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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-QSB

|ý                                                 | Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. 
|------------------------------------------------- | -----------------------------------------------------------------------------------------
|For the quarterly period ending December 31, 2002
|or                                               
|o                                                 | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Commission file number 000-25839

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IMPLANT SCIENCES CORPORATION(Exact name of registrant as specified in its charter)

|Massachusetts(State or other jurisdiction
of incorporation or organization)                       |  | 04-2837126(IRS Employer
Identification number)
|------------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|107 Audubon Road, #5
Wakefield, MA 01880                                                         
|781-246-0700(Issuers telephone number)                                                           
|Not Applicable(Former name, former address and former fiscal year, if changed since last report.)

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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 o    NO o

Indicate
the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

|Class                        |  | Outstanding at January 31, 2003
|---------------------------- |  | -------------------------------
|Common Stock, $.10 par value |  | 6,236,080                      

Transitional
small business disclosure format (check one):
YES o    NO ý

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IMPLANT SCIENCES CORPORATION

INDEX



|                              |         |                                                                                                             |                                                                                       | Page No.
|----------------------------- | ------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | --------
|PART I. FINANCIAL INFORMATION |         |                                                                                                            
|                              | Item 1. |                                                                                                             | Financial Statements:                                                                 |         
|                              |         | Condensed Balance Sheets as of December 31, 2002 and June 30, 2002 (unaudited)                              |                                                                                       | 2       
|                              |         | Condensed Statement of Operations for the Three and Six Months Ended December 31, 2002 and 2001 (unaudited) |                                                                                       | 3       
|                              |         | Condensed Statement of Cash Flows for the Six Months Ended December 31, 2002 and 2001 (unaudited)           |                                                                                       | 4       
|                              |         | Notes to Condensed Financial Statements (including data applicable to unaudited periods)                    |                                                                                       | 5       
|                              | Item 2. |                                                                                                             | Management's Discussion and Analysis of Financial Condition and Results of Operations |         
|                              | Item 3. |                                                                                                             | Controls and Procedures                                                               |         
|PART II. OTHER INFORMATION    |         |                                                                                                            
|                              | Item 1. |                                                                                                             | Legal Proceedings                                                                     |         
|                              | Item 2. |                                                                                                             | Changes in Securities and Use of Proceeds                                             |         
|                              | Item 3. |                                                                                                             | Defaults Upon Senior Securities                                                       |         
|                              | Item 4. |                                                                                                             | Submission of Matters to a Vote of Security-Holders                                   |         
|                              | Item 5. |                                                                                                             | Other Information                                                                     |         
|                              | Item 6. |                                                                                                             | Exhibits and Reports on Form 8-K                                                      |         
|                              |         | Signatures                                                                                                  |                                                                                       | 20      

1

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

IMPLANT SCIENCES CORPORATION        CONDENSED BALANCE SHEETS        (Unaudited)

|                                                           |                                                                                                                                                                            | December 31,
2002          |           | June 30,
2002 |          
|---------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ------------- | ---------
|ASSETS                                                     |                                                                                                                                                                            |                            |           |               |          
|Current Assets:                                            |                                                                                                                                                                            |                            |           |               |          
|                                                           | Cash and cash equivalents                                                                                                                                                  |                            | $         | 1,796,000     |          
|                                                           | Accounts receivable, net                                                                                                                                                   |                            |           | 928,000       |          
|                                                           | Inventories                                                                                                                                                                |                            |           | 760,000       |          
|                                                           | Investmentsavailable for sale securities                                                                                                                                  |                            |           | 81,000        |          
|                                                           | Prepaid and other current assets                                                                                                                                           |                            |           | 128,000       |          
|                                                           |                                                                                                                                                                            |                            |           |               |          
|                                                           |                                                                                                                                                                            | Total Current Assets       |           |               | 3,693,000
|Property and equipment, net                                |                                                                                                                                                                            |                            | 3,528,000 |               |          
|Other non-current assets                                   |                                                                                                                                                                            |                            | 145,000   |               |          
|                                                           |                                                                                                                                                                            |                            |           |               |          
|Total Assets                                               |                                                                                                                                                                            | $                          | 7,366,000 |               | $        
|                                                           |                                                                                                                                                                            |                            |           |               |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                       |                                                                                                                                                                            |                            |           |               |          
|Current Liabilities:                                       |                                                                                                                                                                            |                            |           |               |          
|                                                           | Accounts payable                                                                                                                                                           |                            | $         | 890,000       |          
|                                                           | Accrued expenses                                                                                                                                                           |                            |           | 670,000       |          
|                                                           | Current portion of long-term debt                                                                                                                                          |                            |           |              |          
|                                                           | Obligations under capital leases                                                                                                                                           |                            |           | 8,000         |          
|                                                           |                                                                                                                                                                            |                            |           |               |          
|                                                           |                                                                                                                                                                            | Total Current Liabilities  |           |               | 1,568,000
|                                                           |                                                                                                                                                                            |                            |           |               |          
|Long-term Liabilities:                                     |                                                                                                                                                                            |                            |           |               |          
|Long-term debt, net of current portion                     |                                                                                                                                                                            |                            |          |               |          
|Obligations under capital lease                            |                                                                                                                                                                            |                            | 13,000    |               |          
|Deferred income taxes                                      |                                                                                                                                                                            |                            | 29,000    |               |          
|                                                           |                                                                                                                                                                            |                            |           |               |          
|                                                           |                                                                                                                                                                            |                            | 42,000    |               |          
|                                                           |                                                                                                                                                                            |                            |           |               |          
|                                                           |                                                                                                                                                                            |                            | 1,610,000 |               |          
|                                                           |                                                                                                                                                                            |                            |           |               |          
|7% Series A Convertible Preferred Stock; $10 stated value; |                                                                                                                                                                            |                            |           |               |          
|                                                           | 5,000,000 shares authorized; 250,000 and no shares issued and outstanding as of December 31, 2002 and June 30, 2002, respectively                                          |                            |           | 1,697,000     |          
|Stockholders' equity:                                      |                                                                                                                                                                            |                            |           |               |          
|                                                           | Common stock, $0.10 par value; 20,000,000 shares authorized; 6,236,080 and 6,200,901 shares issued and outstanding as of December 31, 2002 and June 30, 2002, respectively |                            |           | 624,000       |          
|                                                           | Additional paid-in capital                                                                                                                                                 |                            |           | 14,448,000    |          
|                                                           | Accumulated deficit                                                                                                                                                        |                            |           | (10,772,000   | )        
|                                                           | Deferred compensation                                                                                                                                                      |                            |           | (40,000       | )        
|                                                           | Accumulated other comprehensive income                                                                                                                                     |                            |           | 21,000        |          
|                                                           | Notes receivable from employees                                                                                                                                            |                            |           | (222,000      | )        
|                                                           |                                                                                                                                                                            |                            |           |               |          
|                                                           |                                                                                                                                                                            | Total Stockholders' Equity |           |               | 4,059,000
|                                                           |                                                                                                                                                                            |                            |           |               |          
|Total Liabilities and Stockholders' Equity                 |                                                                                                                                                                            | $                          | 7,366,000 |               | $        
|                                                           |                                                                                                                                                                            |                            |           |               |          

