10QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-QSB

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from______________to_____________ 

Commission file number 0-13092

SPECTRASCIENCE, Inc.

(A Development Stage Enterprise)

(Exact name of small business issuer

as specified in its charter)

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

11568 Sorrento Valley Rd., Suite 11

                San Diego, California 92121               

(Address of principal executive offices)

              (858) 847-0200              

(Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the  registrant was required to file such reports), and (2) has been subject to such filing requirements  for the past 90 days.

YES x  NO o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

APPLICABLE ONLY TO ISSUERS INVOLVED IN

BANKRUPTCY PROCEEDINGS DURING THE

PRECEDING FIVE YEARS

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

YES x NO o

The number of shares of the Registrant’s common stock, par value $.01 per share, outstanding on  November 14, 2007 was 40,650,087. As of this date, the Registrant also had 2,000,000 Series A Convertible Preferred stock outstanding and warrants to purchase 250,000 shares of Series A Convertible Preferred stock.

Transitional Small Business Disclosure Format (Check one): YES o NO x

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SpectraScience, Inc.

(A Development Stage Enterprise)

Index

PART I - FINANCIAL INFORMATION		Page No.
Item 1.	Financial Statements (Unaudited)	4
Item 2.	Management's Discussion and Analysis or Plan of Operation	14
Item 3A(T).	Controls and Procedures	17
PART II - OTHER INFORMATION		17
Item 1.	Legal Proceedings	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults Upon Senior Securities	17
Item 4.	Submission of Matters to a Vote of Security Holders	17
Item 5.	Other Information	17
Item 6.	Exhibits	17
SIGNATURES		18

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PART IFINANCIAL INFORMATION:

Item 1.Financial Statements (Unaudited)

SpectraScience, Inc.

(A Development Stage Enterprise)

CONDENSED BALANCE SHEETS

	September 30, 2007			December 31, 2006
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,297,540		$	174,802
Inventories		126,822			123,981
Prepaid expenses and other current assets		41,133			50,933
Total current assets		1,465,495			349,716
Fixed assets, net		10,290			-
Patents, net		228,495			243,062
TOTAL ASSETS	$	1,704,280		$	592,778
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	52,062		$	57,689
Accrued liabilities		8,292			9,286
Total current liabilities		60,354			66,975
STOCKHOLDERS’ EQUITY
Undesignated capital stock, undesignated par value, 22,750,000 shares authorized, none issued		-			-
Series A Convertible Preferred Stock, $.01 par value: Authorized - 2,250,000 shares Issued and outstanding - 2,000,000 shares at September 30,  2007 (0 shares at December 31, 2006)		20,000			-
Common stock, $.01 par value:
Authorized--100,000,000 shares
Issued and outstanding 40,650,087 shares at September 30, 2007 (38,370,087 shares at December 31, 2006)		406,501			383,701
Additional paid-in capital		6,835,186			2,742,888
Deficit accumulated during the development stage		(5,617,761	)		(2,600,786	)
TOTAL STOCKHOLDERS’ EQUITY		1,643,926			525,803
TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY	$	1,704,280		$	592,778

Note: The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all of the information required by accounting principles generally accepted in the United States of America for complete financial statements.

See accompanying notes to unaudited condensed financial statements.

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SpectraScience, Inc.

(A Development Stage Enterprise)

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,						August 2, 2004 (Inception of Successor Company) to September 30,
	2007			2006			2007			2006			2007
Gross revenue	$	-		$	-		$	-		$	-		$	-
Operating expenses:
Research and development		198,159			93,725			392,458			309,274			1,129,533
General and administrative		756,827			241,514			1,201,449			609,582			3,118,218
Sales and Marketing		154,419			-			450,613			-			450,613
Total operating Expenses		1,109,405			335,239			2,044,520			918,856			4,698,364
Operating loss		(1,109,405	)		(335,239	)		(2,044,520	)		(918,856	)		(4,698,364	)
Other income, net		17,840			4,994			27,545			10,215			80,603
Net Loss		(1,091,565	)		(330,245	)		(2,016,975	)		(908,641	)		(4,617,761	)
Deemed dividend on preferred stock		-			-			(1,000,000	)		-			(1,000,000	)
Net loss applicable to common  stockholders	$	(1,091,565	)	$	(330,245	)	$	(3,016,975	)	$	(908,641	)	$	(5,617,761	)
Basic and diluted net loss per share	$	(0.03	)	$	(0.01	)	$	(0.08	)	$	(0.02	)
Weighted average common shares outstanding		40,650,087			38,351,754			39,786,198			37,891,138

See accompanying notes to unaudited condensed financial statements.

