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 March 31,
2009





or





o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              For the transition period fromto





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 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 May 14, 2009 was 69,707,615. As of this date the Registrant also
had outstanding warrants to purchase 787,966 shares of common
stock.


2





SPECTRASCIENCE,
INC.





FORM
10-Q


For
the Quarterly Period Ending March 31, 2009




TABLE
OF CONTENTS





PART
      I
              FINANCIAL
      INFORMATION:
              4Item
      1.
              Financial
      Statements (Unaudited)
              4Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              12Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              14Item
      4.
              Controls
      and Procedures
              14Item
      4T.
              Controls
      and Procedures
              14PART
      II
              OTHER
      INFORMATION
              15Item
      1.
              Legal
      Proceedings
              15Item
      1A.
              Risk
      Factors
              15Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              15Item
      3.
              Defaults
      Upon Senior Securities
              15Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              15Item
      5.
              Other
      Information
              15Item
      6.
              Exhibits
              15SIGNATURES
              16


3




PART I   FINANCIAL INFORMATION:




Item 1. Financial Statements
(Unaudited)





SpectraScience,
Inc. and Subsidiary


Consolidated
Balance Sheets





March 31,
                                    2009
                                  
                                  
                                  December31,
                                    2008(Unaudited)
                                  
                                  
                                  (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                  
                                  $
                                  817,650
                                  
                                  
                                  $
                                  1,618,181Accounts
      Receivable (net)
                                  
                                  
                                  48,764
                                  
                                  
                                  
                                  23,877Inventories
      (net of allowances)
                                  
                                  
                                  357,865
                                  
                                  
                                  
                                  465,881Prepaid
      expenses and other current assets
                                  
                                  
                                  325,659
                                  
                                  
                                  
                                  85,344Total
      current assets
                                  
                                  
                                  1,549,938
                                  
                                  
                                  
                                  2,193,283Fixed
      assets, net
                                  
                                  
                                  1,879,919
                                  
                                  
                                  
                                  1,876,738Patents,
      net
                                  
                                  
                                  3,103,158
                                  
                                  
                                  
                                  3,165,550TOTAL
      ASSETS
                                  
                                  $
                                  6,533,015
                                  
                                  
                                  $
                                  7,235,571LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                                  
                                  $
                                  247,214
                                  
                                  
                                  $
                                  345,762Accrued
      liabilities
                                  
                                  
                                  59,908
                                  
                                  
                                  
                                  88,081Total
      current liabilities
                                  
                                  
                                  307,122
                                  
                                  
                                  
                                  433,843STOCKHOLDERS’
      EQUITYUndesignated
      capital stock, undesignated par value, 22,750,000 shares authorized, none
      issued
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Series
      A Convertible Preferred Stock, $.01 par value:Authorized
      - 2,250,000 shares Issued and outstanding – no shares at March 31, 2009
      (no shares at December 31, 2008)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Common
      stock, $.01 par value:Authorized—100,000,000
      sharesIssued
      and outstanding 69,707,615 shares at March 31, 2009 (68,613,598 shares at
      December 31, 2008)
                                  
                                  
                                  697,076
                                  
                                  
                                  
                                  686,136Additional
      paid-in capital
                                  
                                  
                                  18,336,433
                                  
                                  
                                  
                                  17,835,865Accumulated
      (deficit)
                                  
                                  
                                  (12,807,616
                                  )
                                  
                                  
                                  (11,720,273
                                  )TOTAL
      STOCKHOLDERS’ EQUITY
                                  
                                  
                                  6,225,893
                                  
                                  
                                  
                                  6,801,728TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                  
                                  $
                                  6,533,015
                                  
                                  
                                  $
                                  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.


4





SpectraScience,
Inc. and Subsidiary


CONDENSED
STATEMENTS OF OPERATIONS


(Unaudited)




Three Months Ended
                                      March 31,2009
                                    
                                    
                                    2008Revenue
                                    
                                    $
                                    49,110
                                    
                                    
                                    $
                                    3,800Cost
      of revenue
                                    
                                    
                                    22,135
                                    
                                    
                                    
                                    2,716Gross
      profit
                                    
                                    
                                    26,975
                                    
                                    
                                    
                                    1,084Operating
      expenses:Research
      and development
                                    
                                    
                                    465,845
                                    
                                    
                                    
                                    490,448General
      and administrative
                                    
                                    
                                    464,776
                                    
                                    
                                    
                                    687,783Sales
      and marketing
                                    
                                    
                                    186,536
                                    
                                    
                                    
