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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, 2005
 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
  Delaware
    
    13-3986004(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 3 West Main Street, Suite 201
Irvington, New York 10533   (914) 591-3783
 Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
 o þ
 o þ
 þ o
 þ
  o o þ
 o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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ELECTRO-OPTICAL SCIENCES, INC.
2005 FORM 10-K ANNUAL REPORT
 TABLE OF CONTENTS
 PagePART IItem 1. Business
    
    
    1Item 2. Properties
    
    
    39Item 3. Legal Proceedings
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
    
    
    40Item 6. Selected Financial Data
    
    
    42Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    43Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    48Item 8. Financial Statements and Supplementary Data
    
    
    49Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
    
    
    67Item 9A. Controls and Procedures
    
    
    67Item 9B. Other Information
    
    
    67PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    68Item 11. Executive Compensation
    
    
    68Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    68Item 13. Certain Relationships and Related Transactions
    
    
    68Item 14. Principal Accountant Fees and Services
    
    
    68PART IVItem 15. Exhibits and Financial Statements Schedules
    
    
    69EX-10.17: AMENDED AND RESTATED CONSULTING AGREEMENTEX-21.1: SUBSIDIARIES OF THE REGISTRANTEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONS




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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, 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 heading 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;
    
    our lesion classifiers,which are sophisticated mathematical algorithms that extract lesion
feature information and classify lesions; and
    
    a central serverin our offices that is intended to perform quality control functions and
provide reports to the physician and in commercial use, will be connected to physicians offices
via the internet.
    1




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A B C D E
 sensitivity specificity
   The Market Opportunity
    2




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Our Strategy
  
    
    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®. Management estimates that the study will commence
in 2006 at over 20 US clinical study sites, and anticipates PMA
approval to commercialize MelaFind® in 2007.
    
    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 six US patents. We will continue to refine and optimize
this technology to ensure that MelaFind® is the leading system for
assisting in the detection of melanoma.
    
    Obtain third party payor reimbursement to support our recurring
revenue pricing model.We intend to offer MelaFind® on a per patient
basis, creating a recurring revenue stream. To do so, we will seek to
obtain third party reimbursement as well as private pay alternatives.
We are working with experts to create an evidence-based medicine
evaluation model consistent with those used to support positive
coverage decisions by the federal Centers for Medicare and Medicaid
Services (CMS) and private payors for similar products. The value
drivers in the model include the cost savings associated with early
detection (approximately $168,000 per patient) and fewer biopsies. We
believe that the use of MelaFind® could result in substantial savings
to the US healthcare system.
    
    Commercialize MelaFind® using multiple sales and marketing strategies.
Our internal sales and marketing effort will focus initially on high
volume/key opinion leader dermatologists with specialties in the
diagnosis and treatment of melanoma. To enter the larger US markets of
general dermatologists, plastic surgeons, and primary care physicians,
and for international markets, we intend to establish partnerships
with pharmaceutical and/or diagnostic device companies with an
established presence in these markets. While we believe obtaining a
positive coverage decision from CMS may take an additional 18 to 36
months following PMA approval, and obtaining a positive coverage
decision from private payors, managed care organizations and state
Medicare administrative contractors may take at least 6 to 12 months
following PMA approval, we intend to commence sales of MelaFind®
immediately upon receiving PMA approval for physicians to offer
MelaFind® to their patients on a self-pay basis.
 Limitations of Current Melanoma Diagnosis
 A B C D E
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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,
 Our lesion classifiers, which are sophisticated mathematical algorithms
 A central server
 Lesion Classifier, Lesion Classifiers Lesion
Classifiers Lesion Classifier Lesion Classifiers
 sensitivity specificity Lesion Classifier
  4




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MelaFind ® Regulatory Status
      Clinical Studies of MelaFind ®
 Goals and Objectives
 in vivo Lesion Classifier
 Lesion Classifiers, Lesion Classifier Lesion
 5




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Classifiers sensitivity specificity
 Lesion
Classifiers Lesion Classifiers
  MelaFind® Development History  Hardware and Software
  Lesion Classifier
    Current Results of Training Studies and Blinded Tests
  6




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February 2006  Training Study and Blinded Test Results
 Training
    Blinded testMelaFind®
    MelaFind®
    Study DermatologistsSensitivity
    

    
    100%

    
    Missed 1 in situ Melanoma

    Missed 1 invasive MelanomaSpecificity
    

    
    50.7%

    
    45.1%

    20.0%(p < 0.0001)Over-Biopsy Ratio
    

    
    4.4:1

    

5:1


7.3:1
   Would you biopsy this lesion toIs this a melanoma?

    rule-out melanoma?Sensitivity / Specificity
    

    
    Sensitivity / SpecificityExpert Dermatologists

    
    38.78% / 82.32%
    

    
    
    70.61% / 48.89%MelaFind®

    
    Sensitivity  98% / Specificity  44%
   Sales and Marketing
  7




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The MelaFind® Value Proposition for the Healthcare System
  Our Reimbursement Strategy
       8




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Competition
  A B C D E
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10




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Manufacturing
    Research and Development Efforts
 Lesion Classifiers
   tm tm tm tm
  11




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Intellectual Property
      US Patents Relating to MelaFind®
 Patent #
    
    Title
    
    Issued
    
    Expiration6,081,612
    
    Systems and Methods for the Multispectral Imaging and
Characterization of Skin Tissue
    
