**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 December 31,
                  2006.[
                  ]
              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
              American
                  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 $24,914,000 as of February 12, 2007. (based
        on the
        closing price for such stock as of February 12, 2007).
 
 Indicate
        the number of shares outstanding of each of the issuer's classes of common
        stock:
 
 Class
              Outstanding
                  at February 12, 2007Common
                  Stock, $.10 par value
              11,800,811
 
 
 
  **IMPLANT
        SCIENCES CORPORATION**
 
 **INDEX**
 
 Page
                  No.PART
                  I. FINANCIAL INFORMATIONItem
                  1.
              Financial
                  Statements (unaudited):Condensed
                  Consolidated Balance Sheets as of December 31, 2006 and June 30,
                  2006
              3Condensed
                  Consolidated Statements of Operations for the Three and Six Months
                  Ended
                  December 31, 2006 and 2005
              4Condensed
                  Consolidated Statements of Cash Flows for the Six Months Ended
                  December
                  31, 2006 and 2005
              5Notes
                  to Condensed Consolidated Financial Statements
              6Item
                  2.
              Management's
                  Discussion and Analysis of Financial Condition
                and
                  Results of Operations
              18Item
                  3.
              Quantitative
                  and Qualitative Disclosure About Market Risk
              25Item
                  4.
              Controls
                  and Procedures
              25PART
                  II. OTHER INFORMATIONItem
                  1.
              Legal
                  Proceedings
              27Item
                  1A
              Risk
                  Factors
              28Item
                  2.
              Unregistered
                  Sales of Equity Securities
              28Item
                  3.
              Defaults
                  Upon Senior Securities
              28Item
                  4.
              Submission
                  of Matters to a Vote of Security-Holders
              28Item
                  5.
              Other
                  Information
              29Item
                  6.
              Exhibits
                  and Reports on Form 8-K
              29Signatures
              30
  2
  
 **IMPLANT
                  SCIENCES CORPORATION****CONDENSED
                  CONSOLIDATED BALANCE SHEETS**(unaudited)**December
                  31,**
              
              **June
                  30,****ASSETS**
              
              **2006**
              
              **2006**Current
                  assets:Cash
                  and cash equivalents
              
              $
              304,000
              
              $
              2,204,000Restricted
                  cash
              
              
              264,000
              
              
              -Accounts
                  receivable, net of allowance of $117,000 and $121,000 at December
                  31,
                  2006
                and
                  June 30, 2006, respectively
              
              
              4,373,000
              
              
              3,658,000Accounts
                  receivable, unbilled
              
              
              181,000
              
              
              43,000Other
                  receivable
              
              
              1,439,000
              
              
              -Inventories
              
              
              1,415,000
              
              
              1,532,000Investments
                  - available for sale securities
              
              
              221,000
              
              
              222,000Prepaid
                  expenses and other current assets
              
              
              316,000
              
              
              505,000Total
                  current assets
              
              
              8,513,000
              
              
              8,164,000Property
                  and equipment, net
              
              
              8,504,000
              
              
              8,909,000Amortizable
                  intangible assets, net
              
              
              1,374,000
              
              
              1,620,000Investment
                  in unconsolidated subsidiary
              
              
              -
              
              
              174,000Other
                  non-current assets
              
              
              456,000
              
              
              229,000Goodwill
              
              
              11,666,000
              
              
              11,666,000Total
                  assets
              
              $
              30,513,000
              
              $
              30,762,000**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Current
                  maturities of long-term debt and obligations under capital
                  lease
              
              $
              1,561,000
              
              $
              420,000Line
                  of credit
              
              
              966,000
              
              
              1,000,000Payable
                  to Med-Tec
              
              
              233,000
              
              
              233,000Accrued
                  expenses
              
              
              1,797,000
              
              
              1,985,000Accounts
                  payable
              
              
              2,126,000
              
              
              1,699,000Current
                  portion of long- term lease liability
              
              
              138,000
              
              
              126,000Deferred
                  revenue
              
              
              543,000
              
              
              479,000Total
                  current liabilities
              
              
              7,364,000
              
              
              5,942,000Long-term
                  liabilities:Long-term
                  debt and obligations under capital lease, net of current maturities
              
              
              1,053,000
              
              
              692,000Long-term
                  lease liability
              
              
              503,000
              
              
              575,000Derivatives
                  related to preferred stock features
              
              
              389,000
              
              
              1,094,000Total
                  liabilities
              
              
              9,309,000
              
              
              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
                  December 31, and June 30, 2006
              
              
              2,602,000
              
              
              2,568,000Stockholders'
                  equity :Common
                  stock, $0.10 par value; 50,000,000 shares authorized; 11,800,811
                  and
                  11,733,804 shares issued at December 31 and June 30, 2006, respectively;
                  11,775,558 and 11,706,810 shares outstanding, at December 31 and
                  June 30,
                  2006, respectively
              
              
              1,180,000
              
              
              1,173,000Additional
                  paid-in capital
              
              
              56,423,000
              
              
              55,284,000Accumulated
                  deficit
              
              
              (38,680,000
              )
              
              (36,290,000
              )Deferred
                  compensation
              
              
              (54,000
              )
              
              (17,000
              )Notes
                  receivable, employees
              
              
              (45,000
              )
              
              (37,000
              )Accumulated
                  other comprehensive income (loss)
              
              
              (3,000
              )
              
              14,000Treasury
                  stock, 25,253 and 26,994 common shares at December 31, and June
                  30, 2006,
                  respectively, at cost
              
              
              (219,000
              )
              
              (236,000
              )Total
                  stockholders' equity
              
              
              18,602,000
              
              
              19,891,000Total
                  liabilities and stockholders' equity
              
              $
              30,513,000
              
              $
              30,762,000
 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 December 31,**
                
                **Six
                    Months Ended December 31,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Revenues:Medical
                $
                    1,038,000
                
                $
                    991,000
                
                $
                    2,198,000
                
                $
                    2,140,000Semiconductor
                4,175,000
                
                3,334,000
                
                8,114,000
                
                6,456,000Security
                    products
                1,905,000
                
                3,215,000
                
                2,386,000
                
                3,616,000Total
                    revenues
                7,118,000
                
                7,540,000
                
                12,698,000
                
                12,212,000Cost
                    of revenues:Cost
                    of medical revenues
                934,000
                
                829,000
                
                1,784,000
                
                1,788,000Cost
                    of semiconductor revenues
                3,215,000
                
                2,940,000
                
                6,264,000
                
                5,637,000Cost
                    of security products revenues
                1,160,000
                
