1,445,862 
|Amortization of deferred debt issuance costs and original issue discount |  |                            | 604,861   
|Change in fair value of derivative and warrant liabilities               |  |                            | 4,471,963 
|Stock-based compensation employees                                       |  |                            | 174,394   
|Stock-based compensation consultants                                     |  |                            | 18,543    
|Amortization of prepaid financing costs                                  |  |                            | -         
|Fair market value of common stock and warrants issued for services       |  |                            | -         
|Changes in operating assets and liabilities:                             |  |                            |           
|Accounts receivable                                                      |  |                            | (286,087  
|Inventory                                                                |  |                            | 25,458    
|Prepaid expenses and other assets                                        |  |                            | 12,914    
|Accounts payable                                                         |  |                            | 21,328    
|Accrued expenses                                                         |  |                            | 85,950    
|Net cash (used in) operating activities                                  |  |                            | (1,914,859
|                                                                         |  |                            |           
|INVESTING ACTIVITIES:                                                    |  |                            |           
|Redemption of certificates of deposit                                    |  |                            | -         
|Purchases of fixed assets                                                |  |                            | (4,170    
|Net cash from (used in) investing activities                             |  |                            | (4,170    
|                                                                         |  |                            |           
|FINANCING ACTIVITIES:                                                    |  |                            |           
|Proceeds from issuance of convertible notes payable                      |  |                            | 2,233,000 
|Debt issuance costs                                                      |  |                            | (379,402  
|Net cash provided by financing activities                                |  |                            | 1,853,598 
|                                                                         |  |                            |           
|Net increase (decrease) in cash and cash equivalents                     |  |                            | (65,431   
|                                                                         |  |                            |           
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                         |  |                            | 250,723   
|                                                                         |  |                            |           
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                               |  | $                          | 185,292   



See accompanying notes to unaudited financial
statements.





6







SpectraScience, Inc.

Notes to Unaudited Condensed Financial
Statements

June 30, 2012



1.     Nature of Business and Basis
of Presentation



Description of Business



SpectraScience, Inc. was incorporated in the State of Minnesota
on May 4, 1983 as GV Medical, Inc. In October 1992, GV Medical discontinued its prior business, refocused its development efforts
and changed its name to SpectraScience, Inc. The “Company,” hereinafter, refers to SpectraScience, Inc. and its wholly-owned
subsidiary Luma Imaging Corp. (“LUMA”). Since 1996, the Company primarily focused on developing the WavSTAT Optical
Biopsy System (the “WavSTAT System”).



The Company has developed and received CE mark approval to market
a proprietary, minimally invasive technology that optically illuminates tissue in real-time to distinguish between normal, pre-cancerous
or cancerous cells without the need to remove the subject cell tissue from the body to make such determinations. The WavSTAT4 Optical
Biopsy System operates by using cool, safe UV laser light to optically illuminate and analyze tissue, enabling the physician to
make an instant diagnosis during endoscopy when screening for cancer, and if warranted, to begin immediate treatment during the
same procedure. Beginning in December 2011, the WavSTAT 4 began to be sold in the European Union for colon cancer detection. In
June 2012 the Company entered into a distribution agreement with PENTAX Europe, GmbH, for the sale of its systems internationally.



On November 6, 2007, the Company acquired the assets of LUMA
in an equity transaction accounted for as an acquisition of assets and now operates LUMA as a wholly-owned subsidiary of the Company.
LUMA had acquired the assets from a predecessor company that had developed, and received FDA approval for, a non-invasive diagnostic
imaging system that can detect cervical cancer precursors and which utilizes an underlying technology that is similar to that of
the WavSTAT System. The addition of the LUMA technology to the Company’s existing WavSTAT System technology provides the
Company with a broad suite of fluorescence-based intellectual property and know-how. During the fiscal year ended December 31,
2010, the Company wrote off the remaining fair value of the LUMA inventory in order to focus on the continued development and marketing
of the WavSTAT System. The Company retained the intellectual property of LUMA for use in the development of future generations
of the WavSTAT System.



The transaction was accounted for as an acquisition of assets
that included intellectual property, inventory and equipment. The intellectual property consisted of a total of 34 issued U.S.
Patents and 28 additional patent applications.



Basis of Presentation



The accompanying unaudited financial statements of the Company
have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q as they are prescribed for smaller reporting companies. Accordingly, they do
not include all of the information and footnotes required by accounting principles generally accepted in the United States of America
for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary to make the financial statements not misleading have been included. Operating results for the six-month period ended
June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. These statements
should be read in conjunction with the financial statements and related notes, which are included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2011.



