UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON
D.C. 20549





Form
10-Q




(Mark
One)




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


For the
quarterly period ended September 30, 2009





or





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


For the
transition period from 
to





Commission
file number 0-13092





SPECTRASCIENCE,
Inc.





(Exact
name of small business issuer


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)


(858)
847-0200


(Issuer's
telephone number)





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  ̈





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
registrant 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.




Large
      accelerated filer        ̈
              Accelerated
      filer          
                  
        ̈Non-accelerated
      filer           ̈
              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 þ





APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:




Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. YES þ NO
 ̈





The
number of shares of the Registrant’s common stock, par value $0.01 per share,
outstanding on November 16, 2009 was 70,107,615 with an additional 21,650,000
shares of Series B Convertible Preferred Stock, par value $0.01 per share,
outstanding. As of this date the Registrant also had outstanding warrants to
purchase 13,654,000 shares of common stock at a weighted average price of $0.34
per share.









SPECTRASCIENCE,
INC.





FORM
10-Q


For
the Quarterly Period Ending September 30, 2009





TABLE
OF CONTENTS





PART
      I
              FINANCIAL
      INFORMATION:
              3Item
      1.
              Financial
      Statements (Unaudited)
              3Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              11Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              14Item
      4.
              Controls
      and Procedures
              14Item
      4T.
              Controls
      and Procedures
              15PART
      II
              OTHER
      INFORMATION
              16Item
      1.
              Legal
      Proceedings
              16Item
      1A.
              Risk
      Factors
              16Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              16Item
      3.
              Defaults
      Upon Senior Securities
              16Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              16Item
      5.
              Other
      Information
              16Item
      6.
              Exhibits
              16SIGNATURES
              17




2




PART I   FINANCIAL INFORMATION:





Item 1. Financial Statements
(Unaudited)





SpectraScience,
Inc. and Subsidiary


Consolidated
Balance Sheets





September 30,
                  2009
                
                
                December 31,
                  2008(Unaudited)
                
                
                (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                1,315,232
                
                
                $
                1,618,181Accounts
      Receivable (net)
                
                
                24,952
                
                
                
                23,877Inventories
      (net of allowances)
                
                
                374,581
                
                
                
                465,881Prepaid
      expenses and other current assets
                
                
                254,351
                
                
                
                85,344Total
      current assets
                
                
                1,969,116
                
                
                
                2,193,283Fixed
      assets, net
                
                
                1,710,261
                
                
                
                1,876,738Patents,
      net
                
                
                2,978,375
                
                
                
                3,165,550TOTAL
      ASSETS
                
                $
                6,657,752
                
                
                $
                7,235,571LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                271,363
                
                
                $
                345,762Accrued
      liabilities
                
                
                195,683
                
                
                
                88,081Total
      current liabilities
                
                
                467,046
                
                
                
                433,843STOCKHOLDERS’
      EQUITYSeries
      B Convertible Preferred Stock, $.01 par value:Authorized
      – 15,000,000; shares issued and outstanding – 8,340,000 shares at
      September 30, 2009 (no shares at December 31, 2008) $1,668,000 liquidation
      value plus accumulated and unpaid dividends of $21,811 as of September 30,
      2009
                
                
                83,400
                
                
                
                -Common
      stock, $.01 par value:Authorized—160,000,000
      sharesIssued
      and outstanding 70,107,615 shares at September 30, 2009 (68,613,598 shares
      at December 31, 2008)
                
                
                701,076
                
                
                
                686,136Additional
      paid-in capital
                
                
                20,946,634
                
                
                
                17,835,865Accumulated
      (deficit)
                
                
                (15,540,404
                )
                
                
                (11,720,273
                )TOTAL
      STOCKHOLDERS’ EQUITY
                
                
                6,190,706
                
                
                
                6,801,728TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                6,657,752
                
                
                $
                7,235,571





Note: The
balance sheet at December 31, 2008 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 condensed financial statements.




3




SpectraScience,
Inc. and Subsidiary


CONDENSED
STATEMENTS OF OPERATIONS


(Unaudited)




Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenue
                  
                  $
                  1,875
                  
                  
                  $
                  52,010
                  
                  
                  $
                  122,266
                  
                  
                  $
                  60,560Cost
      of revenue
                  
                  
                  638
                  
                  
                  
                  22,079
                  
                  
                  
                  81,418
                  
                  
                  
                  27,130Gross
      profit
                  
                  
                  1,237
                  
                  
                  
                  29,931
                  
                  
                  
                  40,848
                  
                  
                  
                  33,430Operating
      expenses:Research
      and development
                  
                  
                  445,888
                  
                  
                  
                  550,283
                  
                  
                  
                  1,180,051
                  
                  
                  
                  1,619,550General
      and administrative
                  
                  
                  565,130
                  
                  
                  
                  389,159
                  
                  
                  
                  1,555,441
                  
                  
                  
                  1,696,865Sales
      and marketing
                  
                  
                  104,479
                  
                  
                  
                  167,419
                  
                  
                  
                  288,587
                  
                  
                  
                  593,254Total
      operating expenses
                  
                  
                  1,115,497
                  
                  
                  
                  1,106,861
                  
                  
                  
                  3,024,079
                  
                  
                  
                  3,909,669Operating
      (loss)
                  
                  
                  (1,114,260
                  )
                  