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

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IMPLANT SCIENCES CORPORATION        CONDENSED STATEMENTS OF OPERATIONS        (Unaudited)

|                                                                               |                                     | Three Months Ended
December 31, |                          | Six Months Ended
December 31, |          
|------------------------------------------------------------------------------ | ----------------------------------- | ------------------------------- | ------------------------ | ----------------------------- | ---------
|
|Revenues:                                                                      |                                     |                                 |                          |                               |          
|                                                                               | Product and contract research:      |                                 |                          |                               |          
|                                                                               |                                     | Medical                         |                          | $                             | 1,138,000
|                                                                               |                                     | Semiconductor                   |                          |                               | 188,000  
|                                                                               | Government contracts                |                                 |                          | 400,000                       |          
|                                                                               |                                     |                                 |                          |                               |          
|                                                                               |                                     |                                 | Total revenues           |                               |          
|                                                                               |                                     |                                 |                          |                               |          
|Cost of sales:                                                                 |                                     |                                 |                          |                               |          
|                                                                               | Cost of medical and semiconductor   |                                 |                          | 942,000                       |          
|                                                                               | Cost of government contracts        |                                 |                          | 357,000                       |          
|                                                                               |                                     |                                 |                          |                               |          
|                                                                               |                                     |                                 | Total cost of sales      |                               |          
|                                                                               |                                     |                                 |                          |                               |          
|Gross margin                                                                   |                                     |                                 | 427,000                  |                               |          
|                                                                               |                                     |                                 |                          |                               |          
|Operating expenses:                                                            |                                     |                                 |                          |                               |          
|                                                                               | Research and development            |                                 |                          | 452,000                       |          
|                                                                               | Selling, general and administrative |                                 |                          | 632,000                       |          
|                                                                               |                                     |                                 |                          |                               |          
|                                                                               |                                     |                                 | Total costs and expenses |                               |          
|                                                                               |                                     |                                 |                          |                               |          
|Loss from operations                                                           |                                     |                                 | (657,000                 | )                             |          
|                                                                               |                                     |                                 |                          |                               |          
|Other income (expense)                                                         |                                     |                                 |                          |                               |          
|                                                                               | Interest income                     |                                 |                          | 11,000                        |          
|                                                                               | Interest expense                    |                                 |                          | (207,000                      | )        
|                                                                               | Other expense                       |                                 |                          |                              |          
|                                                                               |                                     |                                 |                          |                               |          
|                                                                               |                                     |                                 | (196,000                 | )                             |          
|                                                                               |                                     |                                 |                          |                               |          
|Net loss                                                                       |                                     | $                               | (853,000                 | )                             | $        
|                                                                               |                                     |                                 |                          |                               |          
|Net loss per sharebasic:                                                      |                                     | $                               | (0.14                    | )                             | $        
|                                                                               |                                     |                                 |                          |                               |          
|Net loss per sharediluted:                                                    |                                     | $                               | (0.14                    | )                             | $        
|                                                                               |                                     |                                 |                          |                               |          
|Weighted average common shares outstanding used for basic earnings per share   |                                     |                                 | 6,229,413                |                               |          
|                                                                               |                                     |                                 |                          |                               |          
|Weighted average common shares outstanding used for diluted earnings per share |                                     |                                 | 6,229,413                |                               |          
|                                                                               |                                     |                                 |                          |                               |          

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

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IMPLANT SCIENCES CORPORATION        CONDENSED STATEMENT OF CASH FLOWS        (Unaudited)

|                                                     |                                                                             | Six Months Ended
December 31,               |                                 
|---------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------- | --------------------------------
|
|Cash flows from operating activities                 |                                                                             |                                             |                                 
|                                                     | Net loss                                                                    |                                             | $                               
|                                                     | Adjustments to reconcile net loss to net cash used by operating activities: |                                             |                                 
|                                                     |                                                                             | Depreciation and amortization               |                                 
|                                                     |                                                                             | Amortization of discount on preferred stock |                                 
|                                                     |                                                                             | Fair value of stock based compensation      |                                 
|                                                     |                                                                             | Equity in loss in Epsilon Medical           |                                 
|                                                     |                                                                             | Changes in assets and liabilities:          |                                 
|                                                     |                                                                             |                                             | Accounts receivable             
|                                                     |                                                                             |                                             | Inventories                     
|                                                     |                                                                             |                                             | Prepaid and other current assets
|                                                     |                                                                             |                                             | Accounts payable                
|                                                     |                                                                             |                                             | Accrued expenses                
|                                                     |                                                                             |                                             |                                 
|                                                     |                                                                             |                                             |                                 
|                                                     |                                                                             |                                             |                                 
|Cash flows from investing activities                 |                                                                             |                                             |                                 
|                                                     | Purchase of property and equipment                                          |                                             |                                 
|                                                     | Other non-current assets                                                    |                                             |                                 
|                                                     |                                                                             |                                             |                                 
|                                                     |                                                                             |                                             |                                 
|                                                     |                                                                             |                                             |                                 
|Cash flows from financing activities                 |                                                                             |                                             |                                 
|                                                     | Proceeds from common stock, net of discount of $300,000 in 2001             |                                             |                                 
|                                                     | Proceeds from issuance of convertible preferred stock                       |                                             |                                 
|                                                     | Repayments of long-term debt                                                |                                             |                                 
|                                                     |                                                                             |                                             |                                 
|                                                     |                                                                             |                                             |                                 
|                                                     |                                                                             |                                             |                                 
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                             | 782,000                         
|Cash and cash equivalents, beginning                 |                                                                             |                                             | 1,014,000                       
|                                                     |                                                                             |                                             |                                 
|Cash and cash equivalents, ending                    |                                                                             | $                                           | 1,796,000                       
|                                                     |                                                                             |                                             |                                 
|Supplemental disclosure of cash flow information:    |                                                                             |                                             |                                 
|                                                     | Interest paid                                                               |                                             | $                               
|                                                     | Obligations under capital lease                                             |                                             |                                 
|Supplemental disclosure of non-cash activities:      |                                                                             |                                             |                                 
|                                                     | Noncash issuance of Series A warrants                                       |                                             | $                               
|                                                     | Noncash beneficial conversion on preferred stock                            |                                             |                                 
|                                                     | Stock options exercised through note receivable from shareholder            |                                             |                                 