Liquidity and Capital Resources



Historically, the Company’s sources of cash have come
from the issuance and sales of equity securities and interest income. The Company’s historical cash outflows have been primarily
used for operating activities including research, development, administrative and sales activities. Fluctuations in the Company’s
working capital due to timing differences of its cash receipts and cash disbursements also impact its cash flow. The Company expects
to incur significant additional operating losses through at least 2012, as it completes proof-of-concept trials, begins outcome-based
clinical studies and increases sales and marketing efforts to commercialize the WavSTAT4 Systems in Europe. If the Company does
not receive sufficient funding, the Company may be unable to continue as a going concern. The Company may incur unknown expenses
or may not be able to meet its revenue forecast, and one or more of these circumstances would require the Company to seek additional
capital. The Company may not be able to obtain equity capital or debt funding on terms that are acceptable. Even if the Company
receives additional funding, such proceeds may not be sufficient to allow the Company to sustain operations until it becomes profitable
and begins to generate positive cash flows from operations.





7







As of June 30, 2012, the Company had negative working capital
of approximately $5.2 million and cash and cash equivalents of approximately $185,000. In December 2011, the Company entered into
an Engagement Agreement with Laidlaw & Company (UK) Ltd. (“Laidlaw”). Under the Engagement Agreement, Laidlaw will
assist the Company in raising up to $20.0 million in capital over a two-year period from the date of the Engagement Agreement.
During the six-month period ended June 30, 2012, the Company raised approximately $1.85 million under this agreement. However,
if the Company does not receive additional funds in a timely manner, the Company could be in jeopardy as a going concern. The Company
may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Management believes that if
the events defined in the Engagement Agreement occur as expected, such proceeds will be sufficient to allow the Company to sustain
operations until it attains profitability and positive cash flows from operations. However, the Company may incur unknown expenses
or may not be able to meet its revenue expectations which requiring it to seek additional capital. In such event, the Company may
not be able to find capital or raise capital or debt on terms that are acceptable.



The accompanying financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts
and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.



2.     Summary of Significant Accounting
Policies



Revenue recognition



The Company recognizes revenues when persuasive evidence of
an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability
is reasonably assured. Revenue from the sale of the Company’s products is generally recognized when title and risk of loss
transfers to the customer, the terms of which are generally free on board shipping point. The Company uses customer purchase orders
to determine the existence of an arrangement. The Company uses shipping documents and third-party proof of delivery to verify that
title has transferred. The Company assesses whether the fee is fixed or determinable based upon the terms of the agreement associated
with the transaction. To determine whether collection is probable, the Company assesses a number of factors, including past transaction
history with the customer and the creditworthiness of the customer.



Consolidation



The accompanying consolidated financial statements include the
accounts of SpectraScience, Inc. and its wholly-owned subsidiary LUMA. All significant intercompany balances and transactions have
been eliminated in consolidation.



Risks and Uncertainties



The Company operates in an industry that is subject to intense
competition, government regulation and rapid technological change. The Company's operations are subject to significant risk and
uncertainties, including financial, operational, technological, regulatory and other risks associated with a short history of product
sales, including the potential risk of business failure.



Use of Estimates



The Company prepares its consolidated financial statements in
conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to
the financial statements. Significant estimates made by management include, among others, realization of long-lived assets, assumptions
used to value stock options and warrants, assumptions used to value the common stock issued and the assets acquired in the LUMA
acquisition and the realization of intangible assets. Actual results could differ from those estimates.



Inventory Valuation



The Company states its inventories at the lower of cost or market
value, determined on a specific cost basis. The Company provides inventory allowances when conditions indicate that the selling
price could be less than cost due to obsolescence and reductions in estimated future demand. The Company balances the need to maintain
strategic inventory levels with the risk of obsolescence due to changing technology and customer demand levels. Unfavorable changes
in market conditions may result in a need for additional inventory reserves that could adversely impact the Company’s gross
margins. Conversely, favorable changes in demand could result in higher gross margins when the Company sells products.





8







Valuation of Long-lived Assets



The Company’s long-lived assets consist of property and
equipment and intangible assets. Equipment is carried at cost and is depreciated over the estimated useful lives of the assets,
which are generally two to three years, and leasehold improvements are amortized over the lesser of the lease term or the estimated
useful lives of the improvements. The straight-line method is used for depreciation and amortization. Intangible assets consist
of patents, which are amortized using the straight-line method over the estimated useful lives of the patents. The Company does
not capitalize external legal costs and filing fees associated with obtaining patents on its new discoveries. Acquired intellectual
property is recorded at cost and is amortized over its estimated useful life. The Company believes the useful lives assigned to
these assets are reasonable. The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. These computations utilize judgments and assumptions inherent
in management’s estimate of future cash flows to determine recoverability of these assets. If management’s assumptions
about these assets were to change as a result of events or circumstances, the Company may be required to record an impairment loss.



Stock-Based Compensation



The Company accounts for stock-based compensation under the
provisions of FASB ASC Topic 718, Compensation—Stock Compensation  (“ASC 718”), which
requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based
on estimated fair values on the grant date. The Company adopted ASC 718 on January 1, 2006. The Company estimates the fair value
of stock-based awards on the date of grant using the Black-Scholes-Merton option-pricing model (the “Black-Scholes Model”).
The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods
using the straight-line method. The Company estimates forfeitures at the time of grant and revises its estimate in subsequent periods
if actual forfeitures differ from those estimates.



