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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from           to
 Commission file number 000-51481
 ELECTRO-OPTICAL SCIENCES, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    13-3986004(State
or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 3 West Main Street, Suite 201
Irvington, New York 10533  (Address, including zip code, of
registrants principal executive offices)
 (914) 591-3783
 Registrants telephone number, including area code:
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon stock, $0.001 par value
    
    The NASDAQ Stock Market LLC
 Securities registered pursuant to Section 12(g) of the Act:
None
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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##### 



ELECTRO-OPTICAL SCIENCES, INC.
 2008 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    19Item 1B.
    
    Unresolved Staff Comments
    
    
    37Item 2.
    
    Properties
    
    
    37Item 3.
    
    Legal Proceedings
    
    
    37Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    37PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    38Item 6.
    
    Selected Financial Data
    
    
    39Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    40Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    47Item 8.
    
    Financial Statements and Supplementary Data
    
    
    48Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    66Item 9A.
    
    Controls and Procedures
    
    
    66Item 9B.
    
    Other Information
    
    
    69PART IIIItem 10.
    
    Directors, Executive Officers, and Corporate Governance
    
    
    69Item 11.
    
    Executive Compensation
    
    
    69Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    69Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    69Item 14.
    
    Principal Accountant Fees and Services
    
    
    69PART IVItem 15.
    
    Exhibits and Financial Statements Schedules
    
    
    70EX-21.1: SUBSIDIARIES OF THE REGISTRANT
    
    
    74EX-23.1: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    75EX-31.1: CERTIFICATION
    
    
    76EX-31.2: CERTIFICATION
    
    
    77EX-32.1: CERTIFICATIONS
    
    
    78EX-21.1: SUBSIDIARIES OF THE REGISTRANTEX-23.1: CONSENT OF EISNER LLPEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATION
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This Annual Report on Form 10-K , including the sections labeled Managements Discussion and
Analysis of Financial Condition and Results of Operations, contains forward-looking statements that
you should read in conjunction with the financial statements and notes to financial statements that
we have included elsewhere in this report. These statements are based on our current expectations,
assumptions, estimates and projections about our business and our industry, and involve known and
unknown risks, uncertainties, and other factors that may cause our or our industrys results,
levels of activity, performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied in, or contemplated by, the
forward-looking statements. We generally identify these statements by words or phrases such as
believe, anticipate, assuming, expect, intend, plan, will, may, should,
estimate, predict, potential, continue, or the negative of such terms or other similar
expressions. Our actual results and the timing of events may differ significantly from the results
discussed in the forward-looking statements, and you should not place undue reliance on these
statements. Factors that might cause such a difference include those discussed below under the
section Risk Factors, as well as those discussed elsewhere in this Annual Report on Form 10-K . We
disclaim any intent or obligation to update any forward-looking statements as a result of
developments occurring after the period covered by this report or otherwise.
 
 Item 1. Business
 Overview
 ®
 ®
 
    
    a hand-held imaging device, which employs high precision optics and multi-spectral illumination
(multiple colors of light including near infra-red);
    
    our proprietary databaseof pigmented skin lesions, which we believe to be the largest in the US; and
    
    our lesion classifiers, which are sophisticated mathematical algorithms that extract lesion feature
information and classify lesions.
 ® ® ® ®
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A B C D E
 ® ® in situ ®
 ®
 ®
 ® ® ® ® ®
 The Market Opportunity
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Our Strategy
 ®
 
    
    Establish MelaFind®as the leading technology for assisting
in the detection of melanoma.We have invested considerable capital
and expertise into developing our core technology platform, which is
protected by eight US patents. We will continue to refine and optimize
this technology in order to position MelaFind® as the
leading system for assisting in the detection of melanoma.
    
    Pursue the timely FDA approval of MelaFind®. We have
entered into a binding Protocol Agreement with the FDA for the conduct
of the pivotal trial of MelaFind®. On October 12, 2006, we
announced that the FDA had informed us that when submitted, the
MelaFind® premarket approval, or PMA, application would
receive expedited review. Expedited review means that upon filing our
PMA, the FDA will conduct a team review, prioritize the application,
and allocate sufficient resources toward a 180 day review period.
While the expedited review could shorten the MelaFind® FDA
approval process, we can give no assurances that this will be the
case. The data accrual phase of the MelaFind® pivotal trial
was completed in the third quarter of 2008 and the image processing
classification algorithms were finalized in the fourth quarter. At
year end 2008, the databases were undergoing third-party statistical
validation and the classification algorithms were undergoing software
verification and validation. On February 13, 2009, the Company
announced that a third party, independent bio-statistician had
provided positive top line results from the MelaFind®
pivotal trial. We are working to complete our PMA application, which
includes the final study reports, and expect to file it with the FDA
during the second quarter of 2009. Upon obtaining PMA approval from
the FDA, we plan to commercially launch MelaFind® in the
United States.
    
    Commercialize MelaFind®using multiple sales and marketing
strategies.Our internal sales and marketing effort will commence
following PMA approval and it will focus initially on high volume and
key opinion leader dermatologists, including skin cancer specialists,
in key regions of the US. We intend to offer MelaFind® on a
per patient basis, creating a recurring revenue stream. To enter the
larger US markets of general dermatologists and primary care
physicians, and for international markets, we may establish
partnerships with pharmaceutical and/or diagnostic/device companies
with an established presence in these markets. We intend to commence
sales of MelaFind® in the US immediately upon receiving PMA
approval for physicians to offer MelaFind® to their
patients on a self-pay basis. Once sufficient evidence to support
favorable coding and coverage decisions and to obtain appropriate
payment levels, we may pursue national coverage decisions from the
Centers for Medicare and Medicaid Services (CMS) and private payers
for third-party reimbursement.
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Limitations of Current Melanoma Diagnosis
 ® ®
  MelaFind ® Product Description
 ® ® ® ®
 A hand-held imaging device
 
    
    an illuminator that shines 10 different specific wavelengths of light, including near infra-red bands;
    
    a lens system composed of nine elements that creates images of the light reflected from the lesions;
    
    a photon (light) sensor; and
    
    an image processor employing proprietary algorithms to extract many discrete characteristics or
features from the images.
 Our proprietary database of pigmented skin lesions in vivo ®
 Our lesion classifiers, . ® Lesion Classifier, Lesion Classifiers Lesion Classifiers Lesion Classifier Lesion Classifiers ®
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##### Table of Contents



® sensitivity specificity ® Lesion Classifier ®
 ®
 MelaFind ® Regulatory Status
 ® ®
 ® ®
 ® ® ® ® ®
 ®
  ® ® ®
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History of MelaFind ®
 MelaFind ® Development History
 ® ®
 ® ® ® ® ®
 Hardware and Software History
 ® ®
 ® ®
 ®
  Sales and Marketing
 ® ®
 ® ®
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The MelaFind ® Value Proposition for the Healthcare System
 ® ®
 ® ®
 Our Reimbursement Strategy
 ®
  ®
 ®
   ® ® ®
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®
 ® ® ® ® ® ®
 ®
 ® ®
 Competition
 ®
   8




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® ®
   ®
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®
 Manufacturing
 ® ®
 ® ®
 Research and Development Efforts
 ® Lesion Classifier ®
  ® tm ® tm tm tm ®
 ® ®
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Intellectual Property
 ® ® ® ®
  ®
 ® ® ® ® ® ®
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US Patents Relating to Melanoma Detection
 Patent
#
    

