**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**FORM
      10-KSB**





(Mark
      One)


x  ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      fiscal year ended: DECEMBER 31, 2006





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





For
      the
      transition period from ______________ to ______________





Commission
      File Number: 0-13092





**SPECTRASCIENCE,
      INC.**


(Development
      Stage Enterprise)




(Name
      of
      small business issuer in its charter)


MINNESOTA
              41-1448837(State
                  of incorporation)
              (I.R.S.
                  Employer Identification No.)11568-11
                  Sorrento Valley Road, San Diego, CA
              92121(Address
                  of principal executive offices)
              (Zip
                  Code)


Issuer’s
      telephone number: (858) 847-0200





Securities
      registered under Section 12(b) of the Exchange Act: NONE





Securities
      registered under Section 12(g) of the Exchange Act:


COMMON
      STOCK, $0.01 PAR VALUE


(Title
      of
      Class)





Check
      if
      the issuer is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Exchange Act.


o





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








Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yeso Nox





Issuer’s
      revenues for each of its fiscal years ended December 31, 2006 and 2005 were:
      $0





As
      of
      March 23, 2007, the number of outstanding shares of the Registrant’s Common
      Stock, par value $0.01 per share, was 38,370,087. The aggregate market value
      of
      the voting stock held by non-affiliates of the registrant was approximately
      $34,722,414 based on the last reported sale price of $1.23 on March 23, 2007.
      (Symbol SCIE:OB)





**ISSUERS
      INVOLVED IN BANKRUPTCY**


**PROCEEDINGS
      DURING THE PAST FIVE YEARS**





Check
      whether the issuer has filed all documentation and reports required to be filed
      by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of
      securities under a plan confirmed by a court.


Yes x No
      o





**DOCUMENTS
      INCORPORATED BY REFERENCE**





**None**





Transitional
      Small Business Disclosure Format (Check one): Yes o No x


2


**SPECTRASCIENCE,
      INC.**


(A
      Development Stage Enterprise)





**FORM
      10-KSB**


**For
      the Fiscal Year Ended December 31, 2006**





TABLE
      OF
      CONTENTS





Page


BACKGROUND
              4PART
                  I
              5Item
                  1. Description of Business
              5Item
                  2. Description of Property
              20Item
                  3. Legal Proceedings
              20Item
                  4. Submission of Matters to a Vote of Security Holders
              21PART
                  II
              22Item
                  5. Market for Common Equity and Related Stockholder
                  Matters
              22Item
                  6. Management’s Discussion and Analysis or Plan of
                  Operation
              25Item
                  7. Financial Statements
              42Item
                  8. Changes in and Disagreements with Accountants on Accounting
                  and
                  Financial Disclosure
              59Item
                  8A. Controls and Procedures
              59Item
                  8B. Other Information
              59PART
                  III
              60Item
                  9. Directors and Executive Officers. Promoters and Control Persons,
                  Compliance with Section 16(a) of the Exchange Act
              60Item
                  10. Executive Compensation
              62Item
                  11. Security Ownership of Certain Beneficial Owners and Management
                  and
                  Related Stockholder Matters
              64Item
                  12. Certain Relationships and Related Transactions, and Director
                  Independence
              65Item
                  13. Exhibits
              65Item
                  14. Principal Accountant Fees and Services
              66SIGNATURES
              67




3




FORWARD-LOOKING
      STATEMENTS





Certain
      statements in this Annual Report on Form 10-KSB constitute “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.





BACKGROUND





SpectraScience,
      Inc. (the “Company”) filed for bankruptcy protection on September 13, 2002 (US
      Bankruptcy Court, District of Minnesota, Case No. 02-42904). The case was
      converted from a liquidation under Chapter 7 to a Chapter 11 reorganization
      in
      early 2003. The Company’s Plan of Reorganization (the “Plan” or the “Plan of
      Reorganization”) was confirmed on July 22, 2004 and became effective on August
      23, 2004. However, the Company received funding and commenced operations
      effective August 2, 2004. As of August 2, 2004 (for purposes of this Report,
      the
“Effective Date”) the Company became the “Successor Company.” The Company as it
      existed prior to August 2, 2004 is referred to as the “Predecessor Company.”
During the bankruptcy the Company was under the control of a court appointed
      trustee and had no management (all officers and directors resigned), no legal
      counsel, no independent auditors, no transfer agent, and no operations.





The
      Predecessor Company last filed a report on Form 10-KSB for the fiscal year
      ended
      December 31, 2001 (filed March 29, 2002). It filed reports on Form 10-QSB for
      the first two quarters of 2002. It did not file reports on Form 10-KSB for
      the
      fiscal years ended December 31, 2002 and 2003. It did not file any quarterly
      or
      other reports in 2003 or 2004, except for a report on Form 8-K filed on February
      7, 2003 concerning conversion of its bankruptcy case from Chapter 7
      (liquidation) to Chapter 11 (reorganization) and a report on Form 8-K filed
      on
      August 6, 2004 concerning confirmation of the Plan and related matters. The
      Successor Company filed a report on Form 10-KSB for the fiscal years ending
      December 31, 2005, 2004, 2003 and 2002 and has filed reports on Form 10-QSB
      for
      the first three quarters of 2006.





The
      Company has adopted “fresh-start reporting” effective August 2, 2004, given the
      absence of any operating activity or other significant activity for almost
      two
      years, in accordance with the guidelines of the A.I.C.P.A.’s Statement of
      Position 90-7, “Financial Reporting by Entities in Reorganization Under the
      Bankruptcy Code” (“SOP 90-7”).




4




This
      report on Form 10-KSB covers the fiscal years ended December 31, 2006 and 2005,
      including financial statements and notes thereto for each year. In addition,
      this report includes financial data from the inception date (August 2, 2004)
      to
      December 31, 2006.





**PART
      I**





ITEM
      1.
      DESCRIPTION OF BUSINESS.





General


Our
      principal executive offices are located at 11568 Sorrento Valley Rd., Suite
      11,
      San Diego, CA 92121. You can reach us 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 is
      not
      deemed to be a part of this document.





Development
      of the Business


SpectraScience,
      Inc. (“SpectraScience” or the “Company”) was incorporated in the State of
      Minnesota on May 4, 1983 as GV Medical, Inc. In October 1992, GV Medical
      discontinued its prior business, refocused its development efforts and changed
      its name to SpectraScience, Inc. From 1996 until filing for bankruptcy in 2002,
      the Company primarily focused on developing the WavSTAT (TM) Optical
      Biopsy System (“WavSTAT (TM) System”). The WavSTAT (TM) System
      is a proprietary, minimally invasive technology that optically scans tissue
      in
      real-time to distinguish between normal and pre-cancerous or cancerous tissue,
      without the need to remove tissue from the body.





Reorganization


On
      September 13, 2002, the Company voluntarily filed for bankruptcy protection
      under Chapter 7 of the Bankruptcy Code. After negotiations between the Trustee,
      the Creditor Committee, and a potential investor, it was agreed that the case
      should be converted to a Chapter 11 reorganization. On February 5, 2003, the
      Court signed an order converting the case to a Chapter 11 case. Negotiations
      with the potential investor discontinued and a new investor proposed a Plan
      dated May 12, 2004. The bankruptcy court gave final approval to the Plan on
      July
      22, 2004, and the Plan became effective on August 23, 2004. The Company received
      funding and commenced operations effective August 2, 2004. As of August 2,
      2004
      (for purposes of this Report, the “Effective Date”) the Company became the
“Successor Company.” The Company as it existed prior to August 2, 2004, is
      referred to as the “Predecessor Company.”





Under
      the
      Plan, the Company:





§
            settled
                and canceled notes, warrants and monetary claims on August 23, 2004
                of
                $952,570 ($331,270 from the former CEO, $535,000 from note and warrant
                holders and $86,300 in accrued interest) by the issuance of 6,250,020
                shares of common stock.





§
            issued
                11,076,447 shares of common stock to stockholders who participated
                in an
                offering of three new shares of common stock in exchange for cancellation
                of one outstanding share and $0.24 cash generating cash proceeds
                of
                $886,116.




5





§
            issued
                12,384,298 shares to Spectra Acquisition LLC (“SA LLC”), the sponsor of
                the Plan, in satisfaction of a $50,000 investment and as an incentive
                to
                carrying out the Plan.





§
            settled
                claims to vendors of $66,222 through the payment of cash in the amount
                of
                $5,885. The remaining amount of $60,337 was written
                off.





§
            settled
                claims to employees in the amount of $34,762 through the payment
                of cash
                of $6,273. The remaining amount of $28,489 was written
                off.





§
            wrote
                off liabilities in the amount of $108,699 for accrued liabilities
                and
                trade notes payable that was not to be paid as part of the
                Plan.





§
            on
                the Effective Date, the Company established a new Board of Directors
                consisting of Jim Hitchin, Mark D. McWilliams, Rand Mulford and Chester
                Sievert. Mr. Hitchin was elected President, Chief Executive Officer,
                Secretary and Chief Financial Officer. Under the Plan the Board of
                Directors shall remain in place for three years after the Effective
                Date,
                at which time the bylaws then in effect shall determine
                elections.





Products
      and Markets





Our
      first
      product, which has been approved for marketing by the US Food and Drug
      Administration (the “FDA”), is used during endoscopy of the colon when screening
      for colon cancer. We are currently in a clinical trial of a product using the
      same technology for detecting esophageal cancer. We believe that our core
      technology is a platform that can be developed for use in many areas of the
      human body to detect pre-cancer and cancer.





Industry
      Overview





COLORECTAL
      CANCER





The
      American Cancer Society reports colorectal cancer as the third most common
      cancer diagnosed in the United States ("US") with approximately 148,610 new
      cases of colorectal cancer diagnosed in 2006. With an estimated 55,170 deaths
      in
      2006, colorectal cancer is the third leading cause of cancer death in the USA.
      Candidates for colorectal cancer screening include all persons, with or without
      symptoms, over the age of 50 (or an estimated 100 million people in the US)
      and
      will increase 20% over the next ten years. Colorectal cancer statistics for
      the
      European Union are similar.





Colorectal
      cancer is primarily diagnosed through the discovery and histo-pathologic
      analysis of polyps. Colon polyps are small masses of tissue found in the lining
      of the colon that may be either benign or malignant. The most commonly performed
      and generally accepted colorectal cancer screening procedure to detect polyps
      is
      an endoscopy of the lower colon also known as a flexible sigmoidoscopy or a
      full
      colonoscopy. According to the American Society for Gastrointestinal Endoscopy
      guidelines for colorectal cancer screening, large polyps (greater than 1
      centimeter) are generally removed and sent to pathology for evaluation. On
      the
      other hand, the guidelines further state that small polyps (less than 1
      centimeter which account for approximately 85% of all “polyps”) require
      "individualized treatment on a case by case basis". The clinical utility of
      the
      WavSTATTM System occurs when the physician must decide the best course of
      treatment for small polyps. When small polyps are found, it is left to the
      physician's discretion, based on a visual assessment and other factors, whether
      to remove the polyp, place the patient under surveillance, or to biopsy. If
      a
      biopsy is performed and cancer or pre-cancer is documented by pathology, the
      entire polyp must then be removed during a second endoscopy procedure.




6




Using
      current procedures and techniques to detect and treat colorectal cancer,
      five-year survival rates as reported by the American Cancer Society are as
      follows:





§
            90%
                of patients live five years or longer, if the cancer is detected
                and
                treated at an early stage;




§
            only
                67% of patients live five years or longer, if the cancer spreads
                outside
                the polyp and colon to nearby organs or lymph nodes;
                and




§
            the
                five-year survival rate for those patients in whom the cancer has
                spread
                further to the liver or other organs drops dramatically to
                10%.





These
      statistics indicate that early detection is essential to long-term survival.
      Unfortunately, the American Cancer Society reports that only 39% of colorectal
      cancers are currently found at an early stage. Clinical studies indicate that
      colorectal cancer screening procedures result in earlier detection and can
      prevent as many as 20% to 40% of potential colorectal cancers and subsequently
      reduce colorectal cancer deaths by 30% to 50%. Colorectal screening procedures
      not only save lives, they also save money. If a patient is not diagnosed until
      symptoms develop and the disease has spread, or if misdiagnosed at an early
      stage, the chance of patient survival plummets and more advanced treatment
      regimens such as surgery, chemotherapy and/or radiation are necessary to treat
      the patient.





The
      WavSTATTM System was specifically designed to be used during screening endoscopy
      of the colon to aid and improve the physician's ability to identify small polyps
      as normal, pre-cancerous or cancerous tissue in real time. Results from the
      Company's FDA regulated clinical studies performed at the Mayo Clinic
      (Rochester, MN), Massachusetts General Hospital (Boston, MA), Hennepin County
      Medical Center (Minneapolis, MN) and Minnesota Gastroenterology P.A. (St. Paul
      and Minneapolis, MN) demonstrated that using the WavSTATTM System during
      colorectal endoscopic screening increased the physician's diagnostic accuracy
      to
      detect pre-cancerous or cancerous polyps from 82.7% to 96.3%, a very significant
      statistical increase.





Based
      on
      the results demonstrated by these clinical studies, management believes that
      using the WavSTATTM System will:





§
            Significantly
                improve the physician's diagnostic accuracy to determine whether
                small
                polyps in the colon are pre-cancerous or
                cancerous;





§
            Improve
                patient survival rates by earlier detection and treatment of cancers,
                and
                more importantly pre-cancers, by more accurately identifying cancers
                or
                pre-cancers the physician may
                misdiagnose;




7




§
            Improve
                the patient's quality of life by providing an immediate analysis
                of the
                tissue, thereby eliminating the anxiety of waiting several days to
                hear
                the pathology results;





§
            Enable
                the physician to diagnose and treat the patient during the same endoscopy
                procedure with the same biopsy instrument, thereby potentially reducing
                the need for scheduling a second expensive endoscopy for treatment
                purposes;





§
            Be
                cost effective by significantly reducing the number of physical biopsies
                performed and by reducing the need for an unnecessary second endoscopy;
                and





§
            Be
                cost effective by reducing the number of misdiagnosed patients, thereby
                potentially eliminating the need for more costly advanced treatments
                such
                as surgery, chemotherapy and/or
                radiation.





ESOPHAGEAL
      CANCER





The
      Company plans to complete a second application with the FDA for the WavSTATTM
System for the detection of pre-cancerous and cancerous tissue in the esophagus.
      The incidence of esophageal cancer in the U.S. is growing at a rate which is
      five times faster than any other type of cancer.





The
      progression toward esophageal cancer begins with several pre-cancerous stages.
      It is critical for the physician to be able to identify these various stages
      of
      the disease in order to deliver the most appropriate treatment. As with
      colorectal cancer, early and accurate detection of esophageal cancer results
      in
      less invasive, more cost effective treatments with a greater chance for long
      term patient survival.





Barrett’s
      esophagus is a condition of the lining of the lower esophagus thought to be
      caused primarily by Gastro Esophageal Reflux Disease (“GERD”), more commonly
      known as chronic heartburn. Barrett’s esophagus is considered to be a
      pre-malignant stage and a precursor to esophageal cancer. Physicians typically
      recommend that persons with chronic heartburn should have an endoscopy to look
      for Barrett’s esophagus. Some Barrett’s patients will advance further to a stage
      where additional abnormal tissue called dysplasia is present. Dysplasia is
      known
      to be the next progressive step toward esophageal cancer and is categorized
      in
      stages of low grade and high grade. Barrett’s esophagus, dysplasia and
      esophageal cancer patients are currently diagnosed by an endoscopy of the
      esophagus with multiple physical biopsies of the inner lining.





High-grade
      dysplasia is a very critical stage to correctly diagnose because physicians
      frequently recommend surgical resection or removal of the esophagus if Barrett's
      esophagus with high-grade dysplasia is diagnosed. Unfortunately for the patient,
      dysplasia is difficult to find and/or diagnose because it is not reliably
      visible to the physician during standard endoscopy. Diagnosis is critical,
      therefore biopsies (as many as 20 at once) are performed either randomly or
      in a
      geometric pattern throughout the length of the esophagus in the hope of finding
      the most appropriate tissue to biopsy.





Current
      medical practice typically follows the guidelines described below:




8





§
            Patients
                with chronic GERD receive a screening endoscopy of the esophagus
                with
                multiple biopsies to check for Barrett's
                esophagus;





§
            Patients
                with Barrett's esophagus receive an endoscopy with multiple biopsies
                every
                two years to check for dysplasia;





§
            Patients
                with Barrett's esophagus that has progressed to include low grade
                dysplasia receive an endoscopy with multiple biopsies every 6 months
                to
                check for high grade dysplasia; and





§
            Patients
                with Barrett's esophagus that has progressed to include high grade
                dysplasia receive an endoscopy with multiple biopsies every 3 months
                to
                check for cancer and/or may be referred for esophageal surgical resection,
                photodynamic therapy or electrical
                ablation.





The
      American Cancer Society estimates that 14,550 new cases of esophageal cancer
      were diagnosed in the year 2006, with a greater than 90% mortality rate. The
      relatively high death rate associated with esophageal cancer typically results
      from a lack of diagnosis until the cancer has grown to an advanced stage. As
      previously described, the frequency of endoscopic surveillance for these
      patients increases as the pre-cancerous stages advance in hopes of providing
      the
      earliest possible diagnosis.





SpectraScience
      completed a clinical study in April 2002 using its WavSTATTM System for the
      detection of pre-cancerous and cancerous tissue in the esophagus. This clinical
      trial was designed to determine the viability of using our spectroscopic
      techniques to detect esophageal cancer in Barrett's patients, and to develop
      and
      demonstrate the feasibility of the WavSTATTM System for this type of application.
      A total of 87 patients with Barrett's esophagus were enrolled into the trial
      with 326 optical and physical biopsies taken. The results of our preliminary
      evaluation show that we were able to obtain a sensitivity of 95% and a
      specificity of 80% in determining high grade versus low grade dysplasia or
      non-dysplastic Barrett's esophagus. These results suggest that use of the
      WavSTATTM System is feasible in detecting Barrett's esophagus at its various
      stages. We are adding additional patients to this study to provide sufficient
      information for an application to the FDA with a PMA supplement. A clinical
      study is in process and is expected to be completed in 2007.





WavSTAT (TM) Optical
      Biopsy System


______________________________




The
      WavSTAT (TM) Optical
      Biopsy System allows the endoscopist to distinguish in real time whether tissue
      is normal, as opposed to pre-cancerous or cancerous, by optically scanning
      tissue with an optical fiber and obtaining an instant analysis. Management
      believes use of the WavSTAT (TM) System
      can significantly improve the endoscopist’s diagnostic accuracy, enabling the
      endoscopist to immediately determine the best course of treatment for the
      patient, reducing the need for additional procedures, minimizing the number
      of
      biopsies taken and, in some cases, permitting the physician to combine a
      diagnostic and therapeutic procedure in one visit.