The Company accounts for stock-based compensation awards to
non-employees in accordance with FASB ASC Topic 505-50, Equity-Based Payments to Non-Employees    (“ASC
505-50”). Under ASC 505-50, the Company determines the fair value of the warrants or stock-based compensation awards granted
as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably
measurable.



All issuances of stock options or other equity instruments to
employees and non-employees as the consideration for goods or services received by the Company are accounted for based on the fair
value of the equity instruments issued. Any stock options issued to non-employees are recorded in expense and additional paid-in
capital in shareholders’ equity over the applicable service periods using variable accounting through the vesting dates based
on the fair value of the options at the end of each period.



As of June 30, 2012, the Company had one stock-based employee
compensation plan under which it makes grants, the 2011 Equity Incentive Plan (the “EIP”). The EIP provides for the
grant of incentive stock options (“ISOs”), nonqualified stock options (“NQSOs”) and restricted stock awards
to full-time employees (who may also be directors) and NQSOs and restricted stock awards to non-employee directors, consultants,
customers, vendors or providers of services. The exercise price of any ISO may not be less than the fair market value of the common
stock on the date of grant and the term shall not exceed ten years. The amount reserved under the 2011 EIP is 5,000,000 shares
of common stock.  At June 30, 2012, the Company had outstanding 16,295,000 options under the EIP and the Company’s
prior Amended 2001 Stock Plan representing approximately 15% of the Company’s outstanding shares (7,973,124 of which were
exercisable), with 1,200,000 available for future issuance under the 2011 EIP. Awards under the Company’s EIP generally vest
over four years.



The fair value of options granted were estimated at the date
of grant using a Black-Scholes Model which includes several variables including expected life, risk free interest rate, expected
stock price volatility, stock option exercise patterns and expected dividend yield. The Company also must estimate forfeitures
for employee stock options. These models and assumptions are emerging and may change future expenses by increasing or decreasing
stock-based compensation expense. Management used the following weighted average assumptions to value stock options granted during
the six months ended June 30, 2012 and 2011:



|                        |  | 2012    |      |  | 2011 | 
|----------------------- |  | ------- | ---- |  | ---- | 
|Expected life           |  | 5 Years |      |  | -    | 
|Risk-free interest rate |  |         | .85% |  |      | 
|Expected volatility     |  |         | 114% |  |      | 
|Expected dividend yield |  |         | 0%   |  |      | 





9







In addition to the above, management estimated the forfeitures
on employee options under the EIP would have negligible effects because such forfeitures would be a very small percentage. Management
believes that options granted have been to a group of individuals that have a high desire to see the Company succeed and have aligned
themselves to that end.



The expected life used in the calculations were selected by
management based on past experience, forward looking profit forecasts and estimates of what the trading price of the Company’s
stock might be at different future dates.



The risk-free interest rates are the five-year U.S. Treasury
rates as published at the time of making the calculations.



Volatility is a calculation based on fluctuations in the
Company’s stock price over a historical time period consistent with the estimated life of the option. Management computed
and tested this volatility calculation for reasonableness and found it to be acceptable based on a number of
factors including the Company’s current market capitalization, comparison to other similar companies in its area of
interest, the current early revenue stage of the Company and management’s estimate of the net present value of
forward looking profits that has been compiled (for which there is no assurance).



Information with respect to stock option activity is as follows:



|                               |  |                             |           |   | Outstanding Options      | 
|------------------------------ |  | --------------------------- | --------- | - | ------------------------ | 
|                               |  | Options Available For Grant |           |   | Plan Options Outstanding | 
|December 31, 2011              |  |                             | 1,700,000 |   |                          | 
|Options granted                |  |                             | (500,000  | ) |                          | 
|Options exercised              |  |                             | -         |   |                          | 
|Options forfeited              |  |                             | -         |   |                          | 
|Options expired under 2001 EIP |  |                             | -         |   |                          | 
|Additional options authorized  |  |                             | -         |   |                          | 
|Outstanding at June 30, 2012   |  |                             | 1,200,000 |   |                          | 
|Exercisable at June 30, 2012   |  |                             | -         |   |                          | 



There were no options exercised during the six months ended
June 30, 2012 and 2011. At June 30, 2012, total unrecognized estimated employee compensation cost related to non-vested stock options
granted prior to that date is approximately $673,000, which we expect to be recognized over the next three years.



