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 June 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 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
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       o
                Accelerated
      filer          
                   oNon-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 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 August 14, 2009 was 69,707,615 with an additional 4,650,000
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 3,577,966 shares of common stock at a weighted average price of $0.42
per share.









SPECTRASCIENCE,
INC.





FORM
10-Q


For
the Quarterly Period Ending June 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





June 30,
                                            2009
                                          
                                          
                                          December31,
                                            2008(Unaudited)
                                          
                                          
                                          (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                          
                                          $
                                          757,707
                                          
                                          
                                          $
                                          1,618,181Accounts
      Receivable (net)
                                          
                                          
                                          61,635
                                          
                                          
                                          
                                          23,877Inventories
      (net of allowances)
                                          
                                          
                                          319,507
                                          
                                          
                                          
                                          465,881Prepaid
      expenses and other current assets
                                          
                                          
                                          287,019
                                          
                                          
                                          
                                          85,344Total
      current assets
                                          
                                          
                                          1,425,868
                                          
                                          
                                          
                                          2,193,283Fixed
      assets, net
                                          
                                          
                                          1,871,058
                                          
                                          
                                          
                                          1,876,738Patents,
      net
                                          
                                          
                                          3,040,766
                                          
                                          
                                          
                                          3,165,550TOTAL
      ASSETS
                                          
                                          $
                                          6,337,692
                                          
                                          
                                          $
                                          7,235,571LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                                          
                                          $
                                          226,048
                                          
                                          
                                          $
                                          345,762Accrued
      liabilities
                                          
                                          
                                          67,584
                                          
                                          
                                          
                                          88,081Total
      current liabilities
                                          
                                          
                                          293,632
                                          
                                          
                                          
                                          433,843STOCKHOLDERS’
      EQUITYSeries
      B Convertible Preferred Stock, $.01 par value:Authorized
      – 15,000,000; shares issued and outstanding – 2,650,000 shares at June 30,
      2009 (no shares at December 31, 2008) $530,000 liquidation value plus
      accumulated and unpaid dividends of $3,318 as of June 30,
    2009
                                          
                                          
                                          26,500
                                          
                                          
                                          
                                          -Common
      stock, $.01 par value:Authorized—110,000,000
      sharesIssued
      and outstanding 69,707,615 shares at June 30, 2009 (68,613,598 shares at
      December 31, 2008)
                                          
                                          
                                          697,076
                                          
                                          
                                          
                                          686,136Additional
      paid-in capital
                                          
                                          
                                          19,202,431
                                          
                                          
                                          
                                          17,835,865Accumulated
      (deficit)
                                          
                                          
                                          (13,881,947
                                          )
                                          
                                          
                                          (11,720,273
                                          )TOTAL
      STOCKHOLDERS’ EQUITY
                                          
                                          
                                          6,044,060
                                          
                                          
                                          
                                          6,801,728TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                          
                                          $
                                          6,337,692
                                          
                                          
                                          $
                                          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
                        June 30,
                      
                      
                      Six Months Ended
                        June 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Revenue
                      
                      $
                      71,281
                      
                      
                      $
                      4,750
                      
                      
                      $
                      120,391
                      
                      
                      $
                      8,550Cost
      of revenue
                      
                      
                      58,645
                      
                      
                      
                      2,336
                      
                      
                      
                      80,780
                      
                      
                      
                      5,052Gross
      profit
                      
                      
                      12,636
                      
                      
                      
                      2,414
                      
                      
                      
                      39,611
                      
                      
                      
                      3,498Operating
      expenses:Research
      and development
                      
                      
                      268,319
                      
                      
                      
                      578,818
                      
                      
                      
                      734,163
                      
                      
                      
                      1,069,266General
      and administrative
                      
                      
                      525,537
                      
                      
                      
                      619,923
                      
                      
                      
                      990,312
                      
                      
                      
                      1,307,706Sales
      and marketing
                      
                      
                      (2,429
                      )
                      
                      
                      223,629
                      
                      
                      
                      184,107
                      
                      
                      