                                    202,206Total
      operating expenses
                                    
                                    
                                    1,117,157
                                    
                                    
                                    
                                    1,380,437Operating
      loss
                                    
                                    
                                    (1,090,182
                                    )
                                    
                                    
                                    (1,379,353
                                    )Other
      income, net
                                    
                                    
                                    2,839
                                    
                                    
                                    
                                    35,513Net
      Loss
                                    
                                    
                                    (1,087,343
                                    )
                                    
                                    
                                    (1,343,840
                                    )Basic
      and diluted net loss per share
                                    
                                    $
                                    (0.02
                                    )
                                    
                                    $
                                    (0.02
                                    )Weighted
      average common shares outstanding
                                    
                                    
                                    69,525,279
                                    
                                    
                                    
                                    59,649,405




See
accompanying notes to unaudited condensed financial statements.


5





SpectraScience,
Inc. and Subsidiary


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY


For the
three months ended March 31, 2009


(Unaudited)





Common Stock
                        Shares Amount
                      
                      
                      Additional
                        Paid-In
                        Capital
                      
                      
                      Accumulated
                        (Deficit)
                      
                      
                      Total
                        Stockholders’
                        EquityBalance, December 31,
      2008
                      
                      
                      68,613,598
                      
                      
                      $
                      686,136
                      
                      
                      $
                      17,835,865
                      
                      
                      $
                      (11,720,273
                      )
                      
                      $
                      6,801,728Stock
      based compensation - consultants
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      7,370
                      
                      
                      
                      -
                      
                      
                      
                      7,370Stock
      based compensation - employees
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      230,634
                      
                      
                      
                      -
                      
                      
                      
                      230,634Issuance
      of Common Stock
                      
                      
                      1,094,017
                      
                      
                      
                      10,940
                      
                      
                      
                      262,564
                      
                      
                      
                      -
                      
                      
                      
                      273,504Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,087,343
                      )
                      
                      
                      (1,087,343
                      )Balance,
      March 31, 2009
                      
                      
                      69,707,615
                      
                      
                      $
                      697,076
                      
                      
                      $
                      18,336,433
                      
                      
                      $
                      (12,807,616
                      )
                      
                      $
                      6,225,893





See
accompanying notes to unaudited condensed financial statements.


6





SpectraScience,
Inc. and Subsidiary


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Three Months Ended
                                    March 31,2009
                                  
                                  
                                  2008OPERATING
      ACTIVITIES:Net
      loss
                                  
                                  $
                                  (1,087,343
                                  )
                                  
                                  $
                                  (1,343,840
                                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                  
                                  
                                  71,050
                                  
                                  
                                  
                                  66,887Stock-based
      compensation employees
                                  
                                  
                                  230,634
                                  
                                  
                                  
                                  308,430Stock-based
      compensation consultants
                                  
                                  
                                  7,370
                                  
                                  
                                  
                                  69,543Changes
      in operating assets and liabilities:Accounts
      receivable
                                  
                                  
                                  (24,887
                                  )
                                  
                                  
                                  -Inventory
                                  
                                  
                                  108,016
                                  
                                  
                                  
                                  -Prepaid
      expenses and other current assets
                                  
                                  
                                  33,188
                                  
                                  
                                  
                                  (29,500
                                  )Accounts
      payable
                                  
                                  
                                  (98,548
                                  )
                                  
                                  
                                  (61,819
                                  )Accrued
      liabilities
                                  
                                  
                                  (28,172
                                  )
                                  
                                  
                                  (31,677
                                  )Net
      cash used in operating activities
                                  
                                  
                                  (788,682
                                  )
                                  
                                  
                                  (1,021,975
                                  )INVESTING
      ACTIVITIES:Purchases
      of fixed assets
                                  
                                  
                                  (11,839
                                  )
                                  
                                  
                                  -Net
      cash provided by (used in) investing activities
                                  
                                  
                                  (11,839
                                  )
                                  
                                  
                                  -FINANCING
      ACTIVITIESProceeds
      from exercise of stock options
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,275Net
      cash provided by financing activities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,275Net
      increase (decrease) in cash and cash equivalents
                                  
                                  
                                  (800,531
                                  )
                                  
                                  
                                  (174,754
                                  )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                                  
                                  
                                  1,618,181
                                  
                                  
                                  
                                  441,025CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                                  
                                  $
                                  817,650
                                  
                                  
                                  $
                                  266,271Supplemental
      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.


7





SpectraScience,
Inc.


