**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





[X]
            Quarterly
                report pursuant to section 13 or 15(d) of the Securities Exchange
                Act of
                1934. For the quarterly period ending March 31, 2007.[
                ]
            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 000-25839





**IMPLANT
      SCIENCES CORPORATION**


(Exact
      name of registrant as specified in its charter)





**Massachusetts**
            
            **04-2837126**(State
                or other jurisdiction
              of
                incorporation or organization)
            
            (IRS
                Employer
              Identification
                number)107
                Audubon Road, #5 Wakefield, MA
            
            01880(Address
                of Principal Executive Offices)
            
            (Zip
                Code)


**781-246-0700**


(Registrant’s
      Telephone Number, Including Area Code)





Securities
      registered pursuant to Section 12(b) of the Act:





**Title
      of Each Class**     **Name
      of Each Exchange on Which Registered**


Common
      Stock, $.10 par value  A merican
      Stock Exchange








Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 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
      ___





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer.


Large
      Accelerated Filer ____  Accelerated
      Filer ____   Non-Accelerated
      Filer X





Indicate
      by checkmark whether the Registrant is a shell company (as defined in Rule
      12b-2
      of the Exchange Act)


YES
      ___
      NO X




The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant was approximately $20,001,000 as of May 17, 2007. (based on the
      closing price for such stock as of May 17, 2007).





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock:





Class
            Outstanding
                at May 17, 2007Common
                Stock, $.10 par value
            11,835,661





1





**IMPLANT
      SCIENCES CORPORATION**





**INDEX**





Page
                No.PART
                I. FINANCIAL INFORMATIONItem
                1.
            Financial
                Statements (unaudited):Condensed
                Consolidated Balance Sheets as of March 31, 2007 and June 30, 2006
            3Condensed
                Consolidated Statements of Operations for the Three and Nine Months
                Ended
                March 31, 2007 and 2006
            4Condensed
                Consolidated Statements of Cash Flows for the Nine Months Ended March
                31,
                2007 and 2006
            5Notes
                to Condensed Consolidated Financial Statements
            6Item
                2.
            Management's
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            17Item
                3.
            Quantitative
                and Qualitative Disclosure About Market Risk
            23Item
                4.
            Controls
                and Procedures
            23PART
                II. OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            25Item
                1A
            Risk
                Factors
            26Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            26Item
                3.
            Defaults
                Upon Senior Securities
            26Item
                4.
            Submission
                of Matters to a Vote of Security-Holders
            26Item
                5.
            Other
                Information
            26Item
                6.
            Exhibits
            26Signatures
            27





2


**IMPLANT
                SCIENCES CORPORATION****CONDENSED
                CONSOLIDATED BALANCE SHEETS**(unaudited)**March
                31,**
            
            **June
                30,****ASSETS**
            **2007**
            
            **2006**Current
                assets:Cash
                and cash equivalents
            $
                1,706,000
            
            $2,204,000Restricted
                cash
            25,000
            
            -Accounts
                receivable, net of allowance of $100,000 and $113,000 at March 31,
                2007
              and
                June 30, 2006, respectively
            2,472,000
            
            2,419,000Accounts
                receivable, unbilled
            67,000
            
            21,000Inventories
            1,535,000
            
            1,532,000Investments
                - available for sale securities
            156,000
            
            222,000Prepaid
                expenses and other current assets
            303,000
            
            484,000Current
                assets held for sale
            1,244,000
            
            1,319,000Total
                current assets
            7,508,000
            
            8,201,000Property
                and equipment, net
            4,904,000
            
            5,845,000Amortizable
                intangible assets, net
            279,000
            
            404,000Investment
                in unconsolidated subsidiary
            -
            
            174,000Other
                non-current assets
            451,000
            
            195,000Goodwill
            4,091,000
            
            4,091,000Non-current
                assets held for sale
            12,263,000
            
            11,889,000Total
                assets
            $29,496,000
            
            $30,799,000**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Current
                maturities of long-term debt and obligations under capital
                lease
            $ 1,890,000
            
            $  
                372,000Line
                of credit
            38,000
            
            1,000,000Payable
                to Med-Tec
            193,000
            
            233,000Accrued
                expenses
            1,945,000
            
            1,953,000Accounts
                payable
            1,091,000
            
            1,438,000Current
                portion of long- term lease liability
            144,000
            
            126,000Deferred
                revenue
            454,000
            
            408,000Current
                liabilities held for sale
            897,000
            
            412,000Total
                current liabilities
            6,652,000
            
            5,942,000Long-term
                liabilities:Long-term
                debt and obligations under capital lease, net of current maturities
            826,000
            
            525,000Long-term
                lease liability
            464,000
            
            575,000Derivatives
                related to preferred stock features
            294,000
            
            1,094,000Non-current
                liabilities held for sale
            1,597,000
            
            167,000Total
                liabilities
            9,833,000
            
            8,303,000Commitments
                and contingencies (Note 7)Series
                D Cumulative Redeemable Convertible Preferred Stock; $10 stated value;
                500,000 shares authorized 393,939 and 409,091 shares outstanding
                as of
                March 31, 2007 and June 30, 2006
            2,788,000
            
            2,568,000Stockholders'
                equity :Common
                stock, $0.10 par value; 20,000,000 shares authorized; 11,835,661
                and
                11,733,804 shares issued at March 31, 2007 and June 30, 2006,
                respectively; 11,825,116 and 11,706,810 shares outstanding, at March
                31,
                2007 and June 30, 2006, respectively
            1,184,000
            
            1,173,000Additional
                paid-in capital
            56,739,000
            
            55,284,000Accumulated
                deficit
            (40,850,000)
            
            (36,290,000)Deferred
                compensation
            (40,000)
            
            (17,000)Notes
                receivable, employees
            (43,000)
            
            -Accumulated
                other comprehensive (loss) income
            (42,000)
            
            14,000Treasury
                stock, 10,545 and 26,994 common shares at March 31, 2007, and June
                30,
                2006,respectively,
                at cost
            (73,000)
            
            (236,000)Total
                stockholders' equity
            16,875,000
            
            19,928,000Total
                liabilities and stockholders' equity
            $29,496,000
            
            $30,799,000


The
      accompanying notes are an integral part of these condensed consolidated
      financial statements





3


**IMPLANT
                SCIENCES CORPORATION****CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS****(unaudited)****Three
                Months Ended**
              **March
                31,**
            
            **Nine
                Months Ended**
              **March
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Revenues:Medical
            $
                   897,000
            
            $
                1,173,000
            
            $
                3,095,000
            
            $
                3,313,000Semiconductor
            1,898,000
            
            1,783,000
            
            5,436,000
            
            4,475,000Security
                products
            1,121,000
            
            1,469,000
            
            3,507,000
            
            5,084,000Total
                revenues
            3,916,000
            
            4,425,000
            
            12,038,000
            
            12,872,000Cost
                of revenues:Cost
                of medical revenues
            858,000
            
            901,000
            
            2,642,000
            
            2,690,000Cost
                of semiconductor revenues
            1,556,000
            
            1,600,000
            
            4,699,000
            
            4,660,000Cost
                of security products revenues
            781,000
            
            1,570,000
            
            2,557,000
            
            4,889,000Total
                cost of revenues
            3,195,000
            
            4,071,000
            
            9,898,000
            
            12,239,000Gross
                profit
            721,000
            
            354,000
            
            2,140,000
            
            633,000Operating
                expenses:Research
                and development
            359,000
            
            86,000
            
            1,359,000
            
            894,000Selling,
                general and administrative
            1,507,000
            
            1,634,000
            
            4,888,000
            
            5,441,000Impairment
                of long-lived assets
            -
            
            -
            
            37,000
            
            -Total
                operating expenses
            1,866,000
            
            1,720,000
            
            6,284,000
            
            6,335,000Loss
                from operations
            (1,145,000)
            
            (1,366,000)
            
            (4,144,000)
            
            (5,702,000)Other
                income (expenses):Interest
                income
            12,000
            
            17,000
            
            24,000
            
            34,000Interest
                expense
            (226,000)
            
            (25,000)
            
            (283,000)
            
            (140,000)Loss
                on disposal of fixed assets
            -
            
            -
            
            -
            
            (4,000)Equity
                losses in unconsolidated subsidiaries
            -
            
            (116,000)
            
            (158,000)
            
            (240,000)Change
                in fair value of embedded derivatives related to
                    preferred stockfeatures
            95,000
            
            20,000
            
            800,000
            
            911,000Total
                other income (expenses), net
            (119,000)
            
            (104,000)
            
            383,000
            
            561,000Net
                loss
            (1,264,000)
            
            (1,470,000)
            
            (3,761,000)
            
            (5,141,000)Preferred
                distribution, dividends and accretion
            (277,000)
            
            (391,000)
            
            (658,000)
            
            (778,000)Net
                loss from continuing operations
            (1,541,000)
            
            (1,861,000)
            
            (4,419,000)
            
            (5,919,000)Income from
                discontinuedoperations
            21,000
            
            206,000
            
            510,000
            
            576,000Loss
                on sale of Accurel
            (649,000)
            
            -
            
            (649,000)
            
            -Net
                income (loss) from discontinued operations
            (628,000)
            
            206,000
            
            (139,000)
            
            576,000Net
                loss applicable to common shareholders
            $
                (2,169,000)
            
            $
                (1,655,000)
            
            $
                (4,558,000)
            
            $
                (5,343,000)Net
                loss per share applicable to common shareholders, basic and
                diluted
            $
                (0.18)
            
            $
                (0.15)
            
            $
                (0.39)
            
            $
                (0.48)Net
                loss per share, continuing operations
            $
                (0.13)
            
            $
                (0.16)
            
            $
                (0.37)
            
            $
                (0.53)Net
                (loss) earnings per share, discontinued operations
            $
                (0.05)
            
            $ 
                  0.01
            
            $
                (0.02)
            
            $
                0.05Weighted
                average common shares outstanding used in computing basic and diluted
                loss
                per share
            11,815,310
            
            11,379,275
            
            11,784,427
            
            11,170,989


The
      accompanying notes are an integral part of these condensed consolidated
      financial statements








4








**IMPLANT
                  SCIENCES CORPORATION****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS**
                **(unaudited)****Nine
                  Months Ended**
                **March
                  31,****Cash
                  flows from operating activities:**
              **2007**
              
              **2006**Net
                  loss from continuing operations
              $(3,761,000)
              
              $
                  (5,141,000)Income
                  from discontinued operations
              (139,000)
              
              576,000Net
                  loss
              (3,900,000)
              
              (4,565,000)Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              1,050,000
              
              1,045,000Amortization
                  of intangible assets
              125,000
              
              633,000Share-based
                  compensation expense
              925,000
              
              1,972,000Equity
                  loss in unconsolidated subsidiaries
              184,000
              
              240,000Change
                  in fair value of embedded derivatives
              (800,000)
              
              (911,000)Loss
                  on equipment sale or writedown
              37,000
              
              43,000Bad
                  debt expense
              (13,000)
              
              -Deferred
                  compensation
              (23,000)
              
              -Loss
                on sale of
                Accurel
              649,000
              
              -Net
                  assets held for sale
              967,000
              
              602,000Changes
                  in operating assets and liabilities:Accounts
                  receivable
              (86,000)
              
              (84,000)Inventories
              (3,000)
              
              (990,000)Prepaid
                  expenses and other current assets
              181,000
              
              (2,000)Accounts
                  payable
              (347,000)
              
              345,000Accrued
                  expenses
              (141,000)
              
              (541,000)Deferred
                  revenue
              46,000
              
              63,000Net
                  cash used in operating activities
              (1,149,000)
              
              (2,150,000)**Cash
                  flows from investing activities:**Purchase
                  of property and equipment
              (146,000)
              
              (486,000)Increase
                  in other non-current assets
              (256,000)
              
              (251,000)Net
                  cash used in investing activities
              (402,000)
              
              (737,000)**Cash
                  flows from financing activities:**Proceeds
                  from issuance of common stock including the
                exercise
                  of options and the Employee Stock Purchase Plan
              183,000
              
              171,000Proceeds
                  from warrant exercise
              -
              
              69,000Proceeds
                  from secured term note, net of fees and transaction costs
              3,278,000
              
              -Proceeds
                  from issuance of Series D Cumulative Redeemable
                Convertible
                  Preferred Stock, net of issuance costs
              