                      425,835Total
      operating expenses
                      
                      
                      791,427
                      
                      
                      
                      1,422,370
                      
                      
                      
                      1,908,582
                      
                      
                      
                      2,802,807Operating
      (loss)
                      
                      
                      (778,791
                      )
                      
                      
                      (1,419,956
                      )
                      
                      
                      (1,868,971
                      )
                      
                      
                      (2,799,309
                      )Other
      expense (income), net
                      
                      
                      3,585
                      
                      
                      
                      (53,577
                      )
                      
                      
                      748
                      
                      
                      
                      89,090Net
      (Loss)
                      
                      
                      (782,376
                      )
                      
                      
                      (1,366,379
                      )
                      
                      
                      (1,869,719
                      )
                      
                      
                      (2,710,219
                      )Deemed
      Dividend on Preferred Stock
                      
                      
                      (291,955
                      )
                      
                      
                      -
                      
                      
                      
                      (291,955
                      )
                      
                      
                      -Net
      (loss) applicable to common stockholders
                      
                      $
                      (1,074,331
                      )
                      
                      
                      (1,366,379
                      )
                      
                      $
                      (2,161,674
                      )
                      
                      $
                      (2,710,219
                      )Basic
      and diluted net (loss) per share
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.02
                      )
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.04
                      )Weighted
      average common shares outstanding
                      
                      
                      69,707,615
                      
                      
                      
                      69,971,390
                      
                      
                      
                      69,616,447
                      
                      
                      
                      64,302,705





See
accompanying notes to unaudited condensed financial statements.




4





SpectraScience,
Inc. and Subsidiary


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY


For the
six months ended June 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
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              67,848
                              
                              
                              
                              -
                              
                              
                              
                              67,848Stock
      based compensation - employees
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              304,299
                              
                              
                              
                              -
                              
                              
                              
                              304,299Issuance
      of Common Stock
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,094,017
                              
                              
                              
                              10,940
                              
                              
                              
                              262,564
                              
                              
                              
                              
                              
                              
                              
                              273,504Sale
      of Series B Preferred Stock and warrants
                              
                              
                              2,650,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              466,400
                              
                              
                              
                              -
                              
                              
                              
                              466,400Deemed
      Dividend on Preferred Stock
                              
                              
                              -
                              
                              
                              
                              26,500
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              265,455
                              
                              
                              
                              (291,955
                              )
                              
                              
                              -Net
      loss
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              (1,869,719
                              )
                              
                              
                              (1,869,719
                              )Balance,
      June 30, 2009
                              
                              
                              2,650,000
                              
                              
                              $
                              26,500
                              
                              
                              
                              69,707,615
                              
                              
                              $
                              697,076
                              
                              
                              $
                              19,202,431
                              
                              
                              $
                              (13,881,947
                              )
                              
                              $
                              6,044,060





See
accompanying notes to unaudited condensed financial statements.





5





SpectraScience,
Inc. and Subsidiary


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months Ended
                                          June 30,2009
                                        
                                        
                                        2008OPERATING
      ACTIVITIES:Net
      (loss)
                                        
                                        $
                                        (1,869,719
                                        )
                                        
                                        $
                                        (2,710,219
                                        )Adjustments
      to reconcile net (loss) to net cash used in operating
      activities:Depreciation
      and amortization
                                        
                                        
                                        187,464
                                        
                                        
                                        
                                        137,362Stock-based
      compensation employees
                                        
                                        
                                        304,299
                                        
                                        
                                        
                                        547,672Stock-based
      compensation consultants
                                        
                                        
                                        67,848
                                        
                                        
                                        
                                        53,177Fair
      market value of stock issued for services
                                        
                                        
                                        -
                                        
                                        
                                        
                                        7,500Changes
      in operating assets and liabilities:Accounts
      receivable
                                        
                                        
                                        (37,758
                                        )
                                        
                                        
                                        -Inventory
                                        
                                        
                                        146,374
                                        
                                        
                                        
                                        -Prepaid
      expenses and other current assets
                                        
                                        
                                        14,829
                                        
                                        
                                        