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

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IMPLANT SCIENCES CORPORATION        NOTES TO CONDENSED FINANCIAL STATEMENTS        December 31, 2002        (Unaudited)

1. Description of Business

Implant Sciences Corporation develops products for the medical device and explosives detection industry using ion implantation and thin film coatings of
radioactive and non-radioactive materials. We have received Food and Drug Administration 510(k) clearance to market our I-Plant Iodine-125 radioactive
seed for the treatment of prostate cancer. We also have under development, interventional cardiology devices and temporary coronary brachytherapy systems for the prevention of restenosis (reclosure of
the artery after balloon angioplasty). In addition, we modify the surface characteristics of orthopedic joint implants to reduce polyethylene wear and thereby increasing the life of the implant and
provide ion implantation of electronic dopants for the semiconductor industry. Additionally, we are developing an explosives detection device to be used in the detection of trace residues of
explosives.

2. Interim Financial Statements

The financial information for the three and six months ending December 31, 2002 is unaudited but includes all adjustments (consisting only of normal
recurring adjustments) which we consider necessary for a fair presentation of the financial position at such date and of the operating results and cash flows for these periods. The results of
operations and cash flows for the three and six months ended December 31, 2002 are not necessarily indicative of results that may be expected for the entire year. The information contained in
this Form 10-QSB should be read in conjunction with our audited financial
statements, included in our Form 10-KSB/A No. 1 as of and for the year ending June 30, 2002 filed with the Securities and Exchange Commission.

3. New Accounting Standards

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement on Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." SFAS No. 141 improves the transparency of the accounting and reporting for business combinations by requiring that all business combinations are accounted for under a single
method, the purchase method. This statement is effective for all business combinations initiated after June 30, 2001.

In
July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement applies to intangibles and goodwill acquired after June 30, 2001,
as well as goodwill and intangibles previously acquired. Under this statement, goodwill as well as other intangibles, determined to have an infinite life will no longer be amortized; however, these
assets will be reviewed for impairment on a periodic basis. We adopted SFAS No. 142 effective July 1, 2002. Adoption of this pronouncement did not have an effect on our financial
position or results of operations.

In
August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting obligations
associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to (a) all entities and (b) legal obligations associated
with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. SFAS No. 143 amends SFAS No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies," and is effective for financial statements issued for
fiscal years

5

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beginning after June 15, 2002. Adoption of this pronouncement did not have an effect on our financial position or results of operations.

In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," but retains SFAS No. 121's fundamental provisions for (a) recognition/measurement of impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes the accounting/reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for segments of a business to be disposed of but retains APB Opinion No. 30's requirement to report discontinued operations separately from continuing
operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held-for-sale. We adopted SFAS No. 144
effective July 1, 2002. Adoption of this pronouncement did not have an effect on our financial position or results of operations.

In
July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses the accounting for costs associated with
restructuring and other disposal activities. This statement supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity." This statement will be effective for disposal activities initiated after December 31, 2002, and we will adopt this statement for any costs relating to
restructuring or disposal activities initiated after the effective date.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition Disclosure, An Amendment of FAB Statement No. 123." This
statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of Statement No. 123 to require more prominent and more frequent disclosure in financial statements regarding the effects of stock-based compensation. The provisions of
SFAS 148 are effective for fiscal years ending after December 15, 2002 and the interim disclosure provisions are effective for financial reports containing financial statements for
interim periods beginning after December 15, 2002. The Company will continue to apply Accounting Principles Board Opinion No. 25 as the method used to account for stock-based employee
compensation arrangements, where applicable, but will adopt the disclosure requirements of SFAS 148 beginning with the financial statements for its third quarter ending March 31, 2003.

4. Earnings Per Share

Basic earnings per share are computed based only on the weighted average number of common shares outstanding during the period. Diluted earnings per share is
computed by using the weighted average number of common shares outstanding during the period, plus the dilutive effects of shares

6

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issuable through the exercise of stock options (common stock equivalents) unless their inclusion would be antidilutive.

5. Comprehensive Income

We have accumulated other comprehensive income resulting from the unrealized gain on an investment in marketable equity securities of CardioTech
International Inc. which is recorded in the stockholders' equity section of the balance sheet (Note 9). Comprehensive income is summarized below:

|                           |  | Three Months Ended
December 31, |          | Six Months Ended
December 31, |  
|-------------------------- |  | ------------------------------- | -------- | ----------------------------- | -
|
|Net loss                   |  | $                               | (853,000 | )                             | $
|Other comprehensive income |  |                                 | (3,000   | )                             |  
|                           |  |                                 |          |                               |  
|Comprehensive loss         |  | $                               | (856,000 | )                             | $
|                           |  |                                 |          |                               |  

6. Accounts Receivable

Contract revenue under cost sharing research and development agreements is recognized as eligible expenses are incurred. Invoicing of research and development
contracts occurs in accordance with the terms of the contract. Revenue recognized but unbilled is recorded as unbilled accounts receivable. At December 31, 2002 unbilled accounts receivable
represented approximately 18% of total accounts receivable. Generally, there are no prerequisites necessary to bill.

7. Credit Arrangement

We had a term loan facility of $1,500,000, of which $750,000 was utilized at September 30, 2002. On October 7, 2002, we paid the remaining balance
of principal and interest of approximately $192,000 in connection with the Series A 7% Cumulative Convertible Preferred Stock financing and terminated the Term Loan (See Note 8).