                2,297,000
                
                1,776,000
                
                3,319,000Total
                    cost of revenues
                5,309,000
                
                6,066,000
                
                9,824,000
                
                10,744,000Gross
                    margin
                1,809,000
                
                1,474,000
                
                2,874,000
                
                1,468,000Operating
                    expenses:Research
                    and development
                433,000
                
                492,000
                
                1,000,000
                
                808,000Selling,
                    general and administrative
                2,313,000
                
                2,665,000
                
                4,276,000
                
                4,590,000Impairment
                    of long-lived assets
                37,000
                
                -
                
                37,000
                
                -Total
                    operating expenses
                2,783,000
                
                3,157,000
                
                5,313,000
                
                5,398,000Loss
                    from operations
                (974,000)
                
                (1,683,000)
                
                (2,439,000)
                
                (3,930,000)Other
                    income (expenses):Interest
                    income
                8,000
                
                17,000
                
                12,000
                
                28,000Interest
                    expense
                (78,000)
                
                (74,000)
                
                (127,000)
                
                (166,000)Equity
                    losses in unconsolidated subsidiaries
                (38,000)
                
                (84,000)
                
                (158,000)
                
                (124,000)Change
                    in fair value of embedded derivatives related to preferred stock
                    features
                685,000
                
                891,000
                
                705,000
                
                891,000Total
                    other income, net
                577,000
                
                750,000
                
                432,000
                
                629,000Net
                    loss
                (397,000)
                
                (933,000)
                
                (2,007,000)
                
                (3,301,000)Preferred
                    distribution, dividends and accretion
                (44,000)
                
                (387,000)
                
                (381,000)
                
                (387,000)Net
                    loss applicable to common shareholders
                $
                    (441,000)
                
                $
                    (1,320,000)
                
                $
                    (2,388,000)
                
                $
                    (3,688,000)Net
                    loss per share applicable to common shareholders, basic and
                    diluted
                $
                    (0.04)
                
                $
                    (0.12)
                
                $
                    (0.20)
                
                $
                    (0.33)Weighted
                    average common shares outstanding used in computing basic and
                    diluted loss
                    per share
                11,775,557
                
                11,379,275
                
                11,768,986
                
                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)****Six
                  Months Ended**
                **December
                  31, 2006****Cash
                  flows from operating activities:**
              
              **2006**
              
              **2005**Net
                  loss
              
              $
              (2,007,000
              )
              $
              (3,301,000
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              1,221,000
              
              
              1,168,000Amortization
                  of intangible assets
              
              
              246,000
              
              
              414,000Share-based
                  compensation expense
              
              
              534,000
              
              
              1,458,000Equity
                  loss in unconsolidated subsidiaries
              
              
              175,000
              
              
              124,000Change
                  in fair value of embedded derivatives
              
              
              (705,000
              )
              
              (891,000
              )Loss
                  on equipment sale or writedown
              
              
              37,000
              
              
              43,000Accretion
                  of Series D interest
              
              
              -
              
              
              40,000Bad
                  debt expense
              
              
              (21,000
              )
              
              -Deferred
                  compensation
              
              
              (37,000
              )
              
              -Changes
                  in operating assets and liabilities, net of effect of
                  acquisitions:Accounts
                  receivable
              
              
              (832,000
              )
              
              (749,000
              )Inventories
              
              
              117,000
              
              
              (597,000
              )Prepaid
                  expenses and other current assets
              
              
              250,000
              
              
              (99,000
              )Accounts
                  payable
              
              
              427,000
              
              
              621,000Accrued
                  expenses
              
              
              (248,000
              )
              
              (521,000
              )Deferred
                  revenue
              
              
              64,000
              
              
              111,000Net
                  cash used in operating activities
              
              
              (779,000
              )
              
              (2,179,000
              )**Cash
                  flows from investing activities:**Purchase
                  of property and equipment
              
              
              (303,000
              )
              
              (380,000
              )Acquisition
                  of Core Systems, net of cash received
              
              
              -
              
              
              (9,000
              )Acquisition
                  of Accurel Systems International, net of cash received
              
              
              -
              
              
              (2,000
              )Increase
                  in other non-current assets
              
              
              (227,000
              )
              
              (47,000
              )Net
                  cash used in investing activities
              
              
              (530,000
              )
              
              (438,000
              )**Cash
                  flows from financing activities:**Proceeds
                  from issuance of common stock including theexercise
                  of options and the Employee Stock Purchase Plan
              
              
              154,000
              
              
              29,000Proceeds
                  from warrant exercise
              
              
              -
              
              
              69,000Proceeds
                  from secured term note, net of fees and transaction costs
              
              
              -
              
              
              2,833,000Proceeds
                  from issuance of Series D Cumulative RedeemableConvertible
                  Preferred Stock, net of issuance costs
              
              
              -
              
              
              1,896,000Dividends
                  on Series D Cumulative Redeemable Convertible Preferred
                  Stock
              
              
              (349,000
              )
              
              -Principal
                  payments of long-term debt and capital lease obligations
              
              
              (98,000
              )
              
              (1,860,000
              )Payments
                  on line of credit
              
              
              (34,000
              )
              
              -Proceeds
                  from issuance of common stock in connection with privateplacement,
                  net of issuance costs
              
              
              -
              
              
              (31,000
              )Net
                  cash flows (used in) provided by financing activities
              
              
              (327,000
              )
              
              2,936,000Net
                  change in cash and cash equivalents
              
              
              (1,636,000
              )
              
              319,000Cash
                  and cash equivalents at beginning of the period
              
              
              2,204,000
              
              
              1,549,000Cash
                  and cash equivalents at end of the period
              
              $
              568,000
              
              $
              1,868,000**Supplemental
                  Disclosure of Cash Flow Information:**Interest
                  paid in cash
              
              $
              127,000
              
              $
              136,000**Noncash
                  Investing and Financing Activity:**Capital
                  equipment acquired under capital lease
              
              $
              550,000
              
              $
              42,000Accretion
                  of Series D Cumulative Redeemable Convertible Preferred Stock dividends,
                  derivatives and warrants
              
              $
              381,000
              
              $
              387,000Execution
                  of credit agreement pending receipt of cash proceeds
              
              $
              1,050,000
              
              
              -Relative
                  fair value of warrants issued in conjunction with executed credit
                  agreement
              
              $
              450,000
              
              
              -
 
 The
        accompanying notes are an integral part of these condensed consolidated
        financial statements.
 
 
 5
  **IMPLANT
        SCIENCES CORPORATION**
 **NOTES
        TO CONDENSED FINANCIAL STATEMENTS**
 **December
        31, 2006**
 **(Unaudited)**
 
 **1.**  **Description
        of Business**
 
 Implant
        Sciences Corporation (the “Company”) develops products for the medical device
        and security products 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 also modifies
        the
        surface characteristics of orthopedic joint implants to reduce polyethylene
        wear
        and thereby increasing the life of the implant. 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 and analytical services to the semiconductor
        industry.
 