                                        (152,014
                                        )Accounts
      payable
                                        
                                        
                                        (119,714
                                        )
                                        
                                        
                                        (84,568
                                        )Accrued
      liabilities
                                        
                                        
                                        (20,497
                                        )
                                        
                                        
                                        65,624Net
      cash (used in) operating activities
                                        
                                        
                                        (1,326,874
                                        )
                                        
                                        
                                        (2,135,466
                                        )INVESTING
      ACTIVITIES:Purchase
      of certificate of deposit
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,000,000
                                        )Purchases
      of fixed assets
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (35,034
                                        )Net
      cash (used in) investing activities
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,035,034
                                        )FINANCING
      ACTIVITIESProceeds
      from issuance of common stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        445,351Proceeds
      from issuance of preferred stock
                                        
                                        
                                        466,400
                                        
                                        
                                        
                                        -Proceeds
      from exercise of stock options
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,000Net
      cash provided by financing activities
                                        
                                        
                                        466,400
                                        
                                        
                                        
                                        448,351Net
      increase (decrease) in cash and cash equivalents
                                        
                                        
                                        (860,474
                                        )
                                        
                                        
                                        (2,722,149
                                        )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                                        
                                        
                                        1,618,181
                                        
                                        
                                        
                                        5,188,177CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                                        
                                        $
                                        757,707
                                        
                                        
                                        $
                                        2,466,028Supplemental
      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


June
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 scans 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 six month period ended June 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 June 30, 2009, the
Company had working capital of $1,132,236 and a cash balance of $757,707. In
addition, for the six month period ending June 30, 2009, the Company used
($1,326,874) to fund operating activities.





In May
and June 2009, the Company sold 2,650,000 shares of Series B Convertible
Preferred Stock to accredited investors at a price of $0.20 per share for an
aggregate consideration of $530,000. The Company received net cash proceeds of
$466,400 after the payment of finder’s fees and expenses of $63,600. 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.
If the Company does not receive these funds in a timely manner, the Company may
not be able to continue as a going concern. The Company may not be able to find
alternative capital on terms that are acceptable. Management believes that if
funding under the Fusion Capital Agreement occurs, the 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 and may not be able to obtain equity or debt on terms
that are acceptable.





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





In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, (“SFAS”) No. 123(R), “Share-Based Payment”,
(“SFAS 123(R)”) which establishes standards for transactions in which an entity
exchanges its equity instruments for goods or services. SFAS 123(R) requires an
issuer to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award.
SFAS 123(R) became effective for the Company commencing January 1,
2006.





In
accordance with the provisions of SFAS No. 123 “Accounting for Stock-Based
Compensation”, (“SFAS 123”) and Emerging Issues Task Force (“EITF”) No. 96-18,
“Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling Goods or Services,” all other issuances
of common stock, stock options or other equity instruments 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 (unless the fair
value of the consideration received can be more reliably measured). Any 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
six months ended June 30, 2009 and 2008, stock-based compensation was
approximately $372,000 and $601,000, respectively. Stock-based compensation
expense of approximately $126,000 and $288,000 was recognized in research and
development expenses for the six months ended June 30, 2009 and 2008,
respectively. Stock-based compensation of approximately $297,000 and $294,000
was recognized in general and administrative expenses for the six months ended
June 30, 2009 and 2008, respectively. Stock-based compensation expense of
approximately ($51,000) and $19,000 was recognized in sales and marketing
expense for the six months ended June 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 SFAS 123 prospectively for all employee and consultant awards
granted, modified, or settled by the Company on August 2, 2004. Accordingly,
SFAS 123(R) has not had a material impact on the comparability of Company’s
financial statements.