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SpectraScience, Inc.

(A Development Stage Enterprise)

CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

For the nine months ended September 30, 2007

(Unaudited)

	Preferred Stock				Common Stock				Additional Paid-In		Deficit Accumulated During The Development			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Stage			Equity
Balance, December 31, 2006		--		--		38,370,087	$	383,701	$	2,742,888	$	(2,600,786	)	$	525,803
Stock based compensation - consultants										442,520					442,520
Stock based compensation - employees										583,057					583,057
Stock options exercised						10,000		100		1,400					1,500
Issuance of common stock at $0.50 per share						2,270,000		22,700		1,112,300					1,135,000
Issuance of preferred stock and warrants at $0.50 per share, net of expenses		2,000,000								973,021					973,021
Deemed dividend on preferred stock			$	20,000						980,000		(1,000,000	)		--
Net loss												(2,016,975	)		(2,016,975	)
Balance, September 30, 2007		2,000,000	$	20,000		40,650,087	$	406,501	$	6,835,186	$	(5,617,761	)	$	1,643,926

See accompanying notes to unaudited condensed financial statements.

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SpectraScience, Inc.

(A Development Stage Enterprise)

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months Ended  September 30,						August 2, 2004 (Inception of Successor Company) to
	2007			2006			September 30 2007
OPERATING ACTIVITIES:
Net loss	$	(2,016,975	)	$	(908,641	)	$	(4,617,761	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		16,307			21,106			82,436
Stock-based compensation employees		583,057			245,786			1,056,813
Stock-based compensation consultants		442,520			30,518			726,449
Gain on disposal of fixed assets					-			(21,689	)
Write-off of obsolete inventories					12,147			25,188
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		6,959			(11,985	)		(20,222	)
Accounts payable		(5,627	)		20,394			(7,642	)
Accrued liabilities		(994	)		2,642			(23,801	)
Net cash used in operating activities		(974,753	)		(588,033	)		(2,800,229	)
INVESTING ACTIVITIES:
Purchases of fixed assets		(12,030	)		-			(12,030	)
Proceeds from the sale of assets		-			-			25,740
Net cash provided by (used in) investing activities		(12,030	)		-			13,710
FINANCING ACTIVITIES:
Proceeds from issuance of common stock		1,135,000			502,048			1,657,048
Net proceeds from issuance of preferred stock		973,021			-			973,021
Proceeds from exercise of stock options		1,500			5,775			12,000
Net cash provided by financing activities		2,109,521			507,823			2,642,069
Net increase (decrease) in cash and cash equivalents		1,122,738			(80,210	)		(144,450	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		174,802			441,025			1,441,990
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,297,540		$	360,815		$	1,297,540
Supplemental disclosure of non-cash investing and financing activities:
Conversion of notes payable and accrued interest to common stock		-			-		$	565,000
Issuance of common stock in settlement of bankruptcy debt		-			-		$	60,000
Fresh start adjustment to fixed assets and patents		-			-		$	255,379

See accompanying notes to unaudited condensed financial statements.

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SpectraScience, Inc.

(A Development Stage Enterprise)

Notes to Unaudited Condensed Financial Statements

September 30, 2007

1.Nature of Business and Basis of Presentation

Description of Business

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

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

Basis of Presentation

The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the nine month period ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. These statements should be read in conjunction with the financial statements and related notes, which are included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006.

Liquidity and Development Stage Enterprise

The Company is a development stage enterprise. Since August 2, 2004, it has not generated any revenue from the sale of its products and, through September 30, 2007, its efforts have been principally devoted to restarting the Company as it emerged from bankruptcy. The Company has working capital of $1,405,141 and cash and cash equivalents of $1,297,540 at September 30, 2007. If the Company does not receive additional funding in 2007, the Company may not have sufficient funds to execute its intended business plan or generate positive operating results. The Company may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Even if the Company receives additional funding, such funding may be inadequate, or the Company may incur unknown expenses, or it may not be able to meet its revenue forecast, requiring it to seek additional capital.