 *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 six months ended
        December 31, 2006, the Company reported a net loss of $2,007,000 and used
        $742,000 in cash from operations. As of December 31, 2006, the Company had
        an
        accumulated deficit of approximately $38,680,000 and working capital of
        $1,148,000. The Company has drawn approximately $966,000 on a $1,500,000
        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
        December 29, 2006, the company secured a $1.5 million nine (9) month secured
        term loan with Laurus Master Fund, LLP and on January 3, 2007, 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 Notes
        15 and 16 respectively). Based on the current sales, expense and cash flow
        projections, and the proceeds from these two facilities, 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. The Company has a history of being active in submitting proposals
        for
        government sponsored grants and contracts and successful in being awarded
        grants
        and contracts from government agencies. Management will continue to pursue
        government grants and contracts to support its research and development efforts.
        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.
 
 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 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.
  6
 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.
 
 In
        November 2006, the Company received notification from a significant customer
        that the customer will be discontinuing a product line to which the Company
        provides a coating service. In addition to reporting a decrease in medical
        revenue, and gross margin, the Company recorded a $37,000 expense relating
        to
        the impairment of certain capital equipment used in processing this customer’s
        orders, for which there are no alternative uses.
  **2.**  **Interim
        Financial Statements**
  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 six months ended December 31, 2006 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 ending 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 subsidiaries Accurel Systems International
        (“Accurel”) and Core Systems Incorporated (“Core”) (the “Subsidiaries”). All
        intercompany balances have been eliminated in consolidation.
  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:
 
 **December
                  31,**
              
              **June
                  30,****2006**
              
              **2006**Raw
                  materials
              
              $
              634,000
              
              $
              965,000Work-in-progress
              
              
              423,000
              
              
              291,000Finished
                  goods
              
              
              358,000
              
              
              276,000$
              1,415,000
              
              $
              1,532,000
 
  7
 **4.**  **Property
        and Equipment**
 
 Property
        and equipment consists of the following **:**
 **December
                      31,**
                  
                  **June
                      30,****2006**
                  
                  **2006**Total
                      property and equipment
                  
                  $
                  17,229,000
                  
                  $
                  16,413,000Less:
                      accumulated depreciation
                  
                  
                  (8,725,000
                  )
                  
                  (7,504,000
                  )Property
                      and equipment, net
                  
                  $
                  8,504,000
                  
                  $
                  8,909,000
 The
        Company recorded depreciation expense of approximately $1,221,000 and $1,100,000
        for the six month period ended December 31, 2006 and 2005, respectively.
        Depreciation expense for the six month period ended December 31, 2006, 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.
  **5.**  **Accrued
        Expenses**
 
 Accrued
        expenses consist of the following:
 
 **December
                  31,**
              
              **June
                  30,****2006**
              
              **2006**Accrued
                  compensation and benefits
              
              $
              786,000
              
              $
              883,000Accrued
                  costs related to acquisitions
              
              
              203,000
              
              
              304,000Other
                  accrued liabilities
              
              
              808,000
              
              
              798,000$
              1,797,000
              
              $
              1,985,000
 
 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
              
              $
              73,000
 
 
 
 **6.**  **Investment
        in Unconsolidated Subsidiaries**
 
 As
        of
        December 31, 2006, the Company has an 16.9% interest in CorNova, Inc. as
        a
        result of 87,031 shares that have been issued to CorNova by the Company,
        of
        which 14,708 have been categorized as treasury stock (“CorNova treasury stock”)
        in the accompanying balance sheet. The Company’s Chief Executive Officer (“CEO”)
        is one of the directors of CorNova. For the three and six month periods ended
        December 31, 2006 and 2005, the Company recognized approximately $38,000
        and
        $84,000 and $158,000 and $124,000, respectively, of equity losses in
        unconsolidated subsidiaries, representing the Company’s portion of CorNova’s net
        loss. The Company also recorded approximately $22,000 as an unrealized gain
        and
        $78,000 as an unrealized loss in the period ended December 31, 2006 and 2005
        respectively, relating to the change in value of the CorNova treasury stock.
        Gains and losses are recorded as other comprehensive income (loss) in the
        equity
        section of the Company’s financial statements.
  8
 CorNova’s
        unaudited results for the three month period ended December 31, 2006 were:
 
 **Three
                  Month Period Ended**
                **December
                  31****2006**
              
              **2005**Revenue
              
              -
              
              -Expenses
              
              $
              967,000
              
              
              444,000Income
                  tax benefit
              
              
              -
              
              
              -Net
                  Loss
              
              $
              967,000
              
              $
              444,000
 
 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. The Company also has a small satellite facility in Austin,
        TX
        with a lease that expires in November 2010. 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 December 31, 2006 is $641,000, of which
        $132,000 is current.
  Future
        minimum rental payments required under capital leases and operating leases
        with
        non-cancelable terms in excess of one year at December 31, 2006, together
        with
        the present value of net minimum lease payments are as follows:
  **Capital
                  Lease Payments**
              
              **Operating
                  Lease Payments**Year
                  ending June 30:2007
                  remaining 6 months
              
              $
              146,000
              
              $
              850,0002008
              
              
              282,000
              
              
              1,727,0002009
              
              
              266,000
              
              
              1,471,0002010
              
              
              256,000
              
              
              856,0002011
                  and remaining
              
              
              272,000
              
              
              158,000Total
                  future minimum lease payments
              
              $
              1,222,000
              
              $
              5,062,000Less:
                  amounts representing interest
              
              
              (300,000
              )Present
                  value of future minimum lease payments
              
              
              922,000Less:
                  current portion
              
              
              (192,000
              )Capital
                  lease obligation, net of current portion
              
              $
              730,000
 
 (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.
 
 9
 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
        spring 2007.
  
 **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
                  Stock
                Monthly
                Redemption
                  Schedule2007
                  remaining 6 months
              
              $
              -2008
              
              
              1,515,0002009
              
              
              2,424,000Total
              
              $
              3,939,000
 
 The
        monthly redemption of approximately $152,000 plus accrued dividends resumes
        on
        September 1, 2007 as of 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. 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 December 31, 2006,
        $1,260,000 was amortized. As of December 31, 2006, the fair value of this
        conversion feature approximated $389,000.    The value of
        the embedded derivates related to the adjustable dividend rate and the
        potential default provisions were determined to be immaterial at December
        31,
        2006.
 