    06/27/00
    
    02/27/176,208,749
    
    Systems and Methods for the Multispectral Imaging and
Characterization of Skin Tissue
    
    03/27/01
    
    02/27/176,307,957
    
    Multispectral Imaging and Characterization of Biological Tissue
    
    10/23/01
    
    02/27/176,626,558
    
    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
    
    02/27/23
  12




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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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
    
    the FDA, other regulatory authorities, or an IRB do not approve a clinical trial protocol or a
clinical trial, or place a clinical trial on hold;
    
    Patients do not enroll in clinical trials at the rate we expect;
    
    Physicians do not comply with trial protocols;
    
    patient follow-up is not at the rate we expect;
    
    Patients experience adverse events;
    
    IRBs and third-party clinical investigators may delay or reject our trial protocol;
    
    third-party clinical investigators decline to participate in a trial or do not perform a trial on
our anticipated schedule or consistent with the clinical trial protocol, GCPs or other FDA
requirements;
    
    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 may, 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.
   
    
    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.
  15




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
    
    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;
    
    injunctions; and
    
    criminal prosecution.
  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;
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
    
    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.
   qui tam
 Environmental Regulation
  17




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International Regulation
   Product Liability and Insurance
  Employees
  Discontinued Business
  18




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Risk factors
 Investing in our common stock involves a high degree of risk. 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 and you might lose
all or part of your investment in our common stock.
 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;
    
    physicians may not receive any reimbursement from third-party payors, or the level of reimbursement
may be insufficient to support widespread adoption of MelaFind®;
    
    we may experience delays in our 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 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
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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 payors. The markets for MelaFind® may also be limited by the
indications for which its use may be reimbursed.
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Any adverse results in our clinical trials, or difficulties in conducting our clinical trials,
could have a material adverse effect on our business.
  Risk of delay in product development.
   21




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We have incurred losses for a number of years, and anticipate that we will incur continued losses
for the foreseeable future.
  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 payors;    established distribution networks;
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


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.
  We depend on clinical investigators and clinical sites to enroll patients in our clinical trials
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.
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
    
    the FDA, an 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.
 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 the use of MelaFind®;
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
    
    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.
  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.
  25




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
    
    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 payors, 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; and
    
    our ability to establish and maintain any collaborative, licensing or
other arrangements, and the terms and timing of any such arrangements.
  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.
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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.
     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.
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
    
    suppliers may make errors in manufacturing components that could negatively affect 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.
   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.
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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.
  
    
    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
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
    
    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.
    
    
    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.
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The application of the privacy provisions of HIPAA is uncertain.
  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.
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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.
  We face the risk of product liability claims and may not be able to obtain or maintain adequate
insurance.
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We may be adversely affected by a data center failure.
  We may be adversely affected by breaches of online security.
  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.
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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.
   Our success will depend on our ability to attract and retain our personnel.
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Our financial results for future periods may be adversely affected by changes required by financial
and accounting regulatory agencies.
   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 and
provide accurate financial statements could cause our stock price to decrease substantially.
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Risks Relating to our Common Stock
 An active trading market for our common stock may not develop.
  Our stock price will 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;
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
    
    Changes in accounting principles or practices;
    
    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.
  If there are substantial sales of our common stock, our stock price could decline.
   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;
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
    
    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.
   38




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Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  39




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 Market Information
  Fiscal Year Ended December 31, 2005
    
    High
    
    
    LowOctober 28, 2005 - December 31, 2005
    
    $
    8.68
    
    
    $
    5.00
  Dividend Policy
   Securities Authorized For Issuance Under Equity Compensation Plans
  Use of Proceeds From Registered Securities
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Item 6. Selected Financial Data
 The following table sets forth selected financial data for our Company. The financial information
for the years ended December 31, 2003, 2004 and 2005 and as of December 31, 2004 and 2005, 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, 2001 and 2002 and as of December 31, 2001, 2002, and 2003, has 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.
 (in thousands, except share and per share data)
 Year ended December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005Statements of Operations Data:Revenue from grants
    
    $
    290
    
    
    $
    547
    
    
    $
    
    
    
    $
    
    
    
    $
    Cost of grant revenue
    
    
    193
    
    
    
    564
    
    
    
    
    
    
    
    
    
    
    
    General and administrative
expenses
    
    
    2,563
    
    
    
    511
    
    
    
    1,034
    
    
    
    1,234
    
    
    
    2,636Research and development
    
    
    144
    
    
    
    404
    
    
    
    828
    
    
    
    1,892
    
    
    
    3,822Operating loss from continuing
operations
    
    
    (2,610
    )
    
    
    (932
    )
    
    
    (1,862
    )
    
    
    (3,126
    )
    
    
    (6,458
    )Interest (income)/expense
    
    
    (85
    )
    
    
    8
    
    
    
    76
    
    
    
    67
    
    
    
    (174
    )Loss from continuing operations
    
    
    (2,525
    )
    
    
    (940
    )
    
    
    (1,938
    )
    
    
    (3,193
    )
    
    
    (6,284
    )Loss from discontinued operations
    
    
    (343
    )
    
    
    (201
    )
    
    
    (12
    )
    
    
    (426
    )
    
    
    (442
    )Net loss
    
    
    (2,868
    )
    
    
    (1,141
    )
    
    
    (1,950
    )
    
    
    (3,619
    )
    
    
    (6,726
    )Preferred stock deemed dividends
    
    
    (213
    )
    