Currently
      the WavSTAT (TM) System
      has approval to be marketed with a software application for adjunctive use
      by
      the physician to distinguish in real time whether colon tissue is normal, as
      opposed to pre-cancerous or cancerous. The Company has also developed additional
      statistical algorithm software that can be used with the same
      WavSTAT (TM) System
      to differentiate between normal esophageal tissue or Barrett’s esophagus and
      dysplastic or cancerous tissue.




9




The
      WavSTAT (TM) System
      has three components:





§
            a
                console which houses a laser, electronic components that collect
                emitted
                fluorescent signals, and a computer that operates the WavSTAT(TM)System,





§
            WavSTAT(TM)Optical Biopsy Forceps which incorporate an optical fiber that transmits
                and collects light energy to and from the tissue being evaluated;
                the
                WavSTAT(TM)Optical Biopsy Forceps can also be used to treat the patient by removing
                diseased tissue after diagnosis has been made,
                and





§
            proprietary
                software that manages system operations and a statistical tissue
                recognition algorithm that facilitates data analysis and provides
                an
                interpretation of the tissue.





The
      WavSTAT (TM) System
      operates by transmitting low level monochromatic laser light from the console
      through the optical fiber in the forceps directly to the tissue being analyzed.
      The tissue in contact with the optical fiber absorbs the light, and the
      resulting tissue auto-fluorescence is collected and returned to the console
      for
      analysis by the same optical fiber. The result of the analysis is then
      immediately displayed on the monitor for the endoscopist’s use in making a
      clinical decision.





We
      believe that our core technology can be applied to other medical specialties
      to
      differentiate between normal, and pre cancerous or cancerous tissues in other
      areas of the body. We can provide no assurance that the WavStat (TM) System
      will be commercialized, that we will capture the market share we anticipate,
      or
      that we will successfully adapt the WavSTAT (TM) System
      for use in other medical specialties.





Product
      Research and Development





We
      intend
      to invest in research and development in 2007. However, for the foreseeable
      future, research and development activities may be performed by outside
      consultants.





Our
      near
      term research and development efforts will focus primarily on refining our
      algorithm for a Barrett’s esophagus application.





There
      can
      be no assurance that we will be able to develop other applications for the
      WavSTAT (TM) System.


10


Government
      Regulation





*United
      States*





Extensive
      government regulation, both in the United States and internationally, controls
      the design, manufacture, labeling, distribution and marketing of our products,
      particularly regarding product safety and effectiveness. In the United States,
      medical devices are subject to review and clearance by the FDA. The FDA
      regulates the clinical testing, manufacture, labeling, distribution and
      promotion of medical devices. If we fail to comply with applicable requirements
      we could face:





§
            fines,
                injunctions or civil penalties


§
            recall
                or seizure of our products


§
            criminal
                prosecution


§
            a
                recommendation that we not be allowed to contract with the
                government


§
            total
                or partial suspension of production


§
            inability
                to obtain pre-market clearance/approval for our
                devices


§
            withdrawal
                of marketing approvals





The
      Food,
      Drug, and Cosmetic Act, the Public Health Service Act, and Safe Medical Devices
      Act of 1990 and other federal statutes and regulations also govern or influence
      the testing, manufacture, safety, labeling, storage, recordkeeping, clearance,
      advertising and promotion of such products.





In
      the
      United States, medical devices are assigned to one of three classes depending
      on
      the controls the FDA deems necessary to ensure the safety and effectiveness
      of
      the device. The WavSTAT (TM) System
      is a Class III device. In addition to adhering to general controls to which
      all
      medical devices are subject, and special controls such as performance standards,
      post-market surveillance and patient registries, a Class III device must receive
      pre-marketing approval to ensure its safety and effectiveness prior to
      commercialization.





FDA
      approval to distribute a new device can be obtained in one of two ways. If
      a new
      or significantly modified device is “substantially equivalent” to an existing
      legally marketed device, the new device can be commercially introduced after
      filing a 510(k) pre-market notification with the FDA and the subsequent issuance
      by the FDA of an order permitting commercial distribution. Changes to existing
      devices that do not significantly affect safety or effectiveness may be made
      without an additional 510(k) notification. We received 510(k) clearance from
      the
      FDA for our disposable and reusable Optical Biopsy Forceps in December
      1996.





A
      second,
      more comprehensive approval process applies to a Class III device that is not
      substantially equivalent to an existing product. First, the applicant must
      conduct clinical trials in compliance with testing protocols approved by the
      Institutional Review Board at each participating research institution. These
      boards oversee and approve all clinical studies at their institutions. Second,
      a
      Pre-Market Approval (PMA) application must be submitted to the FDA describing
      (i) the clinical trial results, (ii) the device and its components, (iii) the
      methods, facilities and controls used for manufacture of the device, (iv)
      proposed labeling and advertising literature, and (v) the demonstration that
      the
      product is safe and effective.




11




If
      the
      FDA determines, upon receipt of the PMA application, that the application is
      sufficiently complete to permit a substantive review, they will accept the
      application for filing. Review of a pre-market approval application typically
      takes from six months to two years from the date the application is accepted
      for
      filing, but can be significantly longer. Often, during the review period, a
      panel primarily composed of clinicians and acting as an advisory committee,
      will
      likely be convened to review, evaluate, and provide non-binding recommendations
      to the FDA as to whether the device should be approved. Toward the end of the
      application review process, the FDA generally will conduct an inspection of
      the
      manufacturer’s facilities to ensure that the facilities are compliant with the
      applicable Quality System Regulations requirements.





If
      FDA
      evaluations of both the PMA application and the manufacturing facilities are
      favorable, the FDA will issue either an approval letter or a conditional
      approval letter which contains a number of conditions that must be satisfied
      in
      order to secure final approval of the PMA application. When and if those
      conditions are fulfilled to the satisfaction of the FDA, they will issue a
      pre-market approval letter, authorizing commercial marketing of the device
      for
      certain indications. If the FDA’s evaluation of the PMA application or
      manufacturing facilities is not favorable, the FDA will deny approval of the
      application or issue a “not approvable letter.” The FDA may also determine that
      additional clinical trials are necessary, in which case pre-market approval
      could be delayed for several years while additional clinical trials are
      conducted and submitted in an amendment to the PMA application. The pre-market
      approval process can be expensive, uncertain and lengthy, and a number of
      devices for which FDA approval has been sought have never been approved for
      marketing.





Any
      products manufactured or distributed pursuant to FDA clearances or approvals,
      are subject to pervasive and continuing regulation by the FDA, including
      record-keeping requirements and reporting of adverse experiences when using
      the
      product. Device manufacturers are required to register their establishments
      and
      list their devices with the FDA and certain state agencies, and are subject
      to
      periodic inspections by the FDA and certain state agencies. The Food Drug and
      Cosmetic Act requires devices to be manufactured in accordance with Quality
      System Requirements regulations, which impose procedural and documentation
      requirements upon a manufacturer and any of its contract manufacturers with
      respect to manufacturing and quality assurance activities. Quality System
      Requirements regulations also require design controls and maintenance of service
      records. Changes in existing requirements or adoption or new requirements or
      policies could adversely affect our ability to comply with regulatory
      requirements. Failure to comply with regulatory requirements could have a
      material adverse effect on our business, financial condition or results of
      operations.





The
      Predecessor Company submitted a pre-market approval application for market
      clearance of the WavSTAT (TM) Optical
      Biopsy System for use during endoscopic screening of the colon in September
      1998, and was approved by the FDA in November 2000. Based upon beta site outcome
      clinical studies, features were added to the WavSTAT (TM) System,
      and submitted as a supplement to the original filing in September 2001. The
      supplement for the WavSTAT (TM) II
      System was approved by the FDA in November 2001. The Company submitted a
      supplement for approval of WavSTAT (TM) III in
      February 2002 and approval was received in August 2002. We anticipate that
      product improvements requiring approval, or any new applications, such as for
      Barrett’s esophagus developed for the WavSTAT (TM) System
      will be submitted as supplements to the original filing rather than as original
      PMA filings.




12




We
      are
      also subject to numerous federal, state and local laws relating to such matters
      as safe working conditions, manufacturing practices, environmental protection,
      fire hazard control and disposal of hazardous or potentially hazardous
      substances. We will be subject to additional federal, state and local
      environmental laws when commercial development and production of the
      WavSTAT (TM) System
      begins. We are not aware of any manufacturing methods for the
      WavSTAT (TM) System
      that will require extensive or costly compliance with environmental regulations.
      However, since laws change over time there can be no assurance that (i) we
      will not be required to incur significant costs to comply with all applicable
      laws and regulations in the future, or (ii) the impact of changes in those
      laws
      or regulations or adoption of new laws and regulations will not have a material
      adverse effect upon our ability to do business.





*European
      Union and Other Countries*





The
      European Union encompasses most of the major countries in Europe. The European
      Union has adopted numerous directives and standards regulating the design,
      manufacture, clinical trial, labeling, and adverse event reporting for medical
      devices. The principal directive prescribing the laws and regulations pertaining
      to medical devices in the European Union is the Medical Devices Directive,
      93/42/EEC.





Devices
      that comply with the requirements of the Medical Devices Directive will be
      entitled to bear the CE mark, indicating that the device complies with the
      essential requirements of the applicable directive. In order to sell a medical
      device in the European Union, the product must have the CE mark. Generally,
      companies must also go through the ISO certification process in order to obtain
      the CE mark. SpectraScience received ISO 9001 certification in July 2000, and
      CE
      mark authorization for our products in October 2000. In order to maintain ISO
      9001 certification SpectraScience must undergo a yearly audit to assure the
      European Union regulatory agencies of our compliance with ISO 9001 standards.
      Our last audit was in 2002 and we will therefore have to be re-audited to remain
      ISO 9001 certified. There can be no assurance that we will be able to maintain
      ISO 9001 certification or CE mark authorization for any of our products or
      product components. Furthermore, even though a device bears the CE Mark,
      practical complications may arise with respect to market introduction because
      of
      differences among countries in areas such as labeling requirements. We may
      be
      required to spend significant amounts of capital in order to comply with the
      various regulatory requirements of foreign countries.





In
      addition, other areas of the world such as Japan, Asia and South America may
      be
      targeted for regulatory compliance.





Distribution,
      Marketing and Customers





Our
      primary objective is to become a leader in the development and commercialization
      of advanced proprietary diagnostic products with the capability to differentiate
      in real time between healthy, and pre-cancerous or cancerous tissue. During
      2007, our marketing efforts will be focused on establishing the
      cost-effectiveness of the WavSTAT (TM) System
      and its optical biopsy technology.




13




Demonstrating
      cost-effectiveness to integrated healthcare networks is critical to success
      in
      selling a new product. Cost-effectiveness is demonstrated through outcome-based
      clinical studies, which are essential to initiate the sales cycle. We believe
      that outcome-based trials that demonstrate better clinical outcomes and the
      acceptance of the WavSTAT (TM) System
      by key opinion leaders in the health care industry are critical elements in
      gaining market acceptance by integrated healthcare networks and third party
      reimbursement for the WavSTAT (TM) System.





Product
      introduction will require a sales force or a strategic corporate partner that
      has strongly established call patterns within Managed Care (examples of Managed
      Care Organizations are HMOs and PPOs. Kaiser Permanente is an example in the
      Western United States). We believe the availability of clinical support
      specialists to support the sales force, and to conduct training seminars to
      educate endoscopists and other health care providers regarding proper use of
      the
      WavSTAT (TM) System,
      will be a strong component of a product introduction strategy.





We
      may
      seek a strategic partner or alliance to further develop and implement product
      introduction, marketing and sales capabilities. We would focus on partners
      with
      large sales forces and established call patterns within Managed Care
      Organizations in the US. We can provide no assurance that we will be able to
      enter into such strategic partnerships on favorable terms or at all. Currently,
      we intend to use distributors in international target markets. The distributors
      should have significant resources and strong franchises which, when coupled
      with
      our technology, will increase the likelihood of commercial success in those
      markets.





Third-Party
      Reimbursement





We
      plan
      to market and sell the WavSTAT (TM) Optical
      Biopsy System and other products primarily through hospitals and clinics. In
      the
      United States, the purchasers of medical devices generally rely on Medicare,
      Medicaid, private health insurance plans, health maintenance organizations
      and
      other sources of third party reimbursement for health care costs, to reimburse
      all or part of the cost of medical devices and/or the procedure in which the
      medical device is used. Sales of the WavSTAT (TM) System
      will, in part, be dependent on the availability of adequate reimbursement from
      these third party payors for procedures carried out using our products. We
      believe that less invasive procedures generally provide less costly overall
      therapies compared to conventional drugs, surgery and other treatments. We
      anticipate hospital administrators and physicians will justify the use of our
      products by the cost and timesaving recognized and clinical benefits that we
      believe will be derived from the use of our products.





Third
      party payors determine whether to provide coverage for a particular procedure
      and reimburse health care providers for medical treatment at a fixed rate based
      on the diagnosis-related group established by the Center for Medicare and
      Medicaid Services (“CMS”), formerly known as the Health Care Financing
      Administration (“HCFA”). The fixed rate of reimbursement is based on the
      procedure performed and is unrelated to the specific type or number of devices
      used in a procedure. If a procedure is not covered by a diagnosis-related group,
      payors may deny reimbursement. If reimbursement for a particular procedure
      is
      approved, third party payors will reimburse health care providers for medical
      treatment based on a variety of methods, including a lump sum prospective
      payment system based on a diagnosis-related group or per diem, a blend between
      the health care provider’s reported costs and a fee schedule, a payment for all
      or a portion of charges deemed reasonable and customary, or a negotiated per
      capita fixed payment.




14




Funding
      for Medicare and Medicaid is subject to limits set by Congress. In 1997, as
      part
      of the Balanced Budget Act of 1997, Congress approved Medicare coverage for
      preventive colorectal cancer screening tests. Diagnosis-related group
      reimbursement for endoscopic procedures such as flexible sigmoidoscopy,
      colonoscopy and polypectomy, including fees for physical biopsies, has been
      established. Because studies have shown that colorectal cancer screening can
      prevent 20%-40% of potential colorectal cancers and 30%-50% of colorectal cancer
      deaths, management believes that such funding should lead to (i) greater
      awareness of colorectal cancer among the general population, (ii) larger budgets
      for screening, (iii) higher reimbursement levels, and (iv) potentially the
      establishment of new reimbursement codes for new technologies like optical
      biopsy of the esophagus. This does not, however, provide any assurances that
      the
      increased funding will lead to third party reimbursement for the
      WavSTAT (TM) System.





Therefore,
      upon product introduction, currently existing available codes can be used to
      provide a level of reimbursement to users. Management believes however, that
      currently available reimbursement codes do not adequately reimburse for the
      anticipated value that optical biopsy technology brings to the medical care
      system. Optical biopsies are not currently approved for reimbursement by
      third-party payors, and there can be no assurance that optical biopsy technology
      will be approved for any third party reimbursement, even if it proves to play
      a
      significant role in improving the endoscopist’s ability to accurately
      differentiate among polyps in the colon or Barrett’s esophagus, thereby leading
      to early detection and subsequent treatment.





Medical
      equipment capital costs incurred by hospitals are reimbursed separately from
      diagnosis-related group payments. Changes in federal legislation, or policies
      of
      the government or third-party payors that reduce reimbursements under capital
      cost pass through systems, could adversely affect the market for our
      products.





As
      stated
      previously, demonstrating cost-effectiveness and improved patient outcomes
      is
      critical to the sales cycle since payers evaluate these factors in determining
      whether to reimburse for new technologies. Payers may also delay reimbursement
      decisions for a year or more, even when provided with cost-effectiveness data,
      while they conduct their own technology assessments. The availability of
      peer-reviewed literature regarding the technology may help payers in reducing
      this technology assessment timeline. To promote the dissemination of literature
      regarding the WavSTAT (TM) System
      and optical biopsy technology, SpectraScience intends to have published clinical
      utility data in peer-reviewed journals.





We
      expect
      that there will be continued pressure on cost-containment throughout the United
      States health care system. Cost reduction, cost containment, managed care,
      and
      capitation pricing (putting a ceiling on the price) are very familiar themes
      within healthcare. Limits on third-party reimbursements that lead to cuts in
      reimbursements for new or experimental procedures would affect the ability
      of
      smaller companies with new technologies, to compete with larger established
      firms, or with established technologies. Lobbying activities are often necessary
      to bring to light the value of these new technologies but require extensive
      amounts of corporate resources that the Company may not be able to
      afford.




15




Reimbursement
      systems in international markets vary significantly by country and by region
      within some countries, and reimbursement approvals must be obtained on a
      country-by-country basis. Many international markets have government managed
      health care systems that control reimbursement for new products and procedures.
      In most markets, there are private insurance systems as well as government
      managed systems. Market acceptance of the SpectraScience products will depend
      on
      the availability and level of reimbursement in international markets we target.
      There can be no assurance that we will obtain reimbursement in any country
      within a particular time, for a particular time, for a particular amount, or
      at
      all.





We
      are
      unable to predict what additional legislation or regulation relating to the
      health care industry or third-party coverage and reimbursement may be enacted
      in
      the future, if any, or what effect it might have on us. Reforms may include
      (i)
      mandated basic health care benefits, (ii) controls on health care spending
      through limitations on the growth of private health insurance premiums and
      Medicare and Medicaid spending, (iii) greater reliance on prospective payment
      systems, (iv) the creation of large insurance purchasing groups, and (v)
      fundamental changes to the health care delivery system. Management anticipates
      that Congress and state legislatures will continue to review and assess
      alternative health care delivery systems and payment mechanisms. Due to
      uncertainties regarding the ultimate features of reform initiatives and their
      enactment and implementation, we cannot predict which reform proposals, if
      any,
      will be adopted, when they may be adopted or what impact they may have on
      SpectraScience. Failure by hospitals and other users of our products to obtain
      reimbursement from third-party payors, or changes in government and private
      third-party payors’ policies toward reimbursement for procedures employing our
      products, could have a material adverse effect on our business, financial
      condition and results of operations.





Manufacturing
      and Sources of Supply





To
      date,
      our manufacturing activities have consisted of assembling a limited number
      of
      WavSTAT (TM) Systems
      for use in various clinical trials. We do not have experience in manufacturing
      our products in commercial quantities or with the yields that will be necessary
      for us to achieve significant commercial sales. Currently, we complete the
      basic
      assembly of the WavSTAT (TM) console
      in-house. We assemble the components, all of which are available from more
      than
      one source, and inspect and test the completed systems at our facilities.