8





As of
June 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,
customers, 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 10,456,142 reserved at June 30, 2009. At June 30, 2009 the
Company had outstanding 7,150,000 options under the Option Plan representing
approximately 10.3% of the outstanding shares (4,333,333 of which were
exercisable), with 3,306,142 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 six months ending June 30, 2009
and 2008:




2009
                                
                                
                                2008Expected
      life
                                
                                5
      years
                                
                                
                                5 yearsRisk-free
      interest rate
                                
                                2.13%
                                
                                
                                3.85%Expected
      volatility
                                
                                123%
                                
                                
                                161%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 foreclosures 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 stock price since the beginning of the
Successor Company. 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
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      exercised
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Additional
      options available
                
                
                164,102Forfeited
      or expired
                
                
                1,000,000
                
                
                
                (1,000,000
                )Outstanding
      at June 30, 2009
                
                
                3,306,142
                
                
                
                7,150,000
                
                
                $
                0.58
                
                
                
                7.71
                
                
                $
                -Exercisable
      at June 30, 2009
                
                
                
                
                
                
                4,333,333
                
                
                $
                0.65
                
                
                
                6.82
                
                
                $
                -





There
were no options exercised during the six months ended June 30, 2009 and $13,000
(intrinsic value) of options exercised during the 6 months ended June 30, 2008.
At June 30, 2009, total unrecognized estimated employee and director
compensation cost related to non-vested stock options granted prior to that date
is approximately $860,036, which is expected to be recognized over the next two
years.





9




Impairment
or Disposal of Long-Lived Assets





SFAS No.
144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
144”), addresses financial accounting and reporting for the impairment or
disposal of long-lived assets (such as our patents). SFAS 144 requires 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. SFAS 144 also requires
companies to separately report discontinued operations and extends that
reporting requirement to a component of an entity that either has been disposed
of (by sale, abandonment or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or the estimated fair value less costs to sell. The Company
adopted SFAS 144 on August 2, 2004. The provisions of this pronouncement
relating to assets held for sale or other disposal generally are required to be
applied prospectively after the adoption date to newly initiated commitments to
plan to sell or dispose of such asset, as defined, by management. As a result,
management cannot determine the potential effects that adoption of SFAS 144 will
have on the Company's consolidated financial statements with respect to future
disposal decisions, if any. Management believes no impairment exists at June 30,
2009.





Inventories





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





June 30, 2008
                  
                  
                  December 31, 2008Raw
      materials
                  
                  $
                  77,098
                  
                  
                  $
                  205,651Finished
      goods
                  
                  
                  242,409
                  
                  
                  
                  260,230Totals
                  
                  $
                  319,507
                  
                  
                  $
                  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 six months ended June 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 six months ended June
30, 2009 include exercisable stock options, convertible preferred stock and
outstanding warrants. As of June 30, 2009, there were 2,650,000 shares of Series
B Convertible Preferred Stock, warrants to purchase 3,577,966 shares of Common
Stock and 7,150,000 stock options outstanding. If converted under the treasury
method, these instruments would have resulted in an additional approximate
3,415,000 equivalent common shares outstanding.





For the
three and six month periods ended June 30, 2008, approximately 1,377,000
potentially dilutive shares of common stock have been excluded from the
calculation of weighted average number of dilutive common shares which are
comprised of exercisable stock options and warrants to purchase common
stock.





Recent
Accounting Pronouncements





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”) FSP FAS 107-1
and APB 28-1 require disclosures about fair value of financial instruments in
interim and annual financial statements. FSP FAS 107-1 and APB 28-1 are
effective for periods ending after June 15, 2009. The Company adopted FSP 107-1
and APB 28-1 effective for the quarter ending June 30, 2009. The adoption did
not have an impact on the Company’s financial position or results of
operations.





In May
2009, the FASB issued FASB Statement 165, “Subsequent Events” (“SFAS No.
165”). SFAS No. 165 establishes 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 this statement for the
quarter ending June 30, 2009.





10





In June
2009, the FASB issued Statement No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162.”Under the Statement, The FASB
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 those nonpublic nongovernmental
entities that must now apply the American Institute of Certified Public
Accountants Technical Inquiry Service Section 5100, “Revenue Recognition,”
paragraphs 38 – 76. The Company does not expect that the adoption of this
Statement will have a material impact on the Company’s financial
statements.





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 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.