    
    (214
    )
    
    
    (322
    )
    
    
    (676
    )
    
    
    (1,199
    )Preferred stock accretion
    
    
    (180
    )
    
    
    (180
    )
    
    
    (25
    )
    
    
    (258
    )
    
    
    (1,077
    )Stock distribution of preferred
Series B shares
    
    
    
    
    
    
    
    
    
    
    (102
    )
    
    
    
    
    
    
    Net loss attributable to
common stockholders
    
    $
    (3,261
    )
    
    $
    (1,535
    )
    
    $
    (2,399
    )
    
    $
    (4,553
    )
    
    $
    (9,002
    )Net loss per share, basic and
diluted:Continuing operations
    
    $
    (1.90
    )
    
    $
    (0.87
    )
    
    $
    (1.48
    )
    
    $
    (2.34
    )
    
    $
    (2.44
    )Discontinued operations
    
    
    (0.23
    )
    
    
    (0.13
    )
    
    
    (0.01
    )
    
    
    (0.24
    )
    
    
    (0.13
    )Basic and diluted net loss per
common share
    
    $
    (2.13
    )
    
    $
    (1.00
    )
    
    $
    (1.49
    )
    
    $
    (2.58
    )
    
    $
    (2.57
    )Basic and diluted weighted average
number of shares outstanding
    
    
    1,534,760
    
    
    
    1,534,760
    
    
    
    1,614,897
    
    
    
    1,766,608
    
    
    
    3,508,835
 (in thousands, except share and per share
data)
 As of December 31,2001
    
    2002
    
    2003
    
    2004
    
    2005Balance Sheet Data:Total current assets
    
    $
    867
    
    
    $
    111
    
    
    $
    217
    
    
    $
    6,813
    
    
    $
    18,873Total assets
    
    
    1,131
    
    
    
    344
    
    
    
    432
    
    
    
    7,096
    
    
    
    19,166Total liabilities
    
    
    247
    
    
    
    529
    
    
    
    650
    
    
    
    691
    
    
    
    916Redeemable convertible preferred
stock
    
    
    2,155
    
    
    
    2,244
    
    
    
    4,067
    
    
    
    9,955
    
    
    
    Accumulated deficit
    
    
    (7,197
    )
    
    
    (8,518
    )
    
    
    (10,288
    )
    
    
    (13,907
    )
    
    
    (20,633
    )Total stockholders
equity/(deficiency)
    
    
    (3,408
    )
    
    
    (4,657
    )
    
    
    (4,285
    )
    
    
    (3,550
    )
    
    
    18,249
 42




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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, 2005 and the related notes appearing in Part II Item 8 of this report.
 Overview
        43




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Critical Accounting Policies and Significant Judgments and Estimates
   Revenue Recognition
   Stock-Based Compensation
     44




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##### Table of Contents



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, 2005 Compared to Year Ended December 31, 2004
 Research and Development Expense
 General and Administrative Expense
 45




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##### Table of Contents



Interest (Income)/Expense
 Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
 Research and Development Expense.
 General and Administrative Expense.
 Interest (Income)/ Expense.
 Liquidity and Capital Resources (in thousands)
  Cash Flows from Operating Activities.
 Cash Flows from Investing Activities.
 Cash Flows from Financing Activities.
 46




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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 payors, 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; and
    
    our ability to establish and maintain any collaborative, licensing or
other arrangements, and the terms and timing of any such arrangements.
 47




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##### Table of Contents



Contractual Obligations
  Payments Due by Period
 Less than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 years(dollars in thousands)Operating Leases
    
    $
    909
    
    
    $
    204
    
    
    $
    600
    
    
    $
    105
    
    
    
    Total
    
    $
    909
    
    
    $
    204
    
    
    $
    600
    
    
    $
    105
    
    
    
    
  Related Party Transactions
  Off-Balance Sheet Arrangements
  Recent Accounting Developments
 ), Share-Based Payment , , Stock-Based Payment, .
 
 Item 7A.Quantitative and Qualitative Disclosures about Market Risk
  48




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Item 8. Financial Statements and Supplementary Data.
 INDEX TO FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    50Balance Sheets as of December 31, 2004 and 2005
    
    
    51Statements of Operations for the years ended December 31, 2003, 2004 and 2005
    
    
    52Statements of Stockholders Equity / (Deficiency) for the years ended
December 31, 2003, 2004 and 2005
    
    
    53Statements of Cash Flows for the years
ended December 31, 2003, 2004 and 2005
    
    
    54Notes to Financial Statements
    
    
    55
 49




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Report of Independent Registered Public Accounting Firm
 
     
 50




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##### Table of Contents



ELECTRO-OPTICAL SCIENCES, INC.
 
