UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON
D.C. 20549





FORM
10-Q





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


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended March 31, 2010





Commission
file number 0-13092





SPECTRASCIENCE,
INC.





(Exact
name of registrant


as
specified in its charter)





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





11568
Sorrento Valley Rd., Suite 11


San
Diego, California 92121


(Address
of principal executive offices)


(858)
847-0200


(Registrant'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
registration was required to submit and post such files). YES o   NO
o





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





Large
      accelerated filer     o
              Accelerated
      filer                     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 o NO x





The
number of shares of the Registrant’s common stock, par value $0.01 per share,
outstanding on May 17, 2010 was 92,147,615.





SPECTRASCIENCE, INC.





FORM
10-Q


For
the Quarterly Period Ending March 31, 2010




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
                
                14PART
      II
                OTHER
      INFORMATION
                
                14Item
      1.
                Legal
      Proceedings
                
                14Item
      1A.
                Risk
      Factors
                
                14Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                
                14Item
      3.
                Defaults
      Upon Senior Securities
                
                14Item
      4.
                (Removed
      and Reserved)
                
                14Item
      5.
                Other
      Information
                
                14Item
      6.
                Exhibits
                
                14SIGNATURES
                
                16


2


PART I   FINANCIAL INFORMATION:




Item 1. Financial Statements
(Unaudited)





SpectraScience,
Inc. and Subsidiary


Consolidated
Balance Sheets





March 31,
                  2010
                
                
                December31,
                  2009(Unaudited)
                
                
                (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                2,677,336
                
                
                $
                3,408,237Accounts
      Receivable (net)
                
                
                23,668
                
                
                
                40,271Inventories
      (net of allowances)
                
                
                422,333
                
                
                
                405,675Prepaid
      expenses and other current assets
                
                
                145,373
                
                
                
                195,568Total
      current assets
                
                
                3,268,710
                
                
                
                4,049,751Fixed
      assets, net
                
                
                1,118,353
                
                
                
                1,139,839Patents,
      net
                
                
                2,853,592
                
                
                
                2,915,984TOTAL
      ASSETS
                
                $
                7,240,655
                
                
                $
                8,105,574LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                182,651
                
                
                $
                219,783Accrued
      liabilities
                
                
                70,557
                
                
                
                167,475Total
      current liabilities
                
                
                253,208
                
                
                
                387,258STOCKHOLDERS’
      EQUITYSeries
      B Convertible Preferred Stock, $.01 par value:Authorized
      – 25,000,000; shares issued and outstanding – 6,535,000 shares at March
      31, 2010 (25,000,000 shares at December 31, 2009)
                
                
                65,350
                
                
                
                250,000Common
      stock, $.01 par value:Authorized—160,000,000
      sharesIssued
      and outstanding 88,712,615 shares at March 31, 2010 (70,142,615 shares at
      December 31, 2009)
                
                
                887,126
                
                
                
                701,426Additional
      paid-in capital
                
                
                25,599,759
                
                
                
                25,511,360Accumulated
      (deficit)
                
                
                (19,564,788
                )
                
                
                (18,744,470
                )TOTAL
      STOCKHOLDERS’ EQUITY
                
                
                6,987,447
                
                
                
                7,718,316TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                7,240,655
                
                
                $
                8,105,574





Note: The
balance sheet at December 31, 2009 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
                  March 31,2010
                
                
                2009Revenue
                
                $
                11,150
                
                
                $
                49,110Cost
      of revenue
                
                
                2,479
                
                
                
                22,135Gross
      profit
                
                
                8,671
                
                
                
                26,975Operating
      expenses:Research
      and development
                
                
                224,392
                
                
                
                465,845General
      and administrative
                
                
                511,287
                
                
                
                464,776Sales
      and marketing
                
                
                92,104
                
                
                
                186,536Total
      operating expenses
                
                
                827,783
                
                
                
                1,117,157Operating
      loss
                
                
                (819,112
                )
                
                
                (1,090,182
                )Other
      income (expense), net
                
                
                (1,206
                )
                
                
                2,839Net
      Loss
                
                
                (820,318
                )
                
                
                (1,087,343
                )Accumulated
      but unpaid dividend on preferred stock
                
                
                (81,319
                )
                
                
                -Net
      loss applicable to common stockholders
                
                
                (901,637
                )
                
                
                (1,087,343
                )Basic
      and diluted net loss per share
                
                $
                (0.01
                )
                
                $
                (0.02
                )Weighted
      average common shares outstanding
                
                
                74,805,948
                
                
                
                69,525,279





See
accompanying notes to unaudited condensed financial statements.