                  
                  (1,076,930
                  )
                  
                  
                  (2,983,231
                  )
                  
                  
                  (3,876,239
                  )Other
      expense (income), net
                  
                  
                  (724
                  )
                  
                  
                  (24,021
                  )
                  
                  
                  21
                  
                  
                  
                  (113,112
                  )Net
      (Loss)
                  
                  
                  (1,113,537
                  )
                  
                  
                  (1,052,909
                  )
                  
                  
                  (2,983,252
                  )
                  
                  
                  (3,763,127
                  )Deemed
      Dividend on Preferred Stock
                  
                  
                  (544,924
                  )
                  
                  
                  -
                  
                  
                  
                  (836,879
                  )
                  
                  
                  -Accrued
      but Unpaid Dividend on Preferred Stock
                  
                  
                  (21,811
                  )
                  
                  
                  -
                  
                  
                  
                  (21,811
                  )
                  
                  
                  -Net
      (loss) applicable to common stockholders
                  
                  $
                  (1,680,272
                  )
                  
                  
                  (1,052,909
                  )
                  
                  $
                  (3,841,942
                  )
                  
                  $
                  (3,763,127
                  )Basic
      and diluted net (loss) per share
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.06
                  )
                  
                  $
                  (0.06
                  )Weighted
      average common shares outstanding
                  
                  
                  69,774,282
                  
                  
                  
                  68,365,617
                  
                  
                  
                  69,669,059
                  
                  
                  
                  66,657,026





See
accompanying notes to unaudited condensed financial statements.




4




SpectraScience,
Inc. and Subsidiary


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY


For the
nine months ended September 30, 2009


(Unaudited)




Preferred Stock
                      
                      
                      Common Stock
                      
                      
                      Additional
                        Paid-In
                      
                      
                      Accumulated
                        (Deficit)
                      
                      
                      Total
                        Stockholders’Shares
                      
                      
                      Amount
                      
                      
                      Shares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      
                      
                      
                      EquityBalance,
      December 31, 2008
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      68,613,598
                      
                      
                      $
                      686,136
                      
                      
                      $
                      17,835,865
                      
                      
                      $
                      (11,720,273
                      )
                      
                      $
                      6,801,728Stock
      based compensation - consultants
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      147,690
                      
                      
                      
                      -
                      
                      
                      
                      147,690Stock
      based compensation - employees
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      456,397
                      
                      
                      
                      -
                      
                      
                      
                      456,397Exercise
      of stock options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      400,000
                      
                      
                      
                      4,000
                      
                      
                      
                      56,000
                      
                      
                      
                      -
                      
                      
                      
                      60,000Issuance
      of Common Stock
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,094,017
                      
                      
                      
                      10,940
                      
                      
                      
                      262,563
                      
                      
                      
                      -
                      
                      
                      
                      273,503Sale
      of Series B Preferred Stock and warrants
                      
                      
                      8,340,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,434,640
                      
                      
                      
                      -
                      
                      
                      
                      1,434,640Deemed
      Dividend on Preferred Stock
                      
                      
                      -
                      
                      
                      
                      83,400
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      753,479
                      
                      
                      
                      (836,879
                      )
                      
                      
                      -Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      (2,983,252
                      )
                      
                      
                      (2,983,252
                      )Balance,
      September 30, 2009
                      
                      
                      8,340,000
                      
                      
                      $
                      83,400
                      
                      
                      
                      70,107,615
                      
                      
                      $
                      701,076
                      
                      
                      $
                      20,946,634
                      
                      
                      $
                      (15,540,404
                      )
                      
                      $
                      6,190,706





See
accompanying notes to unaudited condensed financial statements.




5




SpectraScience,
Inc. and Subsidiary


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months Ended
                  September 30,2009
                
                
                2008OPERATING
      ACTIVITIES:Net
      (loss)
                
                $
                (2,983,252
                )
                
                $
                (3,763,127
                )Adjustments
      to reconcile net (loss) to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                213,106
                
                
                
                209,300Luma
      equipment write-down
                
                
                155,755Stock-based
      compensation employees
                
                
                456,397
                
                
                
                731,953Stock-based
      compensation consultants
                
                
                147,690
                
                
                
                41,532Fair
      market value of stock issued for services
                
                
                -
                
                
                
                7,500Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (1,075
                )
                
                
                (52,498
                )Inventory
                
                
                91,300
                
                
                
                (283,182
                )Prepaid
      expenses and other current assets
                
                
                104,497
                
                
                
                (6,887
                )Accounts
      payable
                
                
                (74,399
                )
                
                
                (37,005
                )Accrued
      liabilities
                
                
                107,602
                
                
                
                40,417Net
      cash (used in) operating activities
                
                
                (1,782,379
                )
                
                
                (3,111,997
                )INVESTING
      ACTIVITIES:Purchase
      of certificate of deposit
                
                
                -
                
                
                
                (1,000,000
                )Redemption
      of certificate of deposit
                
                
                -
                
                
                
                900,000Purchases
      of fixed assets
                
                
                (15,210
                )
                
                
                (50,222
                )Net
      cash (used in) investing activities
                
                
                (15,210
                )
                
                
                (150,222
                )FINANCING
      ACTIVITIESProceeds
      from issuance of common stock
                
                
                -
                
                
                
                445,351Net
      proceeds from issuance of preferred stock
                
                
                1,434,640
                
                
                
                -Proceeds
      from exercise of stock options
                
                
                60,000
                
                
                
                3,000Net
      cash provided by financing activities
                
                
                1,494,640
                
                
                
                448,351Net
      increase (decrease) in cash and cash equivalents
                
                
                (302,949
                )
                
                
                (2,813,868
                )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                1,618,181
                
                
                
                5,188,177CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                1,315,232
                
                
                $
                2,374,309Supplemental
      disclosure of non-cash operating and financing activities:Stock
      issued at fair value for prepaid stock issuance cost
                
                $
                273,504
                
                
                $
                -





See
accompanying notes to unaudited condensed financial statements.