The
      WavSTAT (TM) System
      will have to be manufactured in accordance with current Quality System
      Regulations requirements in order for us to sell our products in the U.S.,
      and
      ISO 9001 standards in order for us to sell our products in the European Union.
      These requirements impose certain procedural and documentation requirements
      upon
      us with respect to manufacturing and quality assurance activities, as well
      as
      upon those third parties with whom we contract to perform certain manufacturing
      processes.




16




Many
      of
      the raw materials or components used in the manufacture of our products are
“off
      the shelf” items and are available from more than one vendor. However, certain
      components needed for the manufacture of our product, are available only from
      sole or limited source suppliers. The process of qualifying additional or
      replacement vendors for certain components or services can be time-consuming
      and
      expensive, especially in the medical device industry.





Competition





The
      medical device industry is highly competitive. Management believes the Company
      has few direct competitors in applying spectroscopy for the differentiation
      of
      normal, pre cancerous or cancerous tissues in the gastrointestinal tract;
      however, the development of products using spectroscopic diagnostics for various
      medical specialties is rapidly growing. To the best of our knowledge, no other
      competitors have completed FDA clinical studies or submitted a pre-market
      approval application to the FDA or received CE Mark authority to distribute
      a
      product for the detection of colorectal or esophageal cancer.





The
      companies listed below have developed or are in the process of developing
      products that use light-based spectroscopic technology. They could potentially
      compete with SpectraScience products or technologies. Although none of these
      companies uses a technology or method which is the same as the SpectraScience
      technologies and methods.





§
            Xillix
                Technologies (Richmond, British Columbia, Canada-OTC:XLLTF.PK) has
                a FDA
                approved product that uses light-based (not laser) spectroscopy for
                detection of cancer in the lungs, which is different from the Company’s
                technologies. The LIFE-Lung system began commercialization in 1998
                at a
                price significantly higher than the Company’s system. Although Xillix is
                focused primarily on the lung application, they have publicly announced
                their intention to expand into the gastrointestinal
                tract.


§
            MediSpectra,
                Inc. (Lexington, MA) has been focused on developing a system that
                improves
                on the current medical standards for cervical cancer detection. The
                system
                consists of an in-vivo, non-contact device that simultaneously uses
                UV
                fluorescence and white light to scan the cervix in a single measurement.
                It then uses the measurement to localize sites for biopsy, the goal
                being
                to detect precursors to cervical cancer. In November 1999, MediSpectra
                announced that preliminary data they collected using their
                second-generation research device correctly identified pre-cancerous
                cervical lesions with an accuracy superior to the current diagnostic
                standard of care. They received FDA clearance to market for this
                indication in March 2006.


§
            Mediscience
                Technology (Cherry Hill, New Jersey-OTC:MDSC.OB) has conducted feasibility
                clinical studies for oral leukopakia, a pre-cancerous condition of
                the
                mouth, with a prototype product called CD SCAN, which uses a light-based
                spectroscopy system. They also plan to conduct clinical studies in
                the
                areas of cervical cancer with products using spectroscopic
                technology.


§
            Electro-Optical
                Sciences, Inc. (Irvington, NY-OTC:MELA) is focused on the design
                and
                development of a non-invasive, point-of-care instrument to assist
                in the
                early diagnosis of melanoma. MelaFind®, features a hand-held imaging
                device that emits multiple wavelengths of light to capture images
                of
                suspicious pigmented skin lesions and extract data. The data is then
                analyzed against its proprietary database of melanomas and benign
                lesions
                using sophisticated algorithms in order to provide information to
                the
                physician and produce a recommendation of whether the lesion should
                be
                biopsied. They are currently conducting clinical
                trials.




17




Many
      of
      these companies have substantially greater resources than we do, either
      internally or in combination with strategic partners. These resources may allow
      them to develop, market and distribute technologies or products that could
      be
      more effective than those developed or marketed by us, or that would render
      our
      technologies and products obsolete. The resource advantages they may have
      are:





§
            greater
                capital resources,


§
            greater
                manufacturing resources,


§
            greater
                resources and expertise in testing products in clinical
                trials,


§
            greater
                resources and expertise in the areas of research and
                development,


§
            greater
                expertise in obtaining regulatory approvals,
                and


§
            greater
                resources for marketing and sales
                activities.





Patents





SpectraScience
      currently owns exclusive rights to a total of eight issued US patents and
      international patents. SpectraScience has eight issued US patents: “Optical
      Biopsy Forceps” (US Patent 5,762,613), “System for Diagnosing Tissue with
      Guidewire” (US Patent 5,601,087), “Method of Diagnosing Tissue with Guidewire”
(US Patent 5,439,000), “Guidewire Catheter and Apparatus for Diagnostic Imaging”
(US Patent 5,383,467), “Optical Biopsy Forceps System and Method of Diagnosing
      Tissue” (US Patent 6,066,102), “Optical Biopsy Forceps” (US Patent 6,129,683),
“Optical Biopsy System and Methods for Tissue Diagnosis” (US Patent 6,174,291),
      and “Optical Forceps System and Method of Diagnosing and Treating Tissue” (US
      Patent 6,394,964). SpectraScience is the exclusive licensee through the
      Massachusetts General Hospital of US Patent 5,843,000 entitled, “Optical Biopsy
      Forceps and Method of Diagnosing Tissue” and a pending international patent
      application. The patents expire between January 2015 and May 2022. Three of
      the
      issued patents and pending patent applications are focused on types of forceps
      having an optical fiber and biopsy jaws which are positioned to take samples
      for
      biopsy or to remove tissue as therapy from the precise area of view of the
      optical fiber, and methods of tissue diagnosis using these forceps. One issued
      patent pertains to the WavSTATTM System and methods of use. The remaining US
      patents pertain to various apparatus and methods of diagnosing tissue, and
      providing the physician with additional information regarding whether it is
      necessary to take a biopsy sample. Each of the international patents designates
      several countries for patent protection. No claims have been brought against
      SpectraScience alleging that the Company's technology or products infringe
      intellectual property rights of others. In October 2006, the Company filed
      for a
      patent entitled “System and Method for Non-Endoscopic Optical Biopsy Detection
      of Diseased Tissue”.





SpectraScience’s
      ability to obtain and maintain patent protection for its products, preserve
      its
      trade secrets and operate without infringing on the proprietary rights of others
      will directly affect the success the Company's operations. The Company's
      strategy regarding the protection of its proprietary intellectual property
      and
      innovations is to seek patents on those portions of our technology that
      management believes are patentable, to obtain copyrights for its software if
      appropriate, and to protect as trade secrets other confidential information
      and
      proprietary know-how. There are certain technological aspects of the WavSTATTM
System that are not covered by any patents or patent applications.
      SpectraScience seeks to protect its trade secrets and proprietary know-how
      by
      obtaining confidentiality and invention assignment agreements in connection
      with
      employment, consulting and advisory relationships.




18




Our
      ability to obtain and maintain patent protection for our products, preserve
      our
      trade secrets and operate without infringing on the proprietary rights of others
      will directly affect how successful our operations will be. Our strategy
      regarding the protection of our proprietary rights and innovations is to seek
      patents on those portions of our technology that we believe are patentable,
      and
      to protect as trade secrets other confidential information and proprietary
      know-how.





The
      patent and trade secret positions of medical device companies like
      SpectraScience are uncertain and involve complex and evolving legal and factual
      questions. To date, no claims have been brought against SpectraScience alleging
      that our technology or products infringe intellectual property rights of others.
      Often, patent and intellectual property disputes in the medical device industry
      are settled through licensing or similar arrangements. However, there can be
      no
      assurance that necessary licenses from other parties would be available to
      us on
      satisfactory terms, if at all. The costs associated with such arrangements
      may
      be substantial and could include ongoing royalties.


United
      States patent applications are secret until patents are issued or corresponding
      foreign applications are published in other countries. Since publication of
      discoveries in the scientific or patent literature often lags behind actual
      discoveries, management cannot be certain that SpectraScience was the first
      to
      invent the inventions covered by each of its pending patent applications, or
      that it was the first to file patent applications for such inventions. In
      addition, the laws of some foreign countries do not provide the same degree
      of
      intellectual property right protection as do the laws of the United States.
      Litigation associated with patent or intellectual property infringement or
      protection can be lengthy and prohibitively costly. There can be no assurance
      that SpectraScience would have the financial resources to defend its patents
      from infringement or claims of invalidity, or to successfully defend itself
      against intellectual property infringement claims by third parties.





Product
      Liability





The
      risk
      of product liability claims, product recalls and associated adverse publicity
      is
      inherent in the testing, manufacturing, marketing and sale of medical products.
      We have clinical trial liability insurance coverage at this time for our current
      Barrett’s esophagus study. There can be no assurance that future insurance
      coverage will be adequate or available. We may not be able to secure product
      liability insurance coverage on acceptable terms or at reasonable costs when
      needed. Any liability damages could exceed the amount of our coverage. A
      successful product liability claim against us could require us to pay a
      substantial monetary award. Moreover, a product recall could generate
      substantial negative publicity about our products and business and inhibit
      or
      prevent commercialization of other future products.





19




Subsidiaries





We
      have
      no subsidiaries.





Employees





As
      of
      March 23, 2007, SpectraScience had three full-time employees, two involved
      with
      manufacturing and regulatory affairs and one engaged in finance and
      administration. The Company’s payroll is administered through an independent
      third party. SpectraScience is not subject to any collective bargaining
      agreement and management believes that employee relations are generally
      satisfactory.





SpectraScience
      relies heavily on external consultants in the financial, regulatory, software
      development and design engineering areas. When management determines to increase
      our workforce in response to improved economic, market, and/or business
      conditions, there is no assurance that we will be able to attract or retain
      employees with the skills we require.





ITEM
      2.
      DESCRIPTION OF PROPERTY.





SpectraScience
      leases its principal executive offices from an unrelated third party. The office
      consists of approximately 2,500 square feet of office, research and development,
      manufacturing, quality testing, and warehouse space. The lease provides for
      monthly rental payments of $2,540 through February 2007, plus a pro rata share
      of operating expense and real estate taxes (approximately $561 per month).
      A new
      lease for the same facility was signed on February 2, 2007 which expires on
      December 31, 2007. The new lease requires rental payments of $2,794 per month
      and similar pro rata expenses.





ITEM
      3.
      LEGAL PROCEEDINGS.





Reorganization





On
      September 13, 2002, the Company voluntarily filed for bankruptcy protection
      under Chapter 7 of the Bankruptcy Code. After negotiations between the Trustee,
      the Committee, and a potential investor, it was agreed that the case should
      be
      converted to a Chapter 11, reorganization. On February 5, 2003, the Court signed
      an order converting the case to a Chapter 11 case. Negotiations with the
      potential investor ended and a new investor proposed a Plan of Reorganization
      dated May 12, 2004. The bankruptcy court gave final approval to the Plan on
      July
      22, 2004, and the Plan became effective on August 23, 2004. The Company received
      funding and commenced operations effective August 2, 2004. As of August 2,
      2004
      (for purposes of this Report, the “Effective Date”) the Company became the
“Successor Company.” The Company as it existed prior to August 2, 2004, is
      referred to as the “Predecessor Company.”





20





Under
      the
      Plan, the Company:





§
            settled
                and canceled notes, warrants and monetary claims on August 23, 2004
                of
                $952,570 ($331,270 from the former CEO, $535,000 from note and warrant
                holders and $86,300 in accrued interest) by the issuance of 6,250,020
                shares of common stock.





§
            issued
                11,076,447 shares of common stock to stockholders who participated
                in an
                offering of three new shares of common stock in exchange for one
                outstanding share and $0.24 cash generating cash proceeds of
                $886,116.





§
            issued
                12,384,298 shares to Spectra Acquisition LLC, the sponsor of the
                Plan, in
                satisfaction of a $50,000 investment and as an incentive to carrying
                out
                the Plan.





§
            settled
                claims to vendors of $66,222 through the payment of cash in the amount
                of
                $5,885. The remaining amount of $60,337 was written
                off.





§
            settled
                claims to employees in the amount of $34,762 through the payment
                of cash
                of $6,273. The remaining amount of $28,489 was written
                off.





§
            wrote
                off liabilities in the amount of $108,699 for accrued liabilities
                and
                trade notes payable that was not to be paid as part of the
                Plan.





On
      the
      Effective Date, a new Board of Directors of the reorganized Company consisting
      of four members was established as follows: Jim Hitchin, Mark D. McWilliams,
      Rand P. Mulford and Chester E. Sievert. Subsequent to the Effective Date, Mr.
      Hitchin was elected President, Chief Executive Officer, Secretary and Chief
      Financial Officer. Under the Plan, the Board of Directors shall remain in place
      for three years after the Effective Date at which time the bylaws then in effect
      shall determine elections.





We
      adopted fresh-start reporting, as of August 2, 2004, in accordance with SOP
      90-7. Under fresh-start reporting, a new entity has been deemed created for
      financial reporting purposes.





We
      are
      not currently a party to any legal proceedings.





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





There
      have been no matters submitted to a vote of the security holders since the
      annual meeting held on May 10, 2001 except for a vote on the Plan solicited
      by
      mail during June and July 2004 in the course of the Bankruptcy Court
      proceedings. A majority of the stockholders approved the Plan.


21





**PART
      II**





ITEM
      5.
      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.





Market
      Information





From
      the
      bankruptcy filing to October 24, 2005, trading of our common stock was reported
      in the “Pink Sheets” under the symbol “SCIE.PK”. Pink Sheets® LLC is a provider
      of pricing and financial information for the over-the-counter (OTC) securities
      markets. Since October 25, 2005 trading of our common stock has been on the
      over-the-counter bulletin board under the symbol SCIE.OB. The last reported
      bid
      price of the common stock on March 23, 2007 was $1.23.





The
      following table sets forth, for the periods indicated, the high and low bid
      prices as reported by the Pink Sheets, from January 1, 2005 through October
      24,
      2005, and on the OTC Bulletin Board from October 25, 2005 through December
      31,
      2006. To the best of our knowledge, the information obtained from these sources
      is accurate.





2005
                Stock Prices
            2006
                Stock PricesQUARTER
                ENDED
            High
                Bid
            Low
                Bid
            High
                Bid
            Low
                BidMarch
                31
            0.93
            0.80
            2.00
            1.45June
                30
            1.55
            1.55
            1.55
            0.90September
                30
            1.05
            0.95
            1.55
            0.62December
                31
            1.48
            1.25
            1.45
            0.50





The
      prices of the common stock reflect inter-dealer prices and do not necessarily
      reflect the prices of actual transactions. These prices do not reflect retail
      mark-up, mark-down or commission and may not represent actual
      transactions.





Holders





On
      March
      23, 2007 we had approximately 750 registered stockholders of record of the
      38,370,087 shares of our common stock. We estimate that there are approximately
      2,500 beneficial stockholders of our common stock.





Transfer
      Agent





The
      transfer agent and registrar for our common stock is Wells Fargo Shareowner
      Services, located at 161 N. Concord Exchange, South Saint Paul, Minnesota 55075.
      Their telephone number is (800) 468-9716.





22




Penny
      Stock





Until
      our
      shares qualify (if ever) for inclusion on an exchange, the public trading,
      if
      any, of our common stock will be on the Over-the-Counter Bulletin Board. As
      a
      result, an investor may find it difficult to dispose of, or to obtain accurate
      quotations as to the price of, our common stock. Our common stock is subject
      to
      provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of
      1934, as amended (the "Exchange Act"), commonly referred to as the "penny stock
      rule." Section 15(g) sets forth certain requirements for transactions in penny
      stocks, and Rule 15g-9(d) incorporates the definition of "penny stock" that
      is
      found in Rule 3a51-1 of the Exchange Act. The SEC generally defines "penny
      stock" to be any equity security that has a market price less than $5.00 per
      share, subject to certain exceptions. So long as our common stock is deemed
      to
      be a penny stock, trading in the shares will be subject to additional sales
      practice requirements on broker-dealers who sell penny stock to persons other
      than established customers and accredited investors. "Accredited investors"
      are
      persons with assets in excess of $1,000,000 or annual income exceeding $200,000
      or $300,000 together with their spouse. For transactions covered by these rules,
      broker-dealers must make a special suitability determination for the purchase
      of
      such security and must have the purchaser's written consent to the transaction
      prior to the purchase. Additionally, for any transaction involving a penny
      stock, unless exempt, the rules require the delivery, prior to the first
      transaction, of a risk disclosure document, prescribed by the SEC relating
      to
      the penny stock market. A broker-dealer also must disclose the commissions
      payable to both the broker-dealer and the registered representative, and current
      quotations for the securities. Finally, monthly statements must be sent
      disclosing recent price information for the penny stocks held in an account
      and
      information on the limited market in penny stocks. Consequently, these rules
      may
      restrict the ability of a broker-dealer to trade and/or maintain a market in
      our
      common stock and may affect the ability of our stockholders to sell their
      shares.





Dividends





To
      date,
      we have not declared or paid cash dividends on our common stock. The current
      policy of the Board of Directors is to retain any earnings to fund the
      development and growth of our business. Consequently, no cash dividends are
      expected to be paid on our common stock in the foreseeable future.





Recent
      Sales of Unregistered Securities





The
      Company issued common stock during the second quarter of 2006 without
      registration under the Securities Act in connection with a private placement
      of
      securities under Regulation D. The gross proceeds were $502,048. No agents
      or
      underwriters participated and no commission or other compensation was paid
      for
      placement of the securities.


23




**2006
      Sale of Common Stock**





No.
                of Shares
            749,325Type
                of purchasers
            Accredited
                Investors(1)Price/Share
            $0.67Aggregate
                Cash Proceeds
            $502,048Exemption
                from Registration
            Regulation
                D of the Securities Act








Shares
      were sold in 2004 under the Plan and otherwise, as described in the following
      table. No agents or underwriters participated and no commission or other
      compensation was paid for placement of the securities.





**2004
      Sale of Common Stock**





**Private
                Placement**
            **Chapter
                11 Plan**No.
                of Shares
            4,378,333
            29,710,766(2)Type
                of purchasers
            Accredited
                Investors(1)
            Participants
                in Rights Offering, Claimants, Plan Sponsor(2)Price/Share
            $0.12
            See
                Note(2),
                belowAggregate
                Cash Proceeds
            $525,400
            $936,116Exemption
                from Registration
            Sections
                4(2) and 4(6) of the Securities Act and Regulation D
            §1145
                of the Bankruptcy Act





1.
            As
                defined in Regulation D under the Securities
                Act.





2.
            In
                the Rights Offering a holder of common stock was required to exchange
                one
                share and $0.24 for three new shares. The trading price of the common
                stock during the Rights Offering ranged from approximately $0.12
                to $0.45.
                11,076,447 shares were issued in the Rights Offering in August 2004.
                Creditors consisted of the former CEO (600,000 shares) and Noteholders
                and
                warrant holders (5,650,020 shares). The price paid by them was
                extinguishment of all claims (approximately $0.10 per share). SA
                LLC, the
                Plan Sponsor, received 12,384,298 shares, consisting of 5,000,000
                of
                common stock issued at $0.01 per share and the balance in connection
                with
                the level of success of the Rights
                Offering.