              
              1,894,000Dividends
                  on Series D Cumulative Redeemable Convertible Preferred
                  Stock
              (440,000)
              
              (207,000)Principal
                  payments of long-term debt and capital lease obligations
              (981,000)
              
              (1,885,000)Payments
                  on line of credit
              (962,000)
              
              500.000Payments
                  of additional issuance costs related to private placement of common
                  stock
              -
              
              (31,000)Proceeds
                  from secured term note, net of fees and transaction costs
              -
              
              2,833,000Net
                  cash flows provided by financing activities
              1,078,000
              
              3,344,000Net
                  change in cash and cash equivalents
              (473,000)
              
              457,000Cash
                  and cash equivalents at beginning of the period
              2,204,000
              
              1,549,000Cash
                  and cash equivalents at end of the period
              1,731,000
              
              2,006,000**Supplemental
                  Disclosure of Cash Flow Information:**Interest
                  paid in cash
              241,000
              
              136,000**Noncash
                  Investing and Financing Activity**Capital
                  equipment acquired under capital lease
              -
              
              42,000Accretion
                  of Series D Cumulative Redeemable Convertible Preferred Stock dividends,
                  derivatives
                  and warrants
              371,000
              
              572,000







The
      accompanying notes are an integral part of these condensed consolidated
      financial statements








5


**IMPLANT
      SCIENCES CORPORATION**


**NOTES
      TO CONDENSED FINANCIAL STATEMENTS**


**March
      31, 2007**


**(Unaudited)**





**1.**  **Description
      of Business**





Implant
      Sciences Corporation (the “Company”) develops products for the medical device,
      semiconductor processing and security equipment industry. Its core technology
      involves ion implantation and thin film coatings of radioactive and
      non-radioactive materials. The Company has received Food and Drug Administration
      510(k) clearance to market both its I-Plant TM Iodine-125 radioactive seed for the treatment of prostate cancer and its
      Ytterbium-169 source for breast cancer therapy. The Company has been selling
      these Iodine-125 seeds since 2001. The Company markets and sells its existing
      trace explosives detector products while continuing to make significant
      investments in developing the next generation of these products. The Company
      provides ion implantation services and equipment to the semiconductor
      industry.





On
      May 1,
      2007, the Company entered into an Asset Purchase Agreement (the “Agreement”) to
      sell substantially all of the assets (the “Transaction”) of its subsidiary,
      Accurel Systems International Corporation (“Accurel), a California corporation,
      to Evans Analytical Group LLC, a Delaware limited liability company (“Evans”).
      Evans acquired all of the fixed assets and accounts receivable of the Company.
      The total purchase price of the Transaction was approximately $12,705,000.
      In
      addition, the Company will issue a warrant to purchase 350,000 shares of the
      Company’s common stock to Legend Merchant Group, our investment banker involved
      with the Transaction, at a price of $2.00 per share and agreed to pay them
      a fee
      based upon a percentage of gross aggregate consideration received by the
      Company.





In
      connection with the Transaction, we entered into an escrow agreement (the
“Escrow Agreement”) with Evans, Accurel, and Zions First National Bank. 
Pursuant to the Escrow Agreement, Evans deposited $1,000,000 (the “Escrow
      Amount”) of the total purchase price for the assets into an escrow
      account.  Any valid claims for indemnification made by Evans pursuant to
      section 6.3 of the Purchase Agreement shall be drawn from this sum. The Escrow
      Agreement provides, subject to any claims of indemnifications, for a release
      of
      $500,000 on approximately each of March 31, 2008 and March 31, 2009.





Also
      in
      connection with the Transaction, we entered into a Non-competition and
      Nondisclosure Agreement (the “NCD”) with Evans whereby we agreed not to engage
      in any business that directly competes with the business of Accurel. In
      addition, the NCD prohibits us from disclosing any confidential information
      concerning the business of Accurel. The NCD will remain in effect for five
      years
      from the date of its execution. In
      addition, the Company repaid a $1,500,000 secured term note, plus accrued
      interest, issued to Laurus Master Fund, Ltd. on December 29, 2006.





*Risks
      and Uncertainties*





While
      the
      Company strives to bring new products to market, it is subject to a number
      of
      risks similar to other technology-based companies, including risks related
      to:
      (a) its dependence on key individuals and collaborative research partners;
      (b)
      competition from substitute products and larger companies; (c) its ability
      to
      develop and market commercially usable products and obtain regulatory approval
      for its products under development; and (d) its ability to obtain the
      substantial additional financing necessary to adequately fund the development,
      commercialization and marketing of its products. For the nine months ended
      March
      31, 2007, the Company reported a net loss from continuing operations of
      $4,419,000 and used $598,000 in cash from operations. As of March 31, 2007
      and
      June 30, 2006, respectively, the Company had an accumulated deficit of
      approximately $41,824,000 and working capital of $856,000. The Company has
      drawn
      approximately $1,531,000 on a $5,000,000 revolving credit facility with a bank.
      Management continually evaluates plans to reduce its operating expenses and
      increase its cash flow from operations. Failure of the Company to achieve its
      projections may require the Company to seek additional financing or take other
      measures to provide the cash needed to continue operations.





On
      January 3, 2007, the Company executed an agreement with Silicon Valley based
      Bridge Bank, N.A. which increased the Company’s revolving credit facility from
      $1.5 million to $5.0 million (see Note 10). Based on the current sales, expense
      and cash flow projections, and the proceeds from this facility and the sale
      of
      Accurel, the Company believes that the current level of cash and
      cash-equivalents on hand, and the net proceeds from current government contracts
      will be sufficient to fund operations for the next twelve months. However,
      because there can be no assurances that sales will materialize as forecasted,
      management will continue to closely monitor and attempt to control costs at
      the
      Company and will continue to actively seek the needed capital through government
      grants and awards, strategic alliances, private financing sources, and through
      its lending institutions .





Management
      has prepared operating plans which would indicate the Company has sufficient
      financial resources to sustain operations for at least the next twelve months.
      These plans depend on the successful increase in the semiconductor service
      revenue and the successful launching of a new handheld trace explosives detector
      product. Should forecasted revenues not be met, management has developed plans
      which provide for cost cutting measures. Management believes that these cost
      cutting measures will be sufficient to allow the Company to continue as a going
      concern should revenue projections not be met. In addition, the proceeds from
      the sale of Accurel will further support the business plan of the Company.





The
      Company's consolidated financial statements have been presented on the basis
      that it is a going concern, which contemplates the realization of assets and
      the
      satisfaction of liabilities in the normal course of business. The Company has
      suffered recurring losses from continuing operations. The Series D preferred
      stock contains mandatory redemptions on a monthly basis. These mandatory
      redemptions are redeemable in cash or shares of the Company’s common stock, at
      the Company’s option so long as the price of the Company’s stock does not fall
      below 110% of the fixed conversion price. The Company received a waiver
      of
      the monthly amortization payments for the period December 2006 - August 2007,
      to
      the mandatory redemption date. The redemption payments resume in September
      2007.




There
      can
      be no assurances that forecasted results will be achieved or that the Company’s
      stock price will remain at a level to allow the Company to redeem the
      outstanding shares of Series D preferred and accrued dividends with shares
      of
      its common stock. These conditions raise substantial doubt about the Company's
      ability to continue as a going concern.  The financial statements do not
      include any adjustments relating to the recoverability and classification of
      asset amounts or the amounts and classification of liabilities that might be
      necessary should the Company be unable to continue as a going
      concern.





6


**2.**  **Interim
      Financial Statements and Basis of Presentation**




The
      accompanying condensed consolidated financial statements of the Company have
      been prepared in accordance with the accounting principles generally accepted
      in
      the United States of America. In the opinion of management, the accompanying
      condensed consolidated financials statements include all adjustments (consisting
      only of normal recurring adjustments), which the Company considers necessary
      for
      a fair presentation of the financial position at such date and of the operating
      results and cash flows for the periods presented. The result of operations
      and
      cash flows for the three and nine months ended March 31, 2007 may not
      necessarily be indicative of results that may be expected for any succeeding
      quarter or for the entire fiscal year. The information contained in this Form
      10-Q should be read in conjunction with the Company’s audited financial
      statements, included in our Form 10-K as of and for the year ended June 30,
      2006
      filed with the Securities and Exchange Commission on October 12,
      2006.




The
      accompanying condensed consolidated financial statements include the accounts
      of
      the Company and its wholly owned subsidiary Core Systems Incorporated (“Core”)
      (the “Subsidiary”). All intercompany balances have been eliminated in
      consolidation. Substantially all of the assets of the Company’s wholly-owned
      subsidiary, Accurel, have been sold pursuant to the Agreement and accordingly,
      our financial statements have reflected the assets and liabilities of Accurel
      in
      our balance sheet as assets and liabilities, respectively, as held for sale
      as
      of March 31, 2007 and the statement of operations of Accurel as discontinued
      operations for the three and nine months ended March 31, 2007 and 2006,
      respectively. Additionally, the related information contained in the notes
      to
      the financial statements includes those of the Company’s continuing operations
      unless specifically identified as disclosures related to discontinued
      operations.




Our
      significant accounting policies are described in Note 2 to the financial
      statements included in Item 7 of our Form 10-K as of June 30, 2006. Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon the financial statements, which have been prepared in accordance
      with
      accounting principles generally accepted in the United States of America (“U.S.
      GAAP”). The preparation of financial statements in conformity with U.S. GAAP
      requires management to make estimates and judgments, which are evaluated on
      an
      on-going basis, that affect the amounts reported in the Company’s condensed
      consolidated financial statements and accompanying notes. Management bases
      its
      estimates on historical experience and on various other assumptions that it
      believes are reasonable under the circumstances, the results of which form
      the
      basis for making judgments about the carrying values of assets and liabilities
      and the amounts of revenues and expenses that are not readily apparent from
      other sources. Actual results could differ from those estimates and judgments.
      In particular, significant estimates and judgments include those related to
      revenue recognition, allowance for doubtful accounts, useful lives of property
      and equipment, inventory reserves, business combinations, valuation for goodwill
      and acquired intangible assets, accounting for embedded derivatives and warranty
      reserves.









**3.**  **Inventories**




Inventories
      consist of the following:




**March
                  31,**
              
              **June
                  30,****2007**
              
              **2006**Raw
                  materials
              
              $693,000
              
              $
                  965,000Work-in-progress
              
              351,000
              
              291,000Finished
                  goods
              
              491,000
              
              276,000$1,535,000
              
              $
                  1,532,000





**4.**  **Property
      and Equipment**





Property
      and equipment consists of the following **:**


**March
                  31,**
              
              **June
                  30,****2007**
              
              **2006**Total
                  property and equipment
              $12,258,000
              
              $12,149,000Less:
                  accumulated depreciation
              (7,354,000)
              
              (6,304,000)Property
                  and equipment, net
              $4,904,000
              
              $
                  5,845,000




The
      Company
      recorded depreciation expense of approximately $1,050,000 and $1,045,000 for
      the
      nine month period ended March 31, 2007 and 2006, respectively. Depreciation
      expense for the nine month period ended March 31, 2007, includes an adjustment
      of approximately $55,000 of accumulated depreciation related to the disposal
      of
      certain capital equipment associated with the orthopedic coatings group.
      Capitalized leases and leasehold improvements are amortized based upon the
      lesser of the term of the lease or the useful life of the asset and such expense
      is included in depreciation expense.




7


**5.**  **Accrued
      Expenses**





Accrued
      expenses consist of the following:





**March
                31,**
            
            
            **June
                30,****2007**
            
            
            **2006**Accrued
                compensation and benefits
            
            
            $  
                994,000
            
            
            $  
                882,000Accrued
                costs related to acquisitions
            
            
            201,000
            
            
            304,000Other
                accrued liabilities
            
            
            750,000
            
            
            767,000$1,945,000
            
            
            $1,953,000





The
      Company accrues warranty costs in the period the related revenue is recognized
      and adjusts the reserve balance as needed to address potential future
      liabilities. The following table details the changes in the Company’s warranty
      reserve, which is included in other accrued liabilities in the schedule
      above.