Inventories



Inventories consisted of the following at June 30, 2012 and
December 31, 2011:



|               |  | June 30, 2012 |         |  | December 31, 2011 |  
|-------------- |  | ------------- | ------- |  | ----------------- | -
|Raw materials  |  | $             | 271,326 |  |                   | $
|Finished goods |  |               | 71,054  |  |                   |  
|Totals         |  | $             | 342,380 |  |                   | $



Earnings (Loss) Per Share



Basic earnings (loss) per share is computed by dividing net
income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period of
computation. Diluted earnings (loss) per share is computed similarly to basic earnings per share except that the denominator is
increased to include the number of additional common shares that would have been outstanding if the potential common shares had
been issued and only if the additional common shares would be dilutive. Basic and diluted loss per share are the same for the six
month periods ended June 30, 2012 and 2011, since any additional common stock equivalents would be antidilutive. Potentially dilutive
shares of common stock that have been excluded from the calculation of the weighted average number of dilutive common shares for
the six months ended June 30, 2012 include stock options to purchase 16,295,000 shares of common stock, warrants to purchase 53,396,441
shares of common stock, convertible debt convertible into 41,021,402 shares of common stock and preferred stock convertible into
3,585,000 shares of common stock.





10









3. Liabilities



Convertible Debentures



For the six-month period ended June 30, 2012, the Company
issued Convertible Debentures (“Debentures”) at a face amount of $2,350,526. At June 30, 2012, the unamortized
discount of $807,600 consisted of a discount on the derivative liability of $402,222, discount on the warrant liability of
$364,844 and original issue discount of $40,534. The discount will be amortized over the remaining term of the Debentures.
The Debentures have an original term of 6 months, accrue interest at a rate of 20% per year, carry an original issue discount
of 5% and will convert into common stock at an initial conversion price of $0.0573 per share at maturity. The Debentures were
issued with detachable five-year cashless warrants (“Holders Warrants”) that allow the holders to purchase one
share of stock for each two shares available under the converted Debentures at an exercise price of $0.0745 per share. In
addition, the Company issued five-year cashless Agent Warrants equal to 10% of the total number of shares issuable under the
Debentures and Holders Warrants at an exercise price of $0.0745 per share. At June 30, 2012, there were Debentures, Holders
Warrants and Agent Warrants convertible or exercisable into 41,021,402, 20,510,701 and 6,153,210 shares of common stock,
respectively. The conversion price of the Debentures and the exercise price of the warrants are subject to an adjustment
feature in the event that the Company issues securities for less than the conversion price of the Debentures or the exercise
price of the Holders Warrants and Agent Warrants. The accounting for the adjustment features of the conversion price and the
warrant exercise price is described separately below under, “Warrant Liability” and “Derivative
Liability”. Upon issuance of the Debentures the Company received net cash proceeds of $1,851,098, net of $379,402 in
transaction costs and $117,526 of original issue discount. On June 30, 2012, if converted, the value of the Debentures would
exceed their face value by approximately $3,803,000.



Warrant Liability



The Company issued Debentures with Holders Warrants
and Agent Warrants that include a possible exercise adjustment feature in the event that the Company issues securities
for consideration less than that offered with the warrants (referred to as “Derivative Warrants”) and in
certain change of control transactions. Effective January 1, 2009, the accounting guidance regarding derivative warrants
changed and required that certain of the Company’s warrants be recorded as a liability and measured at fair value
recorded in earnings. The Company records the fair value of these warrants in its statement of operations in the line
“Change in fair value of derivative and warrant liabilities.” The Company measures these warrants using a
modified Black-Scholes option valuation model using similar assumptions to those described herein under, “Stock-Based
Compensation.” For the six month period ended June 30, 2012, the Company recorded non-cash expense related to these
warrants of approximately $2,769,000. At June 30, 2012, there were exercisable warrants to purchase 26,663,911 shares of
common stock subject to this price adjustment feature. The time period over which the Company will be required to evaluate
the fair value of these warrants is approximately four years and six months. Upon issuance of the Debentures, the Company
recorded a Warrant Liability of $1,888,415 and an initial fair value non-cash expense of $380,334. For the six-month period
ended June 30, 2012, the Company recorded non-cash expense of $1,402,939 which represents the change in the fair value of
the Warrant Liability from inception to June 30, 2012, resulting in a Warrant Liability amount of $3,291,354.



The Company computes the fair value of the
warrant liability at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash
income. The key component in the value of the warrant liability is the Company’s stock price, which is subject to
significant fluctuation and is not under the Company’s control. The resulting effect on the Company’s net loss is
therefore subject to significant fluctuation and will continue to be so until the Derivative Warrants expire (approximately
five years from the date of issuance). Assuming all other fair value inputs remain constant, the Company will record non-cash
expense when its stock price increases and non-cash income when its stock price decreases.



The assumptions used in determining fair value represent management’s
best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result,
if factors change, including changes in the market value of the Company’s common stock, the Company’s fair value estimates
could be materially different in the future.