4


SpectraScience, Inc. and
Subsidiary


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY


For the
three months ended March 31, 2010


(Unaudited)





Preferred Stock
                                
                                
                                Common Stock
                                
                                
                                Additional
                                  Paid-In
                                
                                
                                Accumulated
                                
                                
                                Total
                                  Stockholders’Shares
                                
                                
                                Amount
                                
                                
                                Shares
                                
                                
                                Amount
                                
                                
                                Capital
                                
                                
                                Deficit
                                
                                
                                EquityBalance,
      December 31, 2009
                                
                                
                                25,000,000
                                
                                
                                
                                250,000
                                
                                
                                
                                70,142,615
                                
                                
                                $
                                701,426
                                
                                
                                $
                                25,511,360
                                
                                
                                $
                                (18,744,470
                                )
                                
                                $
                                7,718,316Stock
      based compensation – consultants
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                11,369
                                
                                
                                
                                
                                
                                
                                
                                11,369Stock
      based compensation – employees
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                38,180
                                
                                
                                
                                
                                
                                
                                
                                38,180Common
      stock issued for services
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                105,000
                                
                                
                                
                                1,050
                                
                                
                                
                                38,850
                                
                                
                                
                                
                                
                                
                                
                                39,900Conversion
      of Series B Preferred Stock
                                
                                
                                (18,465,000
                                )
                                
                                
                                (184,650
                                )
                                
                                
                                18,465,000
                                
                                
                                
                                184,650
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                -Net
      loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (820,318
                                )
                                
                                
                                (820,318
                                )Balance, March
      31, 2010
                                
                                
                                6,535,000
                                
                                
                                $
                                65,350
                                
                                
                                
                                88,712,615
                                
                                
                                $
                                887,126
                                
                                
                                $
                                25,599,759
                                
                                
                                $
                                (19,564,788
                                )
                                
                                $
                                6,987,447





See
accompanying notes to unaudited condensed financial statements.


5


SpectraScience, Inc. and
Subsidiary


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Three Months Ended
                    March 31,2010
                  
                  
                  2009OPERATING
      ACTIVITIES:Net
      loss
                  
                  $
                  (820,318
                  )
                  
                  $
                  (1,087,343
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  83,878
                  
                  
                  
                  71,050Stock-based
      compensation employees
                  
                  
                  38,180
                  
                  
                  
                  230,634Stock-based
      compensation consultants
                  
                  
                  11,369
                  
                  
                  
                  7,370Amortization
      of prepaid financing costs
                  
                  
                  38,219Fair
      market value of common stock issued for services
                  
                  
                  39,900Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  16,603
                  
                  
                  
                  (24,887
                  )Inventory
                  
                  
                  (16,658
                  )
                  
                  
                  108,016Prepaid
      expenses and other current assets
                  
                  
                  11,976
                  
                  
                  
                  33,188Accounts
      payable
                  
                  
                  (37,132
                  )
                  
                  
                  (98,548
                  )Accrued
      liabilities
                  
                  
                  (96,918
                  )
                  
                  
                  (28,172
                  )Net
      cash used in operating activities
                  
                  
                  (730,901
                  )
                  
                  
                  (788,682
                  )INVESTING
      ACTIVITIES:Purchases
      of fixed assets
                  
                  
                  -
                  
                  
                  
                  (11,839
                  )Net
      cash (used in) investing activities
                  
                  
                  -
                  
                  
                  
                  (11,839
                  )Net
      (decrease) in cash and cash equivalents
                  
                  
                  (730,901
                  )
                  
                  
                  (800,531
                  )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                  
                  
                  3,408,237
                  
                  
                  
                  1,618,181CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                  
                  $
                  2,677,336
                  
                  
                  $
                  817,650Supplemental
      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


March
31, 2010





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. Since 1996, the Company has 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 System 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, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2010. 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, 2009.