Balance
                at June 30, 2006
            $
                66,000Accrued
                warranty expense
            47,000Charges
                against the reserve
            (53,000)Balance
                at September 30, 2006
            $
                60,000Accrued
                warranty expense
            24,000Charges
                against the reserve
            (11,000)Balance
                at December 31, 2006
            $
                73,000Accrued
                warranty expense
            (13,000)Charges
                against the reserve
            (3,000)Balance
                at March 31, 2007
            $
                57,000





**6.**  **Investment
      in Unconsolidated Subsidiaries**





As
      of
      March 31, 2007, the Company has a 16.9% interest in CorNova, Inc. as a result
      of
      87,031 shares having been issued to CorNova by the Company. The Company’s Chief
      Executive Officer (“CEO”) is one of the directors of CorNova. For the three and
      nine month periods ended March 31, 2007 and 2006, the Company recognized
      approximately $0 and $116,000 and $158,000 and $241,000, respectively, of equity
      losses in unconsolidated subsidiaries, representing the Company’s portion of
      CorNova’s net loss. In the quarter ended March 31, 2007, CorNova sold its
      holding of the Company’s stock. As a result, 14,708 shares of stock previously
      categorized as treasury stock has been reclassified to additional paid in
      capital in the accompanying balance sheet.





As
      a
      result of the cumulative net losses incurred, the Company’s investment in
      CorNova is zero. No further writedowns will be incurred unless CorNova has
      cumulative net income sufficient to offset the cumulative net
      losses.





7. 
      Commitments and Contingencies




(a)
      Capital and Operating Leases




The
      Company has an operating lease for its manufacturing, research and office space
      in Wakefield, MA which expires on December 31, 2008. The Company has an option
      to extend the lease for five additional years. Under the terms of the lease,
      the
      Company is responsible for its proportionate share of real estate taxes and
      operating expenses relating to this facility. The Company also has leases for
      both of its facilities in Sunnyvale, CA. The leases expire in December 2009
      and
      September 2010 and the Company has an option to extend each lease for five
      additional years. Effective with the sale of the assets of Accurel Systems
      on
      May 1, 2007, the Company executed a sublease agreement for one of its California
      facilities and termininated the lease for its satellite facility in Austin,
      TX
      (See Note 14). Under the terms of the leases, the Company is responsible for
      its
      proportionate share of real estate taxes and operating expenses relating to
      these facilities.




In
      conjunction with the acquisition of Accurel, the Company recorded a lease
      liability of $829,000. This liability reflects managements estimate of the
      excess of payments required under the Accurel facility lease, at the date of
      acquisition, versus the fair market value of lease payments that would have
      been
      required, if the lease had been negotiated under current market conditions.
      The
      balance of the lease liability on March 31, 2007 is $608,000, of which $144,000
      is current, and these amounts are included within liabilities held for sale
      in
      the accompanying balance sheet.





8


Future
      minimum rental payments required under capital leases and operating leases
      with
      non-cancelable terms in excess of one year at March 31, 2007, together with
      the
      present value of net minimum lease payments are as follows:




**Capital
                Lease Payments**
            
            **Operating
                Lease Payments (1)**Year
                ending June 30:2007
                remaining 3 months
            
            $
                7,000
            
            $
                388,0002008
            
            25,000
            
            1,464,0002009
            
            23,000
            
            1,201,0002010
            
            15,000
            
            578,0002011
                and remaining
            
            2,000
            
            84,000Total
                future minimum lease payments
            $
                72,000
            
            $
                3,715,000Less:
                amounts representing interest
            (9,000)Present
                value of future minimum lease payments
            63,000Less:
                current portion
            (19,000)Capital
                lease obligation, net of current portion
            $
                44,000





(1)
      adjusted for the
      effect of the sublease on the Lucerne Road facility





(b)
      Pending Litigation





From
      time
      to time, we are subject to various claims, legal proceedings and investigations
      covering a wide range of matters that arise in the ordinary course of our
      business activities. Each of these matters is subject to various uncertainties.





On
      March 24,
      2006, the Company brought suit in the United States District Court in the
      District of Massachusetts against Rapiscan and its parent, OSI Systems, Inc.
      (“OSI”). The Company is requesting rescission of the Rapiscan Agreement, for
      lack of performance and other grounds. In the alternative, the Company is
      seeking termination of the Rapiscan Agreement due to material breaches of
      contract and implied covenant of good faith and fair dealing and for damages
      due
      to Rapiscan’s breach of contract and the implied covenant of good faith and fair
      dealing.





On
      March
      27, 2006, the Company received notice that Rapiscan filed a complaint against
      the Company in the United States District Court for the Central District of
      California, regarding the Rapiscan Agreement. Rapiscan’s complaint against the
      Company is based upon claims of breach of contract and breach of warranty and
      is
      requesting a decree for specific performance, declaratory relief and injunctive
      relief.





As
      of
      August 18, 2006, as a result of motions made by both parties, the two lawsuits
      have been consolidated in the United States District Court for the Central
      District of California with the Company as plaintiff. Rapiscan and OSI have
      filed a motion to dismiss certain of the Company’s claims. As of October 30,
      2006, the court has ruled that the Company’s claim of breach of fiduciary duty
      was dismissed but OSI’s motion to dismiss all other claims was denied. The
      litigants are presently in the discovery process which should be completed
      by
      July 2007. Trial is expected in early 2008.





On
      or
      about March 8, 2006, the Company commenced an arbitration under the Rules of
      the
      American Arbitration Association against Respondents Majid Ghafghaichi (“Majid”)
      and Vahe Sarkissisian (“Vahe”), seeking a total of $3,994,000 for
      indemnification of various “Losses,” as defined in, and expressly allowed
      pursuant to, a Stock Purchase Agreement dated March 9, 2005 (the “Agreement”),
      between the Company, as the purchaser, Accurel Systems International Corporation
      (“Accurel), and  Majid and Vahe, as the sellers of 100% of the issued and
      outstanding shares of Accurel stock.





More
      specifically, there are four claims asserted by the Company against Respondents:
      (1) Damages of $3.4 million resulting from misrepresentations concerning the
      loss of business from a key Accurel customer; (2) unauthorized withdrawals
      in
      the amount of approximately $276,000 from Accurel by the Respondents prior
      to
      the closing; (3) approximately $49,000 of disallowed transaction expenses that
      the Respondents improperly received; and (4) undisclosed net liabilities
      totaling approximately $269,000.





Respondents
      have asserted counterclaims seeking “an aggregate amount in excess of
      $1,750,000,” based on the allegedly “late payment” to Respondents of Company
      stock and a Secured Promissory Note as part of the consideration for their
      sale
      of Accurel stock.  The Company has filed a detailed denial of all
      counterclaims.





On
      April
      11, 2007, the Company and the Respondents executed a Settlement
      and Mutual Release Agreement dismissing the claims and counterclaims. As a
      result of this settlement, the Company will record a gain of approximately
      $201,000 in the fourth quarter as a result of reversing an accrual relating
      to
      this matter.





9


**8.**
            **Redeemable
                Convertible Preferred Stock**





The
      following table reflects the required redemption of the Series D before the
      effect of the accrued dividends:





Year
                ending June 30:
            
            Preferred
                StockMonthly
              Redemption
                Schedule2007
                remaining 3 months
            
            $                -2008
            
            1,515,0002009
            
            2,424,000Total
            
            $
                3,939,000





On
      December 28, 2006, Laurus consented to permit the Company to defer the December
      2006, January 2007, February 2007, March 2007, April 2007, May 2007, June 2007,
      July 2007, and August 2007 redemptions to the end of the term. The monthly
      redemption of approximately $152,000 plus accrued dividends resumes on September
      1, 2007. Subject to certain conditions, it is at the Company’s option to pay
      this amount in cash or in common stock at a fixed conversion price of $4.15
      per
      common share. This fixed conversion price is subject to reset should the Company
      declare a stock dividend or split, combine the outstanding common stock into
      a
      smaller number of shares, or issue, by reclassification of its common stock,
      any
      shares or other securities of the Company. The fixed conversion price shall
      be
      adjusted proportionately so that the holder of the Series D shall be entitled
      to
      receive the kind and number of shares or other securities of the Company which
      such Laurus would have owned or have been entitled to receive after the
      happening of any of the events described above, had such shares of Series D
      Preferred Stock been converted immediately prior to the happening of such event.





The
      Company valued the Series D at issuance at its residual value of $2,700,000
      based on the fair values of the financial instruments issued in connection
      with
      this preferred stock financing, including the warrants, the embedded derivative
      instruments and offering costs. The amounts recorded in the financial statements
      represent the amounts attributed to the sale of the Series D preferred stock,
      the amount allocated to warrants of $672,000, the value attributed to the
      embedded derivatives of $1,397,000 and $271,000 of issuance costs (including
      $154,000 of unamortized costs of the July 6, 2005 term note). The Company is
      accreting these discounts on the carrying value of the preferred stock to its
      redemption value at September 1, 2008, or the actual conversion date,
      whichever is earlier. The accretion of these amounts is being recorded as a
      preferred dividend in the period of accretion. As of March 31, 2007, $1,150,000
      was amortized. As of March 31, 2007, the fair value of this conversion feature
      approximated $294,000.    The value of the embedded
      derivates related to the adjustable dividend rate and the potential default
      provisions were determined to be immaterial at March 31, 2007.





On
      May
      31, 2006, the Company amended the Series D and the Certificate of Vote of
      Directors Establishing a Class or Series of Stock. The terms of the amendment
      permit the Company to defer approximately $455,000 of cash payments,
      representing the January 2006, February 2006 and March 2006 amortization
      payments, and to defer the October 2006 amortization payment, should such
      payment be required in cash, to the mandatory redemption date of September
      30,
      2008. In consideration, the Company agreed to the conversion of the April 2006,
      May 2006, June 2006, July 2006, August 2006 and September 2006 amortization
      payments into 261,233 shares of common stock of the Company at a conversion
      price of $3.48 per share, representing a reduction in principal of approximately
      $909,000, and to reduce the Fixed Conversion Price of the remaining Series
      D
      stock from $6.80 per share to $4.15 per share. In addition, Laurus was granted
      a
      warrant to purchase 150,000 shares of the Company’s common stock at an exercise
      price of $4.26 per share. The warrants were valued at $375,000 using the Black
      Scholes model and the following assumptions: volatility of 79%, an expected
      life
      5 years, and a risk free interest rate of 4.89%.





The
      amendment of the Series D, as described above, was accounted for as an
      extinguishment of debt in accordance with EITF 96-19 "Debtor's Accounting for
      a
      Modification or Exchange of Debt Instruments." The Company determined a
      substantial difference in the net present value of the cash flows under the
      terms of the amendment was more than 10 percent different from the present
      value
      of the remaining cash flows under the terms of the original Series D agreement.
      Due to the substantial difference, the Company determined an extinguishment
      of
      debt had occurred with the amendment, and as such, it was necessary to reflect
      the Series D at its fair market value and record a loss on extinguishment of
      debt of approximately $1,294,000.





10


**9.**
            **Share-based
                compensation plans**





*Stock
      Option Plans*




As
      of
      March 31, 2007, a total of 129,003, 75,702, and 208,000 shares are available
      for
      issuance under the 1998 Stock Option Plan, the 2000 Incentive and Non-Qualified
      Stock Option Plan and the 2004 Stock Option Plan, respectively.





The
      following table presents the cumulative activity of the stock option plans
      for
      the nine months ended March 31, 2007:




**Shares**
            
            **Weighted-**
              **Average**
              **Exercise
                Price**Outstanding
                at June 30, 2006
            1,836,551
            
            $
                5.41Granted
            405,188
            
            2.32Exercised
            (34,365)
            
            1.49Cancelled
            (168,736)
            
            6.25Outstanding
                at March 31, 2007
            2,038,638
            
            $
                4.90Options
                exercisable at end of period
            1,309,798
            
            $
                5.46Weighted-average
              fair value of options granted during period
            
            
            $1.44








On
      December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (“SFAS”) No. 123 (Revised 2004)
“Share-Based Payments,” (“SFAS 123R”), which is a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation.” SFAS 123R supersedes Accounting
      Principal Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
      Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the
      approach in SFAS 123R is similar to the approach described in SFAS 123, however,
      SFAS 123R requires all share-based payments to employees, including grants
      of
      employee stock options and stock issued from certain employee stock purchase
      plans, to be recognized in earnings based on their modified-grant date fair
      values. Pro forma disclosure is no longer an alternative. Effective July 1,
      2005, the Company adopted SFAS 123R.