24


ITEM
      6.
      MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





The
      following discussion and analysis provides information that management believes
      is relevant to assess and understand our results of operations and financial
      condition. This discussion should be read in conjunction with the financial
      statements and footnotes that follow such financial statements.





Certain
      statements contained herein that are not related to historical results,
      including, without limitation, statements regarding the Company's business
      strategy and objectives, future financial position, expectations about pending
      litigation and estimated cost savings, 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 (the "Securities Exchange Act") 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,
      regulatory policies, competition from other similar businesses, and market
      and
      general economic factors. All forward-looking statements contained in this
      Form
      10-KSB are qualified in their entirety by this statement.





Plan
      of Operation





The
      Company currently has FDA approval to market the WavSTAT (TM) System
      for detecting pre-cancerous and cancerous tissue in the colon. Our plan is
      to
      add another indication for use in detecting pre-cancer and cancer in the
      esophagus. During the next year SpectraScience intends to:





§
            complete
                a Phase II clinical studies for an esophagus
                application,


§
            file
                a supplement with the FDA for this new indication for
                use,


§
            continue
                to develop the market with key physician opinion leaders, both
                international and domestic, for our approved product as well as for
                a
                Barrett’s esophagus application,


§
            begin
                sales both domestically and
                internationally,


§
            develop
                strategic relationships for distribution and marketing and complete
                outcome based clinical studies for the colon application,
                and


§
            submit
                to CMS, an application for reimbursement codes for use of the
                WavSTAT(TM)System upon completion of an outcome based clinical
                study.





We
      do not
      anticipate any significant purchase or sale of plant and significant equipment
      or any significant changes in the number of employees other than a proportional
      increase in operational employees and sales people consistent with our
      increasing revenue (if any).





Cash
      on
      hand as of December 31, 2006 and 2005 was $174,802 and $441,025
      respectively.





Reclassification/Restatement





In
      2006,
      we have reclassified payroll and stock-based compensation costs in the statement
      of operations for the period from August 2, 2004 to June 30, 2006. The change
      in
      reporting implemented
      during 2006 is the direct result of a reclassification of payroll and
      stock-based compensation costs previously recorded in General and Administrative
      expense to Research and Development expense. Reclassifications were based on
      our
      estimate of time spent by employees on research and development rather than
      general and administrative activities. The reclassification did not result
      in
      any changes to net loss or net loss per share amounts. The tables below present
      the amounts previously reported on prior filings and balances after
      reclassifications:





25





**Year
                Ended December 31, 2005**
            
            **August
                2, 2004 (Inception of Successor Company) to**
              **December
                31, 2005****As
                Previously Reported**
            
            **After
                Reclassification**
            
            **As
                Previously Reported**
            
            **After
                Reclassification**Operating
                expenses:Research
                and
              development
            
            $
            53,122
            
            $
            250,883
            
            $
            53,122
            
            $
            330,775General
                and
              administrative
            
            
            874,957
            
            
            677,196
            
            
            1,263,843
            
            
            986,190Total
                operating expenses
            
            $
            928,079
            
            $
            928,079
            
            $
            1,316,965
            
            $
            1,316,965





Liquidity
      and Capital Resources





SpectraScience
      has financed its operations principally through private placements of its common
      stock. Cash provided by financing operating activities totaled $3,225 during
      the
      year ended December 31, 2005 and $509,323 during the year ended December 31,
      2006. Cash and cash equivalents as of December 31, 2006 and 2005 totaled
      $174,802 and $441,025, respectively. The cash decreased due to expenses incurred
      in operations, principally in salaries, clinical trial expenses and professional
      fees. The decrease was offset by proceeds of approximately $500,000 from a
      Regulation D private placement.





SpectraScience
      expects to incur significant additional operating losses through at least 2007,
      as we complete a current clinical trial, begin outcome-based clinical studies,
      research and development activities continue, and sales and marketing efforts
      to
      commercialize the WavSTAT (TM) System
      begin.


The
      Company signed an agreement with Glocap Funding, LLC to assist it in raising
      additional funds to complete its plan of operation. The Company expects to
      complete funding in the second quarter of 2007. However, if we do not receive
      funding in a timely manner, the Company could be in jeopardy as a going concern.
      We may not be able to find alternative capital or raise capital or debt on
      terms
      that are acceptable. The Company believes that if it receives funding in the
      second quarter of 2007, such proceeds will be sufficient to allow the Company
      to
      sustain operations until it attains profitability and positive cash flows from
      operations. In either case, we may incur unknown expenses, or we may not be
      able
      to meet our revenue forecast, and that will require us to seek additional
      capital




26




SpectraScience’s
      future liquidity and capital requirements will depend upon a number of factors,
      including but not limited to:





§
            the
                timing and progress of outcome-based clinical
                trials,


§
            the
                timing and extent to which SpectraScience’s products gain market
                acceptance,


§
            the
                timing and expense of product
                introduction,


§
            the
                timing and expense of developing marketing and distribution
                channels,


§
            the
                progress and expense of developing next generation products and new
                applications for the WavSTAT(TM)System,


§
            the
                potential requirements and related costs for product modifications,
                the
                timing and expense of various U.S. and foreign regulatory
                filings,


§
            the
                maintenance of various U.S. and foreign government approvals, or
                the
                timing of receipt to obtain additional approvals,
                and


§
            the
                status and maintenance of SpectraScience’s patent
                portfolio.





Historical
      Results of Operations





The
      following discussion should be read in conjunction with the financial statements
      and the related notes thereto included in this report.





***Fiscal
      Year Ended December 31, 2006 As Compared To Fiscal Year Ended December 31,
      2005***





Gross
      Revenue


The
      Company had no revenue in either period.





Operating
      Loss


Losses
      increased to $1,336,875 in 2006 compared to $928,079 in 2005 as additional
      research and development and general administrative expenses were incurred
      to
      start a clinical trial in 2006. Research and development costs were $406,300
      in
      2006 compared to $250,883 in 2005. The increase of $155,417 was due to the
      fact
      that the research and development costs were limited in 2005 with a limited
      number of patients enrolled in the clinical trial. The majority of the patients
      were enrolled in 2006. General and administrative costs in 2006 were $930,575
      compared to $677,196 in 2005. The majority of the increase of $253,379 was
      due
      to amortization of stock options issued during 2006.





Other
      Income (Expense)


For
      the
      year ended December 31, 2006, other income was $26,068 principally due to
      interest income on cash balances and the gain on sale of assets. For the
      year ended December 31, 2005, other income was $15,791, principally due to
      interest income on cash balances.





Operating
      Activities


During
      the years ended December 31, 2006 and 2005, operating activities used net cash
      of $788,096 and $699,655, respectively, primarily due to payment of clinical
      trial expenses, professional fees and payroll.




27




Investing
      Activities


Investing
      activities provided $12,550 and $4,950 for the years ended December 31, 2006
      and
      2005, due to the sale of assets.





Financing
      Activities


For
      the
      year ended December 31, 2006, financing activities provided $509,323 primarily
      due to a Regulation D private placement that of common shares netting $502,048.
      The remainder was due to the exercise of 48,500 employee stock options netting
      $7,275. For the year ended December 31, 2005, financing activities provided
      $3,225 due to the exercise of 21,500 employee stock options.





The
      Company signed an agreement with Glocap Funding, LLC to assist it in raising
      additional funds. The Company expects to complete funding in the second quarter
      of 2007. However, if we do not receive funding in a timely manner, the Company
      could be in jeopardy as a going concern. We may not be able to find alternative
      capital or raise capital or debt on terms that are acceptable. The Company
      believes that if it receives funding in the second quarter of 2007, such
      proceeds will be sufficient to allow the Company to sustain operations until
      it
      attains profitability and positive cash flows from operations. In either case,
      we may incur unknown expenses, or we may not be able to meet our revenue
      forecast, and that will require us to seek additional capital





Working
      Capital


Decreases
      in working capital during the year ended December 31, 2006 in the amount of
      $307,963 was due to increased expenses for a clinical trial, payroll and
      professional fees.





Critical
      Accounting Policies and Estimates


The
      discussion and analysis of our financial condition and results of operations
      are
      based upon our financial statements, which have been prepared in accordance
      with
      accounting principles generally accepted in the United States of America. The
      preparation of these financial statements requires us to make estimates and
      judgments that affect the reported amounts of assets, liabilities, revenues
      and
      expenses and related disclosure of contingent assets and liabilities. On an
      on-going basis, we evaluate these estimates, including those related to bad
      debts, intangibles, income taxes, financing operations, contingencies and
      litigation. We base our estimates on historical experience and on various other
      assumptions that are believed to be reasonable under the circumstances, the
      results of which form the basis for making judgments about the carrying values
      of assets and liabilities that are not readily apparent from other sources.
      Actual results may differ from these estimates under different assumptions
      or
      conditions.





We
      have
      identified the policies below as critical to our business operations and the
      understanding of our results of operations. The impact and any associated risks
      related to these policies on our business operations is discussed throughout
      Management's Discussion and Analysis or Plan of Operation where such policies
      affect our reported and expected financial results. Note that our preparation
      of
      this Report on Form 10-KSB requires us to make estimates and assumptions that
      affect the reported amount of assets and liabilities, disclosure of contingent
      assets and liabilities at the date of our financial statements, and the reported
      amount of revenue, if any, and expenses during the reporting period. There
      can
      be no assurance that actual results will not differ from those
      estimates.




28




*Accounting
      For Transactions Involving Stock Compensation*


In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) 123(R) (revised 2004),
      "Share-Based Payment", (“SFAS 123(R)”) which amends FASB Statement 123 and was
      effective for public companies for annual periods beginning after December
      15,
      2005. The new standard requires us to expense employee stock options and other
      share-based payments. Since inception on August 2, 2004, the Company has been
      recording to expense the fair value of employee and non-employee options. These
      expenses amounted to $467,560 and $154,674 for the years ended December 31,
      2006
      and 2005, respectively. The application of SFAS 123(R) has not had a material
      impact on our financial statements.





*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 financial
      statements with respect to future disposal decisions, if any. Management
      believes no impairment exists at December 31, 2006.





Recent
      Accounting Pronouncements





*Accounting
      for Uncertainty in Income Taxes*





In
      July
      2006, the Financial Accounting Standards Board issued Financial Interpretation
      No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”, which applies
      to all tax positions related to income taxes subject to SFAS 109, “Accounting
      for Income Taxes”. FIN 48 requires a new evaluation process for all tax
      positions taken. If the probability for sustaining said tax position is greater
      than 50%, then the tax position is warranted and recognition should be at the
      highest amount which would be expected to be realized upon ultimate settlement.
      FIN 48 requires expanded disclosure at each annual reporting period unless
      a
      significant change occurs in an interim period. Differences between the amounts
      recognized in the statements of financial position prior to the adoption of
      FIN
      48 and the amounts reported after adoption are to be accounted for as an
      adjustment to the beginning balance of retained earnings. The Company has
      completed its initial evaluation of the impact of the January 1, 2007, adoption
      of FIN 48 and determined that such adoption is not expected to have a material
      impact on the Company's financial position or results of
      operations.





29


**Risks**




We
      have
      described below a number of uncertainties and risks which, in addition to
      uncertainties and risks presented elsewhere in this annual report may adversely
      affect our business, operating results and financial condition. The
      uncertainties and risks enumerated below as well as those presented elsewhere
      in
      this annual report should be considered carefully in evaluating our company
      and
      our business and the value of our securities.





WE
      HAVE
      ACCUMULATED LOSSES SINCE OUR INCEPTION, AND CURRENTLY HAVE NO PRODUCTS OR
      SERVICES ON THE MARKET THAT ARE CURRENTLY GENERATING REVENUES.





Our
      inability to generate revenues and profits from products we have recently
      introduced onto the market could cause us to go out of business and could cause
      our stockholders to lose their entire investment. We have not had any revenues
      for the past four years. To date, we have engaged primarily in research,
      development and clinical testing. Since the beginning of the Successor Period,
      we have not been profitable, and we cannot be certain that we will ever achieve
      or sustain profitability. We have incurred a cumulative net loss in the amount
      of $2,600,786 from the beginning of the Successor Period through December 31,
      2006. We have no products or services on the market that are currently
      generating revenues. Our failure to generate meaningful revenues and ultimately
      profits from potential products and applications of our technology could force
      us to raise additional capital which may not be available or available on
      acceptable terms. This could ultimately reduce or suspend our operations and
      ultimately go out of business. Developing our product candidates will require
      significant additional research and development, including non-clinical testing
      and clinical trials, as well as regulatory approval. We expect these activities,
      together with our general and administrative expenses, to result in operating
      losses for the foreseeable future.





As
      discussed in Note 2 to the financial statements, the Company has incurred losses
      and negative cash flows from operating activities from its inception. As of
      December 31, 2006, management believes that the Company will require additional
      financing to fund its operations, but cannot assure that such financing will
      be
      available. Such matters raise substantial doubt about the Company’s ability to
      continue as a going concern. Management’s plans concerning these matters are
      also described in Note 2. The financial statements do not include any
      adjustments related to the recoverability and classification of assets, or
      the
      amounts and classification of liabilities, that may result from the outcome
      of
      this uncertainty.





WE
      MAY
      REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE MAY
      NOT
      BE ABLE TO CONTINUE OPERATIONS.




We
      had an
      operating cash flow deficit of $788,096 for the year ended December 31,
      2006. We do not currently have sufficient financial resources to fund our
      operations beyond September 30, 2007. Therefore, we need additional funds
      to continue as a going concern.





30




During
      the first quarter of 2007, the Company sold 950,000 shares of common stock
      to
      accredited investors under Regulation D of the Securities and Exchange Act
      for a
      net amount of $475,000. No commissions were paid on this transaction. This
      funding is intended to keep the Company’s operations in place until it can close
      on a larger planned funding.





Even
      if
      we do receive a larger funding we may still need additional capital to fully
      implement our business, operating and development plans. Should the financing
      we
      require to sustain our working capital needs be unavailable or prohibitively
      expensive when we require it, the consequences would be a material adverse
      effect on our business, financial condition, results of operations and cash
      flows.





Even
      despite the availability of funds from future sources, our independent
      registered public accounting firm may issue a qualified opinion, to the effect
      that there is substantial doubt about our ability to continue as a going concern
      due to, among other factors, the subjective acceleration provisions and
      conditions that must be met in order to access the funds. A qualified opinion
      could itself have a material adverse effect on our business, financial
      condition, results of operations and cash flows.





WE
      MAY
      FACE INTENSE COMPETITION FROM COMPANIES THAT HAVE GREATER FINANCIAL, PERSONNEL
      AND RESEARCH AND DEVELOPMENT RESOURCES THAN OURS.





These
      competitive forces may impact our projected growth and ability to generate
      revenues and profits, which would have a negative impact on our business and
      the
      value of your investment. Our competitors may be developing products, which
      could compete with the WavSTAT (TM) System
      we are developing. Our commercial opportunities will be reduced or eliminated
      if
      our competitors develop and market products for any of the diseases that we
      target that are





§
            are
                more effective;


§
            or
                are less expensive than the products or product candidates we are
                developing.





Even
      if
      we are successful in developing effective WavSTAT (TM) Systems,
      and obtain FDA and other regulatory approvals necessary for commercializing
      them, our products may not compete effectively with other successful products.
      Researchers are continually learning more about diseases, which may lead to
      new
      technologies and tools for analysis. Our competitors may succeed in developing
      and marketing products either that are more effective than those that we may
      develop, alone or with our collaborators, or that are marketed before any
      products we develop are marketed.





Our
      competitors may include fully integrated medical device companies, universities
      and public and private research institutions. Many of the organizations
      competing with us, have substantially greater capital resources, larger research
      and development staffs and facilities, greater experience in product development
      and in obtaining regulatory approvals, and greater marketing capabilities than
      we do.





The
      market for medical devices is intensely competitive. Many of our potential
      competitors have longer operating histories, greater name recognition, more
      employees, and significantly greater financial, technical, marketing, public
      relations, and distribution resources than we have. This intense competitive
      environment may require us to make changes in our products, pricing, licensing,
      services or marketing to develop, maintain and extend our current technology.
      Price concessions or the emergence of other pricing or distribution strategies
      of competitors may diminish our revenues, adversely impact our margins or lead
      to a reduction in our market share, any of which may harm our
      business.




31




OUR
      WavSTAT (TM) SYSTEM
      TECHNOLOGY MAY BECOME OBSOLETE.





Our
      WavSTAT (TM) System
      products may be made unmarketable by new scientific or technological
      developments where new treatment modalities are introduced that are more
      efficacious or more economical than our WavSTAT (TM) System
      products. Any one of our competitors could develop a more effective product
      which would render our technology obsolete.





WE
      ARE
      DEPENDENT FOR OUR SUCCESS ON A KEY EXECUTIVE OFFICER.





Our
      success depends to a critical extent on the continued services of our Chief
      Executive Officer, Jim Hitchin. If we lost this key executive officer, we would
      be forced to expend significant time and money in the pursuit of a replacement,
      which would result in both a delay in the implementation of our business plan
      and the diversion of limited working capital. We can give you no assurance
      that
      we could find a satisfactory replacement for this key executive officer at
      all,
      or on terms that are not unduly expensive or burdensome. We do not have an
      employment agreement with Mr. Hitchin and his employment is severable by either
      party at will. We currently carry a key man life insurance policy on him in
      the
      amount of $2,000,000.





OUR
      INABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD IMPEDE OUR ABILITY
      TO
      GENERATE REVENUES AND PROFITS AND TO OTHERWISE IMPLEMENT OUR BUSINESS PLAN
      AND
      GROWTH STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND COULD
      ADVERSELY AFFECT THE VALUE OF YOUR INVESTMENT.





We
      currently have an extremely small staff comprised of 3 full time employees
      consisting of our Chief Executive Officer, our Operations Manager and a Clinical
      Studies/Product Engineer/Manager as well as other personnel employed on a
      contract basis. Although we believe that these employees, together with the
      consultants currently engaged by the Company, will be able to handle most of
      our
      additional administrative, research and development and business development
      in
      the near term, we will nevertheless be required over the longer-term to hire
      highly skilled managerial, scientific and administrative personnel to fully
      implement our business plan and growth strategies. We cannot assure you that
      we
      will be able to engage the services of such qualified personnel at competitive
      prices or at all, particularly given the risks of employment attributable to
      our
      limited financial resources and lack of an established track
      record.





