U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

Form 10-QSB

(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, 2001

|[  ] | 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      | (I.R.S. Employer Identification Number)
|of incorporation or organization)

14405 21stAvenue N, Suite 111 Minneapolis, Minnesota
55447-4638 (Address of principal executive offices)

(763) 745-4120 (Issuers telephone number)

Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 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

The number of shares of the Registrants common stock, par value $.25 per
share, outstanding on May 10, 2001 was 7,136,313.

Transitional Small Business Disclosure Format (Check One): Yes  No X

# SpectraSCIENCE, Inc.

# FORM 10-QSB

# March 31, 2001

# Table of Contents

`PART I -- FINANCIAL INFORMATION.........................................................3
   ITEM 1.     FINANCIAL STATEMENTS.....................................................3
   ITEM 2.     MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
               AND RESULTS OF OPERATIONS................................................6

PART II -- OTHER INFORMATION............................................................8
   ITEM 1.     LEGAL PROCEEDINGS........................................................8
   ITEM 2.     CHANGES IN SECURITIES....................................................8
   ITEM 3.     DEFAULTS UPON SENIOR SECURITIES..........................................8
   ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................8
   ITEM 5.     OTHER INFORMATION........................................................8
   ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K.........................................9

SIGNATURES.............................................................................10`

Page 2

PART I  FINANCIAL INFORMATION

# SpectraSCIENCE, Inc.

# FORM 10-QSB

# BALANCE SHEETS (Unaudited)

|                                       | March 31,2001 | December 31,2000(1)
|-------------------------------------- | ------------- | -------------------
|
|ASSETS                                 |               |                    
|Current assets:                        |               |                    
|Cash and cash equivalents              |               |                    
|Inventory                              |               |                    
|Other current assets                   |               |                    
|                                      
|Total current assets                   |               |                    
|Net fixed assets                       |               |                    
|Other assets                           |               |                    
|                                      
|TOTAL ASSETS                           |               |                    
|                                      
|LIABILITIES AND SHAREHOLDERS EQUITY   |               |                    
|Current liabilities:                   |               |                    
|Accounts payable                       |               |                    
|Note payable - trade creditors         |               |                    
|Accrued compensation and taxes         |               |                    
|Accrued expenses                       |               |                    
|Accrued clinical research fees         |               |                    
|                                      
|Total current liabilities              |               |                    
|                                      
|SHAREHOLDERS EQUITY                   |               |                    
|Common stock, $.25 par value:          |               |                    
|Authorized--17,000,000 shares          |               |                    
|Issued and outstanding--               |               |                    
|7,004,438 shares on March 31, 2001 and |               |                    
|7,004,438 shares on December 31, 2000  |               |                    
|Additional paid-in capital             |               |                    
|Accumulated deficit                    |               |                    
|                                      
|TOTAL SHAREHOLDERS EQUITY             |               |                    
|                                      
|TOTAL LIABILITIES AND                  |               |                    
|SHAREHOLDERS EQUITY                   |               |                    
|                                      

|(1) | The balance sheet on December 31, 2000 is derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See notes to financial statements.

Page 3

# SpectraSCIENCE, Inc.

# FORM 10-QSB

# STATEMENTS OF OPERATIONS(Unaudited)

|                                           | Three Months EndedMarch 31
|------------------------------------------ | --------------------------
|
|Operating expenses                         |                           
|Research and development                   |                           
|Selling, general and administrative        |                           
|                                          
|Total operating expenses                   |                           
|                                          
|Interest and other income                  |                           
|                                          
|Net loss                                   |                           
|                                          
|Net loss per common share                  |                           
|                                          
|Weighted average common shares outstanding |                           

See notes to financial statements.

Page 4

# SpectraSCIENCE, Inc.

# FORM 10-QSB

# STATEMENTS OF CASH FLOW (Unaudited)

|                                                    | Three Months EndedMarch 31
|--------------------------------------------------- | --------------------------
|
|OPERATING ACTIVITIES                                |                           
|Net loss                                            |                           
|Adjustments to reconcile net loss to cash used in   |                           
|operating activities:                               |                           
|Depreciation                                        |                           
|Changes in operating assets and liabilities:        |                           
|Increase in inventories                             |                           
|Decrease in other current assets                    |                           
|Increase (Decrease) increase in current liabilities |                           
|                                                   
|Net cash used in operating activities               |                           
|                                                   
|INVESTING ACTIVITIES                                |                           
|Purchase of fixed assets                            |                           
|Decrease in long term commitment                    |                           
|                                                   
|Net cash used in investing activities               |                           
|                                                   
|FINANCING ACTIVITIES                                |                           
|Proceeds from issuance of common stock              |                           
|                                                   
|Net cash provided by financing activities           |                           
|                                                   
|Net increase in cash and cash equivalents           |                           
|                                                   
|Cash and cash equivalents at beginning of period    |                           
|                                                   
|Cash and cash equivalents at end of period          |                           
|                                                   

See notes to financial statements.