Title
    

Issued
    

Expiration6,081,612
    
    Systems and Methods for the
Multispectral Imaging and
Characterization of Skin Tissue
    
    06/27/00
    
    02/27/186,208,749
    
    Systems and Methods for the
Multispectral Imaging and
Characterization of Skin Tissue
    
    03/27/01
    
    02/27/186,307,957
    
    Multispectral Imaging and
Characterization of Biological
Tissue
    
    10/23/01
    
    02/27/206,626,558
    
    Apparatus for Uniform Illumination
of an Object
    
    09/30/03
    
    08/31/216,657,798
    
    Method for Optimizing the Number
of Good Assemblies Manufacturable
From a Number of Parts
    
    12/02/03
    
    02/10/236,710,947
    
    Method for Assembling Lens Elements
    
    03/23/04
    
    02/27/237,102,672
    
    Integrated CMOS Imaging Array &
Dark Current Monitor
    
    09/05/06
    
    01/10/247,127,094
    
    Method of Controlling Data
Gathered at Remote Locations
    
    10/24/06
    
    03/11/25
 Filed US Patent Relating to Melanoma Detection
 Patent #
    

Title
    

Filedn/a
    
    Reducing noise in Digital Images
    
    08/9/06n/a
    
    Quantitative Analysis of Skin Characteristics
    
    03/2/07n/a
    
    Regulating use of a device to perform a procedure on a subject
    
    06/12/07n/a
    
    Dermatology information
    
    09/04/07n/a
    
    Characterizing a texture of an image
    
    12/14/07
 ® ® ® ® ®
 ® ®
 ® ®
 ®
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® ®
 ®
  FDA Regulation
 ®
 ®
 ® ®
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® ® ®
 ®
  
    
    MelaFind® may not be safe or effective to the FDAs satisfaction;
    
    the data from our pre-clinical studies and clinical trials may be insufficient to support approval;
    
    the manufacturing process or facilities we use may not meet applicable requirements; and
    
    changes in FDA approval policies or adoption of new regulations may require additional data.
   ®
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®
   
    
    establishment registration and device listing;
    
    QSR, which requires manufacturers to follow design, testing, control,
documentation and other quality assurance procedures;
    
    labeling regulations, which prohibit the promotion of products for
unapproved or off-label uses and impose other restrictions on
labeling;
    
    medical device reporting regulations, which require that manufacturers
report to the FDA if a device may have caused or contributed to a
death or serious injury or malfunctioned in a way that would likely
cause or contribute to a death or serious injury if it were to recur;
and
    
    corrections and removal reporting regulations, which require that
manufacturers report to the FDA field corrections and product recalls
or removals if undertaken to reduce a risk to health posed by the
device or to remedy a violation of the FD&C Act that may present a
risk to health.
   
    
    warning letters;
    
    fines and civil penalties;
    
    unanticipated expenditures;
    
    delays in approving or refusal to approve our applications, including supplements;
    
    withdrawal of FDA approval;
    
    product recall or seizure;
    
    interruption of production;
    
    operating restrictions;
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
    
    injunctions; and
    
    criminal prosecution.
  Non-FDA Government Regulation
 ® ®
 
    
    the anti-kickback statute prohibits certain business practices and
relationships that might affect the provision and cost of healthcare
services reimbursable under Medicare, Medicaid and other federal
healthcare programs, including the payment or receipt of remuneration
for the referral of patients whose care will be paid by Medicare or
other federal healthcare programs;
    
    the physician self-referral prohibition, commonly referred to as the
Stark Law, which prohibits referrals by physicians of Medicare or
Medicaid patients to providers of a broad range of designated
healthcare services in which the physicians or their immediate family
members have ownership interests or with which they have certain other
financial arrangements;
    
    the anti-inducement law, which prohibits providers from offering
anything to a Medicare or Medicaid beneficiary to induce that
beneficiary to use items or services covered by either program;
    
    the Civil False Claims Act, which prohibits any person from knowingly
presenting or causing to be presented false or fraudulent claims for
payment by the federal government, including the Medicare and Medicaid
programs; and
    
    the Civil Monetary Penalties Law, which authorizes the US Department
of Health and Human Services (HHS) to impose civil penalties
administratively for fraudulent or abusive acts.
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qui tam
 Environmental Regulation
  International Regulation
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Product Liability and Insurance
 ® ® ® ® ®
 Employees
  Discontinued Business
 ® ® ® ® ® ®
 Other
 www.eosciences.com www.eosciences.com
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Item 1A. Risk Factors
 You should carefully consider the following risk factors, as well as the other information
contained in this report. If any of the following risks actually occur, our business, financial
condition and results of operations would suffer. In that case, the trading price of our common
stock would likely decline.
 Risks Relating to Our Business
 We currently do not have, and may never develop, any commercialized products.
 ® ® ® ®
 
    
    we may not be able to obtain regulatory approvals for MelaFind®, or the approved indication
may be narrower than we seek;
    
    MelaFind® may not prove to be safe and effective in clinical trials to the FDAs satisfaction;
    
    physicians may not receive any reimbursement from third-party payers, or the level of reimbursement may
be insufficient to support widespread adoption of MelaFind®;
    
    we may experience delays in our continuing development program;
    
    any products that are approved may not be accepted in the marketplace by physicians or patients;
    
    we may not have adequate financial or other resources to complete the continued development or to
commence the commercialization of MelaFind® and we will not have adequate financial or other
resources to achieve significant commercialization of MelaFind®;
    
    we may not be able to manufacture our products in commercial quantities or at an acceptable cost; and
    
    rapid technological change may make our technology and products obsolete.
 ®
 We have not received, and may never receive, FDA approval to market MelaFind ®
 ® ® ® ®
 
    
    MelaFind® may not be safe or effective to the FDAs satisfaction;
    
    the data from our pre-clinical studies and clinical trials may be insufficient to support approval;
    
    the manufacturing process or facilities we use may not meet applicable requirements; and
    
    changes in FDA approval policies or adoption of new regulations may require additional data.
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® ® ® ® ® ®
 If MelaFind ® is approved by the FDA, it may be approved only for narrow indications.
 ® ® ® ® ® ® ®
 ® ® ® ®
 MelaFind ® may not be commercially viable if we fail to obtain an adequate level of
reimbursement by Medicare and other third party payers. The markets for MelaFind ® may
also be limited by the indications for which its use may be reimbursed.
  ® ® ®
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®
 ® ®
  The FDA may require additional clinical trials and any adverse results in such clinical trials, or
difficulties in conducting such clinical trials, could have a material adverse effect on our
business.
 ® ®
 We have incurred losses for a number of years, and anticipate that we will incur continued losses
for the foreseeable future.
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We expect to operate in a highly competitive market, we may face competition from large,
well-established medical device manufacturers with significant resources, and we may not be able to
compete effectively.
 ® ®
 
    
    significantly greater name recognition;
    
    established relations with healthcare professionals, customers and third-party payers;
    
    established distribution networks;
    
    additional lines of products, and the ability to offer rebates, higher discounts or
incentives to gain a competitive advantage;
    
    greater experience in conducting research and development, manufacturing, clinical
trials, obtaining regulatory approval for products, and marketing approved products;
and
    
    greater financial and human resources for product development, sales and marketing,
and patent litigation.
  Technological breakthroughs in the diagnosis or treatment of melanoma could render
MelaFind ® obsolete.
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® ®
 For any additional clinical trials required for MelaFind ® by the FDA or with respect to
clinical trials relating to the development of our core technology for other applications, we
depend on clinical investigators and clinical sites and other third parties to manage the trials
and to perform related data collection and analysis, and, as a result, we may face costs and delays
that are outside of our control.
 ® ® ®
 ®
 
    
    the FDA, an Institutional Review Board (IRB) or other regulatory authorities
place our clinical trial on hold;
    
    patients do not enroll in clinical trials at the rate we expect;
    
    patient follow-up is not at the rate we expect;
    