 10
 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.
 
 **9.**
            **Share-based
                compensation plans** 
 *Stock
        Option Plans*
  As
        of
        December 31, 2006, a total of 129,003, 47,402, and 350,000 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 three months ended December 31, 2006:
 **Shares**
                
                **Weighted-**
                  **Average**
                  **Exercise
                    Price**Outstanding
                    at September 30, 2006
                
                
                1,886,938
                
                $
                5.32Granted
                
                
                40,000
                
                
                2.37Exercised
                
                
                -
                
                
                -Cancelled
                
                
                (2,000
                )
                
                14.00Outstanding
                    at December 31, 2006
                
                
                1,924,938
                
                $
                5.25Options
                    exercisable at end of period
                
                
                1,282,880
                
                $
                5.45Weighted-average
                    fair value of options granted during period
                
                
                
                
                $
                1.59
   *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 December 31, 2006, a total of
        10,669
        shares are available for issuance under the Plan.
 
 11
 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
        December 31, 2006, 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 December
        31, 2006 and 2005 is $16,000 and $17,000 respectively.
  *Non-qualified
        options and warrants*
 
 Included
        in the consolidated statement of operations for the period ended December
        31,
        2006 is $3,000 of compensation expense attributable to other non-employee
        options and warrants.
 
 **10.**
            **Employee
                Stock-Based Compensation**  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 $323,000 of stock based compensation, which includes $16,000
        of
        compensation expense attributable to its Employee Stock Purchase Plan in
        the
        three month period ended December 31, 2006.
 
 The
        total
        non-cash stock-based compensation expense, including $3,000 of options and
        warrants issued to non-employees, included in the consolidated statement
        of
        operations for the three month period ended December 31, 2006 and 2005 is
        included in the following expense categories:
  **Three
                    months ended December 31,****2006**
                
                **2005**Cost
                    of revenues
                
                $
                95,000
                
                $
                94,000Research
                    and development
                
                
                22,000
                
                
                210,000Selling,
                    general and administrative
                
                
                206,000
                
                
                724,000Total
                
                $
                323,000
                
                $
                1,028,000
 As
        of
        December 31, 2006 there was $1,267,000 of total unrecognized compensation
        expense related to unvested share based compensation arrangements under the
        various share-based compensation plans. This expense is expected to be
        recognized as follows:
  **Period
                  Ended June 30:**Remaining
                  6 months 2007
              
              $
              501,0002008
              
              
              590,0002009
              
              
              164,000Thereafter
              
              
              12,000Total
              
              $
              1,267,000
 
 12
 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.
  **Three
                  month period ended**
                **December
                  31, 2006****Stock
                  Option Plan**
              
              **Stock
                  Purchase Plan**Risk
                  free interest rate
              4.58%
                  - 4.72%
              
              5.17%Expected
                  dividend yield
              0%
              
              0%Expected
                  lives (years)
              3.5
                  - 6 years
              
              6
                  monthsExpected
                  volatility
              78%
              
              78%Expected
                  forfeiture rate
              10%
              
              0%Contractual
                  term
              5
                  -
                  10 years
              
              6
                  months
  **11.**
            **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.  During the three months ended December 31, 2006 and
        2005, approximately $0 and $104,000, respectively, of amortization expense
        was
        recognized, which is included in selling, general and administrative expenses
        in
        the accompanying consolidated statements of operations. As of December 31,
        2006,
        the outstanding principal balance is approximately $233,000.  For the three
        months ended December 31, 2006 and 2005, the Company recorded approximately
        $6,000 and $8,000, respectively, of interest expense relating to this
        transaction.
  *Installment
        Note*
 
 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 December 31, 2006 and 2005, the Company recorded interest
        expense of approximately $11,000 and $15,000, respectively, in connection
        with
        this note. As of December 31, 2006, the Accurel note balance is approximately
        $642,000.
  The
        Loan
        Agreement requires Accurel to report monthly financial results to the bank
        and
        for Accurel to comply with certain financial covenants. As of December 31,
        2006
        Accurel was in compliance with the covenants.
 
 13
 Future
        principal payments on this note are as follows:
  **Year
                  ending June 30,**2007
                  remaining six months
              
              $
              176,0002008
              
              
              350,0002009
              
              
              116,000Total
              
              $
              642,000
 
 *Revolving
        Credit Facility*
 
 On
        September 7, 2006, the Company extended the expiration date of its $1,500,000
        revolving credit facility with Silicon Valley based Bridge Bank, N.A. The
        revolving credit facility expiring December 31, 2007, provides for advances
        of
        up to eighty percent (80%) of the Company’s eligible accounts receivable, bears
        interest at the prime rate plus one-half percent (1/2%) (8.75% as of December
        31, 2006), and is collateralized by certain assets of the Company. The credit
        facility is also subject to various financial covenants. As of December 31,
        2006, $966,000 has been drawn on this credit facility. The Company was in
        violation of certain covenants associated with this facility in the months
        of
        August 2006 - December 2006, and has received waivers from the
        bank.
 
 **12.**
            **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
        margin 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 for the three
        and six months ended December 31, 2006 and 2005 are:
 
 **Medical**
              
              **Semiconductor**
              
              **Security**
              
              **Total****Three
                  months ended**
                **December
                  31, 2006**Revenue
              
              $
              1,038,000
              
              $
              4,175,000
              
              $
              1,905,000
              
              $
              7,118,000Cost
                  of revenues
              
              
              (934,000
              )
              
              (3,215,000
              )
              
              (1,160,000
              )
              
              (5,309,000
              )Gross
                  margin
              
              $
              104,000
              
              $
              960,000
              
              $
              745,000
              
              $
              1,809,000Assets
              
              $
              3,155,000
              
              $
              24,506,000
              
              $
              2,853,000
              
              $
              30,513,000**Three
                  months ended**
                **December
                  31, 2005**Revenue
              
              $
              991,000
              
              $
              3,334,000
              
              $
              3,215,000
              
              $
              7,540,000Cost
                  of revenues
              
              
              (829,000
              )
              
              (2,940,000
              )
              
              (2,297,000
              )
              
              (6,066,000
              )Gross
                  margin
              
              $
              162,000
              
              $
              394,000
              
              $
              918,000
              
              $
              1,474,000Assets
              
              $
              3,569,000
              
              $
              24,723,000
              
              $
              4,394,000
              
              $
              32,685,000
 
  14
  
 **Medical**
              
              **Semiconductor**
              
              **Security**
              
              **Total****Six
                  months ended December 31, 2006**Revenue
              
              $
              2,198,000
              
              $
              8,114,000
              
              $
              2,386,000
              
              $
              12,698,000Cost
                  of revenues
              
              
              (1,784,000
              )
              