The
      Company recorded $203,000 of stock based compensation, which includes $6,000
      of
      compensation expense attributable to its Employee Stock Purchase Plan in the
      three month period ended March 31, 2007.





The
      total
      non-cash stock-based compensation expense, including $131,000 of options and
      warrants issued to non-employees, included in the consolidated statement of
      operations for the three month period ended March 31, 2007 and 2006 is included
      in the following expense categories:




**Three
                  months ended March 31,****2007**
              
              **2006**Cost
                  of revenues
              $
                  53,000
              
              $
                  309,000Research
                  and development
              28,000
              
              (172,000)Selling,
                  general and administrative
              253,000
              
              310,000Total
              $
                  334,000
              
              $
                  447,000






As
      of
      March 31, 2007 there was $945,000 of total unrecognized compensation expense
      related to unvested share based compensation arrangements under the various
      share-based compensation plans.  This
      amount is exclusive of options to employees of the discontinued operation,
      which
      prior to the transaction would have represented an additional $123,000 of
      unrecognized compensation expense.This expense is expected to be
      recognized as follows:





**Period
                  Ended June 30:**Remaining
                  3 months 2007
              $
                  217,0002008
              460,0002009
              206,000Thereafter
              62,000Total
              $
                  945,000




11


The
      fair
      value of each option award is estimated on the date of grant using the
      Black-Scholes option pricing model using the assumptions noted in the following
      table. Expected volatility is based on historical volatility of the Company’s
      common stock. The Company uses historical data to estimate future option
      forfeitures within the valuation model. The expected term of options granted
      is
      calculated using the “Simplified Method” as outlined SFAS 123R and reflects the
      period of time that options granted are expected to be outstanding. The
      risk-free rate for periods within the contractual life of the option is based
      on
      the U.S Treasury yield curve in effect at the time of grant. There are no
      special terms relating to the rights to exercise options relating to the
      employee terminations in conjunction with the sale of Accurel.




**Three
                month period ended****March
                31, 2007****Stock
                Option Plan**
            
            **Stock
                Purchase Plan**Risk
                free interest rate
            4.71%
                - 4.79%
            
            5.17%Expected
                dividend yield
            0%
            
            0%Expected
                lives (years)
            3.5
                - 6 years
            
            6
                monthsExpected
                volatility
            77%
                - 78%
            
            78%Expected
                forfeiture rate
            10%
            
            0%Contractual
                term
            5
                -
                10 years
            
            6
                months





*Employee
      Stock Purchase Plan*





In
      September 1998, the Company adopted the 1998 Employee Stock Purchase Plan (the
      “1998 Plan”). The Plan provides a method whereby employees of the Company will
      have an opportunity to acquire an ownership interest in the Company through
      the
      purchase of shares of common stock of the Company through payroll deductions.
      After 12 months of employment, an employee is eligible to participate and can
      defer up to 10% of their wages into this Plan, with a maximum of $25,000 in
      any
      calendar year. The purchase price of the common stock is calculated at the
      lower
      of 85% of the closing price of the stock on the first day of the plan period
      or
      the last day of the plan period. The periods are January 1 to June 30 and July
      1
      to December 31. Fractional shares are not issued. Participants may withdraw
      at
      any time by giving written notice to the Company and will be credited the
      amounts of deferrals in their account. The maximum number of shares eligible
      to
      be issued under the Plan is 141,000. As of March 31, 2007, a total of 10,669
      shares are available for issuance under the Plan.





In
      December 2006, the Company adopted the 2006 Employee Stock Purchase Plan (the
      “2006 Plan”). The 2006 Plan provides a method whereby employees of the Company
      will have an opportunity to acquire an ownership interest in the Company through
      the purchase of shares of common stock of the Company through payroll
      deductions. After 12 months of employment, an employee is eligible to
      participate and can defer up to 10% of their wages into this Plan, with a
      maximum of $25,000 in any calendar year. The purchase price of the common stock
      is calculated at the lower of 85% of the closing price of the stock on the
      first
      day of the plan period or the last day of the plan period. The periods are
      January 1 to June 30 and July 1 to December 31. Fractional shares are not
      issued. Participants may withdraw at any time by giving written notice to the
      Company and will be credited the amounts of deferrals in their account. The
      maximum number of shares eligible to be issued under the Plan is 500,000. As
      of
      March 31, 2007, a total of 500,000 shares are available for issuance under
      the
      Plan.





Compensation
      expense under the 1998 and 2006 Plans for the three month periods ended March
      31, 2007 and 2006 is $6,000 and $10,000 respectively.




*Non-qualified
      options and warrants*





Included
      in the consolidated statement of operations for the period ended March 31,
      2007
      is $131,000 of compensation expense attributable to other non-employee options
      and warrants.






**10.**
            **Long-term
                Debt and Credit
                Arrangements**




*MED-TEC
      Payment Obligation*





On
      July
      31, 2003, the Company entered into an agreement with its former exclusive
      distributor of prostate seeds, to release each other from further obligations
      under the original Distributor Agreement.  The new agreement conveys to the
      Company direct marketing and sales capabilities to sell its I-Plant Seed
      brachytherapy seeds for use in the treatment of prostate cancer.  In
      connection with this, the Company’s former exclusive distributor agreed to work
      cooperatively to transition customers and marketing materials directly to the
      Company.  The distributor also agreed not to compete with the Company for a
      period of three years.  The present value of this payment obligation was
      recorded as approximately $1,007,000, using a rate of 10.24%. This amount was
      recorded as an intangible asset and has been amortized over its estimated useful
      life of 29 months.  As of March 31, 2007, the outstanding and past due
      principal balance is approximately $193,000.  For the three months ended
      March 31, 2007 and 2006, the Company recorded approximately $6,000 and $7,000,
      respectively, of interest expense relating to this transaction.




*Installment
      Note - Accurel*





At
      the
      time of its acquisition, Accurel had a $1,400,000 fixed rate installment note
      with a bank. The note called for monthly payments of $29,000 plus interest
      at a
      rate of 6.84%, through September 1, 2008 (the “Loan Agreement”). The bank
      consented to continue the note under the same terms after the acquisition.
      The
      note is collateralized by substantially all assets of Accurel. During the three
      month period ended March 31, 2007 and 2006, the Company recorded interest
      expense of approximately $11,000 and $15,000, respectively, in connection with
      this note. As of March 31, 2007, the Accurel note was paid in full.




12


*Revolving
      Credit Facility and Term Note with Bridge Bank*





On
      January 3, 2007, the Company executed an Amended and Restated Loan and Security
      Agreement (the “Loan Agreement”) which amended and restated the terms of a
      Business Financing Agreement originally dated as of June 1, 2005 with Silicon
      Valley based Bridge Bank, N.A. (the “Bank”) increasing the revolving credit
      facility from $1.5 million to $5.0 million. This revolving credit facility
      (the
“line of credit”) has a two year term, provides for advances of up to eighty
      percent (80%) of the Company’s eligible accounts receivable and up to the lesser
      of $1,000,000 or forty percent (40%) of eligible inventory, bears interest
      at
      the prime rate, plus one-half percent (1/2%) per annum, and is collateralized
      by
      all assets of the Company.




On
      April 27,
      2007, in conjunction with the sale of the assets of Accurel, the Company entered
      into a Loan and Security Modification Agreement whereby the Bank consented
      to
      the sale of the Accurel assets and removed Accurel as a borrower under the
      Loan
      Agreement.





The
      Company was in violation of certain covenants associated with this facility
      in
      the months of January - March 2007, and has received waivers from the bank.
      As
      of March 31, 2007, $38,000 has been drawn on this credit facility.





In
      conjunction with this financing, the Company drew from funds available on the
      line of credit and paid in full the outstanding term loan balance of
      approximately $623,000 at Comerica Bank. In addition, pursuant to the terms
      of
      the Loan Agreement, the Company converted $1,600,000 of the outstanding line
      of
      credit balance into a 30 month term note bearing an interest rate at the prime
      rate plus one percent (1%) per annum payable in thirty (30) equal monthly
      installments of principal, plus all accrued interest beginning on February
      10,
      2007.




Pursuant
      to the Loan Agreement, the Company issued to Bridge Bank. N.A. a seven-year
      warrant to purchase up to 18,939 shares of the Company’s common stock at a price
      equal to $2.64 per share. The
      warrants were valued using the Black Scholes model and the following
      assumptions: volatility of 78%, an expected life 7 years, and a risk free
      interest rate of 4.54%. Pursuant
      to ABP No 14 “Accounting for Convertible Debt and Debt Issued with Stock
      Purchase Warrants”, the note and warrants have been recorded at their relative
      fair value. The Company will accrete the value of the warrants, $28,000, to
      the
      term note over the life of the note. As of March 31, 2007, approximately $3,000
      has been amortized.





*Laurus
      Short Term Note*





On
      December 29, 2006, the Company executed a $1.5 million secured term note (the
      “Note”) payable to Laurus. The Company received $1,500,000 in gross proceeds,
      less a management fee of $60,000 and related transaction costs of approximately
      $500. The term note is collateralized by substantially all of the Company’s
      assets and two of its subsidiaries, has a 9-month term and bears interest at
      a
      rate equal to prime plus 1% per annum. The Note contains certain restrictive
      and
      financial covenants. Upon the occurrence of certain events of default specified
      in the Note, amounts owed under the Note may be declared immediately due and
      payable. In connection with the financing, the Company issued Laurus a warrant
      to purchase up to 458,000 shares of the Company’s common stock at a price equal
      to $2.50 per share. The
      warrants were valued using the Black Scholes model and the following
      assumptions: volatility of 78%, an expected life 5 years, and a risk free
      interest rate of 4.53%. Net cash proceeds from this financing were $1,439,500
      and were used for general working capital.





Pursuant
      to ABP No 14 “Accounting for Convertible Debt and Debt Issued with Stock
      Purchase Warrants”, the note and warrants have been recorded at their relative
      fair value. The Company is accreting the value of the warrants, $450,000, to
      the
      term note over the life of the note. As of March 31, 2007, approximately
      $143,000 has been amortized.





**11.**
            **Financial
                Information by Segment**




Under
      SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
      Information,” operating segments are defined as components of an enterprise
      about which separate financial information is available that is evaluated
      regularly by the chief operating decision maker, or decision making group,
      in
      deciding how to allocate resources and in assessing performance. The Company's
      chief operating decision making group is composed of the chief executive officer
      and members of senior management. The Company's reportable segments are:
      Medical, Semiconductor and Security Products.





Gross
      profit is the measure that management uses when evaluating the Company’s
      segments, therefore, operating expenses are excluded from the financial
      information below.




The
      revenues, expenses and assets related to these segments from
      continuing operations for the three and nine months ended March 31 2007 and
      2006
      are:




**Three
                  months ended March 31, 2007**
              **Medical**
              
              **Semiconductor**
              
              **Security**
              
              **Total**Revenue
              $
                  897,000
              
              $
                  1,898,000
              
              $
                  1,121,000
              
              $
                  3,916,000Cost
                  of revenues
              (858,000)
              
              (1,556,000)
              
              (781,000)
              
              (3,195,000)Gross
                  profit
              $
                  39,000
              
              $
                  342,000
              
              $
                  340,000
              
              $
                  721,000Assets
              $3,427,000
              
              $9,824,000
              
              $2,738,000
              
              $15,989,000**Three
                  months ended March 31, 2006**Revenue
              $
                  1,173,000
              
              $
                  1,783,000
              
              $
                  1,469,000
              
              $
                  4,425,000Cost
                  of revenues
              (901,000)
              
              (1,600,000)
              
              (1,570,000)
              
              (4,071,000)Gross
                  profit
              $
                  272,000
              
              $
                  183,000
              
              $
                  (101,000)
              
              $
                  354,000Assets
              $3,938,000
              
              $11,884,000
              
              $3,243,000
              
              $19,025,000




13


**Nine
                  months ended March 31, 2007**
              **Medical**
              
              **Semiconductor**
              
              **Security**
              
              **Total**Revenue
              $
                  3,095,000
              
              $
                  5,436,000
              
              $
                  3,507,000
              
              $
                  12,038,000Cost
                  of revenues
              (2,642,000)
              
              (4,699,000)
              
              (2,557,000)
              
              (9,898,000)Gross
                  profit
              $
                  453,000
              
              $
                  737,000
              
              $
                  950,000
              
              $
                  2,140,000Assets
              $3,427,000
              
              $9,824,000
              
              $2,738,000
              
              $15,989,000**Nine
                  months ended, March 31, 2006**Revenue
              $
                  3,313,000
              
              $
                  4,475,000
              
              $
                  5,084,000
              
              $
                  12,872,000Cost
                  of revenues
              (2,690,000)
              
              (4,660,000)
              
              (4,889,000)
              
              (12,239,000)Gross
                  profit
              $
                  623,000
              
              $
                  (185,000)
              
              $
                  195,000
              
              $
                  633,000Assets
              $3,938,000
              
              $11,884,000
              
              $3,243,000
              
              $19,025,000


International sales accounted for $413,000 and $1,437,000 for the three month
      period ended March 31, 2007 and 2006, respectively and $2,373,000 and $3,448,000
      in the nine month period ended March 31, 2007 and 2006 respectively.