6




SpectraScience,
Inc.


Notes
to Unaudited Condensed Financial Statements


September
30, 2009





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. From 1996, the
Company primarily focused on developing the WavSTAT ® Optical Biopsy System
(“WavSTAT System”). The “Company” refers to SpectraScience, Inc. and its wholly
owned subsidiary Luma Imaging Corporation.





The
Company has developed and received FDA 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
physically remove tissue from the body to make such determination. The WavSTAT
System operates by using cool, safe laser light to analyze tissue, enabling the
physician to make an instant diagnosis during endoscopy and, if warranted, to
begin immediate treatment during the same procedure. The WavSTAT is FDA approved
for colon cancer detection.





On
November 6, 2007, the Company acquired the assets of Luma Imaging Corporation
(“LUMA ® ”) and
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 existing
WavSTAT technology provides the Company with a broad suite of fluorescence-based
intellectual property and know-how. LUMA received FDA approval as an adjunct to
colposcopy in March 2006.





Basis
of Presentation





The
accompanying unaudited condensed 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 nine-month period ended September 30, 2009 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2009. 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, 2008.





Liquidity
and Going Concern





The
Company has recently begun marketing its products. As of September 30, 2009, the
Company had working capital of $1,502,070 and a cash balance of $1,315,232. In
addition, for the nine-month period ending September 30, 2009, the Company used
($1,782,379) to fund operating activities.





From May
through September 30, 2009, the Company sold 8,340,000 shares of Series B
Convertible Preferred Stock to accredited investors at a price of $0.20 per
share for an aggregate consideration of $1,668,000. The Company received net
cash proceeds of $1,434,640 after the payment of finder’s fees and expenses of
$233,360. The Series B Convertible Preferred Stock was sold as a component of a
Unit offering described in more detail under the “Shareholders’ Equity”
paragraph below.





On
January 30, 2009, the Company entered into a Common Stock Purchase Agreement
with Fusion Capital Fund II. Under the Purchase Agreement, Fusion Capital is
obligated, under certain conditions, to purchase shares from us in an aggregate
amount of $6.0 million from time to time over a twenty-four (24) month
period.





SpectraScience
expects to incur significant additional operating losses through at least 2010,
as we complete clinical trials, begin outcome-based clinical studies and
increase sales and marketing efforts to commercialize the WavSTAT systems. If we
do not receive sufficient
funding, the Company may be unable to continue as a going concern. We may incur
unknown expenses or we may not be able to meet our revenue forecast, and one or
more of these circumstances would require us to seek additional capital. We 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 attains profitability and positive cash
flows from operations.





7




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





We
recognize revenue, net of discounts, from sales of our medical devices and sales
of disposable supplies related to our medical devices when items have been
shipped, when title transfers, when the selling price is fixed or determinable,
and when collection of the resulting receivable is reasonably assured. Terms of
sale are generally FOB origin, reflecting that title and risk of loss are
assumed by the purchaser at the shipping point.





Consolidation





The
accompanying consolidated financial statements include the accounts of
SpectraScience, Inc. and its wholly-owned subsidiary Luma Imaging Corporation.
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
development stage company, 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
require 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 assumptions used to value the consideration issued, the
assets acquired in the Luma acquisition and the realization of intangible
assets. Actual results could differ from those estimates.





Stock-Based
Compensation





All
issuances of stock options or other equity instruments employees and to
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 stockholders’ 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.





For the
nine-months ended September 30, 2009 and 2008, stock-based compensation was
approximately $604,000 and $773,000, respectively. Stock-based compensation
expense of approximately $195,000 and $361,000 was recognized in research and
development expenses for the nine months ended September 30, 2009 and 2008,
respectively. Stock-based compensation of approximately $439,000 and $370,000
was recognized in general and administrative expenses for the nine months ended
September 30, 2009 and 2008, respectively. Stock-based compensation expense of
approximately ($30,000) and $42,000 was recognized in sales and marketing
expense for the nine months ended September 30, 2009 and 2008, respectively. The
benefit recorded in sales and marketing stock option expense was the result of
recapturing previously recognized expense as a result of option holder’s
terminations. The Company previously adopted the fair value recognition
provisions of future accounting standards prospectively for all employee and
consultant awards granted, modified, or settled by the Company on August 2,
2004. Accordingly, changes in accounting standards as they relate to stock-based
compensation have not had a material impact on the comparability of Company’s
financial statements.