              (6,264,000
              )
              
              (1,776,000
              )
              
              (9,824,000
              )Gross
                  margin
              
              $
              414,000
              
              $
              1,850,000
              
              $
              610,000
              
              $
              2,874,000Assets
              
              $
              3,155,000
              
              $
              24,506,000
              
              $
              2,853,000
              
              $
              30,513,000**Six
                  months ended December 31, 2005**Revenue
              
              $
              2,140,000
              
              $
              6,456,000
              
              $
              3,616,000
              
              $
              12,212,000Cost
                  of revenues
              
              
              (1,788,000
              )
              
              (5,637,000
              )
              
              (3,319,000
              )
              
              (10,744,000
              )Gross
                  margin
              
              $
              352,000
              
              $
              819,000
              
              $
              297,000
              
              $
              1,468,000Assets
              
              $
              3,569,000
              
              $
              24,723,000
              
              $
              4,394,000
              
              $
              32,685,000
 
 
 International sales accounted for $1,361,000 and $1,891,000 for the three
        month
        period ended December 31, 2006 and 2005, respectively and $1,960,000 and
        $2,011,000 in the six month period ended December 31, 2006 and 2005
        respectively.
 
 **13.**
            **Goodwill
                and Other Intangible Assets**  At
        December 31, 2006 and June 30 2006, the Company had goodwill and intangible
        assets of $13,040,000 and $13,286,000 respectively. 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 December 31, 2006, management believes no impairment
        exists.
  There
        were no changes in the carrying value of goodwill for the three months ended
        December 31, 2006. Goodwill within each reportable segment, are as
        follows:
  **Semiconductor
                  Services**
              
              **Semiconductor
                  Testing**Balance
                  as of December 31 and June 30, 2006
              
              $
              4,091,000
              
              $
              7,575,000
 
 
 15
 The
        following table summarizes the Company’s intangible assets as of December 31,
        2006:
 **Gross
                        Carrying Amount**
                    
                    **Accumulated
                        Amortization**
                    
                    **Net
                        Carrying Amount****June
                        30, 2006**
                    
                    **Additions**
                    
                    **December
                        31, 2006**
                    
                    **June
                        30, 2006**
                    
                    **Additions**
                    
                    **December
                        31, 2006**
                    
                    **December
                        31, 2006**Non-Compete
                    
                    $
                    1,057,000
                    
                    $
                    -
                    
                    $
                    1,057,000
                    
                    $
                    1,050,000
                    
                    $
                    7,000
                    
                    $
                    1,057,000
                    
                    $
                    -Name
                        Recognition
                    
                    
                    200,000
                    
                    
                    -
                    
                    
                    200,000
                    
                    
                    38,000
                    
                    
                    14,000
                    
                    
                    52,000
                    
                    
                    148,000Customer
                        Base
                    
                    
                    1,630,000
                    
                    
                    -
                    
                    
                    1,630,000
                    
                    
                    445,000
                    
                    
                    162,000
                    
                    
                    607,000
                    
                    
                    1,023,000Technology
                    
                    
                    125,000
                    
                    
                    -
                    
                    
                    125,000
                    
                    
                    43,000
                    
                    
                    13,000
                    
                    
                    56,000
                    
                    
                    69,000Treatment
                        Planning System
                    
                    
                    300,000
                    
                    
                    -
                    
                    
                    300,000
                    
                    
                    116,000
                    
                    
                    50,000
                    
                    
                    166,000
                    
                    
                    134,000Total
                    
                    $
                    3,312,000
                    
                    $
                    -
                    
                    $
                    3,312,000
                    
                    $
                    1,692,000
                    
                    $
                    246,000
                    
                    $
                    1,938,000
                    
                    $
                    1,374,000
  Estimated
        amortization expense for intangible assets with finite lives on our balance
        sheet as of December 31, 2006, for the fiscal years ending June 30, is as
        follows:
 
 2007
                    remaining six months
                
                $
                240,0002008
                
                
                462,0002009
                
                
                380,0002010
                
                
                246,0002011
                
                
                46,000$
                1,374,000
   **14.**
            **Loss
                Per Share**  The
        Company had the following potential dilutive securities outstanding on December
        31, 2006: options and warrants to purchase 1,924,938 and 2,124,328 shares,
        respectively, of the Company’s common stock at weighted average exercise prices
        of $5.25 and $6.35 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 December 31, 2006 because the
        inclusion thereof would be antidilutive.
 
 **15.**
            **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.
 
 16
 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. The Company recorded an other receivable
        which represents the net cash proceeds which were not received until January
        3,
        2007.
  **16.**
            **Subsequent
                Event** 
 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 (See Note 11). 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.
  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.
 
 
  17
  
 **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.
 
 We
        currently provide ion implantation and analytical services to numerous
        semiconductor manufacturers, research laboratories, and universities. The
        application of our ion implantation technologies to modify the surfaces of
        orthopedic joint implants has been historically applied primarily to product
        manufactured by the Stryker-Orthopaedics Division of Stryker Corporation.
        While
        this orthopedic coating customer has provided a steady source of revenue
        to the
        Company for many years, we have been informed that they are changing their
        product line which will eliminate the coating services currently conducted
        by
        the Company. This phase out occurred in the second quarter of fiscal 2007.
 
 In
        October 2004 and March 2005, we acquired two California semiconductor companies.
        Through these acquisitions, we have more than doubled our semiconductor capacity
        and are now able to offer diagnostic services and semiconductor equipment
        refurbishment services to semiconductor manufacturers, research laboratories
        and
        universities.
 
 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, orthopedic
        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, source conditioning
        equipment and semiconductor analytical services.
 
 **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 six month periods ended December
        31,
        2006 and 2005. It should be read in conjunction with the financial statements
        and notes thereto appearing elsewhere herein.
 
 *Three
        Month Period Ended December 31, 2006 vs. December 31, 2005*
 
 *Revenues.* Revenues
        for the three months ended December 31, 2006 were $7,118,000 as compared
        to
        $7,540,000 in the three months ended December 31, 2005, a decrease of $422,000
        or 6%. Our revenues by business segment are as follows:
 
 **Three
                    months ended December 31,****2006**
                
                **2005**
                
                **%**
                  **Increase/(Decrease)**Medical
                
                $
                1,038,000
                
                $
                991,000
                
                
                5%Semiconductor
                
                
                4,175,000
                
                
                3,334,000
                
                
                25%Security
                    products
                
                
                1,905,000
                
                
                3,215,000
                
                
                (41%)Total
                
                $
                7,118,000
                
                $
                7,540,000
                
                
                (6%)
  18
 Revenues
        in the medical and semiconductor business segments increased by $888,000
        or 21%
        over the comparable prior year period. The majority of this increase comes
        from
        the continued strong performance of our California subsidiaries combined
        with
        increased revenue recognized from an increase in the volume of our brachytherapy
        seeds. It should be noted; however, that management expects that medical
        revenues will materially decrease in the third quarter and beyond as our
        primary
        orthopedic coating customer has changed their product line and has phased
        out
        Company’s coating services in Q2.
 