**12.**
            **Goodwill
                and Other Intangible
                Assets**




At
      March
      31, 2007 and June 30 2006, the Company had goodwill and intangible assets of
      $4,091,000. SFAS No. 142, “Goodwill and Other Intangible Assets”, requires that
      goodwill and intangible assets with indefinite lives no longer be amortized
      but
      instead be measured for impairment at least annually or whenever events indicate
      that there may be an impairment. In order to determine if impairment exists,
      management continually estimates the reporting unit’s fair value based on market
      conditions and operational performance. The Company may employ the work of
      independent appraisers in making its determination. The Company makes its annual
      assessment as of August 31st of each year to determine if its goodwill is
      impaired. As of June 30, 2006 the Company had determined that its goodwill
      at
      its semiconductor implantation reporting unit was impaired. As a result of
      this
      impairment the Company recorded an impairment charge of $457,000. Goodwill
      and
      intangible assets with indefinite lives at the Company’s semiconductor testing
      unit are not impaired. Future events could cause management to conclude that
      impairment indicators exist and that goodwill and intangible assets with
      indefinite lives associated with the Company’s acquired businesses are impaired.
      Any resulting impairment loss could have a material adverse impact on the
      Company’s financial condition and results of operations.




Intangible
      assets with finite lives are valued according to the future cash flows they
      are
      estimated to produce. These assigned values are amortized over the period of
      time those cash flows are estimated to be produced. Management continually
      evaluates whether events or circumstances have occurred that indicate that
      the
      estimated remaining useful life or the carrying value of these assets has been
      impaired. As of March 31, 2007, management believes no impairment
      exists.




There
      were no changes in the carrying value of goodwill for the three months ended
      March 31, 2007. Goodwill within each reportable segment, are as
      follows:




**Semiconductor
                Services**Balance
                as of March 31, 2007 and June 30, 2006
            $
                4,091,000




The
      following table summarizes the Company’s intangible assets as of March 31,
      2007:





**Gross
                carrying amount**
            
            **Accumulated
                Amortization**
            
            **Net
                Carrying Amount****June
                30, 2006**
            **Additions**
            **March
                31, 2007**
            
            **June
                30, 2006**
            **Additions**
            **March
                31, 2007**
            
            **March
                31, 2007**Non-Compete
            
            $1,007,000
            $            
                -
            $
                1,007,000
            
            $
                1,007,000
            $         
                -
            $
                1,007,000
            
            $            
                 -Customer
                Base
            
            210,000
            -
            210,000
            
            72,000
            31,000
            103,000
            
            107,000Technology
            
            125,000
            -
            125,000
            
            43,000
            19,000
            62,000
            
            63,000Treatment
                Planning System
            
            300,000
            -
            300,000
            
            116,000
            75,000
            191,000
            
            109,000Total
            
            $1,642,000
            $            
                -
            $
                1,642,000
            
            $
                1,238,000
            $
                125,000
            $
                1,363,000
            
            $
                 279,000





14




Estimated
      amortization expense for intangible assets with finite lives on our balance
      sheet as of March 31, 2007, for the fiscal years ending June 30, is as
      follows:








2007
                remaining three months
            
            $
                42,0002008
            
            150,0002009
            
            67,0002010
            
            20,000$
                279,000




**13.**
            **Earnings
                (loss)**




The
      Company had the following potential dilutive securities outstanding on March
      31,
      2007: options and warrants to purchase 2,038,638 and 2,218,267 shares,
      respectively, of the Company’s common stock at weighted average exercise prices
      of $4.90 and $6.19 per share, respectively and (ii) Series D Preferred Stock
      convertible into an aggregate of 949,251 shares of the Company’s common stock.
      Such potential dilutive securities were not included in the calculation of
      diluted loss per share in the period ended March 31, 2007 because the inclusion
      thereof would be antidilutive.





**14.**
            **Discontinued
                Operations**





On
      May
      1,  2007,
      the
      Company completed the sale of its Accurel Division to EAG (“Asset Sale”). The
      Asset Sale was completed in accordance with the terms and conditions of the
      Purchase Agreement. As consideration for the Asset Sale the Company received
      cash proceeds of approximately $12,705,000 of which $1,000,000 was placed in
      escrow. At March 31, 2007, the Company determined that the proceeds, less the
      related transaction costs of approximately $1,366,000 in cash fees and expenses
      and $390,000 in a non-cash charge for three year warrants issued, were less
      than
      the book value of the net assets transferred of $11,598,000 and therefore a
      loss
      on the sale of Accurel of $649,000 was recorded in the quarter ended March
      31,
      2007 as a component of the loss from discontinued operations in the accompanying
      statement of operations.  On
      May 1,
      2007, the Company will recognize a loss of $487,000, which represents
      the amounts due under the Accurel facility lease in excess of amounts to be
      received from sublease rentals. The facility lease, which will remain an
      obligation of the Company, expires in
      2010.





In
      accordance with Statement of Financial Accounting Standards No.144, “Accounting
      for the Impairment or Disposal of Long-Lived Assets”, the March 31, 2007
      financial statements have been prepared and historical statements of operations
      have been reclassified to present the results of Accurel as discontinued
      operations. As noted above, the Company had formally committed to a plan to
      sell
      Accurel in March 2007 and finalized that plan at the closing on May 1, 2007.
      The
      Company has clearly (i) eliminated Accurel’s financial results from its ongoing
      operations, (ii) determined that Accurel, as operated as a separate subsidiary
      was a separate component of its aggregated business as, historically, management
      reviewed separately the Accurel financial results and cash flows apart from
      its
      ongoing continuing operations, and (iii) determined that it will have no further
      continuing involvement in the operations of Accurel after the sale.





The
      assets and liabilities of Accurel as of March 31, 2007 are as
      follows:





**Assets
                  of discontinued operations**:Accounts
                  receivable, net
              $ 
                  1,230,000Other
                  current assets
              14,000Total
                  Current Assets of Discontinued Operations
              1,244,000Goodwill
              7,198,000Intangible
                  assets
              924,000Fixed
                  assets and equipment, net
              4,044,000Other
                  non-current assets of Accurel
              97,000Total
                  Non-Current Assets of Discontinued Operations
              12,263,000Total
                  assets of Discontinued Operations
              $13,507,000**Liabilities
                  of Discontinued Operations**:Accounts
                  payable and accrued expenses
              $   
                  574,000Current
                  portion of capital leases
              323,000Total
                  Current Liabilities of Discontinued Operations
              897,000Long-term
                  portion of Capital leases
              1,597,000Other
                  non-current liabilities
              -Total
                  Non-Current Liabilities of Discontinued Operations
              1,597,000$
                  2,494,000





15


Condensed
      results of operations relating to Accurel for the three and nine months ended
      March 31, 2007 and 2006 are as follows:





**Three
                Months Ended March 31,**
            
            **Nine
                Months Ended March 31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Revenues:
            $
                2,187,00000
            
            $2,124,000
            
            $6,763,000
            
            $5,888,000Gross
                profit
            596,000
            
            653,000
            
            2,051,000
            
            1,841,000Operating
                income
            86,000
            
            223,000
            
            645,000
            
            629,000Loss
                on sale of Accurel
            (649,000)
            
            -
            
            (649,000)
            
            -Income
                (loss) from discontinued operations
            $(628,000)
            
            $
                206,000
            
            $(139,000)
            
            $
                576,000





**15.**
            **Subsequent
                Event**





On
      May 1,
      2007, in conjunction with the sale of Accurel, (see Note 14). the Company paid
      in full the balance due plus accured interest on the Laurus Short Term note,
      in
      the amount of approximately $1,512,000.


16


**ITEM
      2.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





**OVERVIEW**





Over
      the
      past twenty two years, Implant Sciences Corporation has both developed and
      acquired technologies using ion implantation and thin film coatings. Initially
      this technology was used in semiconductor processing but soon expanded to
      include various medical device applications including the modification of
      orthopedic joint implant surfaces to reduce polyethylene wear generation and
      the
      manufacture of products for radiation therapy treatments. Our latest application
      of this technology includes the manufacturing of trace explosives detection
      equipment.





In
      October 2004 and March 2005, we acquired two California semiconductor companies.
      Through these acquisitions, we more than doubled our semiconductor capacity
      and
      were able to offer diagnostic services and semiconductor equipment refurbishment
      services to semiconductor manufacturers, research laboratories and universities.
      On May 1, 2007, we sold the assets of our diagnostic services subsidiary to
      Evans Analytical Group LLC.





Other
      applications of our ion beam technology have been in the area of temporary
      brachytherapy products. In May 1999, we received Food and Drug Administration
      510(k) clearance to market our I-Plant TM Iodine-125 radioactive seed for the treatment of prostate cancer and in 2001
      recognized our first sale.





Since
      May
      1999, we have been performing research to develop a trace explosives detector,
      which could be used to detect hidden bombs in airports and other public places.
      This technology is yet another application of our ion source technology. At
      present, we have developed both portable and bench-top systems for use in
      airports and Department of Defense facilities and have successfully marketed
      these products both domestically and internationally. In fiscal 2006, as part
      of
      a plan to reduce manufacturing costs, we transitioned the production of these
      products to a contract manufacturer. As we continue to sell and deliver these
      products, we work both independently and in conjunction with various government
      agencies, to develop the next generation of trace explosives detectors and
      identify new applications for our proprietary technology.





The
      Company manages its business and reports results from operations for three
      business segments: Medical, which includes radioactive seeds, medical product
      coatings, medical related government contracts and other related activities;
      Security Products, which includes development contracts and product sales
      related to the Company’s trace explosives detection products; and Semiconductor,
      which includes ion implantation, disk refurbishment and source conditioning
      equipment.





Substantially
      all of the assets of the Company’s wholly-owned subsidiary, Accurel, have been
      sold. Management’s discussion and analysis of financial condition and results of
      operations are based on the Company’s continuing operations.







**RESULTS
      OF OPERATIONS**





The
      following is a discussion and analysis of the financial condition and results
      of
      operation of the Company for the three and nine month periods ended March 31,
      2007 and 2006. It should be read in conjunction with the financial statements
      and notes thereto appearing elsewhere herein.





*Three
      Month Period Ended March 31, 2007 vs. March 31, 2006*





*Revenues.* Revenues
      for the three months ended March 31, 2007 were $3,916,000 as compared to
      $4,425,000 in the three months ended March 31, 2006, a decrease of $509,000
      or
      12%. Our revenues by business segment are as follows:


**Three
                  months ended March 31,****2007**
              **2006**
              **%****Increase****/**
                **(Decrease)**Medical
              $
                  897,000
              $
                  1,173,000
              (24%)Semiconductor
              1,898,000
              1,783,000
              6%Security
                  products
              1,121,000
              1,469,000
              (24%)Total
              $
                  3,916,000
              $
                  4,425,000
              (12%)




Revenues
      in the medical products business segment decreased by $276,000 or 24% compared
      to the comparable prior year period. The decrease in revenues in the medical
      products segment is primarily due to the loss of revenue from our primary
      orthopedics coatings customer. Our primary orthopedic coating customer changed
      their product line and phased out our coatings services during the second
      quarter of fiscal 2007.





Revenues
      in the Semiconductor business segment increased by $115,000, or 6% for the
      three
      month period ended March 31, 2007 as compared to the same period of the prior
      year. The increase in our Semiconductor business segment is primarily due to
      an
      increase in sales of our Krytek source conditioning units.