    IRBs and third-party clinical investigators delay or reject our trial protocol;
    
    third-party organizations do not perform data collection and analysis in a
timely or accurate manner;
    
    regulatory inspections of our clinical trials or manufacturing facilities,
among other things, require us to undertake corrective action or suspend or
terminate our clinical trials, or invalidate our clinical trials;
    
    changes in governmental regulations or administrative actions; and
    
    the interim or final results of the clinical trial are inconclusive or
unfavorable as to safety or effectiveness.
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If MelaFind ® is approved for reimbursement, we anticipate experiencing significant
pressures on pricing.
 ® ®
 ® ®
 MelaFind ® may never achieve market acceptance even if we obtain regulatory approvals.
 ® ® ® ® ® ® ® ®
 
    
    perceived effectiveness of MelaFind®;
    
    convenience of use;
    
    cost of use of MelaFind®;
    
    availability and adequacy of third-party coverage or reimbursement;
    
    approved indications and product labeling;
    
    publicity concerning MelaFind®or competitive products;
    
    potential advantages over alternative diagnostic methodologies;
    
    introduction and acceptance of competing products or technologies; and
    
    extent and success of our sales, marketing and distribution efforts.
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® ® ® ® ® ® ® ®
 We may be unable to complete the development and commence commercialization of MelaFind ® or other products without additional funding and we will not be able to achieve significant
commercialization without additional funding.
 ® ®
 
    
    the schedule, costs, and results of clinical trials;
    
    the success of our research and development efforts;
    
    the costs and timing of regulatory approval;
    
    reimbursement amounts for the use of MelaFind® that we are
able to obtain from Medicare and third party payers, or the amount of
direct payments we are able to obtain from patients and/or physicians
utilizing MelaFind®;
    
    the cost of commercialization activities, including products, product
marketing and building a domestic direct sales force;
    
    the emergence of competing or complementary technological developments;
    
    the costs of filing, prosecuting, defending and enforcing any patent
claims and other rights, including litigation costs and the results of
such litigation;
    
    the costs involved in defending any patent infringement actions
brought against us by third parties; and
    
    our ability to establish and maintain any collaborative, licensing or
other arrangements, and the terms and timing of any such arrangements.
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If we are unable to establish sales, marketing and distribution capabilities or enter into and
maintain arrangements with third parties to sell, market and distribute MelaFind ® , our
business may be harmed.
 ® ® ®
 ®
 We have limited manufacturing capabilities and manufacturing personnel, and if our manufacturing
capabilities are insufficient to produce an adequate supply of MelaFind ® , our growth
could be limited and our business could be harmed.
 ® ® ®
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®
 ® ®
 ®
 Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to
supply problems and price fluctuations, which could harm our business. We anticipate contracting
for final device assembly and integration, but no contract for such services on a commercial basis
has yet been procured.
 ® ® ®
  
    
    suppliers may make errors in manufacturing components that could negatively impact the
effectiveness or safety of our products, or cause delays in shipment of our products;
    
    we may not be able to obtain adequate supply in a timely manner or on commercially reasonable
terms;
    
    we may have difficulty locating and qualifying alternative suppliers for our sole-source suppliers;
    
    switching components may require product redesign and submission to the FDA of a PMA supplement or
possibly a separate PMA, either of which could significantly delay production;
    
    our suppliers manufacture products for a range of customers, and fluctuations in demand for the
products these suppliers manufacture for others may affect their ability to deliver components to
us in a timely manner; and
    
    our suppliers may encounter financial hardships unrelated to our demand for components, which
could inhibit their ability to fulfill our orders and meet our requirements.
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® ® ®
 We will not be able to sell MelaFind ® unless and until its design is verified and
validated in accordance with current good manufacturing practices as set forth in the US medical
device Quality System Regulation.
 ® ® ® ® ® ®
 Assuming that MelaFind ® is approved by regulatory authorities, if we or our suppliers
fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems
with MelaFind ® , it could be subject to restrictions or withdrawal from the market.
 ® ® ® ®
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® ® ® ® ®
 
    
    warning letters;
    
    fines and civil penalties;
    
    unanticipated expenditures;
    
    delays in approving or refusal to approve MelaFind®;
    
    withdrawal of approval by the FDA or other regulatory bodies;
    
    product recall or seizure;
    
    interruption of production;
    
    operating restrictions;
    
    injunctions; and
    
    criminal prosecution.
  We are involved in a heavily regulated sector, and our ability to remain viable will depend on
favorable government decisions at various points by various agencies.
 ®
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
    
    billing for services;
    
    quality of medical equipment and services;
    
    confidentiality, maintenance and security issues associated with
medical records and individually identifiable health information;
    
    false claims; and
    
    labeling products.
  We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians
utilizing MelaFind ® could be subject to significant penalties for noncompliance.
 ® ® ®
 The application of the privacy provisions of HIPAA is uncertain.
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®
 We may become subject to claims of infringement or misappropriation of the intellectual property
rights of others, which could prohibit us from shipping affected products, require us to obtain
licenses from third parties or to develop non-infringing alternatives, and subject us to
substantial monetary damages and injunctive relief. Our patents may also be subject to challenge on
validity grounds, and our patent applications may be rejected.
 ® ® ®
 ® ®
  New product development in the medical device industry is both costly and labor intensive with very
low success rates for successful commercialization; if we cannot successfully develop or obtain
future
products, our growth would be delayed.
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We face the risk of product liability claims and may not be able to obtain or maintain adequate
insurance.
 ® ® ® ® ® ®
 ® ®
  We may be adversely affected by a data center failure.
 ® ®
 We may be adversely affected by breaches of online security.
 ®
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We are dependent upon telecommunications and the internet.
 ®
 We will be obligated to comply with Federal Communications Commission regulations for radio
transmissions used by our products.
 ® ®
 All of our operations are conducted at a single location. Any disruption at our facility could
increase our expenses.
  We may be liable for contamination or other harm caused by materials that we handle, and changes in
environmental regulations could cause us to incur additional expense.
  Failure to obtain and maintain regulatory approval in foreign jurisdictions will prevent us from
marketing abroad.
 ® ®
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®
 Our success will depend on our ability to attract and retain our personnel.
  ®
  Our financial results for future periods will be affected by the attainment of milestones.
 ®
 If we fail to maintain the adequacy of our internal controls, our ability to provide accurate
financial statements could be impaired and any failure to maintain our internal controls could have
an adverse effect on our stock price.
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Risks Relating to our Common Stock
 An active trading market for our common stock may not be sustained.
  Our stock price may be volatile, meaning purchasers of our common stock could incur substantial
losses.
  