Page 5

# SpectraSCIENCE, Inc.

# FORM 10-QSB

# March 31, 2001

Safe Harbor Statement Under the Private Securities Litigation Reform
Act of 1995

Certain statements in this
Form 10-QSB constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Words or phrases such
as may, expects, will continue, is
anticipated, management believes, estimate,
projects, hope or similar expressions or the negatives
thereof identify forward-looking statements. Such forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical, currently anticipated or projected results.
We caution you not to place undue reliance on forward-looking statements. Please
refer to Exhibit 99 of the Companys Annual Report on Form 10-KSB for the
year ended December 31, 2000, for certain important cautionary factors, risks
and uncertainties related to forward-looking statements.

NOTES TO FINANCIAL STATEMENTS

Note A      Basis of Presentation

The accompanying unaudited
financial statements of SpectraSCIENCE, Inc. (the Company or
we) have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2001. These statements should be read in conjunction with the financial
statements and related notes which are incorporated by reference in the
Companys Annual Report on Form 10-KSB for the year ended December 31,
2000.

Note B      Net Loss Per Share

Net loss per share is
computed using the weighted average number of common shares outstanding during
the period. Common equivalent shares from stock options and warrants are
excluded from the computation as their effect is anti-dilutive. In February
1997, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
128, Earnings Per Share (the Statement). This
Statement replaces the presentation of primary earnings per share (EPS) with
basic EPS and also requires dual presentation of basic and diluted EPS for
entities with complex capital structures. This Statement was effective for the
fiscal year ending December 31, 1998. For the quarter ended March 31, 2001,
there is no difference between basic earnings per share under Statement No. 128
and primary net loss per share as reported.

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

(a)      Business

SpectraSCIENCE, Inc.
(the Company or SpectraSCIENCE) 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 Optical Biopsy System is
SpectraSCIENCEs first fully developed product to incorporate
its proprietary Laser Induced Fluorescence

Page 6

technology for worldwide clinical
use. SpectraSCIENCE received final FDA approval and European CE mark
approval in the last quarter of the year 2000.

The Companys corporate
offices are located at 14405 21st Avenue N, Suite 111, Minneapolis,
Minnesota 55447. The Companys telephone number is (763) 745-4120, its fax
number is (763) 745-4126, and its e-mail address is
admin@spectrascience.com. The Company also has a web-site that can be
accessed athttp://www.spectrascience.com. The Companys
Common Stock is traded on the Over-The-Counter Bulletin Board under the symbol
SPSI.

(b)      Results of Operations

The Company recorded no
revenue for the three months ended March 31, 2001 and March 31, 2000. As a
result, the Company had no cost of products sold or gross profit for the same
periods.

Overall research and
development expenses for the three months ended March 31, 2001 were $610,828,
compared to $334,573 for the same period in 2000, an increase of 82.5%. Research
and development expenses related specifically to new product and application
development for the three months ended March 31, 2001 were $543,915, compared to
$334,573 for the same period in 2000. During this period our research and
development resources were focused on three cost-effectiveness and outcome based
clinical studies, product refinement, and developing our platform technology for
an additional application. The increase was primarily due to (i) clinical
contract expenses, (ii) increased consulting expenses related to development of
a next generation product, (iii) increased salary expense due to the addition of
an engineer, and (iv) increased expenses relating to design engineering and
product development for an additional application.

Research and development
expenses related to the development of manufacturing operations and processes
for the three months ended March 31, 2001 were $66,913, compared to $0 for the
same period in 2000. The increase was primarily due to (i) the hiring of a
manufacturing engineer and an assembler, and (ii) an increase in tools and
supplies expense. We expect to continue to have increased expenses for
manufacturing operations as we prepare for anticipated sales.

Selling, general and
administrative expenses for the three months ended March 31, 2001 were $291,397,
compared to $242,518 for the same period in 2000. The increase of 20.2% was
primarily due to increased expenses related to hiring a director of marketing; a
position that was vacant during the same period in 2000.

Interest and other income for
the three months ended March 31, 2001 was $45,657, compared to $52,588 for the
same period in 2000. The decrease of 13.2% was due to lower balances in cash and
cash equivalents.