Derivative Liability



During the six-month period ended June 30, 2012, the
Company issued convertible Debentures with a conversion price that includes a possible exercise adjustment feature in the
event that it issues securities for consideration less than that offered with the convertible Debentures (referred to as
“Derivative Liabilities”). The Company records the fair value of the conversion feature in its statement of
operations in the line “Change in fair value of derivative and warrant liabilities.” The Company measures the
conversion feature using a modified Black-Scholes option valuation model using similar assumptions to those described herein
entitled, “Stock-Based Compensation.” For the six month period ended June 30, 2012, the Company recorded non-cash
expense related to this conversion feature of approximately $3,427,000. At June 30, 2012, there were convertible shares
to purchase 41,021,402 shares of common stock subject to this price adjustment feature. The time period over which the
Company will be required to evaluate the fair value of this conversion feature is approximately six months. Upon issuance of
the Debentures, the Company recorded a derivative liability of $1,573,320 and an initial fair value non-cash expense of
$432,685. For the six-month period ended June 30, 2012, the Company recorded non-cash expense of $2,256,005 which represents
the change in the fair value of the Derivative Liability from inception to June 30, 2012, resulting in a Derivative Liability
amount of $3,829,325 at June 30, 2012.



The Company computes the fair value of the derivative liability
at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash income. The key component
in the value of the derivative liability is the Company’s stock price, which is subject to significant fluctuation and is
not under its control. The resulting effect on net loss is therefore subject to significant fluctuation and will continue to be
so until the Company’s Debentures, which the convertible feature is associated with, matures (approximately six months from
the date of issuance). Assuming all other fair value inputs remain constant, the Company will record non-cash expense when its
stock price increases and non-cash income when its stock price decreases.





11







The assumptions used in determining fair value represent management’s
best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result,
if factors change, including changes in the market value of the Company’s common stock, the Company’s fair value estimates
could be materially different in the future.



4. Shareholders’ Equity



Stock Options



In February 2012, the Company granted
a stock option to purchase 500,000 shares of common stock at an exercise price of $0.09 per share to our European Director of Business
Development. The option vests 25% at grant and 1/36 of the remaining grant amount monthly for three years.





12







5. Fair Value Measurements



Accounting guidance on fair value measurements and disclosures
defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system, and
defines required disclosures. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business.



The Company's balance sheet contains derivative and warrant
liabilities that are recorded at fair value on a recurring basis. The three-level valuation hierarchy for disclosure of fair value
is as follows:



Level 1: uses quoted market prices in active markets for identical
assets or liabilities.



Level 2: uses observable market-based inputs or unobservable
inputs that are corroborated by market data.



Level 3: uses unobservable inputs that are not corroborated
by market data.



The fair value of the Company’s recorded derivative and
warrant liabilities is determined based on unobservable inputs that are not corroborated by market data, which require a Level
3 classification. A modified Black Scholes option valuation model was used to determine the fair value with similar assumptions
to those described herein entitled, “Stock-Based Compensation”. The Company records derivative and warrant liabilities
on the balance sheets at fair value with changes in fair value recorded in the consolidated statements of operations.



The following table presents the balances of liabilities measured
at fair value on a recurring basis by level as of June 30, 2012:







|                     |  | Fair Value Measurements Using |  
|-------------------- |  | ----------------------------- | -
|                     |  | Quoted Prices in              |  
|                     |  | Active Markets for            |  
|                     |  | Identical Assets              |  
|                     |  | (Level 1)                     |  
|As of June 30, 2012  |  |                               |  
|Derivative liability |  | $                             | -
|Warrant liability    |  |                               | -
|Total                |  | $                             | -



The following table presents changes in the liabilities with
significant unobservable inputs (Level 3) for the six months ended June 30, 2012:



|                                                |  | Warrant   |           |  | Derivative |   |           | Total     | 
|----------------------------------------------- |  | --------- | --------- |  | ---------- | - | --------- | --------- | 
|                                                |  | Liability |           |  | Liability  |   |           | Liability | 
|Beginning balance, December 31, 2011            |  | $         | -         |  |            | $ | -         |           | 
|Issuance of convertible debt and warrants       |  |           |           |  |            |   |           |           | 
|Resulting in derivative and warrant liabilities |  |           | 1,888,415 |  |            |   | 1,573,319 |           | 
|Change in estimated fair value                  |  |           | 317,148   |  |            |   | 452,240   |           | 
|Balance, March 31, 2012                         |  |           | 2,205,563 |  |            |   | 2,025,559 |           | 
|Change in the estimated fair value              |  |           | 1,085,791 |  |            |   | 1,803,766 |           | 
|Ending balance, June 30, 2012                   |  | $         | 3,291,354 |  |            | $ | 3,829,325 |           | 



6. Contingencies



None



7. Subsequent Events



In July 2012, the Company issued 30,000 restricted common shares
to a vendor for services. The fair value of the shares was determined to be $8,000, based upon the market value of the stock on
the date of issuance.



On July 13, 2012, the shareholders of the Company approved an
amendment to the Company’s Amended and Restated Articles of Incorporation increasing the number of authorized shares of capital
stock from 225,000,000 to 325,000,000, consisting of an increase in authorized shares of common stock from 175,000,000 to 275,000,000.



In August 2012, Holders of Convertible Debentures with a face
value of $600,000 converted their Debentures into 10,471,204 shares of common stock. In addition, associated with these Debentures,
the Company paid $60,000 in accrued interest by issuing 1,047,120 shares of common stock.