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2.Summary of Significant Accounting Policies

The Company adopted fresh-start reporting as of August 2, 2004 in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”). Under fresh-start reporting, a new entity has been deemed created for financial reporting purposes.

Use of Estimates

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Significant estimates made by management include, among others, realization of long-lived assets. Actual results could differ from those estimates.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, (“SFAS”) No. 123(R), “Share-Based Payment”, (“SFAS 123(R)”) which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123(R) requires an issuer to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. SFAS 123(R) became effective for the Company commencing January 1, 2006. In accordance with the provisions of SFAS No. 123 “Accounting for Stock-Based Compensation”, (“SFAS 123”) and Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services,” all other issuances of common stock, stock options or other equity instruments to non-employees as the consideration for goods or services received by the Company are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). Any options issued to non-employees are recorded in expense and additional paid-in capital in stockholders’ equity over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options at the end of each period. The intrinsic value of the options granted are assumed to be zero because the exercise price of options granted equaled the fair market value of the underlying stock at the date of grant.

For the nine months ended September 30, 2007 and 2006, stock-based compensation was approximately $1,026,000 and $267,000, respectively. Stock-based compensation expense of approximately $784,000 and $267,000 was recognized in general and administrative expenses for the nine months ended September 30, 2007 and 2006, respectively. Stock based compensation expense of approximately $242,000 and $0 was recognized in sales and marketing expense for the nine months ended September 30, 2007 and 2006, respectively. The Company previously adopted the fair value recognition provisions of SFAS 123 prospectively for all employee and consultant awards granted, modified, or settled by the Successor Company on August 2, 2004. Accordingly, SFAS 123(R) has not had a material impact on the comparability of Company’s financial statements.

As of September 30, 2007, the Company has one stock-based employee compensation plan (the “Option Plan"). The Option Plan provides for the grant of incentive stock options (“ISOs") to full-time employees (who may also be Directors) and nonqualified stock options ("NSOs") to non-employee directors, consultants, customers, vendors or providers of services and expires on January 30, 2011. The exercise price of any ISO may not be less than the fair market value of the common stock on the date of grant and the term shall not exceed ten years. The amount reserved under the Option Plan equals 15% of the outstanding shares of the Company, totaling 6,097,513 reserved at September 30, 2007. At September 30, 2007, the Company had outstanding 4,772,000 options under the Option Plan representing approximately 11.7% of the outstanding shares (2,903,334 of which were exercisable), with 1,325,513 available for future issuance. Awards under the Company’s Option Plan vest over three years.

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The fair value of options granted were estimated at the date of grant using a Black-Scholes option-pricing model which includes several variables including expected life, risk free interest rate, expected stock price volatility, stock option exercise patterns and expected dividend yield. The Company also must estimate forfeitures for employee stock options. These models and assumptions are emerging and may change future expenses by increasing or decreasing stock-based compensation expense. Management used the following weighted average assumptions to value all stock options for the nine months ending September 30, 2007 and 2006:

	2007	2006
Estimated/contract life	5 years	5 years
Risk-free interest rate	4.37%	5.13%
Expected volatility	138%	220%
Expected dividend yield	0%	0%

In addition to the above, management estimated the forfeitures on employee options under the Option Plan would have negligible effects because such forfeitures would be a very small percentage. Management believes that options granted have been to a group of individuals that have a high desire to see the Company succeed and have aligned themselves to that end.

The expected life used in the calculations were selected by management based on past experience, forward looking profit forecasts and estimates of what the trading price of the Company’s stock might be at different future dates.

The risk-free interest rates are the 5-year U.S. Treasury rate as published at the time of making the calculations.

Volatility is a calculation based on the Company’s stock price since the beginning of the Successor Company. Management computed and tested this volatility calculation for reasonableness and found it to be acceptable based on a number of factors including the Company’s current market capitalization, comparables to other companies in our area of interest, the current development stage of the Company and management’s estimate of the net present value of forward looking profits that has been compiled (for which there is no assurance).