WE
      PLAN
      TO GROW VERY RAPIDLY, WHICH WILL PLACE STRAINS ON OUR MANAGEMENT TEAM AND OTHER
      COMPANY RESOURCES TO BOTH IMPLEMENT MORE SOPHISTICATED MANAGERIAL, OPERATIONAL
      AND FINANCIAL SYSTEMS, PROCEDURES AND CONTROLS AND TO TRAIN AND MANAGE THE
      PERSONNEL NECESSARY TO IMPLEMENT THOSE FUNCTIONS. OUR INABILITY TO MANAGE OUR
      GROWTH COULD IMPEDE OUR ABILITY TO GENERATE REVENUES AND PROFITS AND TO
      OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND GROWTH STRATEGIES, WHICH WOULD HAVE
      A
      NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.




32




We
      will
      need to significantly expand our operations to implement our longer-term
      business plan and growth strategies. We will also be required to manage multiple
      relationships with various strategic partners, technology licensors, customers,
      manufacturers and suppliers, consultants and other third parties. This expansion
      and these expanded relationships will require us to significantly improve or
      replace our existing managerial, operational and financial systems, procedures
      and controls; to improve the coordination between our various corporate
      functions; and to manage, train, motivate and maintain a growing employee base.
      The time and costs to effectuate these steps may place a significant strain
      on
      our management personnel, systems and resources, particularly given the limited
      amount of financial resources and skilled employees that may be available at
      the
      time. We cannot assure you that we will institute, in a timely manner or at
      all,
      the improvements to our managerial, operational and financial systems,
      procedures and controls necessary to support our anticipated increased levels
      of
      operations and to coordinate our various corporate functions, or that we will
      be
      able to properly manage, train, motivate and retain our anticipated increased
      employee base.





WE
      MAY
      HAVE DIFFICULTY IN ATTRACTING AND RETAINING MANAGEMENT AND OUTSIDE INDEPENDENT
      MEMBERS TO OUR BOARD OF DIRECTORS AS A RESULT OF THEIR CONCERNS RELATING TO
      THEIR INCREASED PERSONAL EXPOSURE TO LAWSUITS AND STOCKHOLDER CLAIMS BY VIRTUE
      OF HOLDING THESE POSITIONS IN A PUBLICLY-HELD COMPANY.





The
      directors and management of publicly traded corporations are increasingly
      concerned with the extent of their personal exposure to lawsuits and stockholder
      claims, as well as governmental and creditor claims which may be made against
      them, particularly in view of recent changes in securities laws imposing
      additional duties, obligations and liabilities on management and directors.
      Due
      to these perceived risks, directors and management are also becoming
      increasingly concerned with the availability of directors and officers liability
      insurance to pay on a timely basis the costs incurred in defending such claims.
      We currently do carry directors and officers liability insurance. Directors
      and
      officers liability insurance has recently become much more expensive and
      difficult to obtain. If we are unable to obtain directors and officers liability
      insurance at affordable rates or at all, in the future, it may become
      increasingly more difficult to attract and retain qualified outside directors
      to
      serve on our board of directors. The fees of directors are also rising in
      response to their increased duties, obligations and liabilities as well as
      increased exposure to such risks. As a company with a limited operating history
      and limited resources, we will have a more difficult time attracting and
      retaining management and outside independent directors than a more established
      company due to these enhanced duties, obligations and liabilities.





IF
      WE
      FAIL TO COMPLY WITH EXTENSIVE REGULATIONS ENFORCED BY DOMESTIC AND FOREIGN
      REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF OUR PRODUCT CANDIDATES COULD
      BE
      PREVENTED OR DELAYED.




33




Our
      WavSTAT (TM) System
      is subject to extensive government regulations related to development, testing,
      manufacturing and commercialization in the United States and other countries.
      The determination of when and whether a product is ready for large scale
      purchase and potential use will be made by the government through consultation
      with a number of governmental agencies, including the FDA, the National
      Institutes of Health, and the Centers for Disease Control and Prevention. Our
      product candidates are in the clinical stages of development and have not
      received required regulatory approval from the FDA for an esophageal application
      we hope to commercially market. The process of obtaining and complying with
      FDA
      and other governmental regulatory approvals and regulations is costly, time
      consuming, uncertain and subject to unanticipated delays. Despite the time
      and
      expense exerted, regulatory approval is never guaranteed. We also are subject
      to
      the following risks and obligations, among others.





§
            The
                FDA may refuse to approve an application if they believe that applicable
                regulatory criteria are not
                satisfied.


§
            The
                FDA may require additional testing for safety and
                effectiveness.


§
            The
                FDA may interpret data from pre-clinical testing and clinical trials
                in
                different ways than we interpret
                them.


§
            If
                regulatory approval of a product is granted, the approval may be
                limited
                to specific indications or limited with respect to its
                distribution.


§
            The
                FDA may change their approval policies and/or adopt new
                regulations.





Failure
      to comply with these or other regulatory requirements of the FDA may subject
      us
      to administrative or judicially imposed sanctions, including:





§
            warning
                letters;


§
            civil
                penalties;


§
            criminal
                penalties;


§
            injunctions;


§
            product
                seizure or detention;


§
            product
                recalls; and


§
            total
                or partial suspension of
                productions.





DELAYS
      IN
      SUCCESSFULLY COMPLETING OUR CLINICAL TRIALS COULD JEOPARDIZE OUR ABILITY TO
      OBTAIN REGULATORY APPROVAL OR MARKET OUR WavSTAT (TM) SYSTEM
      CANDIDATE ON A TIMELY BASIS.





Our
      business prospects will depend on our ability to complete clinical trials,
      obtain satisfactory results, obtain required regulatory approvals and
      successfully commercialize our WavSTAT (TM) System
      product candidate. Completion of our clinical trials, announcement of results
      of
      the trials and our ability to obtain regulatory approvals could be delayed
      for a
      variety of reasons, including:





§
            unsatisfactory
                results of any clinical trial;


§
            the
                failure of our principal third-party investigators to perform our
                clinical
                trials on our anticipated
                schedules;




34




§
            different
                interpretations of our pre-clinical and clinical data, which could
                initially lead to inconclusive
                results.




OUR
      DEVELOPMENT COSTS WILL INCREASE IF WE HAVE MATERIAL DELAYS IN ANY CLINICAL
      TRIAL
      OR IF WE NEED TO PERFORM MORE OR LARGER CLINICAL TRIALS THAN
      PLANNED.





If
      the
      delays are significant, or if any of our WavSTAT (TM) System
      product candidates do not prove to be safe or effective or do not receive
      required regulatory approvals, our financial results and the commercial
      prospects for our product candidates will be harmed. Furthermore, our inability
      to complete our clinical trials in a timely manner could jeopardize our ability
      to obtain regulatory approval.





THE
      INDEPENDENT CLINICAL INVESTIGATORS THAT WE RELY UPON TO CONDUCT OUR CLINICAL
      TRIALS MAY NOT BE DILIGENT, CAREFUL OR TIMELY, AND MAY MAKE MISTAKES, IN THE
      CONDUCT OF OUR CLINICAL TRIALS.





We
      depend
      on independent clinical investigators to conduct our clinical trials. The
      investigators are not our employees, and we cannot control the amount or timing
      of resources that they devote to our product development programs. If
      independent investigators fail to devote sufficient time and resources to our
      product development programs, or if their performance is substandard, it may
      delay FDA approval of our products. These independent investigators may also
      have relationships with other commercial entities, some of which may compete
      with us. If these independent investigators assist our competitors at our
      expense, it could harm our competitive position.





OUR
      PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE TO RESULTS
      OF
      STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR MARKET ACCEPTANCE,
      PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.





Our
      success depends on our ability to successfully develop and obtain regulatory
      approval to market new products. We expect that a significant portion of the
      research that we will conduct will involve new and unproven technologies.
      Development of a product requires substantial technical, financial and human
      resources even if the product is not successfully completed.





Our
      potential products may appear to be promising at various stages of development
      yet fail to reach the market for a number of reasons, including
      the:





§
            lack
                of adequate quality or sufficient prevention benefit, or unacceptable
                safety during pre-clinical studies or clinical
                trials;


§
            failure
                to receive necessary regulatory
                approvals;


§
            existence
                of proprietary rights of third parties;
                and/or


§
            inability
                to develop manufacturing methods that are efficient, cost-effective
                and
                capable of meeting stringent regulatory
                standards.




35




OUR
      INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD NEGATIVELY IMPACT
      OUR PROJECTED GROWTH AND ABILITY TO GENERATE REVENUES AND PROFITS, WHICH WOULD
      HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR
      INVESTMENT.





We
      rely
      on a combination of patent, patent pending, copyright, trademark and trade
      secret laws, proprietary rights agreements and non-disclosure agreements to
      protect our intellectual properties. We cannot give you any assurance that
      these
      measures will prove to be effective in protecting our intellectual
      properties.





In
      the
      case of patents, we cannot give you any assurance that our existing patents
      will
      not be invalidated, that any patents that we currently or prospectively apply
      for will be granted, or that any of these patents will ultimately provide
      significant commercial benefits. Further, competing companies may circumvent
      any
      patents that we may hold by developing products which closely emulate but do
      not
      infringe our patents. While we currently have and intend to seek patent
      protection for our products in selected foreign countries, those patents may
      not
      receive the same degree of protection as they would in the United States. We
      can
      give you no assurance that we will be able to successfully defend our patents
      and proprietary rights in any action we may file for patent infringement.
      Similarly, we cannot give you any assurance that we will not be required to
      defend against litigation involving the patents or proprietary rights of others,
      or that we will be able to obtain licenses for these rights. Legal and
      accounting costs relating to prosecuting or defending patent infringement
      litigation may be substantial.





The
      WavSTAT (TM) System
      is protected by eight issued patents, in the United States, Canada, Europe
      and
      Japan, of which we own and one for which we own the exclusive license.





We
      also
      rely on proprietary designs, technologies, processes and know-how not eligible
      for patent protection. We cannot give you any assurance that our competitors
      will not independently develop the same or superior designs, technologies,
      processes and know-how.





While
      we
      have and will continue to enter into proprietary rights agreements with our
      employees and third parties giving us proprietary rights to certain technology
      developed by those employees or parties while engaged by the Company, we can
      give you no assurance that courts of competent jurisdiction will enforce those
      agreements.





THE
      PATENTS WE OWN COMPRISE A LARGE PORTION OF OUR ASSETS, WHICH COULD LIMIT OUR
      FINANCIAL VIABILITY.





The
      WavSTAT (TM) System
      is protected by eight issued patents, in the United States, Canada, Europe
      and
      Japan, and an additional patent for which we own an exclusive license. These
      patents comprise a majority of our assets. If our existing patents are
      invalidated or if they fail to provide significant commercial benefits, it
      will
      severely hurt our financial condition, as a majority of our assets would lose
      their value. Further, since our patents are written down over the course of
      their term until they expire, our assets comprised of patents will continually
      be written down until they lose value altogether.




36




LEGISLATIVE
      ACTIONS AND POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS ARE LIKELY TO IMPACT OUR
      FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS.





There
      have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
      there may potentially be new accounting pronouncements or additional regulatory
      rulings which will have an impact on our future financial position and results
      of operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well
      as
      proposed legislative initiatives following the Enron bankruptcy have increased
      general and administrative costs as we have incurred increased legal and
      accounting fees to comply with such rule changes.





OUR
      PRODUCTS MAY BE SUBJECT TO RECALL OR PRODUCT LIABILITY CLAIMS.





Our
      WavSTAT (TM) System
      products may be used in connection with medical procedures in which it is
      important that those products function with precision and accuracy. If our
      products do not function as designed, or are designed improperly, we may be
      forced by regulatory agencies to withdraw such products from the market. In
      addition, if medical personnel or their patients suffer injury as a result
      of
      any failure of our products to function as designed, or an inappropriate design,
      we may be subject to lawsuits seeking significant compensatory and punitive
      damages. Any product recall or lawsuit seeking significant monetary damages
      may
      have a material affect on our business and financial condition.





WE
      HAVE
      NOT PAID ANY CASH DIVIDENDS AND NO CASH DIVIDENDS WILL BE PAID IN THE
      FORESEEABLE FUTURE.





We
      do not
      anticipate paying cash dividends on our common shares in the foreseeable future,
      and we cannot assure an investor that funds will be legally available to pay
      dividends, or that even if the funds are legally available, that the dividends
      will be paid.





THE
      APPLICATION OF THE "PENNY STOCK" RULES COULD ADVERSELY AFFECT THE MARKET PRICE
      OF OUR COMMON SHARES AND INCREASE YOUR TRANSACTION COSTS TO SELL THOSE
      SHARES.





As
      long
      as the trading price of our common shares is below $5 per share, the open-market
      trading of our common shares will be subject to the "penny stock" rules. The
      "penny stock" rules impose additional sales practice requirements on
      broker-dealers who sell securities to persons other than established customers
      and accredited investors (generally those with assets in excess of $1,000,000
      or
      annual income exceeding $200,000 or $300,000 together with their spouse). For
      transactions covered by these rules, the broker-dealer must make a special
      suitability determination for the purchase of securities and have received
      the
      purchaser's written consent to the transaction before the purchase.
      Additionally, for any transaction involving a penny stock, unless exempt, the
      broker-dealer must deliver, before the transaction, a disclosure schedule
      prescribed by the SEC relating to the penny stock market. The broker-dealer
      also
      must disclose the commissions payable to both the broker-dealer and the
      registered representative and current quotations for the securities. Finally,
      monthly statements must be sent disclosing recent price information on the
      limited market in penny stocks. These additional burdens imposed on
      broker-dealers may restrict the ability or decrease the willingness of
      broker-dealers to sell our common shares, and may result in decreased liquidity
      for our common shares and increased transaction costs for sales and purchases
      of
      our common shares as compared to other securities.




37




OUR
      COMMON SHARES ARE THINLY TRADED, SO INVESTORS MAY BE UNABLE TO SELL AT OR NEAR
      ASK PRICES OR AT ALL





Our
      common shares have historically been sporadically or "thinly-traded", meaning
      that the number of persons interested in purchasing our common shares at or
      near
      ask prices at any given time may be relatively small or non-existent. As of
      March 23, 2007, our average trading volume per day for the past three months
      was
      approximately 18,800 shares a day with a high of 79,264 shares traded and a
      low
      of 100 shares traded per day. This situation is attributable to a number of
      factors, including the fact that we are a small company which is relatively
      unknown to stock analysts, stock brokers, institutional investors and others
      in
      the investment community that generate or influence sales volume, and that
      even
      if we came to the attention of such persons, they tend to be risk-averse and
      would be reluctant to follow an unproven company such as ours or purchase or
      recommend the purchase of our shares until such time as we became more seasoned
      and viable. As a consequence, there may be periods of several days or more
      when
      trading activity in our shares is minimal or non-existent, as compared to a
      seasoned issuer which has a large and steady volume of trading activity that
      will generally support continuous sales without an adverse effect on share
      price. We cannot give you any assurance that a broader or more active public
      trading market for our common shares will develop or be sustained, or that
      current trading levels will be sustained.





THE
      MARKET PRICE FOR OUR COMMON STOCK IS PARTICULARLY VOLATILE, GIVEN OUR STATUS
      AS
      A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY-TRADED PUBLIC FLOAT,
      LIMITED OPERATING HISTORY AND LACK OF REVENUES WHICH COULD LEAD TO WIDE
      FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH YOU PURCHASE OUR COMMON
      STOCK MAY NOT BE INDICATIVE OF THE PRICE THAT WILL PREVAIL IN THE TRADING
      MARKET. AN INVESTOR MAY BE UNABLE TO SELL COMMON STOCK AT OR ABOVE THE PURCHASE
      PRICE, WHICH MAY RESULT IN SUBSTANTIAL LOSSES.





The
      market for our common stock is characterized by significant price volatility
      when compared to seasoned issuers, and we expect that our share price will
      continue to be more volatile than a seasoned issuer for the indefinite future.
      In fact, during the ninety-day period ended March 23, 2007, the high and low
      closing prices of a share of our common stock were $1.40 and $0.55,
      respectively. The volatility in our share price is attributable to a number
      of
      factors. First, as noted above, our stock is sporadically and/or thinly traded.
      As a consequence of this lack of liquidity, the trading of relatively small
      quantities of shares by our stockholders may disproportionately influence the
      price of those shares in either direction. The price for our shares could,
      for
      example, decline precipitously in the event that a large number of our shares
      are sold on the market without commensurate demand, as compared to a seasoned
      issuer which could better absorb those sales without adverse impact on its
      share
      price. Secondly, we are a speculative or "risky" investment due to our limited
      operating history and lack of revenues or profits to date and uncertainty of
      future market acceptance for our potential products. As a consequence of this
      enhanced risk, more risk-adverse investors may, under the fear of losing all
      or
      most of their investment in the event of negative news or lack of progress,
      be
      more inclined to sell their shares on the market more quickly and at greater
      discounts than would be the case with the stock of a seasoned issuer. The
      following factors may add to the volatility in the price of our common shares:
      actual or anticipated variations in our quarterly or annual operating results;
      acceptance of our proprietary technology; government regulations, announcements
      of significant acquisitions, strategic partnerships or joint ventures; our
      capital commitments; and additions or departures of our key personnel. Many
      of
      these factors are beyond our control and may decrease the market price of our
      common shares, regardless of our operating performance. We cannot make any
      predictions or projections as to what the prevailing market price for our common
      shares will be at any time, including as to whether our common shares will
      sustain their current market prices, or as to what effect that the sale of
      shares or the availability of common stock for sale at any time will have on
      the
      prevailing market price.




38




Shareholders
      should be aware that, according to SEC Release No. 34-29093, the market for
      penny stocks has suffered in recent years from patterns of fraud and abuse.
      Such
      patterns include (1) control of the market for the security by one or a few
      broker-dealers that are often related to the promoter or issuer; (2)
      manipulation of prices through prearranged matching of purchases and sales
      and
      false and misleading press releases; (3) boiler room practices involving
      high-pressure sales tactics and unrealistic price projections by inexperienced
      sales persons; (4) excessive and undisclosed bid-ask differential and markups
      by
      selling broker-dealers; and (5) the wholesale dumping of the same securities
      by
      promoters and broker-dealers after prices have been manipulated to a desired
      level, along with the resulting inevitable collapse of those prices and with
      consequent investor losses. Our management is aware of the abuses that have
      occurred historically in the penny stock market. Although we do not expect
      to be
      in a position to dictate the behavior of the market or of broker-dealers who
      participate in the market, management will strive within the confines of
      practical limitations to prevent the described patterns from being established
      with respect to our securities. The occurrence of these patterns or practices
      could increase the volatility of our share price.





VOLATILITY
      IN OUR COMMON STOCK PRICE MAY SUBJECT US TO SECURITIES LITIGATION.