Revenues
      in the security products business segment decreased by $348,000, or 24% for
      the
      three month period ended March 31, 2007 compared to the comparable prior year
      period. The decrease in revenues from this business segment is primarily due
      to
      a decrease in unit sales of our handheld trace explosive detectors. The Company
      did not realize an order of the same magnitude as it had in the three month
      period ended March 31, 2006 for its handheld explosives detection equipment.
      The
      lack of sizable unit orders has been partially offset by increased revenues
      associated with a non-recurring government contract in the explosive detection
      arena. Total revenue recognized from this program was approximately $1,012,000.
      The Company continues to make a significant investment in the development and
      manufacturability of the next generation of explosives detection
      equipment.





17


*Cost
      of Revenues* .
      Cost of
      revenues for the three months ended March 31, 2007 was $3,195,000 as compared
      to
      $4,071,000 for the comparable prior year period, a decrease of $876,000 or
      22%.




**Three
                  months ended March 31,****2007**
              **2006**
              **%****Increase/**
                **(Decrease)**Medical
              $
                  858,000
              $
                  901,000
              (5%)Semiconductor
              1,556,000
              1,600,000
              (3%)Security
                  products
              781,000
              1,570,000
              (50%)Total
              $
                  3,195,000
              $
                  4,071,000
              (22%)




Cost
      of
      revenues for our Medical business segment was $858,000 for the three months
      ended March 31, 2007 as compared to $901,000 for the prior year three month
      period, a decrease of $43,000 or 5%. The decrease in Medical cost of revenue
      relates primarily to the decreased direct labor costs associated with the loss
      of our primary orthopedics coatings customer.





Cost
      of
      revenues for our Semiconductor business segment was $1,556,000 for the three
      months ended March 31, 2007 compared to $1,600,000 for the prior year period,
      representing a decrease of $44,000 or 3%. The decrease in Semiconductor cost
      represents the benefits of consolidating certain of Wakefield’s semiconductor
      processing with Sunnyvale leading to a reduction in direct labor.





Cost
      of
      revenues for our Security Products business segment was $781,000 for the three
      months ended March 31, 2007 as compared to $1,570,000 for the prior year period,
      representing a decrease of $789,000 or 50%. This decrease in cost of revenue
      is
      primarily related to the decrease in the number of units of our handheld trace
      explosive detectors sold.


18




*Gross
      Profit*





**Three
                Months ended March 31, 2007**Medical
            
            Semiconductor
            
            Security
            
            TotalRevenues
            $897,000
            
            $1,898,000
            
            $1,121,000
            
            $3,916,000Cost
                of revenues
            858,000
            
            1,556,000
            
            781,000
            
            3,195,000Gross
                profit
            $
                39,000
            
            $
                342,000
            
            $
                340,000
            
            $721,000Profit %
            4%
            
            18%
            
            30%
            
            18%**Three
                Months ended March 31, 2006**Medical
            
            Semiconductor
            
            Security
            
            TotalRevenues
            $
                1,173,000
            
            $1,783,000
            
            $1,469,000
            
            $4,425,000Cost
                of revenues
            901,000
            
            1,600,000
            
            1,570,000
            
            4,071,000Gross
              profit
            $
                272,000
            
            $
                183,000
            
            $
                (101,000)
            
            $354,000Profit %
            23%
            
            10%
            
            (7%)
            
            8%







Overall
      gross profits were 18% of revenues in the three months ended March 31, 2007
      as compared to an 8% gross profit in the prior year period. A decrease in
      the Medical products gross profit percentage was primarily due to the loss
      of our primary orthopedics coatings customer whose products had a higher margin
      than our other medical products. The increase in the Semiconductor business
      segment gross profit percentage is primarily due to the increase in the
      number of our Krytek source conditioning units which have a higher margin than
      our other semiconductor products and service. The increase in the Security
      business segment is primarily due to the elimination of handheld explosives
      detection device manufacturing costs. Once the initial handheld explosives
      device production run was completed, and the manufacturing process was proven,
      manufacturing was transitioned to a contract manufacturer allowing the Company
      to reduce its manufacturing overhead.





*Research
      and Development* .
      Research and development expense for the three months ended March 31, 2007
      was
      $359,000 as compared to $86,000 for the comparable prior year period, an
      increase of $273,000, or 317%. This increase was primarily due to the Company
      using research and development personnel during the three months ended March
      31,
      2006 on its government contract work and the related expenses were charged
      to
      cost of sales. The Company continues to expend its own funds to further the
      development of new products in the areas of explosives and toxic substance
      detection.





*Selling,
      General and Administrative* .
      Selling, general and administrative expense for the three months ended March
      31,
      2007 was $1,507,000 as compared to $1,634,000 for the comparable prior year
      period, a decrease of $127,000, or 8%. The decrease is primarily due to the
      reclassification of consulting expenses related to the sale of our Accurel
      subsidiary. These charges which were expensed during the previous two quarters
      were reclassified in the current quarter as other prepaids and will be charged
      against the net proceeds of the Accurel sale during the fourth quarter of fiscal
      2007.




19


*Other
      Income and Expenses, Net* .
      For the
      three months ended March 31, 2007, we recorded other expense, net, of $119,000
      as compared to $104,000, in the comparable prior year period an increase in
      other expenses net of $15,000 or 14%. Interest income for the three month period
      ended March 31, 2007 was $12,000 as compared to $17,000 for the same prior
      year
      period. The decrease in interest income is primarily related to a decrease
      in
      cash available for investment during the current period as compared to the
      same
      prior year period. Interest expense in the current year period was $226,000
      compared to $25,000 in the prior year period, an increase of $201,000. The
      increase in interest expense was primarily due to interest related to a
      short-term note with Laurus that began during the current quarter along with
      interest related to a financing arrangement with Bridge Bank that began during
      the current quarter . Other
      income and expense includes a loss of $116,000 for the period ended March 31,
      2006, representing the Company’s share of losses attributable to its investment
      in CorNova, an unconsolidated subsidiary accounted for under the equity method
      of accounting. Other
      income includes $95,000 and $20,000 of income attributable to marking to market
      the embedded derivatives associated with the Series D preferred stock, in the
      periods ended March 31, 2007 and 2006, respectively.




*Net
      Loss.* Net loss
      for the three months ended March 31, 2007 was $1,264,000 as compared with
      $1,470,000 for the comparable prior year period, a decrease in net loss of
      $206,000 or 14%. The decrease in net loss is primarily due to the overall
      improvement in gross margins combined with not having equity losses in the
      current quarter related to the Company’s investment in CorNova, which were
      offset by an increase in interest expense related to new financing
      arrangements with Laurus and Bridge Bank.





Preferred
      distribution, dividends and accretion on Series D Redeemable Convertible
      Preferred Stock were $277,000 in the three months ended March 31, 2007 as
      compared to $391,000 in the prior year period. The Company issued Series D
      Redeemable Convertible Preferred Stock on September 30, 2005.





*Net
      Loss From Discontinued Operations.* Net
      loss
      for the three months ended March 31, 2007 was $628,000 as compared with net
      income of $206,000 in the corresponding prior year period. At March 31, 2007,
      the Company determined that the proceeds from the sale of the assets of Accurel,
      less the related transaction costs were less than the book value of the net
      assets transferred and therefore a loss on the sale of $649,000 was recorded
      in
      the quarter ended March 31, 2007.  On
      May 1,
      2007, the Company will recognize a loss of $487,000, which represents
      the amounts due under the Accurel facility lease in excess of amounts to be
      received from sublease rentals. The facility lease, which will remain an
      obligation of the Company, expires in 2010





*Nine
      Month Period Ended March 31, 2007 vs. March 31, 2006*





*Revenues.* Revenues
      for the nine months ended March 31, 2007 were $12,038,000 as compared to
      $12,872,000 in the nine months ended March 31, 2006, a decrease of $834,000
      or
      6%. Our revenues by business segment are as follows:




**Nine
                    months ended March 31,****2007**
                **2006**
                **%****Increase/**
                  **(Decrease)**Medical
                $
                    3,095,000
                $
                    3,313,000
                (7%)Semiconductor
                5,436,000
                4,475,000
                21%Security
                    products
                3,507,000
                5,084,000
                (31%)Total
                $
                    12,038,000
                $
                    12,872,000
                (6%)




Revenues
      in the Medical segment were $3,095,000 in the nine month period ended March
      31,
      2007 as compared to $3,313,000 in the same prior year period, a decrease of
      $218,000, or 7%. This decrease is primarily due to the loss of the Company’s
      primary orthopedics coatings customer during the second quarter of 2007.
      Revenues in the Semiconductor business segment increased by $961,000 or 21%
      over
      the comparable prior year period. This increase comes from the increased Krytek
      source conditioner unit sales combined with a general increase in semiconductor
      revenues from our California subsidiary Core systems. Revenues in the Security
      products business segment were $3,507,000 in the nine month period ended March
      31, 2007 as compared to $5,084,000 in the same prior year period, a decrease
      of
      $1,577,000 or 31%. This decrease is the result of the completion and shipment
      of
      a significant order of t he
      Company’s explosives detection equipment to a customer in China in the
      comparable prior year period. The Company has not realized an order of the
      same
      magnitude as it had in the nine month period ended March 31, 2006. The lack
      of
      sizeable unit orders has been partially offset by the award and performance
      of a
      new government contract in the explosives detection arena.





*Cost
      of Revenues* .
      Cost of
      revenues for the nine months ended March 31, 2007 was $9,898,000 as compared
      to
      $12,239,000 for the comparable prior year period, a decrease of $2,341,000
      or
      19%.




**Nine
                  months ended March 31,****2007**
              **2006**
              **%****Increase/**
                **(Decrease)**Medical
              $
                  2,642,000
              $
                  2,690,000
              (2%)Semiconductor
              4,699,000
              4,660,000
              1%Security
                  products
              2,557,000
              4,889,000
              (48%)Total
              $
                  9,898,000
              $12,239,000
              (19%)




Cost
      of
      revenues for our Medical business unit was $2,642,000 for the nine months ended
      March 31, 2007 as compared to $2,690,000 for the prior year nine month period,
      a
      decrease of $48,000 or 2%. This decrease in cost is primarily related to the
      decreased sales levels in the Medical group related to the loss of the Company’s
      major orthopedics coating customer during the second quarter of 2007 which
      in
      turn reduced the direct labor costs.





20


Cost
      of
      revenues for our Semiconductor business segment remained virtually unchanged
      when comparing with the prior year period even though Semiconductor revenue
      showed a $961,000 increase. Having little change in the Semiconductor cost
      of
      revenues while increasing revenues is due in part to the high fixed costs
      associated with the semiconductor segment. Utilizing the excess capacity of
      the
      semiconductor wafer processing equipment causes minimal variable cost increases.
      Cost of revenues for our Security Products segment was $2,557,000 for the nine
      months ended March 31, 2007 as compared to $4,889,000 for the prior year period
      representing a decrease of $2,332,000 or 48%. This decrease relates directly
      to
      the variable costs associated with the delivery of a significant order of
      handheld explosives detectors in the comparable prior year period.








*Gross
      Profits*





**Nine
                Months ended March 31, 2007**Medical
            
            Semiconductor
            
            Security
            
            TotalRevenues
            $
                3,095,000
            
            $
                5,436,000
            
            $
                3,507,000
            
            $12,038,000Cost
                of revenues
            2,642,000
            
            4,699,000
            
            2,557,000
            
            9,898,000Gross
                profit
            $
                453,000
            
            $
                737,000
            
            $
                950,000
            
            $
                2,140,000Profit
                %
            15%
            
            14%
            
            27%
            
            18%**Nine
                Months ended March 31, 2006**Medical
            
            Semiconductor
            
            Security
            
            TotalRevenues
            $
                3,313,000
            
            $
                4,475,000
            
            $
                5,084,000
            
            $12,872,000Cost
                of revenues
            2,690,000
            
            4,660,000
            
            4,889,000
            
            12,239,000Gross
              profit
            $
                623,000
            
            $
                (185,000)
            
            $
                195,000
            
            $
                633,000Profit %
            19%
            
            (4%)
            
            4%
            
            5%







Overall
      gross profits were 18% of revenues in the nine months ended March 31, 2007
      as
      compared to a 5% gross profit in the prior year period. Our Medical
      products business segments gross profit percentage was 15% for the nine
      months ended March 31, 2007 as compared to 19% for the same prior year period.
      This decrease in gross profit percentage is a result of the Company losing
      its major orthopedics coating customer which generally had higher gross margins
      than our other Medical products. Semiconductor segment gross
      profits improved from (4%) to 14%, as revenues increased at our California
      subsidiary Core Systems. Core System’s gross profit percentage increase was
      partially due to having sold more Krytek source conditioning units in the
      current nine month period than the prior year period. The Krytek units generally
      have a higher gross margin than our other semiconductor products and services.
      The improvement from a 4% gross profit to an 27% gross profit in security
      products is due primarily to the elimination of handheld explosives detection
      device manufacturing costs. In the prior year period the Company’s handheld
      explosives detection device manufacturing capability was being built up to
      provide a high volume production run. Once the initial handheld explosives
      device production run was completed, and the manufacturing process was proven,
      manufacturing was transitioned to a contract manufacturer allowing the Company
      to reduce its manufacturing overhead.