    
    results of our research and development efforts and our clinical trials;
    
    the timing of regulatory approval for our products;
    
    failure of any of our products, if approved, to achieve commercial success;
    
    the announcement of new products or product enhancements by us or our competitors;
    
    regulatory developments in the US and foreign countries;
    
    ability to manufacture our products to commercial standards;
    
    developments concerning our clinical collaborators, suppliers or marketing partners;
    
    changes in financial estimates or recommendations by securities analysts;
    
    public concern over our products;
    
    developments or disputes concerning patents or other intellectual property rights;
    
    product liability claims and litigation against us or our competitors;
    
    the departure of key personnel;
    
    the strength of our balance sheet;
    
    variations in our financial results or those of companies that are perceived to be similar to us;
    
    changes in the structure of and third-party reimbursement in the US and other countries;
    
    changes in accounting principles or practices;
 35




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##### Table of Contents




    
    general economic, industry and market conditions; and
    
    future sales of our common stock.
  If our directors, executive officers, and principal stockholders choose to act together, they may
have the ability to influence all matters submitted to stockholders for approval.
  Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable
and could also limit the market price of our stock.
  
    
    set limitations on the removal of directors;
    
    limit who may call a special meeting of stockholders;
    
    establish advance notice requirements for nominations for election to
our board of directors or for proposing matters that can be acted upon
at stockholder meetings;
    
    do not permit cumulative voting in the election of our directors,
which would otherwise permit less than a majority of stockholders to
elect directors;
    
    prohibit stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of our stockholders; and
    
    provide our board of directors the ability to designate the terms of
and issue a new series of preferred stock without stockholder
approval.
  36




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##### Table of Contents



Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  37




---



##### Table of Contents



PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
 Market Information
  High
    

LowYear Ended December 31, 2008October 1  December 31, 2008
    
    $
    5.37
    
    
    $
    2.29July 1  September 30, 2008
    
    $
    7.98
    
    
    $
    4.50April 1  June 30, 2008
    
    $
    9.99
    
    
    $
    5.71January 1, 2008  March 31, 2008
    
    $
    6.50
    
    
    $
    3.84Year Ended December 31, 2007October 1  December 31, 2007
    
    $
    5.96
    
    
    $
    4.05July 1  September 30, 2007
    
    $
    6.79
    
    
    $
    5.25April 1  June 30, 2007
    
    $
    7.46
    
    
    $
    4.29January 1, 2007  March 31, 2007
    
    $
    7.10
    
    
    $
    4.50
  Dividend Policy
   Securities Authorized For Issuance Under Equity Compensation Plans
  Use of Proceeds from the Sale of Registered Securities
   38




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##### Table of Contents



Item 6. Selected Financial Data
 The following table sets forth selected financial data. The financial information for the
years ended December 31, 2006, 2007, and 2008 and as of December 31, 2007 and 2008 has been derived
from our audited financial statements and related notes appearing in Part II Item 8 of this report
and should be read together with such financial statements and the Managements Discussion and
Analysis of Financial Condition and Results of Operations section appearing in Part II Item 7 of
this report. The financial information for the years ended December 31, 2004 and 2005 and as of
December 31, 2004, 2005, and 2006 have been derived from our audited financial statements not
included in this report. The historical results are not necessarily indicative of results of any
future periods.
 Year Ended December 31,2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008(In thousands, except share and per share data)Statements of Operations Data:Research and development
expenses
    
    $
    1,892
    
    
    $
    3,822
    
    
    $
    7,574
    
    
    $
    7,678
    
    
    $
    12,508General and administrative
expenses
    
    
    1,234
    
    
    
    2,636
    
    
    
    4,526
    
    
    
    5,400
    
    
    
    5,766Operating loss from continuing
operations
    
    
    (3,126
    )
    
    
    (6,458
    )
    
    
    (12,100
    )
    
    
    (13,078
    )
    
    
    (18,274
    )Interest expense/(income)
    
    
    67
    
    
    
    (174
    )
    
    
    (728
    )
    
    
    (1,054
    )
    
    
    (468
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    (201
    )Loss from continuing operations
    
    
    (3,193
    )
    
    
    (6,284
    )
    
    
    (11,372
    )
    
    
    (11,965
    )
    
    
    (17,605
    )(Loss) gain from discontinued
operations
    
    
    (426
    )
    
    
    (442
    )
    
    
    781
    
    
    
    28
    
    
    
    Net loss
    
    
    (3,619
    )
    
    
    (6,726
    )
    
    
    (10,591
    )
    
    
    (11,937
    )
    
    
    (17,605
    )Preferred stock deemed dividends
    
    
    (676
    )
    
    
    (1,199
    )
    
    
    
    
    
    
    
    
    
    
    Preferred stock accretion
    
    
    (258
    )
    
    
    (1,077
    )
    
    
    
    
    
    
    
    
    
    
    Net loss attributable to common
stockholders
    
    $
    (4,553
    )
    
    $
    (9,002
    )
    
    $
    (10,591
    )
    
    $
    (11,937
    )
    
    $
    (17,605
    )Net loss per share, basic and
diluted:Continuing operations
    
    $
    (2.34
    )
    
    $
    (2.44
    )
    
    $
    (1.01
    )
    
    $
    (0.84
    )
    
    $
    (1.08
    )Discontinued operations
    
    
    (0.24
    )
    
    
    (0.13
    )
    
    
    .07
    
    
    
    
    
    
    
    Basic and diluted net loss per
common share
    
    $
    (2.58
    )
    
    $
    (2.57
    )
    
    $
    (.94
    )
    
    $
    (0.84
    )
    
    $
    (1.08
    )Basic and diluted weighted
average number of common shares
outstanding
    
    
    1,766,608
    
    
    
    3,508,835
    
    
    
    11,293,783
    
    
    
    14,220,466
    
    
    
    16,282,176
 As of December 31,2004
    
    2005
    
    2006
    
    2007
    
    2008(In thousands, except share and per share data)Balance Sheet Data:Total current assets
    
    $
    6,813
    
    
    $
    18,873
    
    
    $
    21,771
    
    
    $
    21,328
    
    
    $
    15,836Total assets
    
    
    7,096
    
    
    
    19,166
    
    
    
    22,476
    
    
    
    22,108
    
    
    
    16,620Total liabilities
    
    
    691
    
    
    
    916
    
    
    
    1,162
    
    
    
    1,336
    
    
    
    1,530Redeemable convertible preferred stock
    
    
    9,955
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated deficit
    
    
    (13,907
    )
    
    
    (20,633
    )
    
    
    (31,225
    )
    
    
    (43,162
    )
    
    
    (60,767
    )Total stockholders (deficiency)/equity
    
    
    (3,550
    )
    
    
    18,249
    
    
    
    21,314
    
    
    
    20,772
    
    
    
    15,089
 39




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion contains forward looking statements, which involve risks and
uncertainties. Our actual results could differ from those anticipated in these forward-looking
statements as a result of various factors, including those set forth above under the caption
Business-Risk Factors. You should read the following discussion and analysis of our financial
condition and results of operations together with our financial statements for the year ended
December 31, 2008 and the related notes appearing in Part II Item 8 of this report.
 Overview
 ® ® ® ® ® ® ®
 ®
  ® ®
 ®
  40




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##### Table of Contents



®
  ® ® ®
 ® ®
  Critical Accounting Policies and Significant Judgments and Estimates
   Revenue Recognition
 ® ®
 Stock-Based Compensation
  41




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##### Table of Contents



Share-Based Payment
  Accrued Expenses
  
    
    professional service fees;
    
    contract clinical service fees;
    
    fees paid to contract manufacturers in conjunction with the production
of clinical components or materials; and
    
    fees paid to third party data collection organizations and
investigators in conjunction with the clinical trials.
  Results of Operations (in thousands)
 Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 Research and Development Expense
  ® ®
 42