	Options Available For Grant			Plan Options Outstanding			Weighted Average Exercise Price Share		Weighted-Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding December 31, 2006		3,281,114			2,330,000		$	0.42
Options granted		(2,452,000	)		2,452,000		$	0.86
Options exercised		10,000			(10,000	)	$	0.15
Additional options available		486,399			-			-
Forfeited or expired		-			-
Outstanding at September 30, 2007		1,325,513			4,772,000		$	0.65		8.60	$	2,874,300
Exercisable at September 30, 2007					2,903,334		$	0.50		7.91	$	2,189,250

The total intrinsic value of options exercised during the nine months ended September 30, 2007 and 2006 was $9,500 and $54,841, respectively. At September 30, 2007, total unrecognized estimated employee compensation cost related to non-vested stock options granted prior to that date is approximately $757,000, which is expected to be recognized over the next two years.

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Inventories

Inventories are valued at the lower of cost, determined on the first-in, first-out (FIFO) basis, or market value. Cost includes direct material, labor and overhead. Inventories consist of the following:

	September 30, 2007		December 31, 2006
Raw materials	$	53,717	$	50,876
Work in process		-		-
Finished goods		73,105		73,105
Totals	$	126,822	$	123,981

Income Taxes

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

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period of computation. Diluted earnings (loss) per share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and only if the additional common shares would be dilutive. Basic and diluted loss per share are the same for the nine months ended September 30, 2007 and 2006, since any additional common stock equivalents would be antidilutive. Potentially dilutive shares of common stock that have been excluded from the calculation of the weighted average number of dilutive common shares for the three and nine months ended September 30, 2007 include options to purchase 4,772,000 shares of common stock, 2,000,000 shares issuable upon conversion of Series A Convertible Preferred Stock (“Preferred”) and 250,000 Preferred shares issuable upon exercise of warrants. For the three and nine months ended September 30, 2006, potentially dilutive shares of common stock that have been excluded from the calculation of weighted average number of dilutive common shares are options to purchase 2,340,000 shares of common stock.

3. Stockholders Equity

Preferred Stock and Warrants

On June 12, 2007, the Company’s Articles of Incorporation were amended to designate 2,250,000 of the Company’s undesignated capital stock as Series A Convertible Preferred Stock (the “Preferred”) with par value $0.01 per share. At issuance, the Preferred is convertible into an equal number of shares of the Company’s common stock based upon an initial conversion price of $.50 per share and carries a liquidation preference of like amount. After December 31, 2007, the Preferred will be convertible into common stock at conversion prices ranging from $0.125 to $0.50 per share depending on revenue levels attained through that date. In addition, the Preferred has rights which provide for (i) dividend payments senior to those with respect to common shares, (ii) voting rights equal to the number of common shares into which the Preferred is convertible, (iii) automatic conversion in the event either of an underwritten public offering exceeding $30 million in gross proceeds to the Company at an offering price in excess of $2.00 per share or approval of 67% of the Preferred holders and (iv) adjustments to the conversion price in the event of stock dividends, stock splits or other effective stock subdivisions. If the Company declares a dividend or a distribution on any common stock of the Company, the Company shall pay a dividend or make a distribution on all outstanding shares of Preferred in an amount per share equal to the maximum amount paid or set aside for all shares of common stock into which each such share of Preferred could then be converted. On June 15, 2007, the Company sold 2,000,000 shares of its Preferred to three accredited investors for gross proceeds of $1,000,000 in cash. As additional consideration for the purchase of the Preferred, the Company issued five-year warrants to purchase 250,000 additional shares of Preferred at an initial exercise price of $0.50 per share.

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The convertible feature of the Preferred and the terms of the warrants provide for a rate of conversion or exercise that was below market value at issuance. Such feature, as it specifically relates to the convertible feature of the Preferred, is characterized as a "Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and EITF No. 00-27, "Application of EITF Issue No. 98-5 to Certain Convertible Instruments," the estimated relative fair values of the Preferred and the warrants, in approximate amounts of $782,000 and $218,000, respectively, were calculated assuming the most favorable conversion price determinable to the Preferred shareholders. The value of the BCF was determined by the intrinsic value method and the fair value of the warrants was determined by the Black-Scholes option-pricing model at the date of issuance. The warrant fair value was determined assuming a five-year term, stock volatility of 140%, and a risk-free interest rate of 5.10%. The stand-alone fair value of the BCF was determined to be substantially higher than the proceeds received and, accordingly, the value assigned to the BCF was limited to the gross proceeds received from the offering. Per the guidance of EITF No. 98-5, the value of the BCF and warrants are treated as a deemed dividend to the Preferred stockholders and, due to the potential immediate convertibility of the Preferred stock at issuance, is recorded as an increase to both additional paid-in-capital and deficit accumulated during the development stage at the time of issuance.