*Research
      and Development* .
      Research and development expense for the nine months ended March 31, 2007 was
      $1,359,000 as compared to $894,000 for the comparable prior year period, an
      increase of $465,000, or 52%. The Company continues to expend funds to further
      the development of new products in the areas of explosives and toxic substance
      detection. In addition, the increase in research and development expenses
      relates to the volume and timing of customer funded programs, primarily through
      government grants and contracts. The Company charges its research and
      development personnel to cost of revenues for work performed on these contracts
      and grants. Research and development expenses prior to starting the government
      contracts are charged to operating expenses.





*Selling,
      General and Administrative* .
      Selling, general and administrative expense for the nine months ended March
      31,
      2007 was $4,888,000 as compared to $5,441,000 for the comparable prior year
      period, a decrease of $553,000, or 10%. The decrease is primarily due to a
      reduction in stock based compensation and commission expense paid in conjunction
      with the sale of our handheld explosives detection equipment combined with
      a
      decrease in outside consulting expenses. In addition, the Company recorded
      an
      impairment loss of $37,000 relating to the disposal of capital equipment taken
      out of service in the period ended December 31, 2006.




*Other
      Income and Expenses, Net* .
      For the
      nine months ended March 31, 2007, we recorded other income, net, of $383,000
      as
      compared to $561,000, in the comparable prior year period, a decrease of
      $178,000 or 32%. Interest income for the nine month period ended March 31,
      2007
      was $24,000 as compared to $34,000 for the same prior year period. The decrease
      in interest income is primarily related to a decrease in cash available for
      investment during the current period as compared to the same prior year period.
      Interest expense in the current nine month period was $283,000 compared to
      $140,000 in the prior year period, an increase of $143,000. The increase in
      interest expense was primarily due to interest related to a short-term note
      with
      Laurus along with interest related to a financing arrangement with Bridge Bank
      that both began during the third quarter of 2007. Other income and expense
      includes a loss of $158,000 and $240,000 for the nine month period ended March
      31, 2007 and 2006, respectively, representing the Company’s share of losses
      attributable to its investment in CorNova, an unconsolidated subsidiary
      accounted for under the equity method of accounting. Other
      income includes $800,000 and $911,000 of income attributable to fair value
      adjustments of the embedded derivatives associated with the Series D preferred
      stock, in the periods ended March 31, 2007 and 2006, respectively.




21


*Net
      Loss.* Net loss
      for the nine months ended March 31, 2007 was $3,761,000 as compared with
      $5,141,000 for the comparable prior year period, a decrease in net loss of
      $1,380,000 or 27%. The decrease in net loss is primarily due to the overall
      improvement in gross margins combined with equity losses related to the
      Company’s investment in CorNova ending during the second quarter of 2007, which
      were offset by an increase in interest expense related to new financing
      arrangements during 2007 with Laurus and Bridge Bank.





Preferred
      distribution, dividends and accretion on Series D Redeemable Convertible
      Preferred Stock were $658,000 in the nine months ended March 31, 2007 as
      compared to $778,000 in the prior year period. The Company issued Series D
      Redeemable Convertible Preferred Stock on September 30, 2005.





*Net
      Loss From Discontinued Operations.* Net
      loss
      for the nine months ended March 31, 2007 was $139,000 as compared with a net
      income of $576,000 in the corresponding prior year period. At March 31, 2007,
      the Company determined that the proceeds from the sale of the assets of Accurel,
      less the related transaction costs were less than the book value of the net
      assets transferred and therefore a loss on the sale of $649,000 was recorded
      in
      the quarter ended March 31, 2007.  On
      May 1,
      2007, the Company will recognize a loss of $487,000, which represents
      the amounts due under the Accurel facility lease in excess of amounts to be
      received from sublease rentals. The facility lease, which will remain an
      obligation of the Company, expires in 2010








**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      of
      March 31, 2007, the Company had approximately $1,731,000 in the form of cash
      and
      cash equivalents. During the nine months ended March 31, 2007, operating
      activities used cash of approximately $1,149,000. Net cash used by operating
      activities primarily reflects the $3,900,000 net loss, increased by a
      non-cash gain of $800,000, related to the change in fair value of derivatives,
      and reduced by non-cash charges of $1,175,000 in depreciation and amortization,
      $649,000 related to an impairment charge on the sale of assets of the Company’s
      Accurel subsidiary, $967,000 related to the change in net assets held for sale,
      $925,000 of share-based compensation expense and $184,000 in equity loss in
      unconsolidated subsidiaries. The Company has approximately $1,082,000 of raw
      materials and finished goods inventories related to its handheld explosives
      detection product. This inventory was built in anticipation of future shipments
      of this product to customers. Orders for the explosives detection product to
      date have typically been from foreign governments or agencies of foreign
      governments. The sales cycle to these entities can take a number of months
      to;
      close the order, set up letters of credit from the customer covering the
      payment, and obtain the necessary export licenses and other required
      documentation. Expected future shipments of these products, in the near term,
      can be accomplished with no further investment in inventories and current levels
      of inventory are expected to decrease. Investing activities used $402,000 of
      cash primarily for investment in, or deposits on property and equipment.
      Financing activities consist of, $1,440,000 of proceeds from a note from Laurus,
      $1,600,000 in proceeds in a note from Bridge Bank, offset by $1,943,000 in
      cash
      payments on bank loans, lines of credit and capital leases and by $440,000
      in
      cash dividends paid to the holders of the Series D preferred stock.





On
      December 29, 2006, the Company executed a $1.5 million secured term note (the
      “Note”) payable to Laurus. The Company received $1,500,000 in gross proceeds,
      less a management fee of $60,000 and related transaction costs of approximately
      $500. The term note is collateralized by substantially all of the Company’s
      assets and two of its subsidiaries, has a 9-month term and bears interest at
      a
      rate equal to prime plus 1% per annum. The Note contains certain restrictive
      and
      financial covenants. In connection with the financing, the Company issued Laurus
      a warrant to purchase up to 458,000 shares of the Company’s common stock at a
      price equal to $2.50 per share. Net
      cash
      proceeds from this financing were $1,439,500 and were used for general working
      capital. This Note was paid in full on May 1, 2007, in conjunction with the
      sale
      of the assets of Accurel Systems.




On
      January 3, 2007, the Company executed an Amended and Restated Loan and Security
      Agreement (the “Loan Agreement”) which amended and restated the terms of a
      Business Financing Agreement originally dated as of June 1, 2005 with Silicon
      Valley based Bridge Bank, N.A. (the “Bank”) increasing the revolving credit
      facility from $1.5 million to $5.0 million. This revolving credit facility
      (the
“line of credit”) has a two year term, provides for advances of up to eighty
      percent (80%) of the Company’s eligible accounts receivable and up to the lesser
      of $1,000,000 or forty percent (40%) of eligible inventory, bears interest
      at
      the prime rate, plus one-half percent (1/2%) per annum, and is secured by all
      assets of the Company.




In
      conjunction with this financing, the Company drew from funds available on the
      line of credit and paid in full the outstanding term loan balance of
      approximately $623,000 at Comerica Bank. In addition, pursuant to the terms
      of
      the Loan Agreement, the Company converted $1,600,000 of the outstanding line
      of
      credit balance into a 30 month term note bearing an interest rate at the prime
      rate plus one percent (1%) per annum payable in thirty (30) equal monthly
      installments of principal, plus all accrued interest beginning on February
      10,
      2007.





May
      1999,
      we have been developing several explosive detection systems that could be used
      in airports, public and government buildings, and sporting event facilities.
      The
      systems use our proprietary Laser IMS technology, which includes the use of
      laser beams in combination with ion mobility spectrometry, to electronically
      detect minute quantities of explosive vapor molecules in the air.





We
      are
      currently expending significant resources to develop the next generation of
      our
      current product and to develop new products. Although we continue to fund as
      much research and development as possible through government grants and
      contracts in accordance with the provisions of the respective grant awards
      we
      will require additional funding in order to continue the advancement of the
      commercial development and manufacturing of the explosives detection system.
      We
      will attempt to obtain such financing by: (i) government grants, (ii) private
      financing, or (iii) strategic partnerships. However, there can be no assurance
      that we will be successful in our attempts to raise such additional
      financing.





Consistent
      with our policy to protect our proprietary technologies, we have been awarded
      six patents and have submitted an additional six patent applications to the
      United States Patent and Trademark Office. These patents and applications will
      cover specific design configurations that are responsible for our improved
      vapor
      detection sensitivity.





22


We
      will
      require substantial funds for further research and development, regulatory
      approvals and the marketing of our explosives detection products. Our capital
      requirements depend on numerous factors, including but not limited to, the
      progress of our research and development programs; the cost of filing,
      prosecuting, defending and enforcing any intellectual property rights; competing
      technological and market developments; changes in our development of
      commercialization activities and arrangements; and the hiring of additional
      personnel and capital equipment.





Based
      on
      the current sales, expense and cash flow projections, including cash flows
      generated from the subsequent sale of its Accurel subsidiary in May 2007, the
      Company believes that the current level of cash and cash-equivalents on hand,
      the net proceeds from its revolving line of credit and the funds remaining
      on a
      contract received from the U.S. Army in August 2006, will be sufficient to
      fund
      operations for the next twelve months. However, because there can be no
      assurances that sales will materialize as forecasted, management will continue
      to closely monitor and attempt to control costs at the Company and will continue
      to actively seek the needed capital through government grants and awards,
      strategic alliances, private financing sources, and through its lending
      institutions. Future expenditures for research and product development,
      especially relating to outside testing, are discretionary and, accordingly,
      can
      be adjusted, as can certain selling, general and administrative expenses, based
      on the availability of cash. The financial statements do not include any
      adjustments relating to the recoverability and classification of asset amounts
      or the amounts and classification of liabilities that might be necessary should
      the Company be unable to continue as a going concern.





The
      Company’s future minimum payments under contractual obligations related to
      capital leases, operating leases and term notes as of March 31, 2007 are as
      follows:





**Debt
                and Capital**
              **Lease(1)**
            
            **Operating
                Lease(1)(2)**
            
            **MED-TEC**
            
            **Total**2007
            
            $1,507,000
            
            $
                388,000
            
            $
                193,000
            
            $2,088,0002008
            
            2,226,000
            
            1,464,000
            
            -
            
            3,690,0002009
            
            3,230,000
            
            1,201,000
            
            -
            
            4,431,0002010
            
            15,000
            
            578,000
            
            -
            
            593,0002011
            
            2,000
            
            84,000
            
            -
            
            86,000Total
            
            $
                6,980,000
            
            $
                3,715,000
            
            $
                193,000
            
            $10,888,000




(1)
      Payments
      include interest


(2)
      Adjusted
      for sublease





*Critical
      Accounting Policies*




Our
      significant accounting policies are described in Note 2 to the financial
      statements included in Item 7 of our Form 10-K as of June 30, 2006. Our
      discussion and analysis of our financial condition and results of operations
      are
      based upon the financial statements, which have been prepared in accordance
      with
      accounting principles generally accepted in the United States. The preparation
      of these financial statements requires us to make estimates and judgments that
      affect the reported amounts of assets, liabilities, revenues and expenses,
      and
      related disclosure of contingent assets and liabilities. On an on-going basis,
      we evaluate our estimates, including those related to bad debts, product
      returns, inventories, investments, intangible assets and warranty obligations.
      We base our estimates on historical experience and on various other assumptions
      that are believed to be reasonable under the circumstances, the results of
      which
      form the basis for making judgments about the carrying values of assets and
      liabilities that are not readily apparent from other sources. In the past,
      actual results have not been materially different from our estimates. However,
      results may differ from these estimates under different assumptions or
      conditions. We adopted SFAS No. 142 and, accordingly, goodwill and other
      intangible assets with indefinite lives are no longer amortized, but rather
      such
      assets are subject to annual impairment reviews or more frequently, if events
      or
      circumstances indicate that they may be impaired.