8. Equity Transactions

On October 7, 2002, we issued 250,000 shares of Series A 7% Cumulative Convertible Preferred Stock ("Convertible Preferred Stock") having a stated
value of $10 per share, pursuant to a Securities Purchase Agreement executed on October 7, 2002 with the Laurus Master Fund, Ltd. We received $2,500,000 in gross proceeds, less a
management and placement agent fee of approximately $300,000, and related transaction costs of approximately $101,000. The terms of the Series A 7% Cumulative Convertible Preferred Stock
provide for repayment in cash or with shares of our common stock beginning February 1, 2003. If we elect to convert into shares of our common stock, the common stock will be valued at $5.19 per
share. However, if the closing price of our common stock for any of the 11 trading days prior to a repayment date is less than $5.70, the common stock will be valued at the greater of 83% of the
average of the three lowest closing prices during the 30 trading days immediately

7

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preceding the repayment date or $2.02. The Securities Purchase Agreement contains default covenants, including certain financial covenants. We also granted the investor a security interest in
substantially all of our assets.

In connection with the issuance of the Series A convertible preferred stock, the investor received a warrant to purchase 55,000 shares of our common stock. The common stock
purchase warrant may be exercised at any time and is valid for five years from the date of issuance at an exercise price of $6.23 per share. The warrant was recorded as a discount from the preferred
stock at its estimated fair value of $25,000.

In accordance with the provisions of Emerging Issues Task Force (EITF) Issue 00-27, "Application of EITF Issue No. 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features of Contingently Adjustable Conversion Ratios', to Certain Convertible Securities", which became effective in November 2000, the allocated value of
the Series A convertible preferred stock contained a beneficial conversion feature calculated based on the difference between the effective conversion price of the proceeds allocated to the
Series A convertible preferred stock and the fair market value of the common stock at the date of issuance. The discount arising from the beneficial conversion feature aggregated $537,000 for
the six-month period ending December 31, 2002. The discount is being charged to interest expense during the period from the issuance of the preferred stock to the mandatory
redemption date of April 7, 2004. We recognized $42,000 of dividends as interest expense for the three and six months ended December 31, 2002.

We
valued the Series A Preferred Stock at issuance to be $1,537,000 based on the relative fair market values of the financial instruments issued in connection with this placement,
net of offering costs and the discount on the beneficial conversion. The amounts recorded in our financial statements at December 31, 2002, represents the amounts attributed to the sale of the
preferred stock, net cash proceeds of $2,099,000 ($401,000 of issuance costs incurred), amount allocated to warrants of $25,000, and the amount of the discount related to the value of beneficial
conversion feature of $537,000. We are accreting these discounts on the carrying value of the preferred stock to its redemption value of $2,500,000 at April 7, 2004, using the effective
interest method.

We
utilized approximately $192,000 of the proceeds to repay the outstanding Term Loan to Citizens Bank on October 7, 2002 and we will utilize the remaining proceeds to
commercialize our explosives detection system, purchase certain equipment to expand our semiconductor business, and for general working capital purposes.

During
the second quarter of 2003, the Company granted 50,000 options to purchase common stock to consultants in exchange for services. The Company accounts for stock-based compensation
issued to non-employees in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and Emerging Issues Task Force No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in conjunction with Selling, Goods or Services." The Company recorded approximately $39,000 in expense
associated with the issuance of options to consultants. The Company estimated the fair value of the Common Stock options using the

8

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Black-Scholes option-pricing model. The Company estimated the fair value of the options using the following input assumptions:

Volatility

57%Dividend yield

0%Risk-free interest rate

4.05%Expected lives

10 years


9. Related Party Transactions

SFAS No. 57, "Related Party Disclosures," specifies the nature of information that should be disclosed in financial statements regarding related party
transactions. CardioTech, a public company, is a related party with us by virtue of its significant business relationships.

Certain of our directors hold positions as directors of CardioTech. Our CEO and Chairman of the Board of Directors is also a director of CardioTech. The CEO and Chairman of the Board of
Directors



of CardioTech is also our director. Our acting Chief Financial Officer is also the acting Chief Financial Officer of CardioTech. As of December 31, 2002, approximately $25,000 was due and
payable to our acting Chief Financial Officer.

Accounts
receivable from related parties as of December 31, 2002 consisted of a loan of $138,000 to our chief executive officer and a loan of $84,000 to an employee. The loan to
our chief executive officer was used to exercise options for 50,000 shares of our common stock on December 9, 1997. The loan is due and payable upon the earlier of the disposal of the 50,000
shares or December 9, 2003 and bears interest at the rate of 6% per annum. The loan to an employee was used to exercise options for 20,000 shares of our common stock on November 15,
2002. The loan is due and payable on November 15, 2005 and bears interest at the rate of 3% per annum. These transactions were reported as a reduction of stockholders' equity.

In
March 2000, we entered into a $250,000 joint research agreement with CardioTech to develop a proprietary porous polymer biocompatible coating technology as a platform for our
proprietary radioactive brachytherapy technology. Through December 31, 2002 we paid CardioTech $115,000 pursuant to the aforementioned agreement. Additionally, we acquired 60,000 shares of the
common stock of CardioTech at a price of $1.00 per share. We have also accrued $35,000 as of December 31, 2002 for the final payment due in connection with this agreement and are obligated to
purchase an additional 40,000 shares of CardioTech's common stock at $1.00 per share. As of December 31, 2002, the fair market value of the CardioTech shares held as investment is $81,000.
CardioTech is a publicly traded company whose common stock trades under the symbol CTE on the American Stock Exchange.

9

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management discussion and analysis should be read in conjunction with the financial statements and notes thereto as filed in our
Form 10-KSB/A No. 1 for the year ended June 30, 2002. In addition to historical information, this Form 10-QSB contains forward-looking statements.
The forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the
results of any revision to these forward-looking statements. Readers should carefully review documents that we file from time to time with the Securities and Exchange Commission, including our
Quarterly Reports and Annual Reports filed by us in fiscal 2002 and 2003.