The
      market for our common stock is characterized by significant price volatility
      when compared to seasoned issuers, and we expect that our share price will
      continue to be more volatile than a seasoned issuer for the indefinite future.
      In the past, plaintiffs have often initiated securities class action litigation
      against a company following periods of volatility in the market price of its
      securities. We may in the future be the target of similar litigation. Securities
      litigation could result in substantial costs and liabilities and could divert
      management's attention and resources.





OUR
      OFFICERS AND DIRECTORS OWN OR CONTROL APPROXIMATELY 30.1% (INCLUDING ALL OPTIONS
      EXERCISABLE WITHIN 60 DAYS OF MARCH 23, 2007) OF OUR OUTSTANDING COMMON STOCK,
      WHICH MAY LIMIT THE ABILITY OF OTHER STOCKHOLDERS, WHETHER ACTING SINGLY OR
      TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF THE
      COMPANY. ADDITIONALLY, THIS CONCENTRATION OF OWNERSHIP COULD DISCOURAGE OR
      PREVENT A POTENTIAL TAKEOVER OF THE COMPANY THAT MIGHT OTHERWISE RESULT IN
      STOCKHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE FOR THEIR COMMON
      STOCK.




39




As
      of
      March 23, 2007, our officers and directors beneficially own or control
      approximately 30.1% (including all options exercisable within sixty days of
      March 23, 2007) of our outstanding common shares. These persons will have the
      ability to control substantially all matters submitted to our stockholders
      for
      approval and to control our management and affairs, including extraordinary
      transactions such as mergers and other changes of corporate control, and going
      private transactions.





A
      LARGE
      NUMBER OF COMMON SHARES ARE ISSUABLE UPON EXERCISE OF OUTSTANDING OPTIONS.
      THE
      EXERCISE OF THESE SECURITIES COULD RESULT IN THE SUBSTANTIAL DILUTION OF THE
      INVESTMENT OF OTHER STOCKHOLDERS IN TERMS OF PERCENTAGE OWNERSHIP IN THE COMPANY
      AS WELL AS THE BOOK VALUE OF THE COMMON SHARES. THE SALE OF A LARGE AMOUNT
      OF
      COMMON SHARES RECEIVED UPON EXERCISE OF THESE OPTIONS ON THE PUBLIC MARKET
      TO
      FINANCE THE EXERCISE PRICE OR TO PAY ASSOCIATED INCOME TAXES, OR THE PERCEPTION
      THAT SUCH SALES COULD OCCUR, COULD SUBSTANTIALLY DEPRESS THE PREVAILING MARKET
      PRICES FOR OUR SHARES.





As
      of
      March 23, 2007, there are outstanding common share purchase options entitling
      the holders to purchase 2,330,000 common shares at a weighted average exercise
      price of $0.42 per share (1,988,333 of these shares are exercisable within
      the
      next 60 days). The exercise price for all of the aforesaid options may be less
      than your cost to acquire our common shares. In the event of the exercise or
      conversion of these convertible securities, you could suffer substantial
      dilution of your investment in terms of your percentage ownership in the company
      as well as the book value of your common shares. In addition, the holders of
      the
      common share purchase options may sell common shares in tandem with their
      exercise of those options to finance that exercise, or may resell the shares
      purchased in order to cover any income tax liabilities that may arise from
      their
      exercise of the options **.**





OUR
      ISSUANCE OF ADDITIONAL COMMON SHARES, OR OPTIONS TO PURCHASE THOSE SHARES,
      WOULD
      DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING RIGHTS.





We
      are
      entitled under our articles of incorporation to issue up to 125,000,000 shares
      of capital stock, including 100,000,000 shares of common stock and 25,000,000
      undesignated shares (i.e. shares that may be designated as in a senior position
      to the current stock). After taking into consideration our outstanding common
      stock at March 23, 2007, we will be entitled to issue up to 61,629,913
      (100,000,000 authorized less shares outstanding of 38,370,087) additional common
      shares and up to 25,000,000 shares of other series of capital stock. Our board
      of directors may generally issue stock, or options or warrants to purchase
      those
      shares, without further approval by our stockholders based upon such factors
      as
      our board of directors may deem relevant at that time. It is likely that we
      will
      be required to issue a large amount of additional securities to raise capital
      to
      further our development. It is also likely that we will be required to issue
      a
      large amount of additional securities to directors, officers, employees and
      consultants as compensatory grants in connection with their services, both
      in
      the form of stand-alone grants or under our stock plans. We cannot give you
      any
      assurance that we will not issue additional common stock, or options or warrants
      to purchase those shares, under circumstances we may deem appropriate at the
      time.




40




THE
      ELIMINATION OF MONETARY LIABILITY AGAINST OUR DIRECTORS, OFFICERS AND EMPLOYEES
      UNDER OUR ARTICLES OF INCORPORATION AND THE EXISTENCE OF INDEMNIFICATION RIGHTS
      TO OUR DIRECTORS, OFFICERS, CONSULTANTS AND EMPLOYEES MAY RESULT IN SUBSTANTIAL
      EXPENDITURES BY OUR COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST OUR DIRECTORS,
      OFFICERS, CONSULTANTS AND EMPLOYEES.





Our
      articles of incorporation contains provisions which eliminate the liability
      of
      our directors for monetary damages to the Company and stockholders. Our bylaws
      also require us to indemnify our officers and directors. We may also have
      contractual indemnification obligations under our agreements with our directors,
      officers, consultants and employees. The foregoing indemnification obligations
      could result in our company incurring substantial expenditures to cover the
      cost
      of settlement or damage awards against directors, officers, consultants and
      employees, which we may be unable to recoup. These provisions and resultant
      costs may also discourage the Company from bringing a lawsuit against directors,
      officers, consultants and employees for breaches of their fiduciary duties,
      and
      may similarly discourage the filing of derivative litigation by our stockholders
      against our directors, officers, consultants and employees even though such
      actions, if successful, might otherwise benefit the Company and
      stockholders.





ANTI-TAKEOVER
      PROVISIONS MAY IMPEDE THE ACQUISITION OF OUR COMPANY.





Certain
      provisions of the Minnesota Business Corporation Act and other Minnesota laws
      have anti-takeover effects and may inhibit a non-negotiated merger or other
      business combination. These provisions are intended to encourage any person
      interested in acquiring us to negotiate with, and to obtain the approval of,
      our
      Board of Directors in connection with such a transaction. However, certain
      of
      these provisions may discourage a future acquisition of the Company, including
      an acquisition in which the stockholders might otherwise receive a premium
      for
      their shares. As a result, stockholders who might desire to participate in
      such
      a transaction may not have the opportunity to do so.


41





ITEM
      7.
      FINANCIAL STATEMENTS.





Audited
      financial statements for the years ended December 31, 2006 and 2005, and for
      the
      period from inception (August 2, 2004) to December 31, 2006 are filed as part
      of
      this Form 10-KSB.








SpectraScience,
      Inc.


(A
      Development Stage Enterprise)





Financial
      Statements





Years
      Ended December 31, 2006, and 2005


Page


Report
                  of Independent Registered Public Accounting Firm
              43Balance
                  Sheets as of December 31, 2006 and 2005
              44Statements
                  of Operations for the years ended December 31, 2006 and 2005, and
                  from
              45August
                  2, 2004 (Inception of Successor Company) to December 31,
                  2006Statements
                  of Stockholders’ Equity for the years ended December 31, 2006 and
                  2005,
              46and
                  the 5 months ended December 31, 2004Statements
                  of Cash Flows for the years ended December 31, 2006 and 2005 and
                  from
              47August
                  2, 2004 (Inception of Successor Company) to December 31,
                  2006Notes
                  to Financial Statements
              48


42


**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Stockholders and Board of Directors


SpectraScience,
      Inc.








We
      have
      audited the accompanying balance sheets of SpectraScience, Inc. (a development
      stage enterprise) as of December 31, 2006 and 2005, and the related statements
      of operations, stockholders’ equity and cash flows for the years ended December
      31, 2006 and 2005, and from August 2, 2004 (inception of Successor Company)
      to
      December 31, 2006. These financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of SpectraScience, Inc. as of December
      31, 2006 and 2005, and its results of operations and cash flows for the years
      ended December 31, 2006 and 2005, and from August 2, 2004 (inception of
      Successor Company) to December 31, 2006, in conformity with accounting
      principles generally accepted in the United States of America.





As
      discussed in Note 2 to the financial statements, the Company has incurred losses
      and negative cash flows from operating activities from its inception. As of
      December 31, 2006, management believes that the Company will require additional
      financing to fund its operations, but cannot assure that such financing will
      be
      available. Such matters raise substantial doubt about the Company’s ability to
      continue as a going concern. Management’s plans concerning these matters are
      also described in Note 2. The financial statements do not include any
      adjustments related to the recoverability and classification of assets, or
      the
      amounts and classification of liabilities, that may result from the outcome
      of
      this uncertainty.





/s/
      J.H.
      Cohn LLP





San
      Diego, California


March
      7,
      2007





43


**SpectraScience,
      Inc.**


(A
      Development Stage Enterprise)


**Balance
      Sheets**


**December
      31, 2006 and 2005**





**December
                31,**
              **2006**
            
            **December
                31,**
              **2005**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            174,802
            
            $
            441,025Inventories
            
            
            123,981
            
            
            140,072Prepaid
                expenses and other current assets
            
            
            50,933
            
            
            42,310Total
                current assets
            
            
            349,716
            
            
            623,407Fixed
                assets, net
            
            
            -
            
            
            6,397Patents,
                net
            
            
            243,062
            
            
            262,626TOTAL
                ASSETS
            
            $
            592,778
            
            $
            892,430LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilities:Accounts
                payable
            
            $
            57,689
            
            $
            17,498Accrued
                compensation and taxes
            
            
            9,286
            
            
            15,205Total
                liabilities
            
            
            66,975
            
            
            32,703COMMITMENTS
                AND CONTINGENCIESSTOCKHOLDERS’
                EQUITYUndesignated
                capital stock, undesignated par value,
              25,000,000
                shares authorized, none issued
            
            
            -
            
            
            -Common
                stock, $.01 par value:Authorized--100,000,000
                sharesIssued
                and outstanding—38,370,087 and 37,572,262
              shares
                at December 31, 2006 and 2005, respectively
            
            
            383,701
            
            
            375,723Additional
                paid-in capital
            
            
            2,742,888
            
            
            1,822,123Deferred
                compensation
            
            
            -
            
            
            (48,140
            )Deficit
                accumulated during the development stage
            
            
            (2,600,786
            )
            
            (1,289,979
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            525,803
            
            
            859,727TOTAL
                LIABILITIES AND
              STOCKHOLDERS’
                EQUITY
            
            $
            592,778
            
            $
            892,430





**** *See
      notes to financial statements*


44





**SpectraScience,
      Inc.**


**(A
      Development Stage Enterprise)**


**Statements
      of Operations**


**** **for
      the years ended December 31, 2006 and 2005, and from August 2, 2004 (Inception
      of Successor Company) to December 31, 2006**





**Year
                ended December 31,**
            
            **August
                2, 2004 (Inception of****Successor
                Company) to December 31,****2006**
            
            **2005**
              **Restated**
            
            **2006**
              **Restated**Gross
                revenue
            
            $
            -
            
            $
            -
            
            $
            -Operating
                expenses:Research
                anddevelopment
            
            
            406,300
            
            
            250,883
            
            
            737,075General
                andadministrative
            
            
            930,575
            
            
            677,196
            
            
            1,916,765Total
                operating expenses
            
            
            1,336,875
            
            
            928,079
            
            
            2,653,840Operating
                loss
            
            
            (1,336,875
            )
            
            (928,079
            )
            
            (2,653,840
            )Other
                income (expense):Interest
                expense
            
            
            (376
            )
            
            (180
            )
            
            (556
            )Interest
                income
            
            
            14,594
            
            
            20,935
            
            
            42,535Gain
                on disposal of fixed assets
            
            
            12,550
            
            
            4,950
            
            
            21,689Other
            
            
            (700
            )
            
            (9,914
            )
            
            (10,614
            )Other
                income
            
            
            26,068
            
            
            15,791
            
            
            53,054Net
                loss
            
            $
            (1,310,807
            )
            $
            (912,288
            )
            $
            (2,600,786
            )Basic
                and diluted net loss per share
            
            $
            (0.03
            )
            $
            (0.02
            )Weighted
                average common shares outstanding
            
            
            38,009,626
            
            
            37,553,366





**** *See
      notes to financial statements*


45








**SpectraScience,
                Inc.****(A
                Development Stage Enterprise)**
              **Statements
                of Stockholders’ Equity******
              **for
                the years ended December 31, 2006 and 2005, and the 5 months ended
                December 31, 2004**




**Common
                Stock****Shares**
            
            **Amount**
            
            **Additional****Paid-In****Capital**
            
            **Deferred****Compensation**
            
            **Deficit****Accumulated****During
                    The****Development****Stage**
            
            **Total****Stockholders'****Equity****Balance,
                August 2, 2004**
            
            
            37,384,095
            
            $
            373,841
            
            $
            1,663,271
            
            $
            (200,756
            )
            
            
            
            $
            1,836,356Sale
                of common stock at $0.12 per share
            
            
            166,667
            
            
            1,667
            
            
            18,333
            
            
            
            
            
            
            
            
            20,000Issuance
                of stock options to employees
            
            
            
            
            
            
            
            
            35,825
            
            
            (35,825
            )Compensation
                from options issued to consultants
            
            
            
            
            
            
            
            
            26,123
            
            
            
            
            
            
            
            
            26,123Amortization
                of deferred compensation
            
            
            
            
            
            
            
            
            
            
            
            109,328
            
            
            
            
            
            109,328Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (377,691
            )
            
            (377,691
            )**Balance,
                December 31, 2004**
            
            
            37,550,762
            
            
            375,508
            
            
            1,743,552
            
            
            (127,253
            )
            
            (377,691
            )
            
            1,614,116Compensation
                from options issued to consultants
            
            
            
            
            
            
            
            
            75,561
            
            
            
            
            
            
            
            
            75,561Amortization
                of deferred compensation
            
            
            
            
            
            
            
            
            
            
            
            79,113
            
            
            
            
            
            79,113Stock
                options exercised
            
            
            21,500
            
            
            215
            
            
            3,010
            
            
            
            
            
            
            
            
            3,225Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (912,288
            )
            
            (912,288
            )**Balance,
                December 31, 2005**
            
            
            37,572,262
            
            
            375,723
            
            
            1,822,123
            
            
            (48,140
            )
            
            (1,289,979
            )
            
            859,727Compensation
                from options issued to consultants
            
            
            
            
            
            
            
            
            182,245
            
            
            
            
            
            
            
            
            182,245Amortization
                of deferred compensation
            
            
            
            
            
            
            
            
            237,175
            
            
            48,140
            
            
            
            
            
            285,315Stock
                options exercised
            
            
            48,500
            
            
            485
            
            
            6,790
            
            
            
            
            
            
            
            
            7,275Sale
                of common stock at $0.67 per share
            
            
            749,325
            
            
            7,493
            
            
            494,555
            
            
            
            
            
            
            
            
            502,048Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,310,807
            )
            
            (1,310,807
            )**Balance,
                December 31, 2006**
            
            
            38,370,087
            
            $
            383,701
            
            $
            2,742,888
            
            $
            -
            
            $
            (2,600,786
            )
            $
            525,803




*See
      notes to financial statements*




46








**SpectraScience,
      Inc.**


**(A
      Development Stage Enterprise)**


**Statements
      of Cash Flows** ****


**for
      the years ended December 31, 2006 and 2005** **,**


**and
      from August 2, 2004 (Inception of Successor Company) to December 31,
      2006**





**Year
                Ended**
              **December
                31,**
            
            **August
                2, 2004**
              **(Inception
                of**
              **Successor**
              **Company)
                to**
              December
                31,**2006**
            
            **2005**
            
            **2006**OPERATING
                ACTIVITIES:Net
                loss
            
            $
            (1,310,807
            )
            $
            (912,288
            )
            $
            (2,600,786
            )Adjustments
                to reconcile net loss to cash
              used
                in operating activities:Depreciation
                and amortization
            
            
            25,961
            
            
            28,918
            
            
            66,129Stock-based
                compensation employees
            
            
            285,315
            
            
            79,113
            
            
            473,756Stock-based
                compensation consultants
            
            
            182,245
            
            
            75,561
            
            
            283,929Gain
                on disposal of fixed assets
            
            
            (12,550
            )
            
            (4,950
            )
            
            (21,689
            )Write-off
                of obsolete inventories
            
            
            16,091
            
            
            9,097
            
            
            25,188Changes
                in operating assets
              and
                liabilities:Prepaid
                expenses and other current assets
            
            
            (8,623
            )
            
            12,090
            
            
            (27,183
            )Accounts
                payable
            
            
            40,191
            
            
            5,283
            
            
            (2,013
            )Accrued
                compensation and taxes
            
            
            (5,919
            )
            
            7,521
            
            
            (22,807
            )Net
                cash used in operating activities
            
            
            (788,096
            )
            
            (699,655
            )
            
            (1,825,476
            )INVESTING
                ACTIVITIES:Proceeds
                from the sale of assets
            
            
            12,550
            
            
            4,950
            
            
            25,740Net
                cash provided by investing activities
            
            
            12,550
            
            
            4,950
            
            
            25,740FINANCING
              ACTIVITIES:Proceeds
                from issuance of common stock
            
            
            502,048
            
            
            
            
            
            522,048Proceeds
                from exercise of stock options
            
            
            7,275
            
            
            3,225
            
            
            10,500Net
                cash provided by financing activities
            
            
            509,323
            
            
            3,225
            
            
            532,548Net
                decrease in cash and cash equivalents
            
            
            (266,223
            )
            
            (691,480
            )
            
            (1,267,188
            )CASH
                AND CASH EQUIVALENTS
              AT
                BEGINNING OF PERIOD
            
            
            441,025
            
            
            1,132,505
            
            
            1,441,990CASH
                AND CASH EQUIVALENTS
              AT
                END OF PERIOD
            
            $
            174,802
            
            $
            441,025
            
            $
            174,802Supplemental
                disclosure of non-cash investing and financing activities:Conversion
                of notes payable and accrued
              interest
                to common stock
            
            
            
            
            
            
            
            $
            565,000Issuance
                of common stock in settlement
              of
                bankruptcy debt
            
            
            
            
            
            
            
            $
            60,000Fresh
                start adjustment to fixed assets and
              patents
            
            
            
            
            
            
            
            $
            255,379




*See
      notes to financial statements*


47





**SpectraScience,
      Inc.**


**(A
      Development Stage Enterprise)**





**Notes
      to Financial Statements**





Note
      1 -
      Description of Business





SpectraScience,
      Inc. (the “Company”) filed for bankruptcy protection on September 13, 2002 (U.S.
      Bankruptcy Court, District of Minnesota, Case No. 02-42904). The case was
      converted from liquidation under Chapter 7 to Chapter 11 reorganization in
      early
      2003. The Company’s Plan of Reorganization was confirmed on July 7, 2004 and
      became effective on August 23, 2004. The Company received funding and commenced
      operations effective August 2, 2004. As of August 2, 2004 (for purposes of
      this
      Report, the “Effective Date”) the Company became the “Successor Company” and the
      Company as it existed prior to August 2, 2004 is referred to as the “Predecessor
      Company.” During the bankruptcy, the Company was under the control of a court
      appointed trustee and had no management (all officers and directors had
      resigned), no legal counsel, no outside auditors, no transfer agent, and no
      operations.