Liquidity
and Capital Resources





Historically,
the Company’s sources of cash have included the issuance and sales of equity
securities and interest income. The Company’s historical cash outflows have been
primarily associated with cash used for operating activities including research
and development, administrative and sales activities. Fluctuations in the
Company’s working capital due to timing differences of our cash receipts and
cash disbursements also impact our cash flow. For the three-month period ending
March 31, 2010, the Company used $730,901 in cash to fund operating activities.
As of March 31, 2010, the Company had working capital of $3,015,502 and a cash
balance of $2,677,336.





On
January 30, 2009, the Company entered into a common stock purchase agreement
with Fusion Capital. 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. As of May
17, 2010, the Company had not sold any shares to Fusion Capital.





The Company expects to incur significant additional operating
losses through at least 2010, as it completes clinical trials, begins
outcome-based clinical studies and increases sales and marketing efforts to
commercialize the WavSTAT System. If the Company does not receive sufficient
funding, the Company may be unable to continue as a going concern. The Company
may incur unknown expenses or may not be able to meet its revenue forecast, and
one or more of these circumstances would require the Company to seek additional
capital. The Company may not be able to obtain equity capital or debt funding on
terms that are acceptable. Even if the Company receives additional funding, such
proceeds may not be sufficient to allow the Company to sustain operations until
it attains profitability and positive cash flows from
operations.


7


2.   Summary of Significant Accounting
Policies





Revenue
recognition





In
accordance with Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition , the
Company recognizes revenues when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the price is fixed or
determinable and collectability is reasonably assured. Revenue from the sale of
the Company’s products is generally recognized when title and risk of loss
transfers to the customer, the terms of which are generally free on board
shipping point. The Company use customer purchase orders to determine the
existence of an arrangement. The Company uses shipping documents and third-party
proof of delivery to verify that title has transferred. The Company assesses
whether the fee is fixed or determinable based upon the terms of the agreement
associated with the transaction. To determine whether collection is probable,
the Company assesses a number of factors, including past transaction history
with the customer and the creditworthiness of the customer.





Consolidation





The
accompanying consolidated financial statements include the accounts of
SpectraScience, Inc. and its wholly-owned subsidiary Luma 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 short
history of product sales, including the potential risk of business
failure.





Use
of Estimates





The
Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America, which
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and disclosures made in the accompanying
notes to the 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.





Inventory
Valuation




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





Valuation
of Long-lived Assets




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





Stock-Based
Compensation





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


8


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





All
issuances of stock options or other equity instruments to employees and
non-employees as the consideration for goods or services received by the Company
are accounted for based on the fair value of the equity instruments issued. Any
stock options issued to non-employees are recorded in expense and additional
paid-in capital in 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.





As of
March 31, 2010, 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 13,306,892 reserved at March 31, 2010. At March 31, 2010
the Company had outstanding 7,400,000 options under the Option Plan representing
approximately 8.3% of the outstanding shares (5,016,667 of which were
exercisable), with 5,906,892 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 Model which includes several variables including expected life,
risk free interest rate, expected stock price volatility, stock option exercise
patterns and expected dividend yield. The Company also must estimate forfeitures
for employee stock options. These models and assumptions are emerging and may
change future expenses by increasing or decreasing stock-based compensation
expense. Management used the following weighted average assumptions to value
stock options granted during the three months ending March 31, 2009. There were
no stock options granted during the three months ended March 31, 2010:




2010
                  
                  
                  2009Expected
      life
                  
                  -
                  
                  
                  5 yearsRisk-free
      interest rate
                  
                  
                  -
                  
                  
                  
                  2.02
                  %Expected
      volatility
                  
                  
                  -
                  
                  
                  
                  122
                  %Expected
      dividend yield
                  
                  
                  -
                  
                  
                  
                  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 five-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 its area of interest, the current early revenue stage of the
Company and management’s estimate of the net present value of forward looking
profits that has been compiled (for which there is no
assurance).