In May
and June 2009, as a part of a Units offering, the Company sold 2,650,000 shares
of its Preferred to accredited investors for an aggregate consideration of
$530,000. The Company received net cash proceeds of $466,400 after the payment
of finders’ fees and expenses of $63,600. In addition, the Company issued
five-year warrants to purchase 1,325,000 additional shares of Common Stock at an
initial exercise price of $0.30 per share. 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 EITF
Issue No. 98-5, “Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios” (“EITF 98-5”)
and EITF No. 00-27, “Application of EITF Issue No. 98-5 to Certain Convertible
Instruments,” the estimated relative fair values of the BCF and the warrants, in
approximate amounts of $292,000 and $238,000, 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 approximately 124% and risk-free interest
rates of between 1.98% and 2.74%. 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 EITF
98-5, 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.





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




4.
Subsequent Events




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.





11





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, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”) FSP FAS 107-1
and APB 28-1 require disclosures about fair value of financial instruments in
interim and annual financial statements. FSP FAS 107-1 and APB 28-1 are
effective for periods ending after June 15, 2009. The Company adopted FSP 107-1
and APB 28-1 effective for the quarter ending June 30, 2009. The adoption did
not have an impact on the Company’s financial position or results of
operations.





In May
2009, the FASB issued FASB Statement 165, “Subsequent Events” (“SFAS No.
165”). SFAS No. 165 establishes 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 this statement for the
quarter ending June 30, 2009.





12





In June
2009, the FASB issued Statement No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a
replacement of FASB Statement No. 162.”Under the Statement, The FASB
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 those nonpublic nongovernmental
entities that must now apply the American Institute of Certified Public
Accountants Technical Inquiry Service Section 5100, “Revenue Recognition,”
paragraphs 38 – 76. 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 June 30, 2009 and 2008





The
Company recognized revenue of $71,281 and $4,750 for the three months ended June
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 quarter one year ago.





Overall
research and development expenses for the three months ended June 30, 2009 and
2008 were approximately $268,000 and $579,000, respectively. The $311,000
decrease in research and development expenses related to approximate decreases
in payroll expense of $136,000, clinical expense of $38,000, engineering
development expense of $44,000, stock compensation expense of $39,000,
consulting expense of $26,000 and all other expense of $28,000. The reduction in
all expense categories is a result of a concerted effort to minimize expenses
due to the global economic recession.





General
and administrative expenses for the three months ended June 30, 2009 and 2008
were approximately $525,000 and $620,000, respectively. The $95,000 decrease for
the three months ended June 30, 2009 compared to the three months ended June 30,
2008 was due to approximate decreases of $72,000 in professional fees expense,
$37,000 in payroll expense, $34,000 in consulting expense, $20,000 in travel
expense and $12,000 in other expense, offset by approximate increases of $46,000
in stock compensation expense and $34,000 in amortization of financing fee
expense. The overall decreases were a result of headcount and discretionary
expense reductions due to the Company’s response to the downturn in the overall
economy.





Sales and
marketing expenses for the three months ended June 30, 2009 and 2008 were
($2,000) and $224,000, respectively. The negative expense amount for the current
period is primarily as a result of employee headcount reductions and the
reversal of previously recorded option expense for unvested options which did
not vest due to employee turnover prior to the vesting date. The overall expense
decrease of $226,000 was due to approximate decreases of $81,000 in payroll
expense, $80,000 in stock compensation expense, $24,000 in trade show expense,
$14,000 in advertising expense, $14,000 in consulting expense and $13,000 in all
other expenses. The overall decreases were a result of headcount and
discretionary expense reductions due to the Company’s response to the downturn
in the overall economy.





Other
income, net, for the three months ended June 30, 2009 and 2008 was $3,585 and
$53,577, respectively. The decrease was primarily due to a decrease in interest
income due to lower comparative interest bearing cash balances during the three
months ended June 30, 2009 as compared to the same quarter one year
ago.





As a
result of the above, the net loss for the three months ended June 30, 2009 and
2008 was ($782,376) and ($1,366,379), 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 quarter ended June 30, 2009 approximately $134,000 was
comprised of non-cash stock-option expense.