The
      Company has adopted “fresh-start reporting,” given the absence of any operating
      activity or other significant activity for almost two years and in accordance
      with the guidelines of “Financial Reporting by Entities in Reorganization under
      the Bankruptcy Code (“SOP 90-7”).





The
      Company was incorporated in the State of Minnesota on May 4, 1983 as GV Medical,
      Inc. In October 1992, GV Medical discontinued its prior business, refocused
      its
      development efforts and changed its name to SpectraScience, Inc. From 1996
      until
      filing for bankruptcy reorganization in 2002, the Company primarily focused
      on
      developing the WavSTAT (TM) Optical
      Biopsy System (“WavSTAT (TM) System.”). The WavSTAT (TM) System
      is a proprietary, minimally invasive technology that optically scans tissue
      in
      real-time to distinguish between normal and pre-cancerous or cancerous tissue,
      without the need to remove tissue from the body.





Note
      2 -
      Going Concern and Development Stage Enterprise





The
      Company is a development stage enterprise since it has not yet generated any
      revenue from the sale of products and through December 31, 2006, its efforts
      have been principally devoted to restarting the Company as it emerged from
      bankruptcy. Activities beginning on August 2, 2004 are deemed to be development
      stage operations. Accordingly, Successor Company activities on the accompanying
      financial statements reflect both period to date and inception to date
      development stage activities. As of December 31, 2006, the Company had working
      capital of $282,741 and cash and cash equivalents of $174,802. The Company
      received $475,000 in funding from a Regulation D offering to accredited
      investors during the first quarter of 2007. In addition, the Company expects
      a
      large financing in the second quarter of 2007. However, if the Company does
      not
      receive these funds in a timely manner, the Company could be in jeopardy 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 a
      larger funding occurs as expected in the second quarter, 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 meet the revenue
      forecast that will require the Company to seek additional capital. In such
      an
      event, the Company may not be able to find such capital or raise capital or
      debt
      on terms that are acceptable.




48




The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and the 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.




Note
      3 -
      Significant Accounting Policies





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 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. Actual results could differ from
      those
      estimates.





Cash
      Equivalents





Highly
      liquid investments with original maturities of three months or less when
      purchased are considered to be cash equivalents.





Stock-Based
      Compensation





In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards (“SFAS”), 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 using
      the modified prospective method. The Company’s 2006 results of operations
      reflects a portion of share-based awards earned during the year ended December
      31, 2006 for previously granted stock options. The Company previously adopted
      the fair value recognition provisions of SFAS 123 "Accounting for Stock-Based
      Compensation", ("SFAS 123") prospectively for all employee and
      consultant awards granted, modified, or settled by the Successor Company on
      August 2, 2004. Accordingly, SFAS 123(R) has not had a material impact on the
      Company’s financial statements.




49




In
      accordance with the provisions of SFAS No. 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 of 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 date based on the fair
      value of the options at the end of each period. The intrinsic value of the
      options granted are assumed to be zero because the exercise price of options
      granted equaled the fair market value of the underlying stock at the date of
      grant.





For
      the
      years ended December 31, 2006 and 2005, stock-based compensation was
      approximately $468,000 and $155,000 respectively. Stock-based compensation
      expense was included in both research and development and general and
      administrative expenses in the statements of operations for the years ended
      December 31, 2006 and 2005.





At
      December 31, 2006, the Company has one stock-based employee compensation plan
      (the “Option Plan"), which is described more fully in Note 7.





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 assumptions
      to
      value non-employee options in the past two years:




2006
              2005Expected
                  life
              5
                  years
              5
                  yearsRisk-free
                  interest rate
              4.63%
              4.25%Expected
                  volatility
              230%
              219%Expected
                  dividend yield
              0%
              0%





Management
      used the following assumptions to value employee options granted in June
      2006:


2006Expected
                  life
              5
                  yearsRisk-free
                  interest rate
              5.13%Expected
                  volatility
              220%Expected
                  dividend yield
              0%




50




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. If the volatility calculation had been higher, the expense
      for stock-based compensation would not have changed materially. A much lower
      volatility calculation would materially reduce the expenses for stock-based
      compensation. 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 stage of the Company considering
      it has only recently emerged from bankruptcy and management’s estimate of the
      net present value of forward looking profits that has been compiled (for which
      there is no assurance).





Patents





At
      August
      2, 2004, the start of the Successor Company, the Company capitalized $290,000
      for eight patents. The capitalized amount was based on a combination of income
      and market valuation approaches. The income approach used forecasts prepared
      by
      management, with normalizing adjustments for industry benchmarks. These
      forecasts were discounted to present value, and weighted using various
      assumptions based on probability of success from published statistics. The
      market approach used the licensing price of comparable licenses in the market
      to
      arrive at a forecast, with future cash flows discounted to present value.





The
      capitalized patents are being amortized over the shorter of the remaining legal
      life or their estimated economic life. Amortization of patents for the year
      ended December 31, 2006 and 2005 was $19,564 and $19,322, respectively, and
      patents are reported net of accumulated amortization of $46,938 and $27,374
      at
      December 31, 2006 and 2005, respectively. Amortization expense in each of the
      five years subsequent to December 31, 2006 will approximate
      $19,500.





Research
      and Development





Research
      and development costs are expensed as incurred. There may be cases in the future
      where certain research and development costs such as software development costs
      are capitalized. For the years ended December 31, 2006 and 2005, research and
      development costs were $406,300 and $250,883, respectively.




51




Inventories





Inventories
      are valued at the lower of cost, determined on the first-in, first-out (“FIFO”)
      basis or market value. Costs include direct material, labor and
      overhead.





Fixed
      Assets





On
      August
      2, 2004, fixed assets were adjusted to market value in accordance with the
      requirements of fresh-start reporting. Depreciation is computed using the
      straight-line method over the estimated useful lives of the related assets,
      which range from three to five years. For the years ended December 31, 2006
      and
      2005, depreciation expense was $6,397 and $9,596, respectively. Repairs and
      maintenance are charged to expense as incurred while improvements are
      capitalized. Upon the sale, retirement or disposal of fixed assets, the accounts
      are relieved of the cost and the related accumulated depreciation with any
      gain
      or loss recorded to the statements of operations.





Fair
      Value of Financial Instrument s





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





Long-Lived
      Assets





SFAS
      No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets”,
      addresses financial accounting and reporting for the impairment or disposal
      of
      long-lived assets. 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, 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 January 1, 2002. The provisions of this
      pronouncement relating to assets held for disposal generally are required to
      be
      applied prospectively after the adoption date to newly initiated commitments
      to
      sell or dispose of such assets, (as defined), by management. As a result,
      management cannot determine the potential effects that adoption of SFAS 144
      will
      have on the Company's financial statements with respect to future disposal
      decisions, if any. Management believes no impairment exists at December 31,
      2006.


52





Earnings
      (Loss) Per Share





Under
      SFAS No. 128 "Earnings 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 assumed to be outstanding during the period
      of
      computation. Diluted earnings per share is computed similar 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 if the additional common shares were dilutive.
      For all periods presented, basic and diluted loss per share are the same, as
      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 year ended December
      31, 2006, there were options to purchase 2,330,000 shares of common stock.
      For
      the year ended December 31, 2005, there were options to purchase 1,978,500
      shares of common stock.





Income
      Taxes





Income
      taxes are provided for the tax effects of transactions reported in the financial
      statements and consist of taxes currently due plus deferred income taxes.
      Deferred income taxes are recognized for temporary differences between the
      financial statement and tax bases of assets and liabilities that will result
      in
      taxable or deductible amounts in the future. Deferred income taxes are also
      recognized for net operating loss carryforwards that are available to offset
      future taxable income and research and development credits. Valuation allowances
      are established when necessary to reduce deferred tax assets to the amount
      expected to be realized.





In
      July
      2006, the Financial Accounting Standards Board issued Financial Interpretation
      No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”, which applies
      to all tax positions related to income taxes subject to SFAS 109, “Accounting
      for Income Taxes”. FIN 48 requires a new evaluation process for all tax
      positions taken. If the probability for sustaining said tax position is greater
      than 50%, then the tax position is warranted and recognition should be at the
      highest amount which would be expected to be realized upon ultimate settlement.
      FIN 48 requires expanded disclosure at each annual reporting period unless
      a
      significant change occurs in an interim period. Differences between the amounts
      recognized in the statements of financial position prior to the adoption of
      FIN
      48 and the amounts reported after adoption are to be accounted for as an
      adjustment to the beginning balance of retained earnings. The Company has
      completed it initial evaluation of the impact of the January 1, 2007 adoption
      of
      FIN 48 and determined that such adoption is not expected to have a material
      impact on the Company's financial position or results from
      operations.





Reclassifications





In
      2006,
      the Company reclassified payroll and stock-based compensation costs in the
      statement of operations for the period from August 2, 2004 to June 30, 2006.
      The
      change in reporting implemented during 2006 is the direct result of a
      reclassification of payroll and stock-based compensation costs previously
      recorded in General and Administrative expense to Research and Development
      expense. Reclassifications were based on management's estimate of time spent
      by
      employees on research and development rather than general and administrative
      activities. The tables below present the amounts previously reported on prior
      filings and balance after reclassifications:




53





**Year
                Ended December 31, 2005**
            
            **August
                2, 2004 (Inception of Successor Company) to December 31,
                2005****As
                Previously Reported**
            
            **After
                Reclassification**
            
            **As
                Previously Reported**
            
            **After
                Reclassification**Operating
                expenses:Research
                and development
            
            $
            53,122
            
            $
            250,883
            
            $
            53,122
            
            $
            330,775General
                and administrative
            
            
            874,957
            
            
            677,196
            
            
            1,263,843
            
            
            986,190Total
                operating expenses
            
            $
            928,079
            
            $
            928,079
            
            $
            1,316,965
            
            $
            1,316,965




Note
      4 -
      Inventories





At
      December 31, 2006 and 2005, inventories consisted of the following:





2006
            
            2005Raw
                materials
            
            $
            50,876
            
            $
            60,917Work
                in process
            
            
            0
            
            
            0Finished
                goods
            
            
            73,105
            
            
            79,155Totals
            
            $
            123,981
            
            $
            140,072





Note
      5 -
      Income Taxes





The
      significant components of deferred tax assets as of December 31, 2006 and 2005
      are shown below. A valuation allowance has been established to offset the
      deferred tax assets, as realization of such assets is
      uncertain.


54





Year
                Ended
              December
                31,
              2006
            
            Year
                Ended
              December
                31,
              2005Deferred
                tax assets:Net
                operating loss carryforward
            
            $
            11,480,000
            
            $
            13,591,000Research
                and development credits
            
            
            537,000
            
            
            519,000Inventory
                reserve
            
            
            -
            
            
            177,000Accrued
                liabilities
            
            
            15,000
            
            
            5,000Deferred
                compensation
            
            
            277,000
            
            
            120,000Total
                deferred tax assets
            
            
            12,309,000
            
            
            14,412,000Valuation
                allowance
            
            
            (12,213,000
            )
            
            (14,270,000
            )Net
                deferred tax assets
            
            
            96,000
            
            
            142,000Deferred
                tax liability:Patents
            
            
            (96,000
            )
            
            (142,000
            )Net
                deferred taxes
            
            $
            -
            
            $
            -





The
      following reconciles the tax provision with the expected provision obtained
      by
      applying statutory rates to pretax income:





Year
                Ended December 31,
              2006
            
            Year
                Ended December 31,
              2005Expected
                tax at Federalstatutory
                rates
            
            $
            (446,000
            )
            $
            (310,000
            )Change
                in valuation allowance
            
            
            (2,057,000
            )
            
            (1,146,000
            )Expiration
                of net operating loss carryforwards
            
            
            2,555,000
            
            
            1,387,000Expiration
                of credits
            
            
            -
            
            
            126,000State
                taxes, net
            
            
            (57,000
            )
            
            (53,000
            )Tax
                credits
            
            
            (12,000
            )
            
            (3,000
            )Permanent
                items
            
            
            13,000Other,
                net
            
            
            4,000
            
            
            (1,000
            )Tax
                provision
            
            $
            -
            
            $
            -





At
      December 31, 2006, the Company had Federal net operating loss carryforwards
      of
      approximately $128,981,000 that expire in 2007 through 2025. In addition, the
      Company had research and development tax credits of approximately $537,000
      that
      expire in 2007 through 2020. As a result of previous stock transactions, the
      Company's ability to utilize its net operating loss carryforwards to offset
      future taxable income and utilize future research and development tax credits
      is
      subject to certain limitations under Section 382 of the Internal Revenue Code
      due to changes in equity ownership of the Company. The Company expects
      significant limitations of its net operating loss carryforwards and research
      and
      development tax credits due to the application of Internal Revenue Code Section
      382.




55




Note
      6 -
      Lease Commitments





The
      Company leases its 2,540 square foot facility from an independent third party
      at
      approximately $2,540 per month which expired on February 28, 2007. An extension
      of the lease was negotiated to begin March 1, 2007 and end December 31, 2007
      at
      a rate of $2,794 per month. Total commitments under these leases for 2007 are
      approximately $33,000. For the years ended December 31, 2006 and 2005, rent
      expense totaled $32,624 and $34,061, respectively.




Note
      7 -
      Stock-Based Compensation Plan s





The
      2001
      stock option plan (the “Option Plan”) was amended in 2004. The Option Plan
      provides for the grant of incentive stock options (“ISOs") to our full-time
      employees (who may also be Directors) and nonqualified stock options ("NSOs")
      to
      non-employee directors, consultants, customers, vendors or providers of
      significant 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
      Plan shall equal 15% of the outstanding shares of the Company totaling 5,755,513
      at December 31, 2006. At December 31, 2006, the Company had granted 2,330,000
      options under the Plan (1,988,333 of which are exercisable), with 3,281,114
      available for future issuance.


56





The
      following table summarizes the stock option activity:





Options
                Available For Grant
            
            Plan
                Options Outstanding
            
            Weighted
                Average Exercise Price per Share
            
            Weighted-Average
                Remaining Contractual Term (years)
            
            Aggregate
                Intrinsic Value ($000)Outstanding
                at August 2, 2004
            
            
            4,132,614
            
            
            1,500,000
            
            $
            0.15Options
                granted
            
            
            (275,000
            )
            
            275,000
            
            $
            0.40Options
                exercised
            
            
            -
            
            
            -Outstanding
                at December 31, 2004
            
            
            3,857,614
            
            
            1,775,000
            
            $
            0.19Options
                granted
            
            
            (225,000
            )
            
            225,000
            
            $
            0.94Options
                exercised
            
            
            -
            
            
            (21,500
            )
            $
            0.15Outstanding
                at December 31, 2005
            
            
            3,632,614
            
            
            1,978,500
            
            $
            0.28Options
                granted
            
            
            (400,000
            )
            
            400,000
            
            $
            1.09Options
                exercised
            
            
            48,500
            
            
            (48,500
            )
            $
            0.15Outstanding
                at December 31, 2006
            
            
            3,281,114
            
            
            2,330,000
            
            $
            0.42
            
            
            8.06
            
            $
            2,173Exercisable
                at December 31, 2006
            
            
            
            
            
            1,988,333
            
            $
            0.31
            
            
            7.84
            
            $
            2,073





On
      June
      15, 2006, the Company elected Stanley J. Pappelbaum, M.D. to its Board of
      Directors. Upon election, Dr. Pappelbaum was granted a ten year option to
      purchase 400,000 shares of the Company’s common stock at $1.09 per share, which
      was the closing price on the day of the grant. The estimated value of these
      options is approximately $474,000 ($1.19 per share).





The
      total
      intrinsic value of options exercised during the years ended December 31, 2006
      and 2005 was $60,815 and $21,900, respectively. At December 31, 2006, total
      unrecognized estimated employee compensation cost related to non-vested stock
      options granted prior to that date was $237,174, which is expected to be
      recognized over 1.5 years.





Note
      8 -
      Undesignated Capital Stock





The
      Company has authorized 25,000,000 of undesignated shares of capital stock with
      undesignated par value. The undesignated stock may be issued in one or more
      series as determined from time to time by the Board of Directors. Any series
      authorized for issuance by the Board of Directors may be senior to the common
      stock with respect to any distribution if so designated by the Board of
      Directors upon issuance of the shares of that series. The Board of Directors
      are
      granted the express authority to fix by resolution any other designations,
      powers, preferences, rights (including voting rights), qualifications,
      limitations or restrictions with respect to any particular series created from
      the undesignated stock prior to issuance thereof.




57




Note
      9 -
      Common Stock Issued





In
      June
      2006, the Company made a Regulation D offering to accredited investors of
      749,325 common shares for $502,048. No commissions or fees were paid.
      Additionally, during 2006, an employee exercised options for 48,500 shares
      with
      an exercise price aggregating $7,275. Additional paid in capital has also
      increased by recording the compensation arising from the amortization of the
      value of options issued to employees and consultants over the term of the
      respective contracts.





Note
      10 -
      License Agreement





The
      Company is the exclusive licensee through the Massachusetts General Hospital
      of
      US Patent number 5,843,000 entitled, “Optical Biopsy Forceps and Method of
      Diagnosing Tissue” and a pending international patent application. This license
      agreement requires a royalty be paid on sales of the patent on products using
      claims described within the patent under the license. To date no revenues have
      been generated from sales of products using this patent.





Note
      11 -
      Subsequent Events





During
      the first quarter of 2007, the Company sold 950,000 shares of common stock
      to
      accredited investors under Regulation D of the Securities and Exchange Act
      for a
      net amount of $475,000. One of the Company’s directors participated in this
      offering. He was excluded from a board meeting in which the terms of the
      offering were determined. No commissions were paid on this transaction. This
      funding is intended to keep the Company’s operations in place until it can close
      on a larger planned funding.


58





ITEM
      8.
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.





During
      2006, there were no changes or disagreements with our current Independent
      Registered Public Accounting Firm, J.H. Cohn LLP.





ITEM
      8A.
      CONTROLS AND PROCEDURES.





Evaluation
      of Disclosure Controls and Procedures





Under
      the
      supervision of 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 Rule 13a-15(e) under the Exchange Act) as of the end of the period
      covered by this report (the “Evaluation Date”). Based on that evaluation, the
      Chief Executive Officer and Chief Financial Officer concluded that our
      disclosure controls and procedures were effective.