9





Information
with respect to stock option activity is as follows:





Outstanding OptionsOptions
                                                Available For
                                                Grant
                                              
                                              
                                              Plan Options
                                                Outstanding
                                              
                                              
                                              Weighted
                                                Average
                                                Exercise Price
                                                Per Share
                                              
                                              
                                              Weighted-Average
                                                Remaining
                                                Contractual Term
                                                (years)
                                              
                                              
                                              Aggregate
                                                Intrinsic
                                                Value (1)December 31, 2009
                                              
                                              
                                              3,071,392
                                              
                                              
                                              
                                              7,450,000
                                              
                                              
                                              $
                                              0.54
                                              
                                              
                                              
                                              7.71
                                              
                                              
                                              
                                              -Options
      granted
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Options
      exercised
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Options
      forfeited
                                              
                                              
                                              50,000
                                              
                                              
                                              
                                              (50,000
                                              )
                                              
                                              $
                                              0.80Additional
      options authorized
                                              
                                              
                                              2,785,500Outstanding
      at March 31, 2010
                                              
                                              
                                              5,906,892
                                              
                                              
                                              
                                              7,400,000
                                              
                                              
                                              $
                                              0.54
                                              
                                              
                                              
                                              7.46
                                              
                                              
                                              
                                              -Exercisable
      at March 31, 2010
                                              
                                              
                                              
                                              
                                              
                                              
                                              5,016,667
                                              
                                              
                                              $
                                              0.59
                                              
                                              
                                              
                                              6.71
                                              
                                              
                                              
                                              -





There
were no options exercised during the three months ended March 31, 2010 or 2009.
At March 31, 2010, total unrecognized estimated employee compensation cost
related to non-vested stock options granted prior to that date is approximately
$404,000, which is expected to be recognized over the next two
years.





Impairment
or Disposal of Long-Lived Assets





Current
accounting standards address financial accounting and reporting for the
impairment or disposal of long-lived assets (such as the Company’s patents).
Long-lived assets are to be reviewed for impairment whenever events or changes
in circumstances indicate that their carrying amounts may not be recoverable. If
the cost basis of a long-lived asset is greater than the projected future
undiscounted net cash flows from such asset (excluding interest), an impairment
loss is recognized. Impairment losses are calculated as the difference between
the cost basis of an asset and its estimated fair value. The Company adopted
these standards on August 2, 2004. Management believes that no impairment exists
at March 31, 2010.





Inventories





Inventories
consisted of the following at March 31, 2010 and December 31, 2009:





March 31,
                    2010
                  
                  
                  December 31,
                    2009Raw
      materials
                  
                  $
                  230,148
                  
                  
                  $
                  175,527Finished
      goods
                  
                  
                  192,185
                  
                  
                  
                  230,148Totals
                  
                  $
                  422,333
                  
                  
                  $
                  405,675





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, 2010 and 2009, 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, 2010 include exercisable stock options to purchase 2,200,000 shares of
common stock, warrants to purchase 15,000,000 shares of common stock and
preferred stock convertible into 6,535,000 shares of common stock. If converted
under the treasury method, these instruments would have resulted in an
additional approximate 5,673,000 equivalent common shares
outstanding.





3.
Stockholders Equity





Common
Stock





In
February and March 2010, holders of 18,465,000 shares of Series B Convertible
Preferred Stock converted their holdings into an equal number of shares of
unrestricted Common Stock. The aforementioned Common Stock was registered with
the effectiveness of a Registration Statement accepted by the Securities and
Exchange Commission on February 11, 2010.


10


Between
January and March 2010, the Company issued 105,000 restricted common shares to a
vendor for services. The fair value of the shares was determined to be $39,900,
and the Company recognized expense in the amount of $39,900, based upon the
market value of the stock on the dates of issuance.





Series
B Convertible Preferred Stock





In
February and March 2010, holders of 18,465,000 shares of Series B Convertible
Preferred Stock converted their holdings into an equal number of shares of
unrestricted Common Stock. The aforementioned Common Stock was registered with
the effectiveness of a Registration Statement accepted by the Securities and
Exchange Commission on February 11, 2010. At March 31, 2010, there remained
outstanding 6,535,000 shares of Series B Convertible Preferred
Stock.





4.
Subsequent Events





Common
Stock





Between
March 31, 2010 and May 17, 2010, holders of 3,400,000 shares of Series B
Convertible Preferred Stock Converted their holdings into an equal number of
shares of unrestricted Common Stock. The aforementioned Common Stock was
registered with the effectiveness of a Registration Statement accepted by the
Securities and Exchange Commission on February 11, 2010.





In April
2010, the Company issued 35,000 restricted common shares to a vendor for
services. The fair value of the shares was determined to be $9,450 and the
company recognized expense in the amount of $9,450, based upon the market value
of the stock on the dates of issuance.