 The
        gains
        in the medical and semiconductor segments were offset by a $1,310,000 or
        41%
        decrease in our Security Products business segment. 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. While the Company continues to show steady
        unit
        sales of its handheld explosives detection equipment, it has not realized
        an
        order of the same magnitude as it had in the three month period ended December
        31, 2005. 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. The Company continues to make a significant investment in the development
        and manufacturability of the next generation of explosives detection products.
 
 *Cost
        of Revenues* .
        Cost of
        revenues for the three months ended December 31, 2006 was $5,309,000 as compared
        to $6,066,000 for the comparable prior year period, a decrease of $757,000
        or
        12%.
  **Three
                    months ended December,****2006**
                
                **2005**
                
                **%**
                  **Increase/(Decrease)**Medical
                
                $
                934,000
                
                $
                829,000
                
                
                13%Semiconductor
                
                
                3,215,000
                
                
                2,940,000
                
                
                9%Security
                    products
                
                
                1,160,000
                
                
                2,297,000
                
                
                (49%)Total
                
                $
                5,309,000
                
                $
                6,066,000
                
                
                (12%)
 
 Cost
        of
        revenues for our Semiconductor business segment was $3,215,000 for the three
        months ended December 31, 2006 as compared to $2,940,000 for the prior year
        three month period, an increase of $275,000 or 9%. The increase in Semiconductor
        cost of revenue relates primarily to the increased activity levels at Accurel
        and the personnel needed to support the increased sales combined with the
        variable cost related to increased unit sales of our Krytek source conditioner
        product. Cost of revenues for our Security Products segment was $1,160,000
        for
        the three months ended December 31, 2006 as compared to $2,297,000 for the
        prior
        year period representing a decrease of $1,137,000 or 49% combined with the
        savings from outsourcing the handheld held explosives detection manufacturing
        costs. 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. Medical cost of revenues in the period ended
        December 31, 2006 increased by $105,000 or 13% from the previous year period.
        This increase is primarily due to the variable costs relating to increased
        unit
        sales of our brachytherapy seed product.
 
 *Gross
        Margins*
 **Three
                    Months ended December 31, 2006**Medical
                
                Semiconductor
                
                Security
                
                TotalRevenues
                
                $
                1,038,000
                
                $
                4,175,000
                
                $
                1,905,000
                
                $
                7,118,000Cost
                    of revenues
                
                
                934,000
                
                
                3,215,000
                
                
                1,160,000
                
                
                5,309,000Gross
                    Margin
                
                $
                104,000
                
                $
                960,000
                
                $
                745,000
                
                $
                1,809,000Margin
                    %
                
                
                10
                %
                
                23
                %
                
                39
                %
                
                25
                %
   19
 **Three
                    Months ended December 31, 2005**Medical
                
                Semiconductor
                
                Security
                
                TotalRevenues
                
                $
                991,000
                
                $
                3,334,000
                
                $
                3,215,000
                
                $
                7,540,000Cost
                    of revenues
                
                
                829,000
                
                
                2,940,000
                
                
                2,297,000
                
                
                6,066,000$
                162,000
                
                $
                394,000
                
                $
                918,000
                
                $
                1,474,000Margin
                    %
                
                
                16
                %
                
                12
                %
                
                29
                %
                
                20
                %
 
  Overall
        gross margins were 25% of revenues in the three months ended December 31,
        2006
        as compared to a 20% gross margin in the prior year period. An increase in
        gross
        margins was recognized in our Semiconductor segment, as revenues increase
        at our
        California subsidiaries. Both Accurel and Core are service businesses and
        are
        characterized by a relatively low variable cost, with the exception of the
        variable cost related to the sale of Krytek source conditioner product. As
        a
        result increased revenues beyond the level needed to cover fixed costs will
        have
        an impact on gross margins. Security products had a gross margin of 39% for
        the
        three months ended December 31, 2006 as compared to a gross margin of 29%
        in the
        prior year period. The improvement in security products margin 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.
        The medical segment gross margins were 10% for the three months ended December
        31, 2006 as compared to 16% for the prior year period. The decrease in gross
        margin came as a result of the decline in orthopedic coating revenue and
        high
        fixed costs associated with this operation. Management does not expect an
        improvement in the medical segment’s gross margins in the near future as our
        primary orthopedic coatings customer has phased out a particular product
        line
        needing coating services. Historically this service was a very profitable
        business.
 
 *Research
        and Development* .
        Research and development expense for the three months ended December 31,
        2006
        was $433,000 as compared to $492,000 for the comparable prior year period,
        a
        decrease of $59,000, or 12%. This decrease is primarily the result of the
        Company’s focus of its research and development staff on a contract awarded by
        the U.S. Army in August 2006. 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. While this U.S. Army program is a top priority,
        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 December
        31, 2006 was $2,313,000 as compared to $2,665,000 for the comparable prior
        year
        period, a decrease of $352,000, or 13%. 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. 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
        three months ended December 31, 2006, we recorded other income, net, of $577,000
        as compared to $750,000, in the comparable prior year period a decrease of
        $173,000 or 23%. Other
        income includes $685,000 and $891,000 of income attributable to marking to
        market the embedded derivatives associated with the Series D preferred stock,
        in
        the periods ended December 31, 2006 and 2005, respectively. Other
        income and expense includes a loss of $38,000 and $84,000 for the period
        ended
        December 31, 2006 and 2005, 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. Interest expense in
        the
        current year period was $78,000 compared to $74,000 in the prior year period,
        a
        minimal increase.
  *Net
        Loss.* Net loss
        for the three months ended December 31, 2006 was $397,000 as compared with
        $933,000 for the comparable prior year period, a decrease in net loss of
        $536,000 or 57%. The decrease in net loss is primarily due to the overall
        improvement in gross margins.
 
 20
 Preferred
        distribution, dividends and accretion on Series D Redeemable Convertible
        Preferred Stock were $44,000 in the three months ended December 31, 2006
        as
        compared to $387,000 in the prior year period. The Company issued Series
        D
        Redeemable Convertible Preferred Stock on September 30, 2005.
 