8




As of
September 30, 2009, the Company had one stock-based employee compensation plan
(the “Option Plan"). The Option Plan provides for the grant of incentive stock
options (“ISOs") to full-time employees (who may also be directors) and
nonqualified stock options ("NSOs") to non-employee directors, consultants,
vendors or providers of services and expires on January 30, 2011. 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 Option Plan equals 15% of the outstanding shares of the
Company, totaling 10,516,142 reserved at September 30, 2009. At September 30,
2009 the Company had outstanding 7,350,000 options under the Option Plan
representing approximately 10.48% of the outstanding shares (4,450,000 of which
were exercisable), with 3,166,142 available for future issuance. Awards under
the Company’s Option Plan generally vest over three years.





The fair
value of options granted were estimated at the date of grant using a
Black-Scholes option-pricing 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 all stock options for the nine months ending September 30,
2009 and 2008:




2009
                  
                  
                  2008Expected
      life
                  
                  5
      years
                  
                  
                  5 yearsRisk-free
      interest rate
                  
                  
                  2.02
                  %
                  
                  
                  3.64
                  %Expected
      volatility
                  
                  
                  122
                  %
                  
                  
                  133
                  %Expected
      dividend yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %





In
addition to the above, management estimated the forfeitures on employee options
under the Option Plan would have negligible effects because such forfeitures
would be a very small percentage. Recent forfeitures are due to layoffs which
were not expected to occur at the grant date of these options. Management
believes that options granted to remaining employees 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 5-year U.S. Treasury rate as published at the
time of making the calculations.





Volatility
is a calculation based on the Company’s historical stock price over
approximately, the past 5 years (expected life of stock options). 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, comparables to other companies in our area of interest,
the current development 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).





Options
                  Available
                  For Grant
                
                
                Plan Options
                  Outstanding
                
                
                Weighted Average
                  Exercise Price Share
                
                
                Weighted-Average
                  Remaining
                  Contractual Term
                  (years)
                
                
                Aggregate
                  Intrinsic ValueOutstanding
      December 31, 2008
                
                
                2,142,040
                
                
                
                8,150,000
                
                
                $
                0.58
                
                
                
                8.38Options
      granted
                
                
                (600,000
                )
                
                
                600,000
                
                
                
                0.29
                
                
                
                10.00Options
      exercised
                
                
                400,000
                
                
                
                (400,000
                )
                
                
                0.15
                
                
                
                -Additional
      options available
                
                
                224,102Forfeited
      or expired
                
                
                1,000,000
                
                
                
                (1,000,000
                )
                
                
                -
                
                
                
                -Outstanding
      at September 30, 2009
                
                
                3,166,142
                
                
                
                7,350,000
                
                
                $
                0.58
                
                
                
                7.80
                
                
                $
                -Exercisable
      at September 30, 2009
                
                
                
                
                
                
                4,450,000
                
                
                $
                0.71
                
                
                
                6.91
                
                
                $
                -





The total
intrinsic value of options exercised during the nine months ended September 30,
2009 and 2008 was $160,000 and $13,000, respectively. At September 30, 2009,
total unrecognized estimated employee and director compensation cost related to
non-vested stock options granted prior to that date is approximately $560,000,
which is expected to be recognized over the next two years.




9




Impairment
or Disposal of Long-Lived Intangible Assets





Current
accounting standards address financial accounting and reporting for the
impairment or disposal of long-lived intangible assets (such as our patents).
Accounting standards require that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable. If the cost basis of a long-lived asset is greater than
the projected future undiscounted net cash flows from such asset (excluding
interest), an impairment loss is recognized. Impairment losses are calculated as
the difference between the cost basis of an asset and its estimated fair value.
The Company adopted these accounting standards on August 2, 2004. Management
believes no impairment exists at September 30, 2009.





Inventories





Inventories
consisted of the following at September 30, 2009 and December 31,
2008:





September
                    30, 2009
                  
                  
                  December 31, 2008Raw
      materials
                  
                  $
                  132,172
                  
                  
                  $
                  205,651Finished
      goods
                  
                  
                  242,409
                  
                  
                  
                  260,230Totals
                  
                  $
                  374,581
                  
                  
                  $
                  465,881





Earnings
(Loss) Per Share





Basic
earnings (loss) per share is computed by dividing net income (loss) available to
common stockholders 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 nine months ended September 30, 2009 and 2008, 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 three and nine months
ended September 30, 2009 include outstanding stock options, convertible
preferred stock and warrants. As of September 30, 2009, there were 8,340,000
shares of Series B Convertible Preferred Stock, warrants to purchase 5,721,966
shares of Common Stock and 7,350,000 stock options outstanding.





Recent
Accounting Pronouncements





In April
2009, accounting standards related to “ Interim Disclosures about Fair Value
of Financial Instruments ” require disclosures about fair value of
financial instruments in interim and annual financial statements. These
standards are effective for periods ending after June 15, 2009. The Company
adopted these standards effective for the quarter ending September 30, 2009. The
adoption did not have an impact on the Company’s financial position or results
of operations.





In May
2009, more specific accounting standards related to “ Subsequent Events ”
established general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued.
The Company adopted these standards for the quarter ending June 30,
2009.





In June
2009, a new accounting standard related to the renumbering of all accounting
standards was issued. Under the standard, Accounting Standards Codification
(Codification) will become the source of authoritative U.S. generally accepted
accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under the authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the effective date of
this Statement, the Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. This statement is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. In the FASB’s
view, the issuance of this Statement and the Codification will not change GAAP,
except for certain nonpublic nongovernmental entities. The Company does not
expect that the adoption of this Statement will have a material impact on the
Company’s financial statements.