As a result of the above
factors, the net loss for the three months ended March 31, 2001 was $856,568,
compared to a net loss of $524,503 for the same period in 2000. This represents
an increase of 63.3% from the same period in 2000. The net loss per share for
the three months ended March 31, 2001 was $.12 compared to $.08 for the same
period in 2000.

(c)      Liquidity and Sources of Capital

Cash and cash equivalents on
March 31, 2001 were $2,630,382, compared to $3,734,422 on December 31, 2000. The
decrease in our cash position from December 31, 2000 to March 31, 2001 was
primarily the result of operations.

Page 7

The working capital of the
Company on March 31, 2001 was $2,730,331, compared to $3,571,776 on December 31,
2000. This decrease of 23.6% was primarily due to the net loss for the reasons
previously stated.

Net cash used in operating
activities for the three months ended March 31, 2001 was $1,097,311, compared to
$501,533 for the same period in 2000. The increased use of cash was primarily
due to the larger net loss, an increase in inventory levels and a reduction in
current liabilities between the same periods each year.

Net cash used in investing
activities for the three months ended March 31, 2001 was $6,729 compared to net
cash used of $24,587 for the same period in 2000. This decrease was due to the
reduction of a long-term commitment.

There was no cash provided by
financing activities for the three months ended March 31, 2001, compared to $641,138 for
the same period in 2000.

## PART II  OTHER INFORMATION

## ITEM 1. LEGAL PROCEEDINGS

| | Not
Applicable
| | --------------

## ITEM 2. CHANGES IN SECURITIES

| | Not
Applicable
| | --------------

## ITEM 3. DEFAULTS UPON SENIOR SECURITIES

| | Not
Applicable
| | --------------

## ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

| | Not
Applicable
| | --------------

## ITEM 5. OTHER INFORMATION

(a)      Warrant Exercises

On April 2, 2001 the Company
received net proceeds of $511,015 from the exercise of warrants to purchase
131,875 shares of Common Stock at $3.875 per share. These warrants were held by
shareholders who invested in the Companys private placement of common
stock in March 1999. These warrants were scheduled to expire on March 12, 2001
and on March 31, 2001, but the Company extended the expiration date for those
warrants expiring March 12, 2001 to March 31, 2001, and reduced the exercise
price for all the warrants from $5.00 per share to $3.875. Warrants, as amended,
to purchase 15,000 shares of Common Stock were not exercised and expired.

(b)     Cost Effectiveness and Outcome Clinical Studies

The Company commenced a clinical
outcome/evidence based clinical study at St. Marks Hospital and Academic Institute,
London, United Kingdom during January 2001. St. Marks Hospital is an international
referral center specializing in diseases of the colon. The European Union requires
evidence of cost effectiveness similar to the United States. St. Marks has a well
respected protocol system to prove effectiveness of new technologies.

Page 8

The Company commenced a
clinical outcome and cost effectiveness study at the Veterans Administration
Medical Center (VAMC), Minneapolis, Minnesota during February 2001. Dr. John
Bond, Chief of Gastroenterology at VAMC is serving as the Principle Investigator
for the study. Dr. Bond, Past President of the American Society for
Gastrointestinal Endoscopy, was commissioned by the society, to author the
currently used clinical guidelines for endoscopic colon cancer screening. As
current chair of the Digestive Health Initiatives Colorectal Education
Campaign for prevention and treatment of colorectal diseases, Dr. Bond is in a
unique position to assess the Optical Biopsy System for clinical outcomes
and cost effectiveness.

During March 2001, the
Company commenced a Managed Care clinical outcome and cost-effectiveness study
at Park Nicollet Institute, Minneapolis, Minnesota. Park Nicollet uses flexible
sigmoidoscopy as part of its colorectal screening program for all of its
estimated 44,000 patients age 50 and older, the group considered at
average risk for developing the disease.

Each the three clinical
studies initiated during the first quarter of 2001 are reflective of the
Companys marketing strategy to perform our post-approval cost
effectiveness studies to demonstrate the financial viability of the Optical
Biopsy System with the premier thought leaders in the US and Europe.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Form 8-K:      No reports on Form 8-K were filed by the
Company during the quarter covered by this report.

Page 9

# SpectraSCIENCE, Inc.

# FORM 10-QSB

# March 31, 2001

# 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)                                                                                
|------------------------ | -----------------------------------------------------------------------------------------------------------------------
|                         |                                                                                                                        
|May 14, 2001        Date | /s/ Chester E. Sievert, Jr.
CHESTER E. SIEVERT, JR.
President and Chief Executive Officer
(Principal Executive Officer)

Page 10