 *Six
        Month Period Ended December 31, 2006 vs. December 31, 2005*
 
 *Revenues.* Revenues
        for the six months ended December 31, 2006 were $12,698,000 as compared to
        $12,212,000 in the six months ended December 31, 2005, an increase of $486,000
        or 4%. Our revenues by business segment are as follows:
 
 **Six
                    months ended December 31,****2006**
                
                **2005**
                
                **%**
                  **Increase
                    (Decrease)**Medical
                
                $
                2,198,000
                
                $
                2,140,000
                
                
                3%Semiconductor
                
                
                8,114,000
                
                
                6,456,000
                
                
                26%Security
                    products
                
                
                2,386,000
                
                
                3,616,000
                
                
                (34%)Total
                
                $
                12,698,000
                
                $
                12,212,000
                
                
                4%
  Revenues
        in the semiconductor business segments increased by $1,658,000 or 26% over
        the
        comparable prior year period. This increase comes from the continued strong
        performance of our California subsidiaries. Medical segment revenue increased
        slightly over the comparable prior year period, however, management expects
        that
        medical revenues will materially decrease in the third quarter and beyond
        as our
        primary orthopedic coating customer has changed their product line and has
        phased out Company’s coating services in the second quarter. Gains in the
        semiconductor and medical segments were offset by losses both in the medical
        and
        security products segments. Medical revenues reported a slight decrease of
        $58,000 or 3% when comparing the six month period ended December 31, 2006
        with
        2005.
 The
        security products segment revenue decreased by $1,230,000 or 34%. 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. While the Company continues to show steady
        unit
        sales of its handheld explosives detection equipment, it has not realized
        an
        order of the same magnitude as it had in the six month period ended December
        31,
        2005. 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 six months ended December 31, 2006 was $9,824,000 as compared
        to $10,744,000 for the comparable prior year period, a decrease of $920,000
        or
        9%.
  **Six
                    months ended December 31,****2006**
                
                **2005**
                
                **%**
                  **Increase
                    (Decrease)**Medical
                
                $
                1,784,000
                
                $
                1,788,000
                
                
                -Semiconductor
                
                
                6,264,000
                
                
                5,637,000
                
                
                11%Security
                    products
                
                
                1,776,000
                
                
                3,319,000
                
                
                (46%)Total
                
                $
                9,824,000
                
                $
                10,744,000
                
                
                (9%)
 
 
 Cost
        of
        revenues for our Semiconductor business segment was $6,264,000 for the six
        months ended December 31, 2006 as compared to $5,637,000 for the prior year
        six
        month period, an increase of $627,000 or 11%. The increase in Semiconductor
        cost
        of revenue relates primarily to the increased activity levels at Accurel
        and the
        personnel needed to support the increased sales combined with the variable
        cost
        related to increased unit sales of our Krytek source conditioner product.
        Cost
        of revenues for our Security Products segment was $1,776,000 for the six
        months
        ended December 31, 2006 as compared to $3,319,000 for the prior year period
        representing a decrease of $1,543,000 or 46%. 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. Medical
        cost
        of revenues in the period ended December 31, 2006 remained virtually unchanged
        when comparing with the prior year period.
 
 
 21
 
 *Gross
        Margins*
 **Six
                      Months ended December 31, 2006**Medical
                  
                  Semiconductor
                  
                  Security
                  
                  TotalRevenues
                  
                  $
                  2,198,000
                  
                  $
                  8,114,000
                  
                  $
                  2,386,000
                  
                  $
                  12,698,000Cost
                      of revenues
                  
                  
                  1,784,000
                  
                  
                  6,264,000
                  
                  
                  1,776,000
                  
                  
                  9,824,000Gross
                      Margin
                  
                  $
                  414,000
                  
                  $
                  1,850,000
                  
                  $
                  610,000
                  
                  $
                  2,874,000Margin
                      %
                  
                  
                  19
                  %
                  
                  23
                  %
                  
                  26
                  %
                  
                  23
                  %
  **Six
                        Months ended December 31, 2005**Medical
                    
                    Semiconductor
                    
                    Security
                    
                    TotalRevenues
                    
                    $
                    2,140,000
                    
                    $
                    6,456,000
                    
                    $
                    3,616,000
                    
                    $
                    12,212,000Cost
                        of revenues
                    
                    
                    1,788,000
                    
                    
                    5,637,000
                    
                    
                    3,319,000
                    
                    
                    10,744,000$
                    352,000
                    
                    $
                    819,000
                    
                    $
                    297,000
                    
                    $
                    1,468,000Margin
                        %
                    
                    
                    16
                    %
                    
                    13
                    %
                    
                    8
                    %
                    
                    12
                    %
   Overall
        gross margins were 23% of revenues in the six months ended December 31, 2006
        as
        compared to a 12% gross margin in the prior year period. An increase in gross
        margins was recognized in all of our segments. Semiconductor segment gross
        margins improved from 13% to 23%, as revenues increase at our California
        subsidiaries. Both Accurel and Core are service businesses and are characterized
        by a relatively low variable cost, with the exception of the variable cost
        related to the sale of Krytek source conditioner product. As a result, increased
        revenues beyond the level needed to cover fixed costs will have an impact
        on
        gross margins. Security products had a gross margin of 26% for the six months
        ended December 31, 2006 as compared to a gross margin of 8% in the prior
        year
        period. The improvement in security products margin 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.
        The medical segment gross margins were 19% for the six months ended December
        31,
        2006 as compared to 16% for the prior year period. The increase in gross
        margin
        came from manufacturing efficiencies gained in our seeds operations primarily
        from cost reductions and the reduction in scrap. Management does not expect
        an
        improvement in the medical segment’s gross margins in the near future as our
        primary orthopedic coatings customer has phased out a particular product
        line
        needing coating services. Historically this service was a very profitable
        business.
 
 *Research
        and Development* .
        Research and development expense for the six months ended December 31, 2006
        was
        $1,000,000 as compared to $808,000 for the comparable prior year period,
        an
        increase of $192,000, or 24%. 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 six months ended December
        31, 2006 was $4,276,000 as compared to $4,590,000 for the comparable prior
        year
        period, a decrease of $314,000, or 7%. 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. 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.
  22
 *Other
        Income and Expenses, Net* .
        For the
        six months ended December 31, 2006, we recorded other income, net, of $432,000
        as compared to $629,000, in the comparable prior year period, a decrease
        of
        $197,000 or 31%. Other
        income includes $705,000 and $891,000 of income attributable to fair value
        adjustments of the embedded derivatives associated with the Series D preferred
        stock, in the periods ended December 31, 2006 and 2005, respectively. Other
        income and expense includes a loss of $158,000 and $124,000 for the period
        ended
        December 31, 2006 and 2005, 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. Interest expense in
        the
        current year period was $127,000 compared to $166,000 in the prior year period,
        a $39,000 decrease, or 23%. Interest income in the six month period ended
        December 31, 2006 and 2005 was $12,000 and $28,000, respectively.
  *Net
        Loss.* Net loss
        for the six months ended December 31, 2006 was $2,007,000 as compared with
        $3,301,000 for the comparable prior year period, a decrease in net loss of
        $1,294,000 or 39%. The decrease in net loss is primarily due to the overall
        improvement in gross margins.
 