13







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



Forward-Looking Statements



This quarterly report on Form 10-Q (the “Report”)
contains forward-looking statements that are not related to historical results, including, without limitation, statements regarding
our business strategy and objectives, near term operating goals, expectations regarding the market for our products and beliefs
with respect to opportunities and industry conditions in those markets, beliefs about our products and expectations with respect
to their performance and acceptance, beliefs about the strengths of our intellectual property portfolio, regulatory goals and developments,
our agreement with Laidlaw, future financial position, expectations with respect to stock option expense recognition, future cash
needs, the sufficiency of our working capital and operating losses for the remainder of the current fiscal year, and involve risks
and uncertainties. Although we believe that the assumptions on which these forward-looking statements are based are reasonable,
there can be no assurance that such assumptions will prove to be accurate and actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited
to, changes in law or regulatory policies, unanticipated competition from other similar businesses, adverse outcomes from litigation,
unexpected employee departures or disruptions, adverse market and general economic factors and other factors described in Item
1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Such forward-looking statements are qualified
in their entirety by the cautions and risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December
31, 2011.



Business



SpectraScience, Inc. (the “Company,” “SpectraScience,”
“we,” “our,” or “us”) develops and manufactures innovative Laser Induced Fluorescence spectrophotometry
systems capable of determining whether tissue is normal, pre-cancerous or cancerous without removing tissue from the body. The
WavSTAT Optical Biopsy System (the “WavSTAT System”) is SpectraScience's first product to incorporate its proprietary
Laser Induced Fluorescence technology for worldwide clinical use. The WavSTAT System carries the CE mark designation which allows
for its sale and marketing in the European Union for the diagnosis of cancer. The Company’s second planned application of
this technology for detecting early stage esophageal cancer is presently undergoing a clinical trial to determine its marketability.
Upon successful completion of the trial, the Company plans to self-certify for CE mark approval for sale in the European Union
and then file an application with the FDA seeking permission to begin marketing for that indication for use in the United States.
The Company believes it has a strong intellectual property portfolio that will allow it to continue to expand its WavSTAT cancer
diagnosis platform to address the diagnosis of multiple cancers, utilize additional proprietary bio-photonic techniques to improve
the WavSTAT’s overall diagnostic performance and ultimately allow for the detection of cancer and pre-cancer over a relatively
large area of examined tissue.



Our principal executive offices are located at 11568 Sorrento
Valley Rd., Suite 11, San Diego, CA 92121. We can be reached by telephone at (858) 847-0200; by fax at (858) 847-0880; or by email
at info@spectrascience.com. We have a Web site at http://www.spectrascience.com. The information contained on our Web site shall
not be deemed to be a part of this Report.



Plan of Operation



During the past 12 months, SpectraScience spent a majority of
its time and significant resources redesigning and manufacturing its improved WavSTAT4 Optical Biopsy System. Improvements included
a redesign of the system to make it easier to use and the development of a new diagnostic algorithm that the Company believes is
more accurate and reliable. The WavSTAT4 completed production and qualified for sale in the European Union under the CE Mark in
December 2011.



Over the next 12 months, SpectraScience intends to:



| | · | Market and sell the WavSTAT4 Optical Biopsy System colon cancer diagnostic application in the European Union;
| | - | -------------------------------------------------------------------------------------------------------------



| | · | Continue WavSTAT4 System clinical trials related to the diagnosis of esophageal cancer with a goal to introduce an esophageal application in the European Union in early 2013;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Pursue the introduction of the WavSTAT4 colon cancer application in other international markets, in particular Russia and India;
| | - | --------------------------------------------------------------------------------------------------------------------------------



| | · | Begin WavSTAT4 clinical trials for diagnosis of colon cancer, the goal of which is the preparation of a Supplemental PMA filing with the FDA for approval for sale in the United States;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Begin the design and planning for the next generation of multi-modal fluorescence and broadband spectroscopy systems at our facility in San Diego, California; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Continue to expand and refine our intellectual property portfolio.
| | - | ------------------------------------------------------------------





14









Results of Operations



Three Months Ended June 30, 2012 and 2011



The Company recognized approximately $310,000 and $0 in revenue
for the three months ended June 30, 2012 and 2011, respectively. The revenue in the fiscal 2012 three-month period resulted from
the Company’s distribution agreement with PENTAX Europe, GmbH, signed in June 2012. As a result the Company recognized gross
profit of approximately $110,000 for the quarter ended June 30, 2012.



Total operating expenses increased from approximately $962,000
to $1,074,000, an increase of approximately $112,000 for the three-month period ended June 30, 2012 as compared to the three-month
period ended June 30, 2011. This overall increase was comprised of approximate increases in general and administration expense
of $139,000 offset by an approximate reduction of $27,000 in sales and marketing expense.