Common Stock

In March of 2007, the Company issued 950,000 common shares at $0.50 per share in a Regulation D offering, adding $475,000 to stockholders’ equity. In the second quarter of 2007, the Company issued 1,320,000 common shares at $0.50 per share in a Regulation D offering, adding $660,000 to stockholders’ equity.

Stock Options

In April 2007, the Company granted an option to purchase 500,000 common shares of the Company’s stock at an exercise price of $0.85 to its director of sales and marketing. One third of the option vests upon grant, with another third vesting over each of the next two years on the annual anniversary of the grant.

In June 2007, the Company granted an option to purchase 400,000 common shares of the Company’s stock at an exercise price of $1.10 to a new member of the Board of Directors. One third of the option vests upon grant, with another third vesting over each of the next two years on the annual anniversary of the grant.

In July 2007, the Company granted an option to purchase 75,000 common shares of the Company’s stock at an exercise price of $1.05 to an employee. One third of the option vests upon grant, with another third vesting over each of the next two years on the annual anniversary of the grant.

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In September 2007, the Company granted options to purchase a total of 400,000 common shares of the Company’s stock at an exercise price of $0.75 each to a new member of the Board of Directors and an observer to the Board of Directors. Additional options to purchase 400,000 and 200,000 shares of common stock at exercise prices of $0.90 and $0.75, respectively, were granted to consultants. One third of these options vest upon grant, with another third vesting over each of the next two years on the annual anniversary of the grant.

4. Subsequent Events

In October 2007, the Company retained a Registered Broker-Dealer to assist it in selling up to $15 million of its common stock to accredited individuals and institutions. As of the date of this filing, the Company had not yet sold any stock under this arrangement.

On November 6, 2007, the Company acquired all of the outstanding shares of Luma™ Imaging Corporation (“Luma”). Luma has developed and received FDA approval for an optical non-invasive diagnostic imaging system that is proven to more effectively detect cervical cancer precursors than using conventional means alone. The Luma™ Cervical Imaging System utilizes a single-use disposable probe and requires little additional training as it leverages clinicians’ existing skill sets. When used as an adjunct to colposcopy (the present standard of diagnosis) the Luma™ System detects significantly more high-grade cervical cancer precursors than colposcopy alone. The addition of the Luma™ System provides the Company with significant new and complementary technologies both in the form of immediately marketable products and intellectual property. The Luma™ System also fits well strategically into the Company’s current suite of diagnostic and treatment products.

The Company issued 11.2 million restricted common shares with an estimated market value of approximately $7.8 million to acquire the assets (primarily intellectual property), of Luma in a negotiated transaction. Luma existed as a holding company for intellectual property assets of its predecessor company and SpectraScience acquired no liabilities as a result of the transaction. The Company has not yet finalized the purchase price allocation pending appraisal of the intellectual property. Upon completion of such appraisal the Company expects to allocate the purchase price to intangible assets comprised of intellectual property and goodwill.

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Item 2.Management’s Discussion and Analysis or Plan of Operation

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

This Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this Report, or in our future filings with the SEC, in our press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases “anticipates,” “estimates,” “expects,” “will likely result,” “projects,” “believes,” “intends,” or similar expressions are intended to identify such forward-looking statements, but are not the exclusive means of identifying such statements. These forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the results discussed in the forward-looking statements.

We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date made. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances after the date of such statements. Readers are urged to carefully review and consider the various disclosures made by us in this Report and other reports we file with the SEC that attempt to advise interested parties of the risks and factors that may affect our business. Such forward-looking statements are qualified in their entirety by the cautions and risk factors set forth in our Annual Report on Form 10-KSB covering the year ended December 31, 2006.

Business

SpectraScience, Inc. develops and manufactures innovative Laser Induced Fluorescence spectrophotometry systems capable of determining whether tissue is normal, pre-cancerous or cancerous without removing tissue from the body. The WavStat’ Optical Biopsy System (“WavStat’”) is SpectraScience's first fully developed product to incorporate its proprietary Laser Induced Fluorescence technology for worldwide clinical use. It is approved by the FDA for use during endoscopy of the colon when screening for colon cancer. The Company’s second application of this technology for detecting pre-esophageal cancer is undergoing a clinical trial at three institutions. Upon completion of the trial, the Company plans to file with the FDA a supplement to its existing PMA seeking permission to begin marketing for that indication for use. SpectraScience believes its core technology is a platform technology that can be developed for use in many areas of the human body.