Results of Operations

Comparison for the three months ended December 31, 2002 and 2001

Revenues.Total revenues for the three months ended December 31, 2002 were $1,726,000 as compared to $1,584,000 for
the comparable prior year period, an increase of $142,000 or 9%. The increase is primarily attributable to revenue recognized from new government contracts to develop new applications and products
using our Laser Ion Mobility Spectrometry ("IMS") technology. Our Laser IMS technology is the platform technology used in our explosives detection devices. Government contracts revenues increased by
$190,000 or 90% as compared with the same period last year. Sales of the I-Plant prostate seed remained constant. I-Plant prostate seed sales for the three months
ended December 31, 2002 were approximately $663,000 as compared to $665,000 for the comparable prior year period, a decrease of $2,000. Although sales revenue decreased slightly, the volume of
seeds sold increased by 13%. The decrease in prostate seed revenues was due to expected downward pricing pressure, which has been experienced throughout the industry, leading to a reduction in our
price per seed. Management believes this trend may continue. Revenues from medical and industrial coatings for the three months ended December 31, 2002 were $475,000 as compared to $502,000 for
the comparable
prior year period, a decrease of $27,000 or 5%. The decrease in revenues from medical coatings is due primarily to a $41,000 decrease in industrial coating sales resulting from certain customers
pursuing different product processes not requiring radiopacity. This decrease was offset by a $19,000 increase in sales to our major medical coating customer. Revenues from semiconductors for the
three months ended December 31, 2002 were $188,000 as compared to $207,000 for the comparable prior year period, a decrease of $19,000 or 9%. The decrease was primarily attributable to a
reduction of $45,000 in sales for one particular customer's production needs. This decline in sales was offset by $30,000 of new semiconductor production jobs and the addition of new customers who
require outsourced ion implantation services for research and development activities. We believe that fluctuations in sales in our semiconductor business from
quarter-to-quarter are normal occurrences, however we do believe that moderate growth will continue to be achieved. Less than 5% of all revenues were derived from foreign
sources.

Combined
sales to our two major customers, the Howmedica/Osteonics Division of Stryker Corporation and MED-TEC Iowa, our exclusive distributor of prostate seeds, accounted
for 62% and 67% of revenue for the three months ended December 31, 2002 and 2001, respectively. Our government contract and grant revenue accounted for 23% and 13% of revenue for the three
months ended December 31, 2002 and 2001, respectively. Government contract and grant revenue as a percentage of total revenues increased as a result of our receiving several new grants and
contracts, primarily related to our Laser IMS technology. Grant revenues, principally Small Business Innovative Research (SBIR) programs, fluctuate due to: (a) our desire to obtain external
funding for its research and development efforts; (b) the availability of government funding; and (c) the time required to obtain approval of a grant application. We have been successful
in obtaining SBIR grants in fiscal 2003 and

10

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2002 and expect to continue to seek continuation or replacement of our existing SBIR grants during the remainder of fiscal 2003 and beyond.

Cost of Sales.Cost of sales for the three months ended December 31, 2002 were $1,299,000 as compared to $811,000 for
the comparable prior year period, an increase of $488,000 or 60%. The increases are, in general, attributable to increases in production volume of prostate seeds and increases in government contract
activities. As a percentage of revenues, the cost of medical and semiconductor revenues increased to 71% for the three months ended December 31, 2002 as compared to 49% for the comparable prior
year period. The increase in costs in medical and semiconductor revenues as a percentage of revenues is attributable to (a) lower sales volume in the semiconductor business, which has a high
fixed cost for the ion implantation process, and (b) increased costs related to the production of a higher volume of prostate seeds. Although the volume of seeds sold increased by 13%, the
revenue per seed declined as a result of the industry-wide competitive downward pricing pressures. Management is evaluating and implementing strategies to improve the cost of materials to
produce prostate seeds, developing new products related to the delivery of seeds in prostate procedures, and assessing additional channels of distribution that could increase seed sales volume. During
fiscal 2002 and 2001, we utilized SBIR grants as a significant source of funding for our research and development efforts. We will continue to use SBIR grants as a source of funding for our research
and development efforts in fiscal 2003. Our obligation with respect to these grants is to perform the research on a best-efforts basis. Periodically, we may continue our research and
development efforts related to these projects at our own expense. This cost is considered company-funded research and development.

Research and Development.Research and development expense for the three months ended December 31, 2002 was $452,000
as compared to $258,000 for the comparable prior year period, an increase of $194,000 or 75%. This increase is a result of continued development work in the areas of explosives and toxic substance
detection, temporary brachytherapy and radioactive prostate seed product compliments. Costs incurred in connection with our explosives and toxic substance detection device was approximately $105,000
fot the three months ended December 31, 2002 as compared to $12,000 for the comparable prior year period. We anticipate increases in future expenditures resulting from these and new product
development plans.

Selling, General and Administrative.Selling, general and administrative expenses for the three months ended
December 31, 2002 were $632,000 as compared to $590,000 for the comparable prior year period, an increase of $42,000 or 7%. The increase is primarily attributable to a $55,000 charge for
noncash stock based compensation in connection with the issuance of stock options to a consultant and a loan to an employee for the exercise of stock options. Net of the noncash stock based
compensation, selling, general and administrative expenses decreased by $13,000 or 2%. This decrease reflects management's continued exercise of strict cost containment measures to ensure control over
our administrative spending.

Other Income, Net.For the three month period ended December 31, 2002, we recorded other expense, net, of $196,000 as
compared to other expense, net, of $5,000 for the comparable prior year period, an increase of $191,000. The increase in other expense, net, is primarily attributable to the accretion of discounts
being charged to interest expense on the preferred stock financing (Note 8).

Net Loss.Net loss for the three month period ended December 31, 2002 was $853,000 as compared to $80,000 for the
comparable prior year period, an increase of $773,000. This increase in net loss is primarily a result of the decrease in revenues from the sale of I-Plant prostate seeds and
semiconductor services and the effect of the accretion of discounts and interest expense on the preferred stock financing. The loss was further compounded by increasing cost of producing higher
volumes of I-Plant prostate seeds. Additionally, we incurred more costs in connection with our efforts to commercialize our new explosives detection device and develop new
applications using our Laser IMS technology. Our earnings before interest, taxes, depreciation amortization and other noncash items

11

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("Adjusted EBITDA") for the three months ended December 31, 2002 were a negative Adjusted EBITDA of $404,000 as compared to a positive Adjusted EBITDA of $134,000 for the comparable prior year
period, a decrease in Adjusted EBITDA of $538,000 or 401%. We calculated Adjusted EBITDA by adding depreciation, amortization and noncash stock based compensation of $253,000 and $209,000 to the loss
from operations of $657,000 and $75,000 for the three month period ended December 31, 2002 and 2001, respectively. Adjusted EBITDA is not comparable to earnings determined in accordance with
generally accepted accounting principles. Accordingly, Adjusted EBITDA as determined by us may not be comparable to similarly titled measures reported by other companies. We believe that this
computation is useful in analyzing operating performance, but should be used only in conjunction with results reported in accordance with generally accepted accounting principles. The basic and
diluted net loss per share for the three months ended December 31, 2002 was $0.14 per share as compared to $0.01 per share for the comparable prior year period, an increase in net loss of
$0.13.