10





Fair
Value of Financial Instruments





The
carrying amount of the Company’s cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate their estimated fair values
due to the short-term maturities of those financial instruments.





3.
Stockholders Equity





Common
Stock





On
January 30, 2009, we entered into a Common Stock Purchase Agreement with Fusion
Capital Fund II, an Illinois limited liability company. Under the Purchase
Agreement, Fusion Capital is obligated, under certain conditions, to purchase
shares from us in an aggregate amount of $6.0 million from time to time over a
twenty-four (24) month period.  Under the terms of the Purchase
Agreement, on the date we entered into the agreement, we issued Fusion Capital a
commitment fee consisting of 1,094,017 restricted shares of our common
stock.





Series
B Convertible Preferred Stock and Warrants





On June
22, 2009, the Board of Directors designated 15,000,000 of the Company’s
undesignated capital stock as Series B Convertible Preferred Stock (the
“Preferred”) with par value of $0.01 per share. The Preferred is convertible
into an equal number of shares of the Company’s Common Stock based upon an
initial conversion price of $0.20 per share and carries a liquidation preference
of like amount plus declared but unpaid cumulative dividends. The Preferred is
entitled to receive cumulative dividends in preference to any dividend which may
be declared on the Common Stock at the rate of 8% of the original issue price.
In addition, the Preferred has rights which provide for (i) dividend payments
senior to those with respect to common shares, (ii) voting rights equal to the
number of common shares into which the Preferred is convertible and (iii)
adjustments to the conversion price in the event of stock dividends, stock
splits or other effective stock subdivisions. The Preferred is subject to
automatic conversion in the event of (a) an underwritten public offering
exceeding $10 million in gross proceeds to the Company or, (b) the approval of
67% of the Preferred holders or (c) in the event that the underlying conversion
shares become freely tradable and the average daily trading volume of the
underlying stock is not less than 50,000, nor the average closing price of the
underlying stock is not less than the conversion price then in effect for 10
consecutive trading days.





From May
through September 30, 2009, as a part of a Units offering, the Company sold
8,340,000 shares of its Preferred to accredited investors for an aggregate
consideration of $1,668,000. The Company received net cash proceeds of
$1,434,640 after the payment of finders’ fees and expenses of $233,360. In
addition, the Company issued five-year warrants to purchase 4,170,000 additional
shares of Common Stock at an initial exercise price of $0.30 per share and
764,000 agent warrants at an initial exercise price of $0.35 per share. The fair
value of the agent warrants as determined using the Black-Scholes Model is
approximately $249,000. The convertible feature of the Preferred and the
terms of the warrants provide for a rate of conversion or exercise that was
below market value at issuance. Such feature, as it specifically relates to the
convertible feature of the Preferred, is characterized as a “Beneficial
Conversion Feature” (“BCF”). Pursuant to existing accounting standards, the
estimated relative fair values of the BCF and the warrants, in approximate
amounts of $837,000 and $722,000, respectively, were calculated. The value of
the BCF was determined utilizing an intrinsic value method with the fair value
of the warrants determined using the Black-Scholes option-pricing model at the
date of issuance. The warrant fair values were determined assuming a five-year
term, stock volatility of between approximately 124% and 123% and risk-free
interest rates of between 1.98% and 2.47%. The stand-alone fair value of the BCF
was then determined to be higher than the remaining proceeds received and,
accordingly, the value assigned to the BCF was limited to the gross proceeds
received from the offering net of the fair value of the warrants. Per the
guidance of accounting standards, the value of the BCF is treated as a deemed
dividend to the Preferred stockholders and, due to the potential immediate
convertibility of the Preferred stock at issuance, this value is recorded as an
increase to both additional-paid-in-capital and accumulated deficit at the time
of issuance.




4.
Subsequent Events





Subsequent
events have been evaluated through November 16, 2009, the date the financial
statements are filed with the Securities and Exchange Commission. Through that
date, there were no events requiring disclosure, except for the sale to
accredited investors of an additional 13,310,000 shares of Series B Convertible
Preferred Stock, including Common Stock purchase warrants to purchase 6,655,000
shares at $0.30 per share and 1,331,000 agent warrants to purchase Common Stock
at $0.35 per share. The Company received $2,662,000 gross proceeds from the
sale, and net proceeds of $2,359,000 after payment of $303,000 in finders’
fees.




11




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




Safe
Harbor Statement Under the Private Securities Litigation Reform Act of
1995
 
 This
Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in this Report, or in our
future filings with the SEC, in our press releases and in oral statements made
with the approval of an authorized executive officer, the words or phrases
“anticipates,” “estimates,” “expects,” “will likely result,” “projects,”
“believes,” “intends,” or similar expressions are intended to identify such
forward-looking statements, but are not the exclusive means of identifying such
statements. These forward-looking statements involve risks and uncertainties
that may cause our actual results to differ materially from the results
discussed in the forward-looking statements.
  We
caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date made. We undertake no obligation to revise any
forward-looking statements in order to reflect events or circumstances after the
date of such statements. Readers are urged to carefully review and consider the
various disclosures made by us in this Report and other reports we file with the
SEC that attempt to advise interested parties of the risks and factors that may
affect our business. 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 covering the year ended December 31, 2008.
 