---



##### Table of Contents



®
 General and Administrative Expense
  Interest (Income)/Expense
  Other Income, net
 ® ®
 ® ® ®
 Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
 Research and Development Expense
  General and Administrative Expense
 ®
 Interest (Income)/Expense
 ®
 43




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##### Table of Contents



Other Income
  Gain (Loss) from Discontinued Operations
  Liquidity and Capital Resources (in thousands)
   Cash Flows from Operating Activities
  Cash Flows from Investing Activities
 ®
 Cash Flows from Financing Activities
  44




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##### Table of Contents



Operating Capital and Capital Expenditure Requirements
 ® ® ® ® ®
 ®
 
    
    the schedule, costs, and results of our clinical trials;
    
    the success of our research and development efforts;
    
    the costs and timing of regulatory approval;
    
    reimbursement amounts for the use of MelaFind® that we are
able to obtain from Medicare and third party payers, or the amount of
direct payments we are able to obtain from patients and/or physicians
utilizing MelaFind®;
    
    the cost of commercialization activities, including product marketing
and building a domestic direct sales force;
    
    the emergence of competing or complementary technological developments;
    
    the costs of filing, prosecuting, defending and enforcing any patent
claims and other rights, including litigation costs and the results of
such litigation;
    
    the costs involved in defending any patent infringement actions
brought against us by third parties;
    
    our ability to establish and maintain any collaborative, licensing or
other arrangements, and the terms and timing of any such arrangements;
and
    
    our sales model, which limits the capital cost of MelaFind®
to the physician, thereby increasing the initial capital burden on us.
 45




---



##### Table of Contents



Contractual Obligations
  Payments Due by Period
 Less Than
    
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years(Dollars in thousands)Operating Leases
    
    $
    458
    
    
    $
    256
    
    
    $
    202
    
    
    $
    
    
    
    $
    Total
    
    $
    458
    
    
    $
    256
    
    
    $
    202
    
    
    $
    
    
    
    $
    
  Related Party Transactions
  Off-Balance Sheet Arrangements
  Recently Adopted Accounting Pronouncements
   Recent Accounting Pronouncements
  46




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures about Market Risk
  47




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 INDEX TO FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    49Balance Sheets as of December 31, 2007 and 2008
    
    50Statements of Operations for the years ended December 31, 2006, 2007 and 2008
    
    51Statements of Stockholders Equity for the years ended December 31, 2006, 2007 and 2008
    
    52Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008
    
    53Notes to Financial Statements
    
    54
 48




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      
 49




---



##### Table of Contents



ELECTRO-OPTICAL SCIENCES, INC.
 
 BALANCE SHEETS
 December 31,
    
    
    December 31,2007
    
    
    2008ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    19,196,589
    
    
    $
    15,069,939Marketable securities
    
    
    1,719,905
    
    
    
    390,512Prepaid expenses and other current assets
    
    
    411,554
    
    
    
    375,612Total Current Assets
    
    
    21,328,048
    
    
    
    15,836,063Property and equipment, net
    
    
    616,110
    
    
    
    643,383Patents and trademarks, net
    
    
    118,138
    
    
    
    94,908Other assets
    
    
    45,876
    
    
    
    45,276Total Assets
    
    $
    22,108,172
    
    
    $
    16,619,630LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable (includes related parties of $17,500 as of
December 31, 2008)
    
    $
    567,987
    
    
    $
    634,394Accrued expenses (includes related parties of $10,000 as of
December 31, 2007
    
    
    674,711
    
    
    
    832,228Deferred income
    
    
    74,946
    
    
    
    36,085Other current liabilities
    
    
    18,804
    
    
    
    27,466Total Current Liabilities
    
    
    1,336,448
    
    
    
    1,530,173COMMITMENTS AND CONTINGENCIES (Note 5)Stockholders Equity:Preferred stock  $0.10 par value; authorized 10,000,000 shares:Issued and outstanding: none
    
    
    
    
    
    
    Common stock  $0.001 par value; authorized 30,000,000 shares:Issued and outstanding 15,401,882 and 17,634,498 shares at
December 31, 2007 and 2008, respectively.
    
    
    15,402
    
    
    
    17,634Additional paid-in capital
    
    
    63,930,689
    
    
    
    75,845,953Accumulated other comprehensive loss
    
    
    (12,136
    )
    
    
    (6,868
    )Accumulated deficit
    
    
    (43,162,231
    )
    
    
    (60,767,262
    )Total Stockholders Equity
    
    
    20,771,724
    
    
    
    15,089,457Total Liabilities and Stockholders Equity
    
    $
    22,108,172
    
    
    $
    16,619,630
  50




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##### Table of Contents



ELECTRO-OPTICAL SCIENCES, INC.
 
 STATEMENTS OF OPERATIONS
 Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2007
    
    
    2008Operating expenses:Research and development
    
    $
    7,574,744
    
    
    $
    7,677,578
    
    
    $
    12,507,959General and administrative
    
    
    4,525,789
    
    
    
    5,400,371
    
    
    
    5,766,238Operating loss from continuing operations
    
    
    (12,100,533
    )
    
    
    (13,077,949
    )
    
    
    (18,274,197
    )Interest income
    
    
    (728,053
    )
    
    
    (1,054,130
    )
    
    
    (467,587
    )Other income, net
    
    
    
    
    
    
    (58,567
    )
    
    
    (201,579
    )(728,053
    )
    
    
    (1,112,697
    )
    
    
    (669,166
    )Loss from continuing operations
    
    
    (11,372,480
    )
    
    
    (11,965,252
    )
    
    
    (17,605,031
    )Gain on sale and licensing of discontinued operations
    
    
    781,003
    
    
    
    27,808
    
    
    
    Net loss
    
    $
    (10,591,477
    )
    
    $
    (11,937,444
    )
    
    $
    (17,605,031
    )Net income (loss) per common share, basic and
diluted:Continuing operations
    
    $
    (1.01
    )
    
    $
    (0.84
    )
    
    $
    (1.08
    )Discontinued operations
    
    
    .07
    
    
    
    
    
    
    
    Basic and diluted net loss per common share
    
    $
    (0.94
    )
    
    $
    (0.84
    )
    
    $
    (1.08
    )Basic and diluted weighted average number of common
shares outstanding
    
    
    11,293,783
    
    
    
    14,220,466
    
    
    
    16,282,176
  51




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##### Table of Contents



ELECTRO-OPTICAL SCIENCES, INC.
 