Series
B Convertible Preferred Stock





Between
March 31, 2010 and May 17, 2010, holders of 3,400,000 shares of Series B
Convertible Preferred Stock Converted their holdings into an equal number of
shares of unrestricted Common Stock. The aforementioned Common Stock was
registered with the effectiveness of a Registration Statement accepted by the
Securities and Exchange Commission on February 11, 2010.  At May 17,
2010, there remained outstanding 3,400,000 shares of Series B Convertible
Preferred Stock.





Series
C Convertible Preferred Stock





On April 29, 2010, we designated
25,000,000 of our Undesignated Shares as Series C Preferred Stock.  The
Series C Preferred Stock contains the rights and preferences set forth in the
Certificate of Designation of Rights and Preferences of Series C Preferred
Stock, which are generally the same as the Series B Preferred Stock, but without
any cumulative dividend payable.





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, (the ‘Securities Act”)
and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Securities Exchange Act”). Certain statements contained in this Report that are
not related to historical results, including, without limitation, statements
regarding the Company's business strategy and objectives, near term operating
goals, our expectations regarding the market for our products and beliefs with
respect to opportunities and industry conditions in those markets, our beliefs
about our products and expectations with respect to their performance and
acceptance, regulatory developments, our future financial position, our
expectations with respect to future cash needs, including expansion of existing
facilities, and the sufficiency of our working capital, are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended and involve risks and
uncertainties. Although we believe that the assumptions on which these
forward-looking statements are based are reasonable, there can be no assurance
that such assumptions will prove to be accurate and actual results could differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
changes in law or regulatory policies, unanticipated competition from other
similar businesses, adverse outcomes from litigation, unexpected employee
departures or disruptions, adverse market and general economic factors and other
factors described in Item 1A of our Form 10-K covering the year ended December
31, 2009. 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, 2009.





Business





SpectraScience,
Inc. (the “Company”, “SpectraScience,” “we,” “our,” or “us”)develops and
manufactures innovative Laser Induced Fluorescence spectrophotometry systems
capable of determining whether tissue is normal, pre-cancerous or cancerous
without removing tissue from the body. The WavSTAT  Optical Biopsy System
(“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.


11


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 quarterly 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 12 months,
SpectraScience intends to:





·
            Continue
      selling the WavSTAT System in the U.S. 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
      U.S. market after FDA approval.





·
            Continue
      selling or renting the LUMA system in the U.S. 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.





Results
of Operations





For
the Three Months ended March 31, 2010 and 2009





The
Company recognized revenue of approximately $11,000 and $49,000 for the three
months ended March 31, 2010 and 2009, respectively.





Overall
research and development expenses for the three months ended March 31, 2010 and
2009 were approximately $224,000 and $466,000, respectively. The approximate
$242,000 decrease in research and development expenses is related to approximate
decreases in obsolete inventory expense of $100,000, decreases in stock
compensation expense of $77,000, decreases in payroll expense of $41,000,
decreases in production supplies expense of $8,000 and decreases in all other
expenses of approximately $16,000. The majority of these decreases resulted from
management’s overall efforts to reduce cash expenditures in the face of the
economic recession, beginning approximately one year ago.





General
and administrative expenses for the three months ended March 31, 2010 and 2009
were approximately $511,000 and $465,000, respectively. The approximate $46,000
increase for the three months ended March 31, 2010 compared to the three months
ended March 31, 2009 was due to approximate increases in amortization expense of
$51,000, investor relations expense of $36,000, accounting expenses of $33,000
and payroll expenses of $33,000 offset by approximate decreases of $90,000 of
stock compensation expense, and decreases of $17,000 in all other expenses. The
increase in amortization was a result of additional non-cash amortization
related to a financing facility. The increase in non-cash investor relations
expense is due to the Company contracting with an investor relations firm. The
increase in accounting costs reflects the cost to the Company of filing a
registration statement in the most recent quarter and the increase in payroll is
a result of increased salaries as compared to the prior period one year ago. The
decreases in expenses were a result of headcount and discretionary expense
reductions a result of the downturn in the overall economy. Of the total expense
of $511,000, approximately $49,000 was a result of non-cash stock option
expense.