Research and development expenses remained unchanged for the
three months ended June 30, 2012 as compared to the three months ended June 30, 2011. Overall research and development expenses
for the comparative periods were approximately $289,000 for each period. Despite the similar expense amounts between the periods
there were changes within expense categories. The Company incurred approximate increases in engineering development expense of
$32,000 offset by approximate decreases in travel expense of $19,000 and all other expense of $13,000. The increase in engineering
development expense reflected continued software refinement of the WavSTAT4 System while the offsetting decrease was a result of
decreased travel expense in the three-month period ended June 30, 2012 as compared to the same period one year ago.



General and administrative expenses for the three months ended
June 30, 2012 and 2011 were approximately $653,000 and $514,000, respectively. The approximate $139,000 increase for the three
months ended June 30, 2012 compared to the three months ended June 30, 2011 was due to approximate increases in consulting expense
of $58,000, investor relations expense of $42,000, depreciation expense of $30,000, bad debt expense of $27,000 and all other expense
of $4,000 offset by approximate decreases in accounting expense of $11,000 and travel expense of $11,000. These expense increases
were a result of increased overall business activity and investor relations programs.



Sales and marketing expenses for the three months ended June
30, 2012 and 2011 were approximately $132,000 and $159,000, respectively. The decrease of approximately $27,000 was due to approximate
decreases of $49,000 in recruiting expense, $19,000 in travel expense and $5,000 in delivery expense offset by approximate increases
of $43,000 in payroll expense and $3,000 in trade show expense. The decreases are generally a result of the long recruitment time
required to hire a European-based business development executive to service international markets and the lower associated travel
expenses. The increase is primarily the result of the increased payroll cost of this executive.



As a result of the above, the approximate net operating loss
for the three months ended June 30, 2012 and 2011 was $964,000 and $962,000, respectively.  Of the net operating loss
for the quarter ended June 30, 2012, approximately $93,000 was comprised of non-cash stock option expense.



Non-operating expense increased approximately $4,566,000 as
a result of non-cash expenses related to our convertible debt issuance comprised of approximate increases in warrant and derivative
liability expense of $2,890,000, increased amortization of debt discount of approximately $1,094,000, increased amortization of
debt issuance costs and original issue discount of approximately $461,000, increased interest expense of approximately $117,000
and increases in other non-operating expense of approximately $4,000.



As a result of the above, the approximate net loss increased
by $4,569,000 for the three months ended June 30, 2012 and 2011 from approximately $959,000 to $5,528,000.  Of the net
loss for the quarter ended June 30, 2012, approximately $4,655,000 was comprised of non-cash expense.



Six Months Ended June 30, 2012 and 2011



The Company recognized approximately $310,000 and $0 revenue
for the six months ended June 30, 2012 and 2011, respectively. The revenue in the current six-month period is a result of the Company’s
distribution agreement with PENTAX Europe, GmbH, signed in June of 2012. As a result the Company recognized gross profit of approximately
$110,000 for the six-month period ended June 30, 2012.



Total operating expenses increased from approximately $1,816,000
to $2,111,000, an increase of approximately $295,000 for the six-month period ended June 30, 2012 as compared to the six-month
period ended June 30, 2011. This overall increase was comprised of approximate increases in research and development expense of
$169,000, general and administration expense of $139,000 offset by an approximate reduction of $13,000 in sales and marketing expense.





15







Research and development expenses increased approximately $169,000
for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. Overall research and development expenses
for the comparative periods were approximately $670,000 and $500,000, respectively. The increase was comprised of approximate increases
in engineering development expense of $148,000, Payroll expense of $51,000 offset by approximate decreases in travel expense of
$13,000 and all stock option expense of $17,000. The increase in engineering development expense reflected the continued refinement
of the WavSTAT4 System. Payroll expense increased due to increased regulatory salary expense while the decrease in travel expense
in the six-month period ended June 30, 2012 as compared to the same period one year ago was a result of less international travel
in the current comparative period.



General and administrative expenses for the six months ended
June 30, 2012 and 2011 were approximately $1,200,000 and $1,061,000, respectively. The approximate $139,000 increase for the six
months ended June 30, 2012 compared to the six months ended June 30, 2011 was due to approximate increases in investor relations
expense of $76,000, depreciation expense of $47,000, payroll expense of $38,000, consulting expense of $30,000, bad debt expense
of $27,000, insurance expense of $17,000 and rent expense of $14,000 offset by approximate decreases in stock compensation expense
of $67,000, financial amortization expense of $23,000, legal expense of $16,000 and other expense of $4,000. Investor relations
expense increased because the Company retained a new investor relations firm. Depreciation expense increased due to the classification
of certain WavSTAT4 machines as demonstration units. Payroll expense increased due to the payment of senior management bonuses.
Consulting expense increased as a result of the Company retaining additional technical marketing assessment services. Bad debt
expense increased due to the Company’s shift from small country-specific distributors to PENTAX Europe GmbH. and stock compensation
expense decreased due to a comparative reduction in stock option grants between the two comparative periods.