 Business
 
 SpectraScience,
Inc. 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 (“WavSTAT”) is SpectraScience's first
fully developed product to incorporate its proprietary Laser Induced
Fluorescence technology for worldwide clinical use. It is approved by the FDA
for use during endoscopy of the colon when screening for colon cancer. The
Company’s second application of this technology for detecting pre-esophageal
cancer is undergoing a clinical trial at four institutions. Upon completion of
the trial, the Company plans to file with the FDA seeking permission to begin
marketing for that indication for use. SpectraScience believes its core
technology is a hardware platform technology that can be developed for use in
many areas of the human body such as early detection of pre-cancers in the
lung.
 
 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
 
 The
Company currently has FDA approval to market the WavSTAT System for detecting
pre-cancerous and cancerous tissue in the colon and to market the LUMA System
for use as an adjunct to colposcopy in the detection of early stage cancer and
pre-cancer of the cervix. Our plan is to add another indication for use in
detecting pre-cancer and cancer in the esophagus. Over the next twelve months,
SpectraScience intends to:
 
 ·
              Continue
      selling the WavSTAT System in the US and international markets for the
      detection and treatment of pre-cancer and cancer of the
    colon.
 
 ·
              Complete
      WavSTAT System clinical trials related to the diagnosis of esophageal
      cancers.
 
 ·
              Continue
      marketing and selling the WavSTAT System in international markets for the
      detection of pre-cancer and cancer of the esophagus and in the
      US market after FDA approval.
 
 ·
              Continue
      selling or renting the LUMA System in the US as an adjunct to colposcopy
      to specialized OB/GYN clinics, managed care organizations (early detection
      and future cost avoidance), teaching hospitals and medical environments
      where nurse practitioners and/or medical clinicians can leverage our
      technology for effective early
diagnosis.
 
 ·
              Enhance
      our San Diego facility and grow our organization to allow for a larger
      manufacturing base for both WavSTAT and LUMA Systems and also to continue
      the design and planning for the next generation of fluorescence-based
      systems.
 
 Recent
Accounting Pronouncements
 
 In April
2009, accounting standards related to “ Interim Disclosures about Fair Value
of Financial Instruments ” require disclosures about fair value of
financial instruments in interim and annual financial statements. These
standards are effective for periods ending after June 15, 2009. The Company
adopted these standards effective for the quarter ending September 30, 2009. The
adoption did not have an impact on the Company’s financial position or results
of operations.
 
 In May
2009, more specific accounting standards related to “ Subsequent Events ”
established general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued.
The Company adopted these standards for the quarter ending September 30,
2009.
  12
  In June
2009, a new accounting standard related to the renumbering of all accounting
standards was issued. Under the standard, Accounting Standards Codification
(Codification) will become the source of authoritative U.S. generally accepted
accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under the authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the effective date of
this Statement, the Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. This statement is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. In the FASB’s
view, the issuance of this Statement and the Codification will not change GAAP,
except for certain nonpublic nongovernmental entities. The Company does not
expect that the adoption of this Statement will have a material impact on the
Company’s financial statements.
 
 Results
of Operations
 
 In
response to the global economic recession, SpectraScience eliminated all but the
essential expenses required to focus on manufacturing, selling and marketing the
WavSTAT System in international markets, primarily Europe. As a result, in all
expense categories described below, expenses are materially lower in the current
period as compared to the prior period one year ago.
 
 For
the Three Months ended September 30, 2009 and 2008
 
 The
Company recognized approximate revenue of $2,000 and $52,000 for the three
months ended September 30, 2009 and 2008, respectively. The decrease is a result
of the general downturn in the world economy, as compared to the quarter one
year ago.
 
 Overall
research and development expenses for the three months ended September 30, 2009
and 2008 were approximately $446,000 and $550,000, respectively. The $104,000
decrease in research and development expenses related to approximate decreases
in payroll expense of $179,000, clinical expense of $58,000, production supplies
expense of $17,000, and all other expense of $14,000 offset by increases in
inventory obsolescence of approximately $154,000 and consulting expense of
approximately $10,000. The reduction in all expense categories is a result of a
concerted effort to minimize expenses due to the global economic recession. The
increase in inventory obsolescence expense is primarily the result of a shift to
manufacturing diagnostic systems that utilize more current
technologies.
 
 General
and administrative expenses for the three months ended September 30, 2009 and
2008 were approximately $565,000 and $389,000, respectively. The $176,000
increase for the three months ended September 30, 2009 compared to the three
months ended September 30, 2008 was due to approximate increases of $62,000 in
professional fees expense, $66,000 in stock compensation expense, $34,000 in
amortization expense, $22,000 in bad debt expense and $10,000 in investor
relations expense, offset by approximate decreases of $15,000 in payroll expense
and $3,000 in all other expenses. The overall increases were a result of
increased consultant utilization after an earlier reduction in payroll due to
the poor overall economy and of increases in non-cash amortization and stock
compensation expense.
 
 Sales and
marketing expenses for the three months ended September 30, 2009 and 2008 were
$104,000 and $167,000, respectively. The overall expense decrease of
approximately $63,000 was due to approximate decreases of $70,000 in payroll
expense, $14,000 in trade show expense and $2,000 in stock compensation expense
offset by approximate increases of $19,000 in travel expense and $4,000 in all
other expenses. The overall decreases were a result of headcount expense
reductions due to the Company’s response to the downturn in the overall
economy.
 