****


**ITEM
      3.**  **QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





The
      Company’s financial instruments include cash and cash equivalents. Cash and cash
      equivalents include cash on hand, demand deposits and short-term investments
      with maturities of three months or less when acquired. Cash equivalents
      represent a deposit in a money market account and a certificate of deposit.
      The
      Company does not utilize derivative financial instruments, derivative commodity
      instruments or other market risk sensitive instruments, positions or
      transactions in any material fashion. The principal objective of the Company’s
      asset management activities is to maximize net investment income, while
      maintaining acceptable levels of interest rate risk and facilitating its funding
      needs. At March 31, 2007, the carrying values of the Company’s financial
      instruments approximated fair values based upon current market prices and
      rates.





**ITEM
      4. CONTROLS AND PROCEDURES**





EVALUATION
      OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS




As
      of the
      end of the period covered by this quarterly report, we evaluated the
      effectiveness of the design and operation of our disclosure controls and
      procedures ("Disclosure Controls") and our internal controls and procedures
      for
      financial reporting ("Internal Controls"). This evaluation (the "Controls
      Evaluation") was done under the supervision and with the participation of our
      management, including our Chief Executive Officer ("CEO") and Chief Financial
      Officer ("CFO"). Rules adopted by the SEC require that in this section of the
      Annual Report, we present the conclusions of our CEO and the CFO about the
      effectiveness of our Disclosure Controls and Internal Controls based on and
      as
      of the date of the Controls Evaluation.


23





CEO
      AND
      CFO CERTIFICATIONS




Appearing
      as exhibits to this Annual Report are "Certifications" of the CEO and the CFO.
      The Certifications are required pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 (the "Section 302 Certifications"). This section of the Annual
      Report contains information concerning the Controls Evaluation referred to
      in
      the Section 302 Certifications and this information should be read in
      conjunction with the Section 302 Certifications for a more complete
      understanding of the topics presented.





DISCLOSURE
      CONTROLS AND INTERNAL CONTROLS




Disclosure
      Controls are procedures that are designed with the objective of ensuring that
      information required to be disclosed in our reports filed under the Securities
      Exchange Act of 1934 ("Exchange Act"), such as this Annual Report, is recorded,
      processed, summarized and reported within the time periods specified in the
      SEC's rules and forms. Disclosure Controls are also designed with the objective
      of ensuring that such information is accumulated and communicated to our
      management, including the CEO and CFO, as appropriate, to allow timely decisions
      regarding required disclosure. Internal Controls are procedures which are
      designed with the objective of providing reasonable assurance that (1) our
      transactions are properly authorized, recorded and reported; and (2) our assets
      are safeguarded against unauthorized or improper use, to permit the preparation
      of our financial statements in conformity with generally accepted accounting
      principles.





LIMITATIONS
      ON THE EFFECTIVENESS OF CONTROLS




Our
      management, including the CEO and CFO, has concluded that our disclosure
      controls and procedures are designed to provide reasonable assurance of
      achieving their objectives and have concluded that the controls and procedures
      are effective at that reasonable assurance level.





SCOPE
      OF
      THE CONTROLS EVALUATION




The
      CEO/CFO evaluation of our Disclosure Controls and Internal Controls included
      a
      review of the controls' objectives and design, the controls’ implementation by
      us and the effect of the controls on the information generated for use in this
      Annual Report. In the course of the Controls Evaluation, management sought
      to
      identify data errors, controls problems or acts of fraud and to confirm that
      appropriate corrective action, including process improvements, were being
      undertaken. This type of evaluation will be done on a quarterly basis so that
      the conclusions concerning controls effectiveness can be reported in our
      Quarterly Reports on Form 10-Q and Annual Report on Form 10-K. The overall
      goals
      of these various review and evaluation activities are to monitor our Disclosure
      Controls and Internal Controls and to make modifications as necessary; our
      intent in this regard is that the Disclosure Controls and the Internal Controls
      will be maintained as dynamic systems that change (including with improvements
      and corrections) as conditions warrant.




Among
      other matters, management sought in its evaluation to determine whether there
      were any "significant deficiencies" or "material weaknesses" in our Internal
      Controls, or whether we had identified any acts of fraud involving personnel
      who
      have a significant role in our Internal Controls. In the professional auditing
      literature, "significant deficiencies" are referred to as “reportable
      conditions;” these are control issues that could have a significant adverse
      effect on the ability to record, process, summarize and report financial data
      in
      the financial statements. A "material weakness" is defined in the auditing
      literature as a particularly serious reportable condition where the internal
      control does not reduce to a relatively low level the risk that misstatements
      caused by error or fraud may occur in amounts that would be material in relation
      to the financial statements and not be detected within a timely period by
      employees in the normal course of performing their assigned
      functions.





CONCLUSIONS




Based
      upon the Controls Evaluation, our CEO and CFO have concluded that, as of the
      end
      of the period covered by this quarterly report, our Disclosure Controls are
      effective to provide reasonable assurance that our financial statements are
      fairly presented in conformity with generally accepted accounting principles.




In
      June
      2006, our independent auditors reported to our Audit Committee certain matters
      involving internal controls that our independent auditors considered to be
      a
      significant deficiency. A significant deficiency is a control deficiency or
      combination of control deficiencies, that adversely affects the company’s
      ability to initiate, authorize, record, process, or report external financial
      data reliably in accordance with generally accepted accounting principles such
      that there is more than a remote likelihood that a misstatement of the company’s
      annual or interim financial statements that is more than inconsequential will
      not be prevented or detected.





The
      reportable condition related primarily to the closing and financial reporting
      process.  Management is confident that our financial statements for
      the period ended March 31, 2007 fairly present, in all material respects, our
      financial condition and results of operations.





The
      reportable condition has been discussed in detail among management, our Audit
      Committee and our independent auditors, and we are committed to addressing
      and
      resolving these matters fully and promptly, by putting in place the personnel,
      processes, technology and other resources appropriate to support our financial
      close processes. As part of this commitment, in the second quarter of our fiscal
      year ended June 30, 2007, we used the services of an outside consultant to
      begin
      evaluating our closing and financial reporting process. The consultant will
      make
      recommendations to management to improve these processes.





24


**PART
      II**  **OTHER
      INFORMATION**





**Item
      1.**   **Legal
      Proceedings**





From
      time
      to time, we are subject to various claims, legal proceedings and investigations
      covering a wide range of matters that arise in the ordinary course of our
      business activities. Each of these matters is subject to various uncertainties.





On
      or
      about March 8, 2006, the Company commenced an arbitration under the Rules of
      the
      American Arbitration Association against Respondents Majid Ghafghaichi (“Majid”)
      and Vahe Sarkissisian (“Vahe”), seeking a total of $3,994,000 for
      indemnification of various “Losses,” as defined in, and expressly allowed
      pursuant to, a Stock Purchase Agreement dated March 9, 2005 (the “Agreement”),
      between the Company, as the purchaser, Accurel Systems International Corporation
      (“Accurel), and  Majid and Vahe, as the sellers of 100% of the issued and
      outstanding shares of Accurel stock.





More
      specifically, there are four claims asserted by the Company against Respondents:
      (1) Damages of $3.4 million resulting from misrepresentations concerning the
      loss of business from a key Accurel customer; (2) unauthorized withdrawals
      in
      the amount of approximately $276,000 from Accurel by the Respondents prior
      to
      the closing; (3) approximately $49,000 of disallowed transaction expenses that
      the Respondents improperly received; and (4) undisclosed net liabilities
      totaling approximately $269,000.





Respondents
      have asserted counterclaims seeking “an aggregate amount in excess of
      $1,750,000,” based on the allegedly “late payment” to Respondents of Company
      stock and a Secured Promissory Note as part of the consideration for their
      sale
      of Accurel stock.  The Company has filed a detailed denial of all
      counterclaims.





On
      April
      11, 2007, the Company and the Respondents executed a Settlement
      and Mutual Release Agreement dismissing the claims and counterclaims.





On
      March
      23, 2005, we entered into a Development, Distribution and Manufacturing
      Agreement (the “Rapiscan Agreement”) with Rapiscan Systems, Inc.
      (“Rapiscan”).  Under the terms of this agreement, we gave Rapiscan the
      exclusive worldwide rights to market our Quantum Sniffer TM portable
      and benchtop trace detection devices under their private label.  We also
      agreed to give Rapiscan the exclusive worldwide rights to distribute certain
      other new security products which we may develop in the future with their
      funding, as well as rights, in some circumstances, to manufacture certain
      components of the Quantum Sniffer TM portable
      and benchtop trace detection devices that they are able to sell.





On
      March 24,
      2006, the Company brought suit in the United States District Court in the
      District of Massachusetts against Rapiscan and its parent, OSI Systems, Inc.
      (“OSI”). The Company is requesting rescission of the Rapiscan Agreement, for
      lack of performance and other grounds. In the alternative, the Company is
      seeking termination of the Rapiscan Agreement due to material breaches of
      contract and implied covenant of good faith and fair dealing and for damages
      due
      to Rapiscan’s breach of contract and the implied covenant of good faith and fair
      dealing.





On
      March
      27, 2006, the Company received notice that Rapiscan filed a complaint against
      the Company in the United States District Court for the Central District of
      California, regarding the Rapiscan Agreement. Rapiscan’s complaint against the
      Company is based upon claims of breach of contract and breach of warranty and
      is
      requesting a decree for specific performance, declaratory relief and injunctive
      relief.





As
      of
      August 18, 2006, as a result of motions made by both parties, the two lawsuits
      have been consolidated in the United States District Court for the Central
      District of California with the Company as plaintiff. Presently, discovery
      is in
      process. Rapiscan and OSI have filed a motion to dismiss certain of the
      Company’s claims. As of October 30, 2006, the court has ruled that the Company’s
      claim of breach of fiduciary duty was dismissed but OSI’s motion to dismiss all
      other claims was denied. The
      litigants are presently in the discovery process which should be completed
      by
      July 2007. Trial is expected in early 2008.




Should
      the Company be unsuccessful in prosecuting this matter, it may have a material
      adverse effect on its business and results of operations. No revenue has been
      recorded related to the Rapiscan Agreement.




We
      may,
      from time to time, be involved in other actual or potential proceedings that
      we
      consider to be in the normal course of our business. We do not believe that
      any
      of these proceedings will have a material adverse effect on our
      business.





25


**Item
      1a**   **Risk
      Factors**





An
      investment in our securities involves a high degree of risk. There have been
      no
      material changes to the risk factors previously disclosed in the Company's
      Annual Report on Form 10-K for the fiscal year ended June 30, 2006. You should
      consider carefully all of the material risks described in the Form 10-K,
      before making a decision to invest in our securities. If any of the events
      described therein occur, our business, financial conditions and results of
      operations may be materially adversely affected. In that event, the trading
      price of our securities could decline, and you could lose all or part of your
      investment.







**Item
      2.**   **Unregistered
      Sales of Equity Securities and Use of Proceeds**





Not
      applicable.





**Item
      3.**   **Defaults
      Upon Senior Securities**





Not
      applicable.




**Item
      4.**   **Submission
      of Matters to a Vote of Security Holders**





Not
      applicable.








**Item
      5.**   **Other
      Information**




None





**Item
      6.**   **Exhibits**





The
                following exhibits, required by Item 601 of Regulation S-K, are filed
                as
                part of this Quarterly Report on Form 10-Q. Exhibit numbers, where
                applicable, in the left hand column correspond to those of Item 601
                of
                Regulation S-K.




Exhibit
                No.
            Description31.1
            
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2
            
            Certification
                of the Chief Financial Officer Pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            
            Certification
                of the Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2
            
            Certification
                of the Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted
                Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





26


SIGNATURES




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




Implant
      Sciences Corporation




Date:
      May
      21, 2007  
      /s /
      Anthony J. Armini


Anthony
      J.
      Armini


President
      and
      CEO









Date:
      May
      21, 2007 /s/ Diane
      J. Ryan


Diane
      J. Ryan


VF
      Finance and
      CFO