Comparison for the six months ended December 31, 2002 and 2001

Revenues.Total revenues for the six months ended December 31, 2002 were $3,301,000 as compared to $2,937,000 for the
comparable prior year period, an increase of $364,000 or 12%. The increase is primarily attributable to revenue recognized from new government contracts to develop new applications and products using
our Laser IMS technology. Our Laser IMS technology is the platform technology used in our explosives detection devices. Government contracts revenues increased by $262,000 or 84% as compared with the
same period last year. Sales of the I-Plant prostate seed increased by $172,000 or 14% as compared with the comparable prior year period. While the volume of seeds sold
increased by 28%, the revenue per seed declined as a result of the industry-wide competitive downward pricing pressures. Management believes the volume of prostate seed sales will maintain
a trend of strong growth, but the severe pricing pressure throughout the industry may have a negative effect on seed revenue. Revenues from medical and industrial coatings for the six months ended
December 31, 2002 were $971,000 as compared to $995,000 for the comparable prior year period, a decrease of $24,000 or 2%. The decrease in revenues from coatings is due to a $74,000 decrease in
industrial coating sales resulting from certain customers pursuing different product processes not requiring radiopacity. This decrease was offset by a $55,000, or 8%, increase in sales to our major
medical coating customer. Revenues from semiconductors for the six months ended December 31, 2002 were $397,000 as compared to $443,000 for the comparable prior year period, a decrease of
$46,000 or 10%. The decrease was attributable to a reduction in sales for one customer. This decrease in semiconductor sales was offset by a $48,000 increase in new semiconductor production jobs and
the addition of new customers who require outsourced ion implantation services for research and development activities We believe that fluctuations in sales in our semiconductor business from
quarter-to-quarter are normal occurrences, however, we do believe that moderate growth will continue to be achieved. Less than 5% of all revenues were derived from foreign
sources.

Combined
sales to our two major customers, the Howmedica/Osteonics Division of Stryker Corporation and MED-TEC Iowa, our exclusive distributor of prostate seeds, accounted
for 66% and 67% of revenue for the six months ended December 31, 2002 and 2001. Our government contract and grant revenue accounted for 17% and 11% of revenue for the six months ended
December 31, 2002 and 2001, respectively. Government contract and grant revenue as a percentage of total revenues increased as a result of our receiving several new grants and contracts,
primarily related to our Laser IMS technology, Grant revenues, principally Small Business Innovative Research (SBIR) programs, fluctuate due to: (a) our desire to obtain external funding for
its research and development efforts; (b) the availability of government funding; and (c) the time required to obtain approval of a grant application. We have been successful in
obtaining SBIR grants in fiscal 2003 and 2002 and expect to continue to seek continuation or replacement of its existing SBIR grants during the remainder of fiscal 2003 and beyond.

12

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Cost of Sales.Cost of sales for the six months ended December 31, 2002 were $2,526,000 as compared to $1,974,000 for
the comparable prior year period, an increase of $552,000 or 28%. The increases are, in
general, attributable to increases in production of prostate seeds and increases in government contract activities. As a percentage of revenues, the cost of medical and semiconductor revenues
increased to 73% for the six months ended December 31, 2002 as compared to 65% for the comparable prior year period. This increase in costs in medical and semiconductor revenues as a percentage
of revenues is attributable to i) lower sales volume in the semiconductor business, which has a high fixed cost for the ion implantation process, and ii) increased costs related to the
production of a higher volume of prostate seeds. Although the volume of seeds sold increased by 28%, the revenue per seed declined as a result of the industry-wide competitive downward
pricing pressures. Management is evaluating and implementing strategies to improve the cost of materials to produce prostate sees, developing new products related to the delivery of seeds in prostate
procedures, and assessing additional channels of distribution that could increase seed sales volume. During fiscal 2002 and 2001, we utilized SBIR grants as a significant source of funding for our
research and development efforts. We will continue to use SBIR grants as a source of funding for our research and development efforts in fiscal 2003. Our obligation with respect to these grants is to
perform the research on a best-efforts basis. Periodically, we may continue our research and development efforts related to these projects at its own expense. This cost is considered
company-funded research and development.

Research and Development.Research and development expense for the six months ended December 31, 2002 was $868,000 as
compared to $549,000 for the comparable prior year period, an increase of $319,000 or 58%. This increase is a result of continued development work in the areas of explosives and toxic substance
detection, temporary brachytherapy and radioactive prostate seed product compliments. Costs incurred in connection with our explosives and toxic substance detection device was approximately $256,000
fot the six months ended December 31, 2002 as compared to $25,000 for the comparable prior year period. We anticipate increases in future expenditures resulting from these and new product
development plans.

Selling, General and Administrative.Selling, general and administrative expenses for the six months ended
December 31, 2002 were $1,154,000 as compared to $1,003,000 for the comparable prior year period, an increase of $151,000 or 15%. The increase is primarily attributable to a $55,000 charge for
noncash stock based compensation in connection with the issuance of stock options to a consultant and a loan to an employee for the exercise of stock options. Net of the noncash stock based
compensation, selling, general and administrative expenses increased by $96,000 or 10%. This increase reflects our addition of certain administrative personnel necessary to support our continued
growth and investor relations costs. However, management continues to exercise strict cost containment measures to ensure control over our administrative spending.

Other Income, Net.For the six month period ended December 31, 2002, we recorded other expense, net, of $155,000, as
compared to no other income for the comparable prior year period, an increase of $155,000. The increase in other expense, net, is attributable to the accretion of discounts being charged to interest
expense on the preferred stock financing (Note 8).

Net Loss.Net loss for the six month period ended December 31, 2002 was $1,444,000 as compared to $589,000 for the
comparable prior year period, an increase of $855,000 or 145%. This increase in net loss is primarily a result of the decrease in revenues from the sale of I-Plant prostate
seeds and semiconductor services that we experienced in the second quarter of fiscal 2003; and the effect of the accretion of discounts and interest expense on the preferred stock financing. The loss
was further





compounded by the increasing cost of producing higher volumes of I-Plant prostate seeds. Additionally, we incurred more costs in connection with our efforts to commercialize
our new explosives detection device and develop new applications using our Laser IMS technology. Our earnings before interest, taxes, depreciation amortization and other noncash items ("Adjusted
EBITDA") for the

13

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six months ended December 31, 2002 were a negative Adjusted EBITDA of $783,000 as compared to a negative Adjusted EBITDA of $207,000 for the comparable prior year period, an increase in
negative Adjusted EBITDA of $576,000 or 278%. We calculated Adjusted EBITDA by adding depreciation, amortization and noncash stock based compensation of $464,000 and $382,000 to the loss from
operations of $1,247,000 and $589,000 for the six month period ended December 31, 2002 and 2001, respectively. Adjusted EBITDA is not comparable to earnings determined in accordance with
generally accepted accounting principles. Accordingly, Adjusted EBITDA as determined by us may not be comparable to similarly titled measures reported by other companies. We believe that this
computation is useful in analyzing operating performance, but should be used only in conjunction with results reported in accordance with generally accepted accounting principles. The basic and
diluted net loss per share for the six months ended December 31, 2002 was $0.23 per share as compared to $0.10 per share for the comparable prior year period, an increase in net loss of $0.13
or 130%.