 Other
income, net, for the three months ended September 30, 2009 and 2008 decreased by
approximately $25,000. The reduction was primarily due to a decrease in interest
income due to lower comparative interest bearing cash balances during the three
months ended September 30, 2009 as compared to the same quarter one year
ago.
 
 The net
losses for the three-month periods ended September 30, 2009 and 2008 were
approximately ($1,114,000) and ($1,053,000), respectively. Of the net loss for
the quarter ended September 30, 2009 approximately $232,000 was comprised of
non-cash stock-option expense.
 
 For
the Nine Months ended September 30, 2009 and 2008
 
 The
Company recognized approximate revenue of $122,000 and $61,000 for the nine
months ended September 30, 2009 and 2008, respectively. The increase is a result
of the Company beginning to ramp up its sales primarily as a result of the
completion of the WavSTAT System platform for sale and the introduction of the
product in Europe, as compared to the comparable period one year
ago.
  Overall
research and development expenses for the nine months ended September 30, 2009
and 2008 were approximately $1,180,000 and $1,619,000, respectively. The
approximate $439,000 decrease was comprised of decreases of approximately
$322,000 in payroll expense, $166,000 in stock compensation expense, $118,000 in
engineering development expense, $37,000 in consulting expense, $22,000 in
production supplies expense and $27,000 in all other expense offset by increases
of approximately $253,000 in obsolete inventory expense. The reduction in
overall expenses is a result of an effort to minimize expenses due to the global
economic recession. The increase in inventory obsolescence expense is primarily
the result of a shift to manufacturing diagnostic systems that utilize more
current technologies.
  13
  General
and administrative expenses for the nine months ended September 30, 2009 and
2008 were approximately $1,555,000 and $1,696,000, respectively. The $141,000
reduction was comprised of decreases of approximately $130,000 in payroll
expense, $60,000 in travel expense, $123,000 in professional expense and $19,000
in other expense offset by approximate increases of $91,000 in financing fee
amortization, $68,000 in stock compensation expense and $32,000 in bad debt
expense. The overall decrease was a result of headcount and discretionary
expense reductions due to the Company’s response to the downturn in the global
economy. Certain expense increases were generally a result of increased
consultant utilization after an earlier reduction in headcount and increases in
non-cash amortization.
 
 Sales and
marketing expenses for the nine months ending September 30, 2009 and 2008 were
approximately $288,000 and $593,000, respectively. The $304,000 reduction was
comprised of approximate decreases of $132,000 in payroll expense, $72,000 in
stock compensation expense, $77,000 in advertising and trade shows and $3,000 in
other expense offset by an $18,000 increase in travel expense. The reduction in
stock compensation expense is primarily the result of employee headcount
reductions and the associated re-capture of previously recognized stock
compensation expense. The overall decrease was a result of a reduction in sales
headcount and related sales expenses in response to the overall economic
downturn.
 
 Other
income, net, for the nine months ended September 30, 2009 and 2008 decreased
approximately $113,000. The reduction was primarily due to a decrease in
interest income due to lower comparative interest bearing cash balances held
during the nine months ended September 30, 2009 as compared to the same quarter
one year ago.
 
 As a
result of the above, the approximate net loss for the nine months ended
September 30, 2009 and 2008 was ($2,983,000) and ($3,763,000), respectively. The
decreased net loss was due to decreases in overall operating expense as a result
of planned expense reductions taken as a result of the overall recessionary
market environment. Of the net loss for the nine months ended September 30, 2009
approximately $604,000 was comprised of non-cash stock-option
expense.
 
 Liquidity
and Capital Resources
 
 On
September 30, 2009, the Company had a cash balance of $1,315,252 as compared
with a cash balance of $1,618,181 at December 31, 2008, representing a decrease
of ($302,929) in cash for the period. The cash balances decreased primarily due
to working capital used in operations off set by sales of Series B Convertible
Preferred Stock as described above. There have been minimal capital equipment
expenditures and none are foreseen.
 
 From May
through September 30, 2009, as a part of a Units offering, the Company sold
8,340,000 shares of Series B Convertible Preferred Stock to accredited investors
for an aggregate consideration of $1,668,000. The Company received net cash
proceeds of $1,434,640 after the payment of finders’ fees and expenses of
$233,360. From September 30, 2009 until November 16, 2009 the Company sold an
additional 13,310,000 shares of Series B Convertible Preferred Stock, including
Common Stock purchase warrants to purchase 6,655,000 shares at $0.30 per share
and 1,331,000 agent warrants to purchase Common Stock at $0.35 per share. The
Company received $2,662,000 gross proceeds from the sale, and net proceeds of
$2,359,000 after payment of $303,000 in finders' fees.
 
 On
January 30, 2009, the Company entered into a Common Stock Purchase Agreement
with Fusion Capital Fund II. Under the Purchase Agreement, Fusion Capital is
obligated, under certain conditions, to purchase shares from us in an aggregate
amount of $6.0 million from time to time over a twenty-four (24) month period.
At September 30, 2009, the Company had not sold any shares to Fusion
Capital.
 