 BALANCE SHEETS
 December 31,
    
    
    December 31,2004
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    108,705
    
    
    $
    18,505,030Marketable securities
    
    
    6,594,751
    
    
    
    Accounts receivable, net
    
    
    7,128
    
    
    
    Inventories
    
    
    69,755
    
    
    
    Prepaid expenses and other current assets
    
    
    32,844
    
    
    
    210,940Assets held for sale
    
    
    
    
    
    
    156,677Total Current Assets
    
    
    6,813,183
    
    
    
    18,872,647Property and equipment, net
    
    
    89,306
    
    
    
    175,369Patents and trademarks, net
    
    
    163,459
    
    
    
    84,052Other assets
    
    
    30,201
    
    
    
    33,612Total Assets
    
    $
    7,096,149
    
    
    $
    19,165,680LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)Current
Liabilities:Accounts payable (includes related parties of $2,000 as of
December 31, 2004, and $11,263 as of December 31, 2005)
    
    $
    338,821
    
    
    $
    329,462Accrued expenses (includes related parties of $15,000 as of
December 31, 2005)
    
    
    228,583
    
    
    
    570,052Deferred revenues
    
    
    106,335
    
    
    
    Other current liabilities
    
    
    17,284
    
    
    
    16,828Total Current Liabilities
    
    
    691,023
    
    
    
    916,342REDEEMABLE CONVERTIBLE PREFERRED STOCKRedeemable Preferred Stock Series B convertible 992,986 shares
designated (liquidation preference $2.26 per share); issued
and outstanding 992,986 shares at December 31, 2004
    
    
    2,244,147
    
    
    
    Redeemable Preferred Stock Series C convertible 5,744,340 shares
designated (liquidation preference $2.26 per share); issued
and outstanding 5,414,779 shares at December 31, 2004
    
    
    7,711,027
    
    
    
    COMMITMENTS AND CONTINGENCIES (Note 6)Stockholders Equity (Deficiency):Preferred stock  $.10 par value; authorized 16,936,704 shares
as of December 31, 2004, and 10,000,000 shares as of
December 31, 2005Series A Convertible Preferred Stock, 199,380 shares
designated  (liquidation preference $5.00 per share);
issued and outstanding 198,000 shares at December 31, 2004
    
    
    972,311
    
    
    
    Common stock
 $0.001 par value; authorized 30,000,000 shares:issued and outstanding 1,809,758 shares at December 31, 2004
and 10,837,833 shares at December 31, 2005
    
    
    1,810
    
    
    
    10,838Additional paid-in capital
    
    
    9,611,094
    
    
    
    38,934,420Notes receivable for stock subscriptions
    
    
    (69,000
    )
    
    
    Deferred compensation
    
    
    (159,300
    )
    
    
    (62,610
    )Accumulated deficit
    
    
    (13,906,963
    )
    
    
    (20,633,310
    )Stockholders Equity (Deficiency)
    
    
    (3,550,048
    )
    
    
    18,249,338Total Liabilities and Stockholders Equity (Deficiency)
    
    $
    7,096,149
    
    
    $
    19,165,680
  51




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ELECTRO-OPTICAL SCIENCES, INC.
 
 STATEMENTS OF OPERATIONS
 Year endedDecember 31, 2003
    
    
    December 31, 2004
    
    
    December 31, 2005Operating expenses:Research and development
    
    $
    828,239
    
    
    $
    1,891,551
    
    
    $
    3,821,712General and administrative
    
    
    1,034,397
    
    
    
    1,234,210
    
    
    
    2,636,064Operating loss from continuing operations
    
    
    (1,862,636
    )
    
    
    (3,125,761
    )
    
    
    (6,457,776
    )Interest income
    
    
    (1,373
    )
    
    
    (27,935
    )
    
    
    (173,888
    )Interest expense
    
    
    76,923
    
    
    
    94,976
    
    
    
    75,550
    
    
    
    67,041
    
    
    
    (173,888
    )Loss from continuing operations
    
    
    (1,938,186
    )
    
    
    (3,192,802
    )
    
    
    (6,283,888
    )Loss from discontinued operations
    
    
    (11,917
    )
    
    
    (426,344
    )
    
    
    (442,459
    )Net loss
    
    
    (1,950,103
    )
    
    
    (3,619,146
    )
    
    
    (6,726,347
    )Less:Preferred stock deemed dividends
    
    
    321,830
    
    
    
    676,218
    
    
    
    1,198,439Preferred stock accretion
    
    
    25,228
    
    
    
    257,545
    
    
    
    1,077,492Stock distribution of preferred Series B shares
    
    
    101,700
    
    
    
    
    
    
    
    Net Loss Attributable to Common Stockholders
    
    $
    (2,398,861
    )
    
    $
    (4,552,909
    )
    
    $
    (9,002,278
    )Net loss per common share, basic and diluted:Continuing operations
    
    
    (1.48
    )
    
    
    (2.34
    )
    
    
    (2.44
    )Discontinued operations
    
    
    (0.01
    )
    
    
    (0.24
    )
    
    
    (0.13
    )Basic and diluted net loss per common share
    
    $
    (1.49
    )
    
    $
    (2.58
    )
    
    $
    (2.57
    )Basic and diluted weighted average number of
common shares outstanding
    
    
    1,614,897
    
    
    
    1,766,608
    
    
    
    3,508,835
  52




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ELECTRO-OPTICAL SCIENCES, INC.
 
 STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIENCY)
Years Ended December 31, 2003, 2004 and 2005
 Convertible
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalPreferred Stock
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    StockholdersSeries A
    
    
    Common Stock
    
    
    Paid-in
    
    
    Notes
    
    
    Deferred
    
    
    Accumulated
    
    
    EquityShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Receivable
    
    
    Compensation
    
    
    Deficit
    
    
    (Deficiency)Balance at December 31, 2002
    
    
    198,000
    
    
    $
    972,311
    
    
    
    1,534,760
    
    
    $
    1,535
    
    
    $
    2,752,165
    
    
    
    
    
    
    $
    (45,000
    )
    
    $
    (8,337,714
    )
    
    $
    (4,656,703
    )Preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,228
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,228
    )Amortization of deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,500
    
    
    
    
    
    
    
    22,500Issuance of common stock in
exchange for notes receivable
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    150
    
    
    
    68,850
    
    
    
    (69,000
    )
    
    
    
    
    
    
    
    
    
    
    Adjustment for reduction to
liquidation value of Series B
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,329,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,329,000Stock distribution of preferred
Series B shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101,700
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101,700
    )Common stock options issued
for consulting fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,836
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,836Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,950,103
    )
    
    
    (1,950,103
    )Balance at December 31, 2003
    
    
    198,000
    
    
    $
    972,311
    
    
    
    1,684,760
    
    
    $
    1,685
    
    
    $
    5,119,923
    
    
    $
    (69,000
    )
    
    $
    (22,500
    )
    
    $
    (10,287,817
    )
    
    $
    (4,285,398
    )Sale of common stock
    
    
    
    
    
    
    
    
    
    
    124,998
    
    
    
    125
    
    
    
    137,375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137,500Deferred compensation-stock
option awards to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159,300
    
    
    
    
    
    
    
    (159,300
    )
    
    
    
    
    
    
    Issuance of options to
non-employee directors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,450Preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (257,545
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (257,545
    )Warrants issued in connection
with preferred Series C stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,643,392
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,643,392Beneficial conversion feature in
connection with preferred
Series C stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,465,003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,465,003Issuance of options to consultants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,800Issuance of warrants to consultant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,396
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,396Amortization of deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,500
    
    
    
    
    
    
    
    22,500Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,619,146
    )
    
    
    (3,619,146
    )Balance at December 31, 2004
    
    
    198,000
    
    
    $
    972,311
    
    
    
    1,809,758
    
    
    $
    1,810
    
    
    $
    9,611,094
    
    
    $
    (69,000
    )
    
    $
    (159,300
    )
    
    $
    (13,906,963
    )
    
    $
    (3,550,048
    )Preferred stock accretion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,077,492
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,077,492
    )Conversion of preferred stock
in connection with the
Initial Public Offering
    
    
    (198,000
    )
    
    
    (972,311
    )
    
    
    3,398,105
    
    
    
    3,398
    
    
    
    12,001,578
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,032,665Value of employee options vesting
on attainment of milestone
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    479,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    479,000Issuance of options to consultant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138,000Exercise of option by
non-employee directors
    
    
    
    
    
    
    
    
    
    
    27,500
    
    
    
    28
    
    
    
    15,322
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,350Exercise of options by
former employees
    
    
    
    
    
    
    
    
    
    
    23,361
    
    
    
    23
    
    
    
    23,359
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,382Restricted stock award to employee
    
    
    
    
    
    
    
    
    
    
    11,488
    
    
    
    12
    
    
    
    62,598
    
    
    
    
    
    
    
    (62,610
    )
    
    
    
    
    
    
    Retirement of note receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,000
    
    
    
    
    
    
    
    
    
    
    
    69,000Amortization of deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159,300
    
    
    
    
    
    
    
    159,300Warrants
exchanged for
common stock
    
    
    
    
    
    
    
    
    
    
    1,305,321
    
    
    
    1,305
    
    
    
    (1,305
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of shares of common stock
in connection with the Initial
Public Offering (net of expenses)
    
    
    
    
    
    
    
    
    
    
    4,262,300
    
    
    
    4,262
    
    
    
    17,682,266
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,686,528Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,726,347
    )
    
    
    (6,726,347
    )Balance at December 31, 2005
    
    
    
    
    
    $
    
    
    
    
    10,837,833
    
    
    $
    10,838
    
    
    $
    38,934,420
    
    
    $
    
    
    
    $
    (62,610
    )
    
    $
    (20,633,310
    )
    
    $
    18,249,338
  53




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##### Table of Contents



ELECTRO-OPTICAL SCIENCES, INC.
 
 STATEMENTS OF CASH FLOWS
 Year endedDecember 31, 2003
    
    
    December 31, 2004
    
    
    December 31, 2005Cash flows from operating activities:Loss from continuing operations
    
    $
    (1,938,186
    )
    
    $
    (3,192,802
    )
    
    $
    (6,283,888
    )Loss from discontinued operations
    
    
    (11,917
    )
    
    
    (426,344
    )
    
    
    (442,459
    )Net loss
    
    
    (1,950,103
    )
    
    
    (3,619,146
    )
    
    
    (6,726,347
    )Adjustments to reconcile net loss to net cash used in operating activities:Allowance for doubtful accounts
    
    
    (13,288
    )
    
    
    (9,000
    )
    
    
    (1,000
    )Depreciation and amortization
    
    
    30,987
    
    
    
    35,860
    
    
    
    49,098Noncash compensation and amortization of deferred compensation
    
    
    22,500
    
    
    
    172,950
    
    
    
    638,300Common stock
options and warrants issued for consulting fees
    
    
    96,836
    
    
    
    193,196
    
    
    
    138,000Retirement of stock subscription receivable for consulting services
    
    
    
    
    
    
    
    
    
    
    34,500Amortization of discount on marketable securities
    
    
    
    
    
    
    (10,001
    )
    
    
    (33,502
    )Imputed interest expense attributable to preferred Series C
    
    
    45,000
    
    
    
    
    
    
    
    Imputed interest expense from bridge loan
    
    
    
    
    
    
    80,000
    
    
    