Liquidity and Capital Resources

As of December 31, 2002, we had approximately $1,796,000 in cash in the form of cash and short-term investments. During the six months ended
December 31, 2002, operating activities used cash of approximately $958,000. Net cash used by operating activities primarily reflects the $1,444,000 net loss, a $12,000 increase in accounts
receivable, a $308,000 increase in inventory, and a $108,000 decrease in accrued expenses; offset by a $317,000 increase in accounts payable, $160,000 of amortization of discount on preferred stock,
$55,000 of fair value of stock based compenation, and $409,00 of depreciation and amortization. During the six months ended December 31, 2002, investing activities used cash of approximately
$209,000, which was primarily attributable to $209,000 used in the purchase of property and equipment. During the six months ended December 31, 2002, financing activities provided approximately
$1,949,000 in cash. Net cash provided by financing activities is primarily attributable to the private placement of the Series A 7% Cumulative Convertible Preferred Stock, which provided
$2,099,000, net of management and transaction fees of $401,000; and the exercise of $90,000 of common stock options. This was offset by the repayment of $240,000 in long-term debt and
capital lease obligations.

On
October 7, 2002, we issued 250,000 shares of Series A 7% Cumulative Convertible Preferred Stock having a stated value of $10 per share, pursuant to a Securities Purchase
Agreement executed on October 7, 2002 with the Laurus Master Fund, Ltd. We received $2,500,000 in gross proceeds, less a management and placement agent fee of approximately $300,000, and
related transaction costs of approximately $101,000. The terms of the Series A 7% Cumulative Convertible Preferred Stock provide for repayment in cash or with shares of our common stock
beginning February 1, 2003. If we elect to convert into shares of our common stock, the common stock will be valued at $5.19 per share. However, if the closing price of our common stock for any
of the 11 trading days prior to a repayment date is less than $5.70, the common stock will be valued at the greater of 83% of the average of the three lowest closing prices during the 30 trading days
immediately preceding the repayment date or $2.02. The Securities Purchase Agreement contains default covenants, including certain financial
covenants. We also issued to Laurus Master Fund, Ltd. a common stock purchase warrant to purchase 55,000 shares of our common stock at $6.23 per share and granted them a security interest in
substantially all of our assets. We utilized approximately $192,000 of the proceeds to repay the outstanding Term Loan to Citizens Bank on October 7, 2002 and we will utilize the remaining
proceeds to commercialize our explosives detection system, purchase certain equipment to expand our semiconductor business, and for general working capital purposes.

In
connection with the issuance of the Series A convertible preferred stock, the investor received a warrant to purchase 55,000 shares of our common stock. The common stock
purchase warrant may be exercised at any time and is valid for five years from the date of issuance at an exercise price of $6.23 per share. In connection with the above, we granted the investor a
security interest in substantially all

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of our assets. The warrant was recorded as a discount from the preferred stock at its estimated fair value of $25,000.

In
accordance with the provisions of Emerging Issues Task Force (EITF) Issue 00-27, "Application of EITF Issue No. 98-5 "Accounting for Convertible
Securities with Beneficial Conversion Features of Contingently Adjustable Conversion Ratios', to Certain Convertible Securities", which became effective in November 2000, the allocated value of
the Series A convertible preferred stock contained a beneficial conversion feature calculated based on the difference between the effective conversion price of the proceeds allocated to the
Series A convertible preferred stock and the fair market value of the common stock at the date of issuance. The discount arising from the beneficial conversion feature aggregated $537,000 for
the six-month period ending December 31, 2002. The discount is being charged to interest expense during the period from the issuance of the preferred stock to the mandatory
redemption date of April 7, 2004.

We
valued the Series A Preferred Stock at issuance to be $1,537,000 based on the relative fair market values of the financial instruments issued in connection with this placement,
net of offering costs and the discount on the beneficial conversion. The amounts recorded in our financial statements at December 31, 2002, represents the amounts attributed to the sale of the
preferred stock, net cash proceeds of $2,099,000 ($401,000 of issuance costs incurred), amount allocated to warrants of $25,000, and the amount of the discount related to the value of beneficial
conversion feature of $537,000. We are accreting these discounts on the carrying value of the preferred stock to its redemption value of $2,500,000 at April 7, 2004, using the effective
interest method.

We
had a term loan facility of $1,500,000 of which $750,000 was utilized at September 30, 2002. On October 7, 2002, we paid the remaining balance of principal and interest
of approximately $192,000 in connection with the Series A 7% Cumulative convertible Preferred Stock financing and terminated the Term Loan.

We
are 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. This project has
been ongoing since approximately May 1999. In November 2001, we developed a portable prototype and in December 2001 we demonstrated it to an independent third party. Following
this demonstration, we decided to pursue the technology. At present, we are developing both portable and bench-top systems for use in airports and Department of Defense facilities.
Prototype units have been transported to the Department of Defense and Department of Transportation facilities for demonstration and evaluation.

This
project is currently being undertaken by both our internal scientists and certain outside contractors. The development of new applications is typically funded through government
grants or internal funding. Originally, we funded a research and development program for the electronic detection system to produce enough data to write grant proposals for the Department of Defense
to detect unexploded bombs and mines. Since March 2000, we have received six contracts in the approximate amount of $1,538,000 from agencies such as the Departments of the Army, Air Force and
Navy; as well as the National Institute of Health. On August 12, 2002, we signed a Cooperative Research and Development Agreement with an agency of the Department of Transportation which will
permit us and the government to exchange critical test data and for us to deliver a certain number of units to the Department of Transportation for independent evaluation and field testing.