Sales and marketing expenses for the six months ended June 30,
2012 and 2011 were approximately $241,000 and $254,000, respectively. The decrease of approximately $13,000 was due to approximate
decreases of $58,000 in recruiting expense and $4,000 in other expense offset by approximate increases of $39,000 in payroll expense
and $10,000 in stock compensation expense. The decreases are generally a result of the long recruitment time required to hire a
European-based business development executive to service international markets and an offset with the increased payroll cost of
this executive.



As a result of the above, the approximate net operating loss
for the six months ended June 30, 2012 and 2011 was $2,001,000 and $1,816,000, respectively.  Of the net operating loss
for the six months ended June 30, 2012, approximately $193,000 was comprised of non-cash stock option expense.



Non-operating expense increased approximately $6,677,000 as
a result of non-cash expenses related to our convertible debt issuance comprised of approximate increases in warrant and derivative
liability expense of $4,472,000, increased amortization of debt discount of approximately $1,446,000, increased amortization of
debt issuance costs and original issue discount of approximately $605,000 and increased interest expense of approximately $154,000.



As a result of the above, our net loss increased by approximately
$6,866,000 for the six months ended June 31, 2012 and 2011 from approximately $1,814,000 to $8,680,000.  Of the net loss
for the six months ended June 30, 2012, approximately $6,870,000 was comprised of non-cash expense.



Liquidity and Capital Resources



As of June 30, 2012, the Company had negative working capital
of approximately $5.2 million and cash and cash equivalents of approximately $185,000, compared to positive working capital of
approximately $171,000 and cash and cash equivalents of approximately $251,000 as of December 31, 2011. In December 2011, the Company
entered into an Engagement Agreement with Laidlaw & Company (UK) Ltd. Under the Engagement Agreement, Laidlaw will assist the
Company in raising up to $20.0 million in capital over the next two years. During the six-month period ended June 30, 2012, the
Company raised approximately $1.85 million, net of transaction costs, under this agreement. However, if the Company does not receive
additional funds in a timely manner, the Company could be in jeopardy as a going concern. The Company may not be able to find alternative
capital or raise capital or debt on terms that are acceptable. Management believes that if the events defined in the Engagement
Agreement occur as expected, such proceeds will be sufficient to allow the Company to sustain operations until it attains profitability
and positive cash flows from operations. However, the Company may incur unknown expenses or may not be able to meet its revenue
expectations which requiring it to seek additional capital. In such event, the Company may not be able to find capital or raise
capital or debt on terms that are acceptable.



The financial statements included elsewhere in this quarterly
report have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities
in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification
of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as
a going concern.





16







Off-Balance Sheet Arrangements



We have no off-balance sheet arrangements.



Item 3. Quantitative and Qualitative Disclosures About
Market Risk



Not required





Item 4. Controls and Procedures



Evaluation of Disclosure Controls and Procedures



Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this
Report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective.



Changes in Internal Financial Controls



There was no change in the Company’s internal control
over financial reporting that occurred during the Company’s most recently completed quarter that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control over financial reporting.



|PART II | OTHER INFORMATION
|------- | -----------------



|Item 1. | Legal Proceedings
|------- | -----------------



None



|Item 1A. | Risk Factors
|-------- | ------------



There have been no material changes in our risk factors
from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.



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



None



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------



None



|Item 4. | Mine Safety Disclosures
|------- | -----------------------



None



|Item 5. | Other Information
|------- | -----------------



None



|Item 6. | Exhibits
|------- | --------



|3.1  | Amendment to Amended and Restated Articles of Incorporation                                                                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                           
|3.2  | Amended and Restated Articles of Incorporation (incorporated by reference to exhibit 3.1 to the Company’s current report on Form 8-K filed August 6, 2004)                                                                
|     |                                                                                                                                                                                                                           
|3.3  | Amendment to Amended and Restated Articles of Incorporation (incorporated by reference to exhibit 3.3 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2009, filed on November 16, 2009)
|     |                                                                                                                                                                                                                           
|10.1 | Exclusive Distribution Agreement dated effective June 15, 2012 by and between the Company and PENTAX Europe GmbH.                                                                                                         





17







|31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- | ---------------------------------------------------------------------------------------------------



|31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- | ---------------------------------------------------------------------------------------------------



|32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- | ---------------------------------------------------------------------------------------------------



|32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                          
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                                                                                                                                              
|101* | Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended June 30, 2012, formatted in
XBRL; (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of
Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements.










*Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will
furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this Form 10-Q within
the permitted 30-day grace period for the first quarterly period in which detailed footnote tagging is required after the filing
date of this Form 10-Q.









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SIGNATURES



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



|                      | SpectraScience, Inc.
        (Registrant)
|--------------------- | -----------------------------------------
|                      |                                          
|Date: August 14, 2012 |                                          
|                      |                                          
|                      |                                          
|                      |                                          
|                      |                                          
|Date: August 14, 2012 |                                          
|                      |                                          
|                      |                                          
|                      |                                          





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