Changes
      in Internal Control over Financial Reporting





Under
      the
      supervision of 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 (as defined in Rule 13a-15(f) under
      the Exchange Act) which occurred during the quarter ended December 31, 2006.
      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 December 31, 2006 which have
      materially affected, or are likely to materially affect our internal controls
      over financial reporting





Cautionary
      Statement





A
      control
      system, no matter how well-designed and operated, cannot provide absolute
      assurance that the objectives of the control system are met, and no evaluation
      of internal controls can provide absolute assurance that all control issues
      and
      instances of fraud, if any, within a company have been detected.





ITEM
      8B.
      OTHER INFORMATION.





Not
      Applicable.


59





**PART
      III**








ITEM
      9.
      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
      SECTION 16(a) OF THE EXCHANGE ACT .





SpectraScience
      Directors and Executive Officers





**Jim
      Hitchin, Chairman, President, Chief Financial Officer, Secretary and CEO,
      Director since 2004, Age 64,** joined
      SpectraScience in January 2004 as part of the acquisition team. Previously
      he
      was the founder, CEO and Chairman of Infrasonics, Inc., a medical device company
      in the respiratory care field. The company was the first in its market to have
      ISO9001 and the CE Mark for fourteen 510(k) and two PMA products. Growth was
      at
      a compound rate of 62% during its fifteen-year life before being sold to a
      competitor. In previous companies, he was COO of a public energy company and
      the
      VP, General Manager of a public oceanographic engineering firm. Mr. Hitchin
      has
      extensive experience in all phases of manufacturing and company operations,
      in
      particular, sales and marketing of medical devices. He graduated from San Diego
      State University with a degree in Physics.





**Mark
      D. McWilliams, Director since 2004, Age 50,** Most
      recently served as Director of Cell Imaging and Analysis at Beckman Coulter
      after the recent sale of Q3DM to Beckman in December 2003. He was President
      and
      Chief Executive Officer and Director of Q3DM, a life-sciences startup that
      raised several angel and venture capital funding rounds. Previously, he was
      founder and COO of Medication Delivery Devices (MDD), an alternate care infusion
      systems company that was acquired by Baxter Healthcare in 1996. Mr. McWilliams
      served as a VP of Research and Development at Baxter Healthcare for three years
      following the sale of MDD. Prior to MDD, he served as Product Development
      Manager at the founding of Block Medical where he was responsible for bringing
      the company’s first two FDA approved products rapidly to market. Block was sold
      to Hillenbrand  Industries
      in 1991. He previously worked for Hughes Aircraft, Vacuum General and Martin
      Marietta. He earned his MSME from the Massachusetts Institute of Technology,
      his
      BSME from Northeastern University and holds eight utility patents.





**Rand
      P. Mulford, Director since 2004, Age 63,** Most
      recently, Mr. Mulford served as E.V.P. for Strategy with Forest Capital, with
      a
      majority of his time allocated to assisting one of its subsidiaries, Telos
      Pharmaceuticals, in corporate development and financing. For the previous two
      years, He was part of the senior management team of a small investment banking
      firm that specialized in funding early stage companies and technology-based
      spinouts using private placements. He has worked directly with four portfolio
      companies. Mr. Mulford was asked to identify critical issues and develop
      business strategy, serve on three of the Boards of Directors, assume a direct
      managerial role in two of the companies, and negotiate the successful sale
      of
      one of the companies. His corporate experience includes: Group V.P. of planning
      and control for a petrochemical company; head of corporate planning at Merck;
      C.F.O. of a human tissue company; C.O.O. of a drug discovery company and
      president of its subsidiary, a research chemical company; C.O.O. of a
      diagnostics company; Chairman of the Board of a medical device company; and
      head
      of the corporate development at a bio-pharmaceutical company. Mr. Mulford
      started his business career with the consulting firm of McKinsey & Co. in
      the Chicago office. During an eight-year period, he served about twenty clients
      working on a variety of issues primarily related to strategy and organization.
      Mr. Mulford obtained his bachelors degree in engineering with honors from
      Princeton University in 1965. For the next five years he served as a naval
      officer in the nuclear submarine program. Subsequently, he earned a M.B.A.
      with
      high distinction at Harvard Business School.




60




**Stanley
      J. Pappelbaum M.D., Director since 2006, Age 69,** is
      Managing Partner of Pappelbaum, Turner & Associates, a national healthcare
      consultancy company that advises hospital, medical group, health insurance,
      and
      governmental healthcare clients. Dr. Pappelbaum joined Scripps hospital in
      1996
      as Chief Transformational Officer in charge of creating and implementing
      Scripps’ strategic vision of the future. In 1997, he was promoted to Executive
      Vice President and Chief Operating Officer and, in 1999, he was promoted to
      President and Chief Executive Officer when the hospital reached annual revenues
      of over $1 billion. From 1985 to 1995, he was the managing partner of
      Professional Health Consulting Group, a national company of physician executives
      who analyzed and managed change for complex not-for-profit healthcare systems
      clients throughout the United States. From 1969 to 1984, Dr. Pappelbaum taught
      and practiced Pediatric Cardiology at the University of California, San Diego
      and at San Diego Children’s Hospital, where he was Chief of Pediatric Cardiology
      from 1972-1978. Dr. Pappelbaum completed his undergraduate work at McGill
      University, Montreal and received his medical degree from the University of
      British Columbia Faculty of Medicine in Vancouver. He completed his residency
      in
      pediatric medicine at Montreal Children’s Hospital of McGill University and did
      graduate studies in cardiovascular physiology and a fellowship in pediatric
      cardiology at the University of California, Los Angeles. He also was awarded
      an
      Alfred P. Sloan Fellowship at the Massachusetts Institute of Technology where
      he
      earned a Master's degree in management (health option) from MIT.





**Chester
      E. Sievert, Jr., Director since 2004, Age 55,** is
      currently President of Advanced Photodynamic Technologies. He joined
      SpectraScience as a consultant in June 1996 and has held various executive
      positions since November 1996. Mr. Sievert served as Chairman of the Board
      beginning in June 1999. He served as President from March 1998, and Chief
      Executive Officer from January 1999 until December 2001. He then became
      Executive Vice President of Technology and Chairman of the Board. Prior to
      joining SpectraScience, Mr. Sievert was a founder and President at two medical
      product companies; ReTech, Inc. from 1980 to 1986; and FlexMedics Corporation
      from 1986 to 1995. Both Companies were sold respectively to American Endoscopy,
      Inc. and Phillips Plastics Corporation. As a former Senior Research Health
      Scientist on staff at the University of Minnesota Medical School and the
      Veterans Administration Medical Center, Mr. Sievert has published more than
      50
      medical journal articles in the fields of gastroenterology, endoscopy and fiber
      optics. He has also been awarded eight United States and International patents.
      Mr. Sievert has a Bachelor of Science Degree in Comparative Physiology from
      the
      University of Minnesota.





Section
      16(a) Beneficial Ownership Reporting Compliance





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires our
      directors, executive officers and persons who are beneficial owners of more
      than
      10% of our common stock to file initial reports of ownership and reports of
      changes in ownership of our common stock and any other equity securities of
      SpectraScience with the Securities and Exchange Commission, and to furnish
      us
      with copies of all Section 16(a) reports they file. To the best of our
      knowledge, based upon a review of the copies of such reports furnished to us,
      no
      other reports were required during the year ended December 31, 2006 and all
      Section 16(a) filing requirements applicable to our Officers, Directors, and
      10%
      stockholders were satisfied.




Code
      of Ethics




We
      have adopted a Code of Ethics which applies to our
      principal executive officer, principal financial officer, principal accounting
      officer/controller, and persons performing similar functions. A copy of our
      Code
      of Ethics is filed as Exhibit 14 to our Report on Form 10-KSB for the year
      ended
      December 31, 2005.




Audit
        Committee
  The
        Company is not currently a "listed issuer" as
        defined in Rule 10A-3 under the Securities Exchange Act. However, it does
        have
        an Audit Committee consisting of independent directors as defined by
        NASDAQ standards, an Audit Committee charter and an "Audit Committee
        financial expert". The Company believes that director, Mr.
        Rand Mulford, qualifies as that expert.




61




ITEM
      10.
      EXECUTIVE COMPENSATION.





Cash
      Compensation





Compensation
      awarded, paid to, or earned in the years ended December 31, 2006, 2005 and
      2004
      by the person serving as the Company’s Chief Executive Officer (the “Named
      Executive Officer”) as of December 31, 2006 is shown in the following table. No
      other executive officer serving as of December 31, 2006 had salary or bonus
      compensation exceeding $100,000.





**SUMMARY
                COMPENSATION TABLE**





Name
                and Principle Position
            Year
            Salary
              ($)
            Bonus
              ($)
            Stock
                Awards
            Option
                Awards
              ($)
            Non-Equity
                Incentive Plan Compensation ($)
            Non-Qualified
              Deferred
                Compensation earnings
            All
                Other Compensation
            Total
              ($)JIM
                HITCHIN
              President,
                Chief Executive Officer, Chief Financial Officer and Corporate
                Secretary
            2006
            48,000
            0
            0
            0
            0
            0
            0
            48,0002005
            48,000
            0
            0
            0
            0
            0
            0
            48,0002004
            19,385
            0
            0
            0
            0
            0
            0
            19,385








Mr.
      Hitchin is the Company’s only officer and became involved in researching the
      Company in January 2004 with the interest of developing a plan of
      reorganization. He did not become an officer and director until August 2004.
      He
      does not have a written or unwritten employment agreement and his salary is
      not
      dependent on performance targets, goals or any other condition. Also he is
      not
      subject to severance and change of control arrangements.





The
      Company had no directors, officers or employees from September 13, 2002 until
      August 2, 2004.





Equity
      Awards, Exercises, and Awards Outstanding





There
      were no grants of stock options, restricted stock, stock appreciation rights,
      or
      other equity awards made to the named executive officer, or exercises of any
      options, awards or rights by him during the years ended December 31, 2006 and
      2005. There are no options, restricted stock, stock appreciation rights, or
      other equity awards held by the named executive officer as of December 31,
      2006.




62




Remuneration
      of Members of the Board of Directors





The
      Company does not pay directors for Board of Directors’ meetings or committee
      meetings attended, but reimburses each such director for reasonable travel
      and
      out-of-pocket expenses for attendance at these meetings. Should a director
      be
      required to expend an extraordinary amount of time performing a Company task,
      he/she would be compensated at a rate of $100/hour. No such payments were made
      in 2006 or 2005.





Pursuant
      to the SpectraScience, Inc. Amended 2001 Stock Option Plan, non-employee
      directors McWilliams, Mulford and Sievert were granted non-qualified stock
      options to purchase 400,000, 400,000 and 300,000 shares of common stock,
      respectively, on July 26, 2004 at $0.15 per share. Dr. Pappelbaum joined the
      board in June 2006 and was granted a non-qualified stock option to purchase
      400,000 shares of common stock at $1.09 per share. The exercise prices of the
      options was based on the prevailing market price (defined as the closing price)
      of the common stock on the date of grant.





The
      options granted to employee and non-employee directors under the Amended 2001
      Stock Option Plan expire ten years from the date of grant (subject to earlier
      termination in the event of death), are not transferable (except by will or
      the
      laws of descent and distribution), and become exercisable in three equal annual
      installments commencing on the date of grant.





The
      following table shows the compensation earned by each of our directors (except
      Jim Hitchin, who is a named executive officer) as of the year ended December
      31,
      2006





Name
            Fees
                earned or paid in cash
            Stock
                Awards
            Option
                Awards
            Non-Equity
                Incentive Plan Compensation
            Non-Qualified
                Deferred Compensation Earnings
            All
                Other Compensation
            TotalMark
                McWilliams
            $
                0
            0
            400,000
            0
            0
            $
                0
            400,000
                SharesRand
                Mulford
            $
                0
            0
            400,000
            0
            0
            $
                0
            400,000
                SharesChester
                Sievert
            $
                0
            0
            300,000
            0
            0
            $
                0
            300,000
                SharesStanley
                J. Pappelbaum, M.D.
            $
                0
            0
            400,000
            0
            0
            $
                0
            400,000
                Shares





63





ITEM
      11.
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS.







Summary
      of Securities Authorized for Issuance Under Equity Compensation
      Plans





The
      following table sets forth December 31, 2006 information on our equity
      compensation plans in effect as of that date:





(a)
            
            (b)
            
            (c)Plan
                category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights (1)
            
            Weighted-average
                exercise price of outstanding options, warrants and rights
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))Equity
                compensation plans approved by security holders
            
            
            2,330,000
            
            $
            0.42
            
            
            3,281,114Equity
                compensation plans not approved by security holders
            
            
            0
            
            
            0
            
            
            N/ATotals
            
            
            2,330,000
            
            $
            0.42
            
            
            3,281,114





(1)
      Net
      of equity instruments forfeited, exercised or expired.





2001
      Amended Stock Option Plan





Our
      2001
      Amended Stock Option Plan (the "Option Plan") provides for the grant of
      incentive stock options (ISOs") to our employees (who may also be directors)
      and
      nonqualified stock options ("NSOs") to non-employee directors, consultants,
      customers, vendors or providers of significant services. The Option plan 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 5,635,839 at December 31, 2005.
      At
      December 31, 2006, we had granted 2,330,000 options under the Plan, with
      3,281,114 available for future issuance.





The
      Company’s Option Plan provides that the number of shares of common stock
      available for issuance under the plan shall always equal 15% of the number
      of
      shares of common stock of the Company issued and outstanding.




64




Principal
      and Management Shareholders





The
      following tables set forth certain information regarding the beneficial
      ownership of SpectraScience common stock as of March 23, 2007, by: (a) each
      director of SpectraScience (as of March 23, 2006; (b) each named executive
      officer of SpectraScience; (c) each person or entity known by us to own
      beneficially more than five percent of the Common Stock; and (d) all the
      directors and executive officers of SpectraScience (as of March 23, 2007) as
      a
      group.








Name
                and Address
              11568-11
                Sorrento Valley Rd., San Diego, CA 92014 for all
                parties
            Amount
                of Beneficial Ownership
            Percent
                OwnershipJim
                Hitchin
            9,192,149
            24.0%Mark
                D. McWilliams
            608,333
                (1)
            1.6%Rand
                P, Mulford
            740,000
                (2)
            1.9%Stanley
                J. Pappelbaum, M.D.
            133,333
                (3)
            0.3%Chester
                E. Sievert
            900,000
                (4)
            2.3%All
                Officers & Directors
            11,573,815
            30.1%





1.
            Includes
                400,000 shares which may be acquired upon exercise of options which
                are
                currently exercisable or which become exercisable within 60 days
                following
                the date of this report.


2.
            Includes
                400,000 shares which may be acquired upon exercise of options which
                are
                currently exercisable or which become exercisable within 60 days
                following
                the date of this report.


3.
            Includes
                133,333 shares which may be acquired upon exercise of options which
                are
                currently exercisable or which become exercisable within 60 days
                following
                the date of this report.


4.
            Includes
                300,000 shares which may be acquired upon exercise of options which
                are
                currently exercisable or which become exercisable within 60 days
                following
                the date of this report.





ITEM
      12.
      CERTAIN RELATIONSHIPS, AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE.





Other
      than Mr. Hitchin, the remaining directors of the Company are independent in
      that
      they have no relationship to the corporation that may interfere with the
      exercise of their independence from management and the Company. No independent
      director has a business or family relationship with another director to the
      best
      of Management’s knowledge. The Audit and Compensation Committees consist of Mr.
      Mulford (Chair), McWilliams and Dr. Pappelbaum. The Audit Committee met four
      times and Compensation Committee once during the year ended December 31, 2006.
      The entire board met five times during the year with 100% attendance by
      directors, except for Dr. Pappelbaum who was appointed to the board in June
      2006. He attended each of the three meetings from his appointment until December
      31, 2006.





ITEM
      13.
      EXHIBITS





The
      following documents are filed as part of this report on Form
      10-KSB:





65


Exhibits
      Required by Item 601 of Regulation S-B





Exhibit
                No.
            Description3.1
            Amended
                and Restated Articles of Incorporation(1)10.27
            Amended
                SpectraScience Inc, 2001 Stock Plan(1)10.28
            Form
                of Directors’ Option Agreement(2)14
            Code
              of Ethics Incorporated by reference (2)23
            Consent
                of Independent Registered Public Accounting Firm31
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                302 of the Sarbanes-Oxley Act of 200232
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act of
                2002





(1)
            Incorporated
                by reference to the Company’s Report on Form 8-K, filed on August 6,
                2004.





(2)
            Incorporated
                by reference to the Company’s Report on form 10-KSB for the fiscal year
                ended December 31, 2005, filed on March 31,
                2006.





ITEM
      14.
      PRINCIPAL ACCOUNTANT FEES AND SERVICES





Audit
      Fees. The
      previous independent registered public accounting firm billed $6,518
      in 2002 and were subsequently paid $5,866 by the Trustee on September 24, 2004.
      The fee for the audits of December 31, 2002, 2003 and 2004 were performed
      concurrently in 2004 and were $80,000. The aggregate fees for years ended
      December 31, 2006 and 2005 for professional services rendered
      by independent registered public accounting firm for the audit of the
      annual financial Statements and review of financial Statements included on
      Form
      10-QSB were $81,790 and $104,979, respectively.





Audit-Related
      Fees. There
      were no audit-related fees for the years ended December 31, 2006 and 2005.





All
      Other Fees. There
      were no other fees for the years ended December 31, 2006 and 2005.


66


SIGNATURES








Pursuant
      to the requirements of Sections 13 and 15(d) of the Securities Exchange Act
      of
      1934, as amended, the Registrant has duly caused this report to be signed on
      its
      behalf by the undersigned, thereunto duly authorized.





**SpectraScience,
      Inc.**


**(Registrant)**











Date:
      March 27, 2007 By: /s/ James
      Hitchin


James
      Hitchin-President, Secretary, Chief Financial Officer and Chief Executive
      Officer








Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      report has been signed below by the following persons on behalf of the
      Registrant and in the capacities and on the dates indicated.




/s/
                James
                Hitchin
              James
                Hitchin
              (Principal
                Executive Officer and Principal
              Financial
                and Accounting Officer)
            March
                27, 2007
              Date/s/
                Mark D.
                McWilliams
              Mark
                D. McWilliams
              Director
            March
                27, 2007
              Date/s/
                Rand P.
                Mulford
              Rand
                P. Mulford
              Director
            March
                27, 2007
              Date/s/
                Chester E.
                Sievert
              Chester
                E. Sievert, Jr.
              Director
            March
                27, 2007
              Date/s/
                Stanley J.
                Pappelbaum
              Stanley
                J. Pappelbaum
              Director
            March
                27, 2007
              Date




67