 STATEMENTS OF STOCKHOLDERS EQUITY
Years Ended December 31, 2006, 2007 and 2008
 Accumulated
    
    
    
    
    
    
    TotalAdditional
    
    

    
    
    
    
    Other
    
    
    
    
    
    
    StockholdersCommon Stock
    
    
    Paid-in
    
    

    Deferred
    
    
    Comprehensive
    
    
    Accumulated
    
    
    EquityShares
    
    
    Amount
    
    
    Capital
    
    

    Compensation
    
    
    Loss
    
    
    Deficit
        
    
    (Deficiency)Balance at January 1, 2006
    

    
    10,837,833
    
    
    $
    10,838
    
    
    $
    38,934,420
    

    
    $
    (62,610
    )
    
    
    
    
    
    $
    (20,633,310
    )
    
    $
    18,249,338Exercise of options
    

    
    135,450
    
    
    
    136
    
    
    
    87,929
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    88,065Exercise of warrants
    

    
    10,781
    
    
    
    10
    
    
    
    26,418
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    26,428Amortization of deferred compensation
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    62,610
    
    
    
    
    
    
    
    
    
    
    
    62,610Issuance of shares of common stock
and warrants in connection with
private placement (net of expenses)
    

    
    2,312,384
    
    
    
    2,312
    
    
    
    12,503,075
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,505,387Issuance of options to consultant
    

    
    
    
    
    
    
    
    
    
    161,934
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161,934Share-based compensation expense
    

    
    
    
    
    
    
    
    
    
    811,632
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    811,632Net loss
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,591,477
    )
    
    
    (10,591,477
    )Balance at December 31, 2006
    

    
    13,296,448
    
    
    $
    13,296
    
    
    $
    52,525,408
    
    

    
    
    
    
    
    
    
    
    $
    (31,224,787
    )
    
    $
    21,313,917Exercise of options
    

    
    105,256
    
    
    
    106
    
    
    
    114,421
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    114,527Issuance of shares of common stock
and warrants in connection with
private placement (net of expenses)
    

    
    2,000,178
    
    
    
    2,000
    
    
    
    10,713,847
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,715,847Issuance of options to consultant
    

    
    
    
    
    
    
    
    
    
    139,703
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    139,703Share-based compensation expense
    

    
    
    
    
    
    
    
    
    
    437,310
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    437,310Other comprehensive income/(loss)
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,136
    )
    
    
    
    
    
    
    (12,136
    )Net loss
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,937,444
    )
    
    
    (11,937,444
    )Comprehensive loss (sub-total)
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,949,580
    )Balance at December 31, 2007
    

    
    15,401,882
    
    
    $
    15,402
    
    
    $
    63,930,689
    
    

    
    
    
    
    $
    (12,136
    )
    
    $
    (43,162,231
    )
    
    $
    20,771,724Exercise of options
    

    
    141,823
    
    
    
    141
    
    
    
    73,234
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,375Exercise of warrants
    

    
    2,342
    
    
    
    2
    
    
    
    10,584
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,586Issuance of shares of common stock
in connection with a public
offering(net of expenses)
    

    
    2,088,451
    
    
    
    2,089
    
    
    
    10,970,695
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,972,784Share-based compensation expense
    

    
    
    
    
    
    
    
    
    
    860,751
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    860,751Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,268
    
    
    
    
    
    
    
    5,268Net loss
    
    
    


    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,605,031
    )
    
    
    (17,605,031
    )Comprehensive loss (sub-total)
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,599,763
    )Balance at December 31, 2008
    

    
    17,634,498
    
    
    $
    17,634
    
    
    $
    75,845,953
    

    
    
    
    
    
    $
    (6,868
    )
    
    $
    (60,767,262
    )
    
    $
    15,089,457
  52




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ELECTRO-OPTICAL SCIENCES, INC.
 
 STATEMENTS OF CASH FLOWS
 Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2007
    
    
    2008Cash flows from operating activities:Loss from continuing operations
    
    $
    (11,372,480
    )
    
    $
    (11,965,252
    )
    
    $
    (17,605,031
    )Gain on sale and licensing of discontinued operations
    
    
    781,003
    
    
    
    27,808
    
    
    
    Net loss
    
    
    (10,591,477
    )
    
    
    (11,937,444
    )
    
    
    (17,605,031
    )Adjustments to reconcile net loss to net cash used in operating
activities:Gain on sale of discontinued operations
    
    
    (781,003
    )
    
    
    (27,808
    )
    
    
    Depreciation and amortization
    
    
    138,358
    
    
    
    223,706
    
    
    
    308,977Noncash compensation and amortization of deferred compensation
    
    
    874,241
    
    
    
    437,310
    
    
    
    860,751Amortization of unearned interest income-discontinued operations
    
    
    
    
    
    
    (12,320
    )
    
    
    Common stock options and warrants issued for consulting fees
    
    
    161,934
    
    
    
    139,703
    
    
    
    Amortization of discount on marketable securities
    
    
    
    
    
    
    (519
    )
    
    
    519Changes in operating assets and liabilities:(Increase) decrease in prepaid expenses and other current assets
    
    
    (132,694
    )
    
    
    (67,920
    )
    
    
    35,942Increase in accounts payable and accrued expenses
    
    
    196,193
    
    
    
    124,800
    
    
    
    223,924(Decrease) increase in other current liabilities
    
    
    (751
    )
    
    
    2,727
    
    
    
    8,662(Increase) decrease in other assets
    
    
    (6,146
    )
    
    
    (6,118
    )
    
    
    600Increase (decrease) in deferred income
    
    
    
    
    
    
    74,946
    
    
    
    (38,861
    )Net cash used in operating activities
    
    
    (10,141,345
    )
    
    
    (11,048,937
    )
    
    
    (16,204,517
    )Cash flows from investing activities:Patent costs
    
    
    (35,491
    )
    
    
    (40,006
    )
    
    
    Purchases of property and equipment
    
    
    (508,547
    )
    
    
    (252,847
    )
    
    
    (313,020
    )(Purchase) sale of marketable securities
    
    
    
    
    
    
    (1,731,522
    )
    
    
    1,334,142Proceeds from sale and licensing of discontinued operations
    
    
    500,000
    
    
    
    500,000
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (44,038
    )
    
    
    (1,524,375
    )
    
    
    1,021,122Cash flows from financing activities:Proceeds from private placements/public offering
    
    
    13,180,598
    
    
    
    11,501,023
    
    
    
    11,909,057Expenses related to private placement financing
    
    
    (675,211
    )
    
    
    (785,176
    )
    
    
    (936,273
    )Proceeds from exercise of stock options
    
    
    88,065
    
    
    
    114,527
    
    
    
    73,375Proceeds from exercise of stock warrants
    
    
    26,428
    
    
    
    
    
    
    
    10,586Net cash provided by financing activities
    
    
    12,619,880
    
    
    
    10,830,374
    
    
    
    11,056,745Net increase (decrease) in cash and cash equivalents
    
    
    2,434,497
    
    
    
    (1,742,938
    )
    
    
    (4,126,650
    )Cash and cash equivalents at beginning of year
    
    
    18,505,030
    
    
    
    20,939,527
    
    
    
    19,196,589Cash and cash equivalents at end of year
    
    $
    20,939,527
    
    
    $
    19,196,589
    
    
    $
    15,069,939Supplemental Schedule of Noncash Investing and Financing
Activities:Receivable from sale and licensing of discontinued operations
    
    $
    487,680
    
    
    $
    
    
    
    $
    Unrealized loss (gain) on marketable securities
    
    
    
    
    
    
    12,136
    
    
    
    (5,268
    )
  53




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##### Table of Contents



ELECTRO-OPTICAL SCIENCES, INC.
 