Notes
to Unaudited Condensed Financial Statements


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





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
remove the subject cell tissue from the body to make such determination. The
WavSTAT System operates by using cool, safe UV laser light to optically scan and
analyze tissue, enabling the physician to make an instant diagnosis during
endoscopy when screening for cancer, and if warranted, to begin immediate
treatment during the same procedure. The WavSTAT is FDA approved for colon
cancer detection.





On
November 6, 2007, the Company acquired the assets of Luma Imaging Corporation
(“LUMA ®”) in an
equity transaction accounted for as an acquisition of assets and now operates
LUMA as a wholly owned subsidiary of the Company. LUMA had acquired the assets
from a predecessor company that had developed and received FDA approval for, a
non-invasive diagnostic imaging system that can detect cervical cancer
precursors and which utilizes an underlying technology that is similar to that
of the WavSTAT System. The addition of the LUMA technology to the Company’s
existing WavSTAT System technology provides the Company with a broad suite of
fluorescence-based intellectual property and know-how. 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 three month period ended March 31, 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.





Exiting
Status as a Developmental Stage Company





Prior to
the quarter ended September 30, 2008, the Company was considered a developmental
stage enterprise since it had not yet generated significant revenue from the
sale of its products and its efforts had been principally devoted to moving the
Company forward and preparing our products for domestic and international market
introduction. The Company recorded significant sales and has been an operating
company since the third quarter of 2008.





Liquidity
and Going Concern





The
Company has recently begun marketing its products. As of March 31, 2009, the
Company had working capital of $1,242,816 and a cash balance of $817,650. In
addition, for the three month period ending March 31, 2009, the Company used
($788,692) to fund operating activities.





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, or the Company may
not be able to find such capital or raise capital or debt on terms that are
acceptable.


8





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 for sales are 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 intercom any 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
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and disclosures made in the accompanying
notes to the financials statements. Significant estimates made by management
include, among others, realization of long-lived assets, assumptions used to
value stock options, assumptions used to value the common stock issued and the
assets acquired in the Luma acquisition and the realization of intangible
assets. Actual results could differ from those estimates.





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
three months ended March 31, 2009 and 2008, stock-based compensation was
approximately $238,000 and $378,000, respectively. Stock-based compensation
expense of approximately $73,000 and $184,000 was recognized in research and
development expenses for the three months ended March 31, 2009 and 2008,
respectively. Stock-based compensation expense of approximately $138,000 and
$188,000 was recognized in general and administrative expenses for the three
months ended March 31, 2009 and 2008, respectively. Stock based compensation
expense of approximately $27,000 and $6,000 was recognized in sales and
marketing expense for the three months ended March 31, 2009 and 2008,
respectively. 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.


9





As of
March 31, 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 March 31, 2009. At March 31, 2009
the Company had outstanding 7,550,000 options under the Option Plan representing
approximately 10.8% of the outstanding shares (4,183,333 of which were
exercisable), with 2,742,040 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 three months ending March 31,
2009 and 2008:




2009
                  
                  
                  2008Expected
      life
                  
                  5
      years
                  
                  
                  5 yearsRisk-free
      interest rate
                  
                  
                  2.02
                  %
                  
                  
                  3.2
                  %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. Management believes that options granted have
been to a group of individuals that have a high desire to see the Company
succeed and have aligned themselves to that end.





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





The
risk-free interest rates are the 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
                    
                    
                    600,000
                    
                    
                    
                    (600,000
                    )Outstanding
      at March 31, 2009
                    
                    
                    2,906,142
                    
                    
                    
                    7,550,000
                    
                    
                    $
                    0.57
                    
                    
                    
                    8.05
                    
                    
                    $
                    -Exercisable
      at March 31, 2009
                    
                    
                    
                    
                    
                    
                    4,183,333
                    
                    
                    $
                    0.63
                    
                    
                    
                    7.03
                    
                    
                    $
                    -





There
were no options exercised during the three months ended March 31, 2009 and 2008.
At March 31, 2009, total unrecognized estimated employee compensation cost
related to non-vested stock options granted prior to that date is approximately
$1,630,445, which is expected to be recognized over the next two
years.


10





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 March
31, 2009.





Inventories





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





March 31, 2008
                        
                        
                        December 31, 2008Raw
      materials
                        
                        $
                        88,064
                        
                        
                        $
                        205,651Finished
      goods
                        
                        
                        269,801
                        
                        
                        
                        260,230Totals
                        
                        $
                        357,865
                        
                        
                        $
                        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 three months ended March 31, 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 months ended
March 31, 2009 include exercisable stock options to purchase 1,400,000 shares of
common stock. If converted under the treasury method, these instruments would
have resulted in an additional approximate 295,000 equivalent common shares
outstanding.