Our principal executive offices are located at 11568 Sorrento Valley Rd., Suite 11, San Diego, CA 92121. We can be reached by telephone at (858) 847-0200; by fax at (858) 847-0880; or by email at info@spectrascience.com. We have a web-site at http://www.spectrascience.com. The information contained on our web site shall not be deemed to be a part of this Report.

Plan of Operation

We are a development stage medical device company that has not yet engaged in significant commercial activities. During early 2008 we intend to complete a clinical trial with our WavSTAT™ system for the detection of Barrett’s syndrome, thought to be a pre-cancerous condition of the esophagus. The progression toward esophageal cancer begins with several pre-cancerous stages. It is critical for the physician to be able to identify these various stages of the disease in order to deliver the most appropriate treatment. As with all cancers, early and accurate detection results in less invasive, more cost effective treatments with a greater chance for long term patient survival.

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

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High-grade dysplasia is a critical stage to correctly diagnose because physicians frequently recommend surgical resection or removal of the esophagus if Barrett's esophagus when high-grade dysplasia is present. Unfortunately for the patient, dysplasia is not easily visible to the physician during standard endoscopy. Because early diagnosis is critical, multiple biopsies may be performed either randomly or in a geometric pattern in the esophagus in the hope of finding the most appropriate tissue to biopsy.

If the results of our clinical trial are successful, we will apply for FDA approval (by supplement to our existing approval for colon cancer detection) for use of the WavSTAT™ system in pre-esophageal cancer detection.

In addition, we are seeking to heighten market acceptance of our colon cancer detection technology by demonstrating to managed care organizations that using our optical biopsy technique is faster, more accurate and less expensive than the current technique of removing all suspicious polyps.

SpectraScience expects to incur significant additional operating losses through at least 2008, as we complete a clinical trial, begin outcome-based clinical studies, research and development activities continue, and sales and marketing costs to commercialize the WavSTAT^(TM) System. If we do not receive additional funding in a timely manner, the Company could be in jeopardy as a going concern. We may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Even if the Company receives funding in the fourth quarter of 2007, such proceeds may not be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations; we may incur unknown expenses; or we may not be able to meet our revenue forecast, one or more of these circumstances require us to seek additional capital.

During the first half of 2007, the Company raised $2,135,000 in Regulation D private placements of its shares to accredited investors.

Results of Operations

The Company adopted fresh-start reporting as of August 2, 2004 in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”). Under fresh-start reporting, a new entity has been deemed created for financial reporting purposes.

For the Three Months ended September 30, 2007 and 2006

The Company had no revenue for the three months ended September 30, 2007 and 2006.

Overall research and development expenses for the three months ended September 30, 2007 and 2006 were $198,159 and $93,725, respectively. The increase in research and development expenses related specifically to new product and application development while conducting a clinical trial in the prior period.

General and administrative expenses for the three months ended September 30, 2007 and 2006 were $756,827 and $241,514, respectively. The increase for the three months ended September 30, 2007 compared to the three months ended September 30, 2006 was primarily due to a non-cash increase in stock option compensation expense.

Sales and marketing expenses for the three months ended September 30, 2007 and 2006 were $154,419 and $0, respectively. This increase was due to the Company beginning to build a sales organization to commence selling the WavSTAT™ system.

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Other income, net for the three months ended September 30, 2007 and 2006 was $17,840 and $4,994, respectively. The increase was primarily due to an increase in interest income due to higher interest bearing cash balances during the three months ended September 30, 2007.

As a result of the above, the net loss for the three months ended September 30, 2007 and 2006 was ($1,091,565) and ($330,245), respectively. The increased net loss was primarily due to increases in stock option compensation expense and new sales and marketing activities.

For the Nine months ended September 30, 2007 and 2006

The Company had no revenue for the nine months ended September 30, 2007 and 2006.

Overall research and development expenses for the nine months ended September 30, 2007 and 2006 were $392,458 and $309,274, respectively. For both reporting periods, research and development expenses related specifically to new product and application development in a clinical trial.