    Changes in operating assets and liabilities:Decrease in receivables
    
    
    53,585
    
    
    
    20,662
    
    
    
    8,128(Increase) decrease in inventories
    
    
    (39,296
    )
    
    
    3,110
    
    
    
    (16,122
    )Increase in prepaid expenses and other current assets
    
    
    (3,464
    )
    
    
    (36,211
    )
    
    
    (181,507
    )Increase (decrease) in accounts payable and accrued expenses
    
    
    137,414
    
    
    
    (7,676
    )
    
    
    332,110(Decrease) increase in deferred revenues
    
    
    (57,300
    )
    
    
    106,335
    
    
    
    (106,335
    )(Decrease) increase in other current liabilities
    
    
    (21,879
    )
    
    
    5,308
    
    
    
    (456
    )Net cash used in operating activities
    
    
    (1,699,008
    )
    
    
    (3,064,613
    )
    
    
    (5,865,133
    )Cash flows from investing activities:Patent costs
    
    
    (5,986
    )
    
    
    (3,166
    )
    
    
    (5,316
    )Purchases of property and equipment
    
    
    (2,432
    )
    
    
    (88,884
    )
    
    
    (121,239
    )(Purchase) sale of marketable securities
    
    
    
    
    
    
    (6,584,750
    )
    
    
    6,628,253Net cash (used in) provided by investing activities
    
    
    (8,418
    )
    
    
    (6,676,800
    )
    
    
    6,501,698Cash flows from financing activities:Proceeds from Initial Public Offering
    
    
    
    
    
    
    
    
    
    
    21,311,500Expenses related to Initial Public Offering
    
    
    
    
    
    
    
    
    
    
    (3,624,972
    )Proceeds from issuance of Series C preferred stock
    
    
    1,500,000
    
    
    
    9,171,480
    
    
    
    Expenses related to Series C preferred stock offering
    
    
    (252,278
    )
    
    
    (447,553
    )
    
    
    Proceeds from (repayment of) notes payable stockholders
    
    
    48,000
    
    
    
    (48,000
    )
    
    
    Proceeds from issuance of notes payable
    
    
    520,000
    
    
    
    920,000
    
    
    
    Proceeds from sale of common stock
    
    
    
    
    
    
    137,500
    
    
    
    38,732Payment for stock subscription receivable
    
    
    
    
    
    
    
    
    
    
    34,500Net cash provided by financing activities
    
    
    1,815,722
    
    
    
    9,733,427
    
    
    
    17,759,760Net (decrease) increase in cash and cash equivalents
    
    
    108,296
    
    
    
    (7,986
    )
    
    
    18,396,325Cash and cash equivalents at beginning of period
    
    
    8,395
    
    
    
    116,691
    
    
    
    108,705Cash and cash equivalents at end of period
    
    $
    116,691
    
    
    $
    108,705
    
    
    $
    18,505,030Supplemental Cash Flow Information:Cash paid for interest
    
    $
    24,378
    
    
    $
    14,976Supplemental Schedule of Noncash Financing Activities:Notes payable exchanged for Series C preferred stock
    
    $
    505,000
    
    
    $
    1,015,000Notes receivable received for common stock
    
    $
    69,000
    
    
    
    Preferred stock accretion
    
    $
    25,228
    
    
    $
    257,545
    
    
    $
    1,077,492Reduction to liquidation value Series B preferred stock
    
    $
    2,329,000Beneficial conversion feature in connection with Series C preferred stock
    
    
    
    
    
    $
    1,465,003Fair value of warrants issued in connection with Series C preferred stock
    
    
    
    
    
    $
    2,643,392Reclassification of inventories and patents to assets held for sale
    
    
    
    
    
    
    
    
    
    $
    156,677
  54




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##### Table of Contents



Notes to Financial Statements
 (In thousands, except for share and per share data)
(For the years ended December 31, 2005, 2004 and 2003)
 1. Principal Business Activities and Summary of Significant Accounting Policies:
 Organization and Business
    Business Segments
 Disclosures about Segments of an
Enterprise and Related Information,
 Reverse Stock Split and Conversion of Preferred Stock
 
  Reclassification
  Cash and Cash Equivalents
  55




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##### Table of Contents



Marketable Securities
 Accounting for Certain Investments in Debt and Equity Securities
 Accounts Receivable
  Inventories
  Assets Held for Sale
  Property and Equipment
  Patents
  Revenue Recognition
 
  Warranty Costs
 Accounting for Contingencies
 Income Taxes
 Accounting for Income Taxes
 56




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##### Table of Contents



Estimates
  Long-lived Assets
  Research and Development
  Stock-Based Compensation
 Accounting for Stock-Based Compensation Accounting for
Stock-Based Compensation, Transition and Disclosure
 December 31,2003
    
    
    2004
    
    
    2005Net loss attributable to common
stockholders, as reported
    
    $
    (2,399
    )
    
    $
    (4,553
    )
    
    $
    (9,002
    )Add: stock-based employee compensation
included in reported net loss, net of income
tax effect
    
    
    23
    
    
    
    173
    
    
    
    638Deduct: stock-based employee compensation
expense determined under fair-value-based
method, net of related tax effect
    
    
    (65
    )
    
    
    (186
    )
    
    
    (539
    )Pro forma net loss
    
    $
    (2,441
    )
    
    $
    (4,566
    )
    
    $
    (8,903
    )Basic and diluted loss per share, as reported
    
    $
    (1.49
    )
    