For the
three months ended March 31, 2008, 2,211,000 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 to
purchase 3,345,000 shares of common stock and warrants to purchase 1,775,824
shares of common stock.





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.


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 Wav Stat ®
Optical Biopsy System (“Wav Stat”) 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 five 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 technology that
can be developed for use in many areas of the human body.





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 colon cancer and
pre-cancer.





·
            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
      esophageal cancer and pre-cancer 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 (increase revenue), 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.


12





Results
of Operations





For
the Three Months ended March 31, 2009 and 2008





The
Company recognized revenue of $49,110 and $3,800 for the three months ended
March 31, 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 as opposed to the quarter one year
ago.





Overall
research and development expenses for the three months ended March 31, 2009 and
2008 were $465,845 and $490,448, respectively. The $24,604 decrease in research
and development expenses related to decreases in stock option expense of
$110,953, decreases in consulting expense of $19,038, offset by increases in all
other expense of $105,387. Stock option expense decreased due to head count
reductions and decreases in the market price of our common stock. Of the total
expense amount of $465,845, approximately $73,000 was a result of non-cash stock
option expense.





General
and administrative expenses for the three months ended March 31, 2009 and 2008
were $464,776 and $687,783, respectively. The $223,007 decrease for the three
months ended March 31, 2009 compared to the three months ended March 31, 2008
was due to a decrease of $80,448 in payroll expense, a decrease of $49,620 in
stock option expense, a decrease of $46,650 in consulting expense, a decrease of
$29,074 in travel expense and a decrease of $17,215 in all other expenses.
Generally, these decreases were a result of headcount and discretionary expense
reductions a result of the downturn in the overall economy. Of the total expense
of $464,776, approximately $138,000 was a result of non-cash stock option
expense.





Sales and
marketing expenses for the three months ended March 31, 2009 and 2008 were
$186,536 and $202,206, respectively. This decrease of $15,670 was primarily due
to a decrease of $24,757 in consulting expense offset by an increase of 9,087 in
all other expenses. Of the total expense of $186,536, approximately $27,000
was a result of non-cash stock option expense.





Other
income, net for the three months ended March 31, 2009 and 2008 was $2,839 and
$35,513, 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 March 31, 2009 as compared to the same quarter one year
ago.





As a
result of the above, the net loss for the three months ended March 31, 2009 and
2008 was ($1,087,343) and ($1,343,840), 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 March 31, 2009 approximately $238,000 was
comprised of non-cash stock-option expense.





Liquidity
and Capital Resources





On March
31, 2009, the Company had cash balances of $817,650 as compared with cash
balances of $1,618,181 at December 31, 2008, representing a decrease of
($800,531) 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.





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, or the Company may
not be able to find such capital or raise capital or debt on terms that are
acceptable.





SpectraScience
expects to incur significant additional operating losses through at least 2009,
as we complete a clinical trial, begin outcome-based clinical studies and
increase sales and marketing efforts to commercialize the WavSTAT and LUMA
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 not be able to find
alternative capital or raise capital or debt 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; 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.


13





Item 3. Quantitative and Qualitative
Disclosures About Market Risk





Not
required




Item 4. Controls and
Procedures





Not
Required




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 March
31, 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 that 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 principal
executive officer and principal 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 March 31,
2009.





Management’s
assessment of the effectiveness of our internal control over financial reporting
as of March 31, 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 March 31, 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
March 31, 2009 which have materially affected, or are likely to materially
affect our internal controls over financial reporting.


14





PART
      II
            OTHER
      INFORMATIONItem
      1.
            Legal
      ProceedingsNoneItem
      1A.
            Risk
      FactorsNo
      reponse required of smaller reporting companiesItem
      2.
            Unregistered
      Sales of Equity Securities and Use of ProceedsNoneItem
      3.
            Defaults
      Upon Senior SecuritiesNoneItem
      4.
            Submission
      of Matters to a Vote of Security HoldersNoneItem
      5.
            Other
      InformationNoneItem
      6.
            ExhibitsExhibit
      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.





15





SpectraScience,
Inc.




FORM
10-Q





March
31, 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
      May 15, 2009
                    /s/
      James HitchinJames
      HitchinPresident,
      Chief Executive Officer(Principal
      executive officer)Date
      May 15, 2009
                    /s/
      James DorstJames
      DorstChief
      Financial Officer(Principal
      Financial and Accounting
Officer)


16