Sales and
marketing expenses for the three months ended March 31, 2010 and 2009 were
approximately $92,000 and $187,000, respectively. This decrease of approximately
$95,000 was primarily due to approximate decreases of $78,000 in payroll expense
and $23,000 in stock compensation expense offset by an approximate increase of
$6,000 in all other expenses. The decrease in overall expense was a result of
headcount and discretionary expense reductions a consequence of management’s
response to the downturn in the economy. Of the total expense of $92,000,
approximately $4,000 was a result of non-cash stock option expense.





As a
result of the above, the approximate net loss for the three months ended March
31, 2010 and 2009 was $820,000 and $1,087,000, respectively. The decreased net
loss was due to decreases in overall operating expense as a result of planned
expense reductions taken as a result of the overall recessionary market
environment. Of the net loss for the quarter ended March 31, 2010, approximately
$50,000 was comprised of non-cash stock-option expense.


12


Liquidity
and Capital Resources





Historically,
the Company’s sources of cash have included the issuance and sales of equity
securities and interest income. The Company’s historical cash outflows have been
primarily associated with cash used for operating activities including research
and development, administrative and sales activities. Fluctuations in the
Company’s working capital due to timing differences of our cash receipts and
cash disbursements also impact our cash flow. For the three-month period ending
March 31, 2010, the Company used $730,901 in cash to fund operating activities.
As of March 31, 2010, the Company had working capital of $3,015,502 and a cash
balance of $2,677,336.





On
January 30, 2009, the Company entered into a common stock purchase agreement
with Fusion Capital. 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. As of May
17, 2010, the Company had not sold any shares to Fusion Capital.





The
Company expects to incur significant additional operating losses through at
least December 31, 2010, as we complete clinical trials, begin outcome-based
clinical studies and increase sales and marketing efforts to commercialize the
WavSTAT systems. If we do not receive sufficient funding, the Company may be
unable to continue as a going concern. We may incur unknown expenses or we may
not be able to meet our revenue forecast, and one or more of these circumstances
would require us to seek additional capital. We may not be able to obtain equity
capital or debt funding on terms that are acceptable. Even if the Company
receives additional funding, such proceeds may not be sufficient to allow the
Company to sustain operations until it attains profitability and positive cash
flows from operations.


13


Item 3. Quantitative and Qualitative
Disclosures About Market Risk





Not
required




Item 4. Controls and
Procedures





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in the Exchange Act Rule 13a-15(e)) as of March 31, 2010. 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.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are
effective.


Changes
in Internal Financial Controls





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 control over financial reporting which may have occurred during the
quarter ended March 31, 2010. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that there were no changes in the
Company’s internal control over financial reporting during the quarter ended
March 31, 2010 which have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.





PART II
            OTHER
      INFORMATION





Item
1.
            Legal
      Proceedings


None





Item
      1A.
            Risk
    Factors


There
have been no material changes in our risk factors from those disclosed in Part
I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December
31, 2009.





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


None





Item
3.
            Defaults Upon Senior
      Securities


None





Item
4.
            (Removed and
      Reserved)





Item
5.
            Other
      Information


On April
29, 2010, we designated 25,000,000 of our undesignated shares of capital
stock  as Series C Preferred Stock.  The Series C Preferred Stock
contains the rights and preferences set forth in the Certificate of Designation
of Rights and Preferences of Series C Preferred Stock, which are generally the
same as our Series B Preferred Stock, but without any cumulative dividend
payable.  On April 29, 2010, we also designated an additional 15,000,000 of
our undesignated shares of capital stock as common stock.





Item
6.
            Exhibits





Exhibit
    4.1
            Certificate
      of Designation for Series C Preferred Stock.  Incorporated by
      reference to exhibit 4.6 to the Company’s post-effective amendment No. 1
      to registration statement on Form S-1, as filed with the SEC on May 11,
      2010.





Exhibit
      4.2
            Certificate of Designation of
      Common Stock.  Incorporated by reference to exhibit 4.7 to the
      Company’s post-effective amendment No. 1 to registration statement on Form
      S-1, as filed with the SEC on May 11,
  2010.





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.


14


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




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 17, 2010
                    /s/
      James HitchinJames
      HitchinPresident,
      Chief Executive Officer(Principal
      executive officer)Date
      May 17, 2010
                    /s/
      James DorstJames
      DorstChief
      Financial Officer(Principal
      financial officer and principal accounting
  officer)


16