For
the Six Months ended June 30, 2009 and 2008





The
Company recognized revenue of $120,391 and $8,550 for the six months ended June
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 quarter one year ago.





13




Overall
research and development expenses for the six months ended June 30, 2009 and
2008 were approximately $734,000 and $1,069,000, respectively. The $335,000
decrease was comprised of decreases of approximately $161,000 in stock
compensation expense, $146,000 in payroll expense, $47,000 in engineering
development expense, $43,000 in consulting expense and $37,000 in clinical
trials expense, offset by increases of approximately $99,000 in other expenses.
The reduction in overall expenses is a result of a concerted effort to minimize
expenses due to the global economic recession.





General
and administrative expenses for the six months ended June 30, 2009 and 2008 were
approximately $990,000 and $1,308,000, respectively. The $318,000 reduction was
comprised of decreases of approximately $110,000 in payroll expense, $111,000 in
professional fee expense, $82,000 in consulting expense, $49,000 in travel
expense and $16,000 in other expense, offset by approximate increases of $57,000
in financing fee amortization. The overall decreases were a result of headcount
and discretionary expense reductions due to the Company’s response to the
downturn in the global economy.





Sales and
marketing expenses for the six months ending June 30, 2009 and 2008 were
approximately $184,000 and $426,000, respectively. The $242,000 reduction was
comprised of approximate decreases of $80,000 in stock compensation expense,
$62,000 in payroll expense, $58,000 in advertising and trade shows and $42,000
in consulting 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. These decreases were a result
of a reduction in sales headcount and related sales expenses in response to the
overall economic downturn.





Other
income, net, for the six months ended June 30, 2009 and 2008 was $748 and
$89,090, respectively. The decrease was primarily due to a decrease in interest
income due to lower comparative interest bearing cash balances during the six
months ended June 30, 2009 as compared to the same quarter one year
ago.





As a
result of the above, the net loss for the six months ended June 30, 2009 and
2008 was ($1,869,719) and ($2,710,219), 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 six months ended June 30, 2009 approximately $372,000 was
comprised of non-cash stock-option expense.





Liquidity
and Capital Resources





On June
30, 2009, the Company had a cash balance of $757,707 as compared with a cash
balance of $1,618,181 at December 31, 2008, representing a decrease of
($860,474) in cash for the period. The cash balances decreased primarily due to
working capital used in operations. There have been minimal capital equipment
expenditures and none are foreseen.





In May
and June 2009, the Company sold 2,650,000 shares of Series B Convertible
Preferred Stock to accredited investors at a price of $0.20 per share for an
aggregate consideration of $530,000. The Company received net cash proceeds
$466,400 after the payment of finder’s fees and expenses of
$63,600.





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.
However, if the Company does not receive these funds in a timely manner, the
Company may not be able to continue 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 Fusion Capital Agreement occurs 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, and may not be able
to obtain equity capital or debt on terms that are acceptable.





SpectraScience
expects to incur significant additional operating losses through at least 2009,
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 additional funding in a timely manner, 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 June
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 June 30, 2009.





Management’s
assessment of the effectiveness of our internal control over financial reporting
as of June 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 June 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
June 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 ProceedsIn
      May and June 2009, the Company sold 2,650,000 shares of Series B
      Convertible Preferred Stock to accredited investors at a price of $0.20
      per share for an aggregate consideration of $530,000. The Company received
      net cash proceeds $466,400 after the payment of finder’s fees and expenses
      of $63,600.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 HoldersNoneItem
      5.
                  Other
      InformationNoneItem
      6.
                  ExhibitsExhibit
      4.4
                  Certificate
      of Designation of Rights and Preferences of Series B Preferred Stock of
      SpectraScience, Inc.Exhibit
      4.5
                  Forms
      of warrant to purchase Common Stock of Spectra Science, Inc.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





June
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
      August 14, 2009
                    /s/
      James HitchinJames
      HitchinPresident,
      Chief Executive Officer(Principal
      executive officer)Date
      August 14, 2009
                    /s/
      James DorstJames
      DorstChief
      Financial Officer(Principal
      Financial and Accounting
Officer)





17