 Notes to Financial Statements
(In thousands, except for share and per share data)
 1. Principal Business Activities and Summary of Significant Accounting Policies:
 Organization and Business
 ® ® ® ®
 ® ® ® ® ® ®
 ® ®
 Business Segments
 ®
 Cash and Cash Equivalents
  54




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##### Table of Contents



Marketable Securities
 Accounting for Certain
Investments in Debt and Equity Securities.
  Level 1:
    
    Observable inputs such as quoted prices in active markets;
 Level 2:
    
    Inputs, other than the quoted prices in active markets, that are observable either
directly or indirectly; and
 Level 3:
    
    Unobservable inputs in which there is little or no market data, which require the
reporting entity to develop its own assumptions.
 Property and Equipment
  Patents
  Revenue Recognition
 ® ®
 Income Taxes
    55




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##### Table of Contents



Estimates
  Long-lived Assets
  Research and Development
  Stock-Based Compensation
 Share-Based Payment
 Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.
 Financial Instruments
  Net Loss per Common Share
 Earnings
Per Share
 Year Ended December 31,2006
    
    
    2007
    
    
    2008Common stock options
    
    
    1,689,412
    
    
    
    1,812,084
    
    
    
    2,069,080Warrants
    
    
    626,845
    
    
    
    1,126,886
    
    
    
    1,124,544Total
    
    
    2,316,257
    
    
    
    2,938,970
    
    
    
    3,193,624
 56




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##### Table of Contents



Comprehensive loss
  Recently
Adopted Accounting Pronouncements
   Recent
Accounting Pronouncements
    57




---



##### Table of Contents



2. Marketable Securities:
  December 31, 2008UnrealizedFair Value
    
    
    Gain (Loss)Corporate debt securities
    
    $
    391
    
    
    $
    (7
    )
   58




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##### Table of Contents



3. Property and Equipment:
  December 31,Estimated2007
    
    
    2008
    
    
    Useful LifeLeasehold improvements
    
    $
    184
    
    
    $
    186
    
    
    Lease TermLaboratory and research equipment
    
    
    672
    
    
    
    821
    
    
    5 yearsOffice furniture and equipment
    
    
    313
    
    
    
    475
    
    
    3-5 years1169
    
    
    
    1482Accumulated depreciation and amortization
    
    
    553
    
    
    
    839$
    616
    
    
    $
    643
  4. Patents:
 ® ® ® $
 5. Commitments and Contingencies:
  Year ended December 31,2009
    
    $
    2562010
    
    
    1862011
    
    
    16$
    458
  ® ®
 ® ®
   59




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##### Table of Contents



6. Employee Benefit Plan:
  7. Stockholders Equity
       ®
  60




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##### Table of Contents



8. Stock-Based Compensation and Warrants:
 Stock Options
    ®
    For the Year EndedDecember 31, 2006
    
    
    December 31, 2007
    
    
    December 31, 2008Expected life
    
    5 years
    
    

    5 years
    

    
    5-10 yearsExpected volatility
    
    
    60
    %
    
    
    60
    %
    
    
    60
    %Risk-free interest rate
    
    
    4.92 - 5.04
    
    
    
    3.41 - 5.02
    
    
    
    1.67 - 3.86
    %Dividend yield
    
    
    0
    
    
    
    0
    
    
    
    0
  61




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##### Table of Contents



$
  WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    Contractual
    
    
    AggregateNumber of
    
    
    Price per
    
    
    Term in
    
    
    IntrinsicShares
    
    
    Share
    
    
    Years
    
    
    ValueOutstanding at January 1, 2006
    
    
    1,115,415
    
    
    $
    0.95
    
    
    
    4.4
    
    
    $
    4,935Granted
    
    
    748,822
    
    
    
    5.56
    
    
    
    4.1Exercised
    
    
    (135,450
    )
    
    
    0.65
    
    
    
    N/AForfeited or expired
    
    
    (39,375
    )
    
    
    6.76
    
    
    
    N/AOutstanding at December 31, 2006
    
    
    1,689,412
    
    
    
    2.88
    
    
    
    4.2
    
    
    
    7,331Granted
    
    
    277,407
    
    
    
    3.11
    
    
    
    3.9Exercised
    
    
    (105,256
    )
    
    
    1.09
    
    
    
    N/AForfeited or expired
    
    
    (49,479
    )
    
    
    5.24
    
    
    
    N/AOutstanding at December 31, 2007
    
    
    1,812,084
    
    
    
    2.96
    
    
    
    3.5
    
    
    
    4,167Granted
    
    
    1,165,539
    
    
    
    3.61
    
    
    
    8.2Exercised
    
    
    (141,823
    )
    
    
    0.52
    
    
    
    N/AForfeited or expired
    
    
    (766,720
    )
    
    
    0.52
    
    
    
    N/AOutstanding at December 31,2008
    
    
    2,069,080
    
    
    
    4.39
    
    
    
    5.8
    
    
    
    621
   Options OutstandingWeighted-
    
    
    
    
    
    
    Options ExercisableAverage
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Remaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$ .46
    
    
    130,000
    
    
    0.9 years
    
    $
    .46
    
    
    
    70,000
    
    
    $
    .46$ .47-$1.00
    
    
    104,578
    
    
    3.0 years
    
    
    1.00
    
    
    
    104,578
    
    
    
    1.00$1.01-$7.75
    
    
    1,834,502
    
    
    6.3 years
    
    
    4.86
    
    
    
    593,825
    
    
    
    5.34$ .01-$7.75
    
    
    2,069,080
    
    
    5.8 years
    
    $
    4.39
    
    
    
    768,403
    
    
    $
    4.30
   62




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##### Table of Contents



®
 Warrants
    9. Related Party Agreements (see Note 5):
  Consulting Agreement with Breaux Castleman
 ®
 Consulting Agreement with Marek Elbaum, Ph.D.
  Consulting Agreement with Robert Friedman, M.D.
  Consulting Agreement with Gerald Wagner, Ph.D. (see also Note 8)
  63




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##### Table of Contents



®
  10. Other Income (including gain on sale of discontinued operations):
 ,
 ® ® ® ® .
 ®
  11. Income Taxes:
  64




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##### Table of Contents



Year Ended December 31,2006
    
    
    2007
    
    
    2008Computed expected tax benefit
    
    $
    (3,866
    )
    
    $
    (4,068
    )
    
    $
    (5,986
    )State tax benefit, net of federal effect
    
    
    (682
    )
    
    
    (718
    )
    
    
    (1,056
    )Increase in the valuation allowance
    
    
    4,548
    
    
    
    4,786
    
    
    
    7,042Provision for income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
  December 31,2007
    
    
    2008Deferred tax assets:Net operating loss carryforwards
    
    $
    8,409
    
    
    $
    10,389Capitalized research and developmental costs
    
    
    7,094
    
    
    
    11,868Non-cash compensation
    
    
    1,064
    
    
    
    1,352Total deferred tax assets
    
    
    16,567
    
    
    
    23,609Less valuation allowance
    
    
    (16,567
    )
    
    
    (23,609
    )Net deferred tax assets
    
    $
    
    
    
    $
    
     65




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##### Table of Contents



12. Quarterly Operating Results (Unaudited)
  Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2008Loss from continuing operations
    
    $
    (4,277
    )
    
    $
    (4,951
    )
    
    $
    (4,200
    )
    
    $
    (4,177
    )Net Loss
    
    $
    (4,277
    )
    
    $
    (4,951
    )
    
    $
    (4,200
    )
    
    $
    (4,177
    )Basic and diluted net loss per share of common
stock
    
    $
    (0.28
    )
    
    $
    (0.32
    )
    
    $
    (0.25
    )
    
    $
    (0.23
    )2007Loss from continuing operations
    
    $
    (2,994
    )
    
    $
    (3,096
    )
    
    $
    (2,709
    )
    
    $
    (3,166
    )Gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Net Loss
    
    $
    (2,994
    )
    
    $
    (3,096
    )
    
    $
    (2,709
    )
    
    $
    (3,138
    )Basic and diluted net loss per share of common stock
    
    $
    (0.22
    )
    
    $
    (0.23
    )
    
    $
    (0.18
    )
    
    $
    (0.20
    )
 
 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures.
 Evaluation of disclosure controls and procedures
   66




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##### Table of Contents



Report of Management on Internal Control Over Financial Reporting.
 