General and administrative expenses for the nine months ended September 30, 2007 and 2006 were $1,201,449 and $609,582, respectively. The increase for the nine months ended September 30, 2007 compared to September 30, 2006 was primarily due to higher professional fees and non-cash stock option compensation expense in 2007 as compared to the prior period.

Sales and marketing expenses for the nine months ended September 30, 2007 and 2006 were $450,613 and $0, respectively. This increase was due to the Company beginning to build a sales organization to commence selling the WavSTAT™ system and the effect of related stock option compensation expense.

Other income, net for the nine months ended September 30, 2007 and 2006 was $27,545 and $10,215, respectively. The increase was primarily due to an increase in interest income a result of higher interest bearing cash balances during the nine months ended September 30, 2007.

As a result of the above, the net loss, before the deemed dividend on preferred stock, for the nine months ended September 30, 2007 and 2006 was ($2,016,975) and ($908,641), respectively. The increase in losses was primarily due to an increase in sales and marketing expense related specifically to building a sales organization to begin selling the Company’s WavSTAT™ system and to increased non-cash stock option compensation expense.

Liquidity and Capital Resources

On September 30, 2007, the Company had cash balances of $1,297,540 compared to $174,802 at December 31, 2006 representing an increase of $1,122,738. The cash increased primarily due to funds raised through the Regulation D placement of the Series A Convertible Preferred Stock and Regulation D private placements of common stock. During the first half of 2007, the Company raised $973,021, net of issuance costs, from the sale of 2,000,000 shares of Series A Convertible Preferred Stock at $0.50 per share and $1,135,000 in three private placements of an aggregate of 2,270,000 shares of common stock at $0.50 per share, in each case sold to accredited investors, adding $2,108,021 to stockholders’ equity. Principal cash use for operations during the quarter ended September 30, 2007 was for professional fees and salaries. There have been minimal capital equipment expenditures and none are foreseen.

SpectraScience expects to incur significant additional operating losses through at least 2008, as we complete a clinical trial, begin outcome-based clinical studies, research and development activities continue, and sales and marketing costs to commercialize the WavSTAT^(TM) System. If we do not receive additional funding in a timely manner, the Company may be unable to continue as a going concern. We may not be able to find alternative capital or raise capital or debt on terms that are acceptable. Even if the Company receives funding in the fourth quarter of 2007, such proceeds may not be sufficient to allow the Company to sustain operations until it attains profitability and positive cash flows from operations; we may incur unknown expenses; or we may not be able to meet our revenue forecast, and one or more of these circumstances would require us to seek additional capital.

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Item 3A(T).Controls and Procedures

Evaluation of Disclosure Controls

As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Report, the Company’s Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15c). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective.

Changes in Internal Controls over Financial Reporting

There were no changes in the Company's internal controls over financial reporting during the three months ended September 30, 2007, which have materially affected or are reasonably likely to materially affect such controls.

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings
	None
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	None
Item 3.	Defaults Upon Senior Securities
	None
Item 4.	Submission of Matters to a Vote of Security Holders
	None
Item 5.	Other Information
	None
Item 6.	Exhibits
Exhibit 31	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

.

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SpectraScience, Inc.

FORM 10-QSB

September 30, 2007

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SpectraScience, Inc.
	(Registrant)
November 14, 2007	/s/ James Hitchin
Date	James Hitchin
	President, Chief Executive Officer and Chief Financial Officer
	(Principal executive officer, principal financial officer, and principal accounting officer)

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EX-31

EXHIBIT 31

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

Certification

I, James Hitchin, Chief Executive Officer and Chief Financial Officer of SpectraScience, Inc. certify that:

1.I have reviewed this report on Form 10-QSB of SpectraScience, Inc.

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4.I am the small business issuer’s officer responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b) [INTENTIONALLY OMITTED]

(c) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.The small business issuer’s certifying officer has disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

November 14, 2007

Signature: /s/James Hitchin                                                  

Name:        James Hitchin

President, Chief Executive Officer and Chief Financial Officer

(Principal Executive Officer and Principal Financial and Accounting Officer)

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of SpectraScience, Inc. (the “Company”) on Form 10-QSB for the nine months ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James Hitchin, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ James Hitchin            

James Hitchin

Chief Executive & Chief Financial Officer

November 14, 2007