    $
    (2.58
    )
    
    $
    (2.57
    )Basic and diluted loss per share, pro forma
    
    $
    (1.51
    )
    
    $
    (2.58
    )
    
    $
    (2.54
    )
  57




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##### Table of Contents



December 31,2003
    
    2004
    
    2005Expected volatility
    
    
    1
    %
    
    
    60
    %
    
    
    60
    %Risk-free interest rate
    
    
    4.52
    %
    
    
    3.17
    %
    
    
    4.39
    %to
    
    to5.43
    %
    
    
    3.94
    %Expected option life (in years)
    
    
    10
    
    
    
    5
    
    
    
    5Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
 Deferred Compensation
 
  Financial Instruments
  Net Loss per Common Share
 Earnings
Per Share
 Year Ended December 31,2003
    
    
    2004
    
    
    2005Common stock options
    
    
    290,678
    
    
    
    965,203
    
    
    
    1,115,415Warrants
    
    
    369,993
    
    
    
    2,758,923
    
    
    
    298,280Redeemable convertible preferred stock
    
    
    1,144,277
    
    
    
    3,398,105
    
    
    
    Total
    
    
    1,804,948
    
    
    
    7,122,231
    
    
    
    1,413,695
 Recent Accounting Developments
 Share-Based Payment
 58




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##### Table of Contents



Stock-Based Payment
 2. Marketable Securities:
  December 31, 2004Grossunrealized
    
    
    Fair
    
    
    AmortizedLoss
    
    
    value
    
    
    CostCorporate commercial paper
    
    $
    
    
    
    $
    2,500
    
    
    $
    2,500Corporate debt
    
    
    (10
    )
    
    
    2,497
    
    
    
    2,507United States Treasury note
    
    
    (8
    )
    
    
    1,580
    
    
    
    1,588$
    (18
    )
    
    $
    6,577
    
    
    $
    6,595
  3. Property and Equipment:
  December 31,Estimated2004
    
    
    2005
    
    
    useful lifeLeasehold improvements
    
    $
    32
    
    
    $
    86
    
    
    Lease TermLaboratory and research equipment
    
    
    119
    
    
    
    131
    
    
    5 yearsOffice furniture and equipment
    
    
    135
    
    
    
    190
    
    
    5 years286
    
    
    
    407Less accumulated depreciation and amortization
    
    
    197
    
    
    
    232$
    89
    
    
    $
    175
 59




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##### Table of Contents



4. Patents:
   Year ended December 31,2006
    
    $
    102007
    
    
    102008
    
    
    102009
    
    
    102010
    
    
    10Thereafter
    
    
    34$
    84
 5. Notes Payable-Stockholders:
  6. Commitments and Contingencies:
  Year ended December 31,2006
    
    $
    2042007
    
    
    2132008
    
    
    2172009
    
    
    1702010
    
    
    105$
    909
   60




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##### Table of Contents



7. Employee Benefit Plan:
  8. Stockholders Equity (Deficiency) and Redeemable Preferred Stock:
      61




---



##### Table of Contents



Accretion
    
    
    Year endedTotal
    
    
    period in
    
    
    December 31,Amount
    
    
    months
    
    
    2003
    
    
    2004
    
    
    2005June 2003 Series C financing costs
    
    $
    252
    
    
    
    60
    
    
    $
    25
    
    
    $
    51
    
    
    $
    42Oct. 2004 Series C financing costs
    
    
    448
    
    
    
    44
    
    
    
    
    
    
    
    20
    
    
    
    102Value of Series C warrants
    
    
    2,643
    
    
    
    44
    
    
    
    
    
    
    
    120
    
    
    
    601Beneficial Conversion  Series C
    
    
    1,465
    
    
    
    44
    
    
    
    
    
    
    
    67
    
    
    
    333Total
    
    $
    4,808
    
    
    
    
    
    
    $
    25
    
    
    $
    258
    
    
    $
    1,078
 Deemed Dividends
  Series C Preferred Stock Carrying Value
  Balance at December 31, 2003
    
    $
    1,823Issuance of
Series C preferred stock in 2004, less associated costs of $448, value of
warrants sold therewith of $2,643, and allocation to beneficial conversion feature
of $1,465
    
    
    5,630Preferred stock accretion
    
    
    258Balance at December 31, 2004
    
    $
    7,711
 62




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##### Table of Contents



9. Initial Public Offering of Common Stock
  10. Stock Options and Warrants:
 Warrants
   Stock Options
    63




---



##### Table of Contents



Weighted-averageNumber
    
    
    exerciseof shares
    
    
    priceOutstanding at January 1, 2003
    
    
    142,581
    
    
    $
    2.16Granted
    
    
    158,565
    
    
    
    .94Expired/ Forfeited
    
    
    (10,468
    )
    
    
    .96Outstanding at December 31, 2003
    
    
    290,678
    
    
    
    1.12Granted
    
    
    679,525
    
    
    
    .46Expired/Forfeited
    
    
    (5,000
    )
    
    
    1.00Outstanding at December 31, 2004
    
    
    965,203
    
    
    
    .66Granted
    
    
    212,780
    
    
    
    2.43Exercised
    
    
    (50,881
    )
    
    
    .76Expired/Forfeited
    
    
    (11,687
    )
    