 
 Internal ControlIntegrated Framework
  67




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
        
 68




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##### Table of Contents



Change in internal control over financial reporting
  Limitations on the effectiveness of controls
  
 Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors, Executive Officers, and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ,
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  69




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 Exhibits and Financial Statement Schedules:
 Financial Statements
  Financial Statement Schedules
  Exhibits
  70




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit Title3
    .1
    
    
    Fourth Amended and Restated Certificate of Incorporation of the Registrant.(1)3
    .2
    
    
    Third Amended and Restated Bylaws of the Registrant.(2)4
    .1
    
    
    Specimen Stock Certificate.(2)4
    .2
    
    
    Second Amended and Restated Investors Rights Agreement dated as of October
26, 2004 by and among the Registrant and the parties listed therein.(3)4
    .3
    
    
    Form of Warrant.(7)4
    .4
    
    
    Form of Warrant.(13)10
    .1*
    
    
    Form of Indemnification Agreement for directors and executive officers.(2)10
    .2*
    
    
    1996 Stock Option Plan.(3)10
    .3*
    
    
    2003 Stock Incentive Plan, as amended.(3)10
    .4*
    
    
    2005 Stock Incentive Plan.(2)10
    .5*
    
    
    Employment Agreement dated as of January 5, 2004 between the Registrant and
Joseph V. Gulfo.(3)10
    .6
    
    
    Consulting Agreement dated as of May 31, 2005 between the Registrant and
Marek Elbaum.(3)10
    .7
    
    
    Lease Agreement dated as of December 16, 1998, by and between the Registrant
and Bridge Street Properties LLC, for office space located at One Bridge
Street, Irvington, New York.(3)10
    .8
    
    
    First Amendment to the Lease Agreement dated as of May 17, 2001 by and
between the Registrant and Bridge Street Properties LLC.(3)10
    .9
    
    
    Second Amendment to the Lease Agreement dated as of June 19, 2003 by and
between the Registrant and Bridge Street Properties LLC.(3)10
    .10
    
    
    Lease Agreement dated as of November 23, 2004, by and between the Registrant
and Bridge Street Properties LLC, for office space located at 3 West Main
Street, Irvington, New York.(3)10
    .11*
    
    
    Consulting Agreement dated as of June 20, 2003 between the Registrant and
Breaux Castleman, as amended.(1)10
    .12
    
    
    Consulting Agreement dated as of June 1, 2005 between the Registrant and
Robert Friedman, M.D.(1)10
    .13
    
    
    Third Amendment dated as of June 6, 2005, by and between the Registrant and
Bridge Street Properties LLC, for office space located at 1 Bridge Street,
Irvington, New York.(1)10
    .14
    
    
    Production Agreement between the Registrant and ASKION GmbH dated as of
January 25, 2006.(4)10
    .15*
    
    
    Amended and Restated Consulting Agreement effective as of April 1, 2006
between the Registrant and Gerald Wagner Consulting LLC.(11)10
    .16*
    
    
    Employment Offer Letter, dated April 24, 2006, between the Registrant and
Richard I. Steinhart.(5)10
    .17*
    
    
    Employment Offer Letter, dated May 30, 2006, between the Registrant and
Christiano S. Butler.(6)10
    .18
    
    
    Securities Purchase Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of October 31, 2006.(8)10
    .19
    
    
    Securities Purchase Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of October 31, 2006.(8)10
    .20
    
    
    Registration Rights Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of October 31, 2006.(8)10
    .21
    
    
    Licensing Agreement between the Registrant and KaVo Dental GmbH, dated as of
December 5, 2006.(9)10
    .22*
    
    
    Amendment No. 1 to Amended and Restated Consulting Agreement dated as of
January 30, 2007 by and among the Registrant, Gerald Wagner and Gerald Wagner
Consulting LLC. (10)10
    .23
    
    
    Research and Feasibility Agreement between Registrant and LOreal S.A. dated
as of March 26, 2007.(12)10
    .24
    
    
    Securities Purchase Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of July 31, 2007.(13)10
    .25
    
    
    Registration Rights Agreement among the Registrant and the purchasers
identified on the signature pages thereto, dated as of July 31, 2007.(13)10
    .26
    
    
    Fifth Amendment dated as of August 24, 2007, by and between the Registrant
and Bridge Street Commercial, LLC, for office space located at 1 Bridge
Street, Irvington, New York. (14)
 71




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##### Table of Contents



ExhibitNumber
    
    Exhibit Title10
    .27
    
    
    Placement Agency Agreement by and between the Registrant and Needham &
Company, LLC, dated as of July 31, 2008.(15)10
    .28
    
    
    Form of Subscription Agreement between and Registrant and each investor.(15)21
    .1#
    
    
    Subsidiaries of Registrant.23
    .1#
    
    
    Consent of Eisner LLP31
    .1#
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31
    .2#
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32
    .1#
    
    
    Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates management compensatory plan, contract or arrangement(1)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-1, as amended
(File No. 333-125517), as filed on July 15, 2005.(2)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-1, as amended
(File No. 333-125517), as filed on August 8, 2005.(3)
    
    Incorporated by reference to the Registrants Registration Statement on Form S-1, as amended
(File No. 333-125517), as filed on June 3, 2005.(4)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on January 31,
2006. Portions of this agreement have been omitted pursuant to a request for confidential
treatment.(5)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on April 27,
2006.(6)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on June 2, 2006.(7)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on November 1,
2006.(8)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on November 8,
2006.(9)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on December 11,
2006.(10)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on January 31,
2007.(11)
    
    Incorporated by reference to the Registrants Annual Report on Form 10-K filed on March 29,
2006.(12)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on March 28,
2007.(13)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on August 1,
2007.(14)
    
    Incorporated by reference to the Registrants Quarterly Report on Form 10-Q filed on November
8, 2007.(15)
    
    Incorporated by reference to the Registrants Current Report on Form 8-K filed on July 31, 2008.#
    
    Filed herewith. 72




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##### Table of Contents



SIGNATURES
  ELECTRO-OPTICAL SCIENCES, INC.By:
    
    /s/ Joseph V. Gulfo, M.D.Joseph V. Gulfo, M.D.
President and Chief Executive Officer
(Principal Executive Officer)
   Signature
    
    Title
    
    Date/s/ Joseph V. Gulfo, M.D.

Joseph V. Gulfo, M.D.
    
    Director, President and
Chief Executive Officer
(Principal Executive Officer)
    
    March 2, 2009/s/ Richard I. Steinhart

Richard I. Steinhart
    
    Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    March 2, 2009/s/ Breaux Castleman

Breaux Castleman
    
    Chairman of the Board of Directors
    
    March 2, 2009/s/ Sidney Braginsky

Sidney Braginsky
    
    Director
    
    March 2, 2009/s/ George C. Chryssis

George C. Chryssis
    
    Director
    
    March 2, 2009/s/ Martin D. Cleary

Martin D. Cleary
    
    Director
    
    March 2, 2009/s/ Dan W. Lufkin

Dan W. Lufkin
    
    Director
    
    March 2, 2009/s/ Gerald Wagner, PhD.

Gerald Wagner, PhD.
    
    Director
    
    March 2, 2009
 73