 Preferred
        distribution, dividends and accretion on Series D Redeemable Convertible
        Preferred Stock were $381,000 in the six months ended December 31, 2006 as
        compared to $387,000 in the prior year period. The Company issued Series
        D
        Redeemable Convertible Preferred Stock on September 30, 2005.
  **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 As
        of
        December 31, 2006, the Company had approximately $568,000 in the form of
        cash
        and cash equivalents. During the six months ended December 31, 2006, operating
        activities used cash of approximately $779,000. Net cash used by operating
        activities primarily reflects the $2,007,000 net loss, increased by a
        non-cash gain of $705,000, related to the change in fair value of derivatives,
        and reduced by non-cash charges of $1,467,000 in depreciation and amortization,
        $534,000 of share-based compensation expense and $175,000 in equity loss
        in
        unconsolidated subsidiaries. The Company has approximately $1,023,000 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 $530,000
        of
        cash primarily for investment in, or deposits on property and equipment.
        Financing activities consist of, $154,000 of proceeds received from participants
        in the Employee Stock Purchase Plan and the exercise of stock options, offset
        by
        $349,000 in cash dividends paid to the holders of the Series D preferred
        stock
        and $132,000 in principal payments against bank loans and capital leases.
 
 On
        September 7, 2006, the Company extended the expiration date of its $1,500,000
        revolving credit facility with Silicon Valley based Bridge Bank, N.A. The
        revolving credit facility, expiring December 31, 2007, provides for advances
        of
        up to eighty percent (80%) of the Company’s eligible accounts receivable, bears
        interest at the prime rate plus one-half percent (1/2%), and is collateralized
        by certain assets of the Company. The credit facility is also subject to
        various
        financial covenants. As of December 31, 2006, $966,000 has been drawn on
        this
        credit facility. The credit facility is subject to various covenants that
        have
        been violated as of December 31, 2006. The Company has received a waiver
        of
        these violations from the bank.
 
 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.
  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.
  23
 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.
 
 Since
        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
        five patents and have submitted an additional four 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.
 
 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, the Company believes
        that
        the current level of cash and cash-equivalents on hand, the net proceeds
        from
        its revolving line of credit and a $3.6M contract received from the U.S.
        Army in
        August 2006, will be sufficient to fund operations for the next twelve months.
        In addition, it is anticipated that the Company will be reducing its operating
        expenses to compensate for the projected decrease in medical sales revenue.
        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 December 31, 2006 are
        as
        follows:
 
 **Debt
                  and Capital Lease(1)**
              
              **Operating
                  Lease(1)**
              
              **MED-TEC**
              
              **Total**2007
              
              $
              379,000
              
              $
              851,000
              
              $
              287,000
              
              $
              1517,0002008
              
              
              2,179,000
              
              
              1,727,000
              
              
              -
              
              
              3,906,0002009
              
              
              383,000
              
              
              1,472,000
              
              
              -
              
              
              1,855,0002010
              
              
              256,000
              
              
              856,000
              
              
              -
              
              
              1,112,0002011
              
              
              271,000
              
              
              158,000
              
              
              -
              
              
              429,000Total
              
              $
              3,468,000
              
              $
              5,064,000
              
              $
              287,000
              
              $
              8,819,000
  (1)
        Payments include interest
  24
 *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 December 31, 2006, 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.
 
 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.
 
 25
 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 December 31, 2006 fairly present, in all material respects,
        our
        financial condition and results of operations.
 
 26
 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.
 
 
 **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.
 
 The
        arbitration is now in the discovery phase, and the hearing is scheduled for
        April 2007.
 
 At
        this
        early stage of the proceedings, particularly before the commencement of
        depositions, it is difficult to assess the final outcome of this arbitration.
        However, the Company believes that the counterclaims have no merit, and will
        vigorously defend itself against such 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.
 
 27
 On
        March
        27, 2006, the Company received notice that Rapiscan filed a complaint against
        the Company and its contract manufacturer, Columbia Tech, 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. Rapiscan’s
        complaint against Columbia Tech is based upon injunctive relief, declaratory
        relief and tortuous interference with contractual relations. On April 12,
        2006,
        Rapiscan dismissed all claims against Columbia Tech.
 
 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 spring 2007.
  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.
 
 **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. 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.**   **Sales
        of Unregistered Securities**
 
 Not
        applicable.
 
 **Item
        3.**   **Defaults
        Upon Senior Securities**
 
 Not
        applicable.
  **Item
        4.**   **Submission
        of Matters to a Vote of Security Holders**
 
 We
        held
        our annual shareholder’s meeting on December 13, 2005. Anthony Armini, Stephen
        Bunker, David Eisenhaure, Michael Szycher and Michael Turmelle were elected
        as
        directors of the Company to hold office until the 2007 annual meeting of
        shareholders. The results for this vote were as follows:
 
 **Name**
                **For**
                **Withheld**Anthony
                    Armini
                9,279,78
                448,945Stephen
                    Bunker
                9,582,25
                144,482Michael
                    Szycher
                8,271,94
                1,456,793David
                    Eisenhaure
                8,595,72
                1,133,008Michael
                    Turmelle
                8,582,09
                1,146,643
 
 
 28
 Proposal
        No. 2 was to approve the 2006 Employee Stock Purchase Plan. The results for
        this
        proposal were as follows:
 
 **For**
              **Against**
              **Abstain**3,289,269
              734,648
              28,198
 
 **Item
        5.**   **Other**
  None
 
 **Item
        6.**   **List
        of Exhibits and Reports**
 
 
 (a)
            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.
 
  (b)
            Reports
                on Form 8-K 
 Current
        Report on Form 8-K dated December 29, 2006 regarding an amendment to the
        Company’s revolving line of credit with Bridge Bank and the execution of a short
        term note with Laurus Master Fund.
 
 
  29
  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 CorporationDate:
                        February 14, 2007
                    /s/
                        Anthony J. ArminiAnthony
                        J. ArminiPresident
                        and CEODate:
                        February 14, 2007
                    /s/
                        Diane J. RyanDiane
                        J. RyanChief
                        Financial Officer