    
    4.85Outstanding at December 31, 2005
    
    
    1,115,415
    
    
    $
    .95Options exercisable at December 31, 2005
    
    
    572,607
    
    
    $
    1.07
  Options Outstanding
    
    
    Options ExercisableWeighted-average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-remaining
    
    
    average
    
    
    
    
    
    
    averageRange of
    
    Number
    
    
    contractual
    
    
    exercise
    
    
    Number
    
    
    exerciseexercise prices
    
    Outstanding
    
    
    life
    
    
    price
    
    
    Exercisable
    
    
    price$.01-$.46
    
    
    804,811
    
    
    3.7 years
    
    $
    .46
    
    
    
    296,503
    
    
    $
    .46$.47-$1.00
    
    
    230,604
    
    
    4.8 years
    
    
    1.00
    
    
    
    226,104
    
    
    
    1.00$1.01-$6.85
    
    
    80,000
    
    
    4.9 years
    
    
    5.69
    
    
    
    50,000
    
    
    
    5.00$.01-$6.85
    
    
    1,115,415
    
    
    4.4 years
    
    $
    .95
    
    
    
    572,607
    
    
    $
    1.07
     64




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##### Table of Contents



11. Related Party Consulting Agreements:
  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.
  12. Discontinued Operations and Assets Held For Sale:
    65




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##### Table of Contents



13. Income Taxes:
  14. Quarterly Operating Results (Unaudited)
  Quarter EndedMarch 31,
    

June 30,
    
    September 30,
    
    December 31,2005:Loss from continuing operations
    
    $
    (1,114
    )
    
    $
    (1,365
    )
    
    $
    (1,371
    )
    
    $
    (2,434
    )Loss from discontinued operations
    
    $
    (129
    )
    
    $
    (201
    )
    
    $
    (72
    )
    
    $
    (40
    )Net Loss
    
    $
    (1,243
    )
    
    $
    (1,566
    )
    
    $
    (1,443
    )
    
    $
    (2,474
    )Net loss attributable to common stockholders
    
    $
    (1,928
    )
    
    $
    (2,247
    )
    
    $
    (2,125
    )
    
    $
    (2,702
    )Basic and diluted net loss
per share of common stock
    
    $
    (1.07
    )
    
    $
    (1.24
    )
    
    $
    (1.14
    )
    
    $
    (0.32
    )2004:Loss from continuing operations
    
    $
    (689
    )
    
    $
    (725
    )
    
    $
    (626
    )
    
    $
    (1,152
    )Loss from discontinued operations
    
    $
    (81
    )
    
    $
    (21
    )
    
    $
    (120
    )
    
    $
    (205
    )Net Loss
    
    $
    (770
    )
    
    $
    (746
    )
    
    $
    (746
    )
    
    $
    (1,357
    )Net loss attributable to common stockholders
    
    $
    (893
    )
    
    $
    (890
    )
    
    $
    (891
    )
    
    $
    (1,878
    )Basic and diluted net loss
per share of common stock
    
    $
    (0.53
    )
    
    $
    (0.51
    )
    
    $
    (0.49
    )
    
    $
    (1.04
    )
 15.
Subsequent Events
   66




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##### Table of Contents



Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Evaluation of disclosure controls and procedures
  Change in internal control over financial reporting
  Limitations
on the effectiveness of controls
  
 Item 9B. Other Information.
  67




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##### Table of Contents



PART III
 
 Item 10. Directors and Executive Officers of the Registrant
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management
  
 Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  68




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
        69




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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)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 1, 2005 between the Registrant and Gerald Wagner
Consulting, LLC. (1)10.12*
    
    Consulting Agreement dated as of June 20, 2003 between the Registrant and Breaux Castleman, as
amended. (1)10.13
    
    Consulting Agreement dated as of June 1, 2005 between the Registrant and Robert Friedman,
M.D. (1)10.14
    
    Task Order Agreement dated as of July 13, 2005 between the Registrant and Battelle Memorial
Institute. (2)10.15
    
    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)
 70




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##### Table of Contents



ExhibitNumber
    
    Exhibit Title10.16
    
    Production Agreement between the Registrant and ASKION GmbH dated as of January 25,
2006. (4)10.17#
    
    Amended and Restated Consulting
Agreement effective as of April 1, 2006 between the Registrant and
Gerald Wagner Consulting LLC21.1#
    
    Subsidiaries of Registrant.31.1#
    
    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#
    
    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    Indicates management compensatory plan,
contract or arrangement1
    
    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.#
    
    Filed herewith. 71




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##### Table of Contents



SIGNATURES
  ELECTRO-OPTICAL SCIENCES, INC.Dated:
March 29, 2006
    
    
    
    
    By:
    /s/ Joseph V. GulfoJoseph V. GulfoPresident 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 29, 2006/s/ Karen Krumeich

Karen Krumeich
    
    Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
    
    March 29, 2006/s/ Breaux Castleman

Breaux Castleman
    
    Chairman of the Board of Directors
    
    March 29, 2006/s/ Sidney Braginsky

Sidney Braginsky
    
    Director
    
    March 29, 2006/s/ George C. Chryssis

George C. Chryssis
    
    Director
    
    March 29, 2006/s/ Martin D. Cleary

Martin D. Cleary
    
    Director
    
    March 29, 2006/s/ Dan W. Lufkin

Dan W. Lufkin
    
    Director
    
    March 29, 2006/s/ Gerald Wagner, PhD.

Gerald Wagner, PhD.
    
    Director
    
    March 29, 2006
 72