 SpectraScience
expects to incur significant additional operating losses through at least 2010,
as we complete clinical trials, begin outcome-based clinical studies and
increase sales and marketing efforts to commercialize the WavSTAT systems. If we
do not receive sufficient
funding, the Company may be unable to continue as a going concern. We may incur
unknown expenses or we may not be able to meet our revenue forecast, and one or
more of these circumstances would require us to seek additional capital. We 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 attains
profitability and positive cash flows from operations.
 
 Item 3. Quantitative and Qualitative
Disclosures About Market Risk
 
 Not
required
  Item 4. Controls and
Procedures
 Not
Required
  14
  Item 4T. 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 of
September 30, 2009 (the “Evaluation Date”). We reviewed in particular whether
the information required to be disclosed is recorded, processed, summarized and
reported  appropriately within the required time periods and was
accumulated and communicated to management in a timely manner. We conducted our
evaluation consistent with the COSO review framework. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures provide reasonable assurance
that:
 
 ·
              Financial
      records are maintained in reasonable detail to accurately and fairly
      reflect the transactions and dispositions of the
  Company.·
              Transactions
      are recorded as necessary to permit preparation of financial statements in
      accordance with generally accepted accounting principles, and receipts and
      expenditures are being made in accordance with authorizations of
      management and directors of the Company.·
              Internal
      controls provide reasonable assurance to prevent or detect in a timely
      manner unauthorized acquisitions, use or dispositions of the Company that
      could have a material effect on the financial
  statements
 
 Evaluation
of Internal Control over Financial Reporting
 
 Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The
Company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with authorization of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could
have a material effect on the financial statements.
 
 Under
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the
framework within the Internal
Control-Integrated Framework, management concluded that our internal
control over financial reporting was effective as of September 30,
2009.
 
 Management’s
assessment of the effectiveness of our internal control over financial reporting
as of September 30, 2009 has not been attested to by McGladrey & Pullen,
LLP, the Company’s independent registered public accounting firm.
 
 Changes
in Internal Financial Controls
 
 Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated any changes to our
internal controls over financial reporting which may have occurred during the
quarter ended September 30, 2009. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that there were no changes in the
Company’s internal controls over financial reporting during the quarter ended
September 30, 2009 which have materially affected, or are likely to materially
affect our internal controls over financial reporting.
  15
 
 PART
      II
              OTHER
      INFORMATIONItem 1.
              Legal
      ProceedingsNoneItem
      1A.
              Risk
      FactorsNo
      response required of smaller reporting companiesItem
      2.
              Unregistered
      Sales of Equity Securities and Use of ProceedsFrom
      May through September 2009, thze Company sold 8,340,000 shares of Series B
      Convertible Preferred Stock to accredited investors at a price of $0.20
      per share for an aggregate consideration of $1,668,000. The Company
      received net cash proceeds of $1,531,600 after the payment of finder’s
      fees and expenses of $233,360.These
      transactions were exempt from registration pursuant to Regulation D
      promulgated under the Securities Act of 1933.Item
      3.
              Defaults
      Upon Senior SecuritiesNoneItem 4.
              Submission
      of Matters to a Vote of Security
Holders
 
 Our
annual meeting of shareholders was held on September 21, 2009. At the annual
meeting, Jim Hitchin, Mark McWilliams, Stanley Pappelbaum, M.D., Chester
Sievert, Jr., the Honorable Tommy Thompson, and F. Duwaine
Townsen were elected as directors for terms expiring at the annual meeting
of our shareowners in 2010. The following table shows the vote totals with
respect to the election of these directors:
  For
                        
                        
                        WithheldJim
      Hitchin
                        
                        
                        60,640,973
                        
                        
                        
                        191,764Mark
      McWilliams
                        
                        
                        60,649,706
                        
                        
                        
                        183,031Stanley
      Pappelbaum, MD
                        
                        
                        60,645,993
                        
                        
                        
                        186,744Chester
      E. Sievert
                        
                        
                        60,637,051
                        
                        
                        
                        195,686Hon.
      Tommy Thompson
                        
                        
                        60,640,971
                        
                        
                        
                        191,766F.
      Duwaine Townsen
                        
                        
                        60,645,723
                        
                        
                        
                        187,014
 
 At the
annual meeting our shareholders also approved an amendment to our Articles of
Incorporation to authorize an additional 50,000,000 shares of Common Stock
($0.01 par value) and 50,000,000 undesignated shares of capital stock. The
following table shows the vote totals with respect to the Amendment to our
Articles of Incorporation:
  Votes
      For
                      
                      Votes
      Against
                      
                      Abstentions58,956,471
                      
                      1,648,119
                      
                      228,147
 
 Item
      5.
                  Other
      InformationNoneItem
      6.
                  ExhibitsExhibit
      3.3
                  Certificate
      of Amendment to the Articles of Incorporation and complete Amended and
      Restated Articles of Incorporation.Exhibit
      31.1
                  Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.Exhibit
      31.2
                  Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.Exhibit
      32.1
                  Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.Exhibit
      32.2
                  Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.
  16
  SpectraScience,
Inc.
  FORM
10-Q
 
 September
30, 2009
  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
      November 16, 2009
                    /s/
      James HitchinJames
      HitchinPresident,
      Chief Executive Officer(Principal
      executive officer)Date
      November 16, 2009
                    /s/
      James DorstJames
      DorstChief
      Financial Officer(Principal
      Financial and Accounting
Officer)
 
 17