In
June 2000, we developed our first generation device, which demonstrated sensitivity to the explosive TNT. In June 2001, we developed a second generation prototype with
increased sensitivity and selectivity. This device can detect and specify an increasing number of compounds within various explosive materials. The explosives that have been tested to date are TNT,
RDX, PETN, EGDN, and DNT. RDX is the primary component of C3 and C4 explosives, such as Datasheet and Semtex, as well

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as certain types of black powder explosives. We believe these explosives represent the majority of the explosives presently used in terrorist activities. After the attack on the World Trade Center
occurred on September 11, 2001, management made the decision to continue the internal funding of the project rather than await funding through government grants. In December 2001, we
successfully demonstrated our working prototype of the electronic detection system to several third parties. Our electronic detection system has been subjected to controlled testing by third parties
and successfully detected C4. As a result of the successful demonstration, we believed it was appropriate to further pursue the commercial development of our electronic detection system device.

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

We
are developing several versions of our explosives detection systems, including: i) a table-top unit, which can be used to screen passengers and carry-on
baggage in airports; and ii) a portable system, which can be used to replace bomb-sniffing dogs to clear buildings, aircrafts, or ships where hidden bombs are believed to exist. We
plan to first market these systems to U.S. government agencies for use in airports, government buildings and facilities.

Although our operations and spending continue to focus on the sales of our semiconductor, medical coatings and prostate seed products, we are currently expending significant resources in
the development of our explosives detection devices. We continue to fund as much research and development as possible through government grants in accordance with the provisions of the respective
grant awards. We will require additional funding in order to advance the commercial development of the explosives detection system. We will attempt to obtain such financing by: (i) government
grants, (ii) the exercise of the redeemable common stock purchase warrants, (iii) private financing, or (iv) strategic partnerships. However, there can be no assurance that we
will be successful in our attempts to raise such additional financing.

We
will require substantial funds for further research and development, future pre-clinical and clinical trials, regulatory approvals, continued expansion of commercial-scale
manufacturing capabilities, and the marketing of our products. Our capital requirements depend on numerous factors, including but not limited to, the progress of our research and development programs;
the progress of pre-clinical and clinical testing; the time and costs involved in obtaining regulatory approvals; 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 purchase of additional facilities and capital
equipment.

As
of December 31, 2002 we were conducting our operations with approximately $1,796,000 in cash. We estimate such amounts combined with our cash flow from operations will be
sufficient to fund our working capital in the next twelve months. Future expenditures for research and product development, especially relating to outside testing and clinical trials, are
discretionary and, accordingly, can be adjusted, as can certain selling, general and administrative expenses, based on the availability of cash.

Critical Accounting Policies

Our significant accounting policies are described in Note 1 to the financial statements included in Item 7 of our Form 10-KSB/A
No. 1 as of June 30, 2002. 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,

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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. There has been no change to
our critical accounting policies through the quarter ending December 31, 2002.

Item 3. Controls and Procedures

"Disclosure controls and procedures" are controls and other procedures designed to ensure that we timely record, process, summarize and report the information
that we are required to disclose in the reports that we file or submit with the SEC. These include controls and procedures designed to ensure that such information is accumulated and communicated to
our management, including our President and Acting Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required under the Sarbanes-Oxley Act of 2002, our President and Acting Chief Financial Officer conducted a review of our disclosure controls and procedures as of a date within
90 days of the date of this report. They concluded, as of the evaluation date, that our disclosure controls and procedures are effective. We have made no significant changes since the
evaluation date to our internal controls relating to accounting and financial reporting.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

Not Applicable

Item 2. Changes in Securities and Use of Proceeds

On October 7, 2002, we issued 250,000 shares of Series A 7% Cumulative Convertible Preferred Stock ("Convertible Preferred Stock") having a stated
value of $10 per share, pursuant to a Securities Purchase Agreement executed on October 7, 2002 with the Laurus Master Fund, Ltd. We received $2,500,000 in gross proceeds, less a
management and placement agent fee of approximately $300,000, and related transaction costs of approximately $101,000. The terms of the Series A 7% Cumulative Convertible Preferred Stock
provide for repayment in cash or with shares of our common stock beginning February 1, 2003. If we elect to convert into shares of our common stock, the common stock will be valued at $5.19 per
share. However, if the closing price of our common stock for any of the 11 trading days prior to a repayment date is less than $5.70, the common stock will be valued at the greater of 83% of the
average of the three lowest closing prices during the 30 trading days immediately preceding the repayment date or $2.02. The Securities Purchase Agreement contains default covenants, including certain
financial covenants. We also issued to Laurus Master Fund, Ltd. a five year common stock purchase warrant to purchase 55,000 shares of our common stock at $6.23 per share and granted them a
security interest in substantially all of our assets. We utilized approximately $192,000 of the proceeds to repay the outstanding Term Loan to Citizens Bank on October 7, 2002 and we will
utilize the remaining proceeds to commercialize our explosives detection system, purchase certain equipment to expand our semiconductor business, and for general working capital purposes.

This private placement was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities

Not Applicable

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

We held our annual shareholders meeting on January 7, 2003. Anthony Armini, Stephen Bunker, Shaun Cave, David Eisenhaure and Michael Szycher were elected
as directors of the Company to hold office until the 2003 annual meeting of the shareholders. The results for this proposal were as follows:

|NAME             |  | FOR       |  | WITHHELD
|---------------- |  | --------- |  | --------
|Anthony Armini   |  | 5,099,152 |  | 117,500 
|Stephen Bunker   |  | 5,188,952 |  | 27,700  
|Shaun Cave       |  | 5,188,952 |  | 27,700  
|David Eisenhaure |  | 5,188,952 |  | 27,700  
|Michael Szycher  |  | 5,188,952 |  | 27,700  

Proposal
No. 2 was an amendment to the Company's 2002 Incentive and Nonqualified Stock Option Plan. The results for this proposal were as follows:

FOR

AGAINST

ABSTAIN4,952,735

253,917

10,000


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Item 5. Other Information



Our chief executive officer and chief financial officer have furnished to the SEC the certification with respect to this Report that is required by
Section 906 of the Sarbanes-Oxley Act of 2002.

Item 6. List of Exhibits and Reports on Form 8-K





|Exhibit No. |  | Description                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------
|3.1*        |  | Certificate of Vote of Directors establishing Series A 7% Cumulative Convertible Preferred Stock, dated October 7, 2002.
|4.1*        |  | Specimen Certificate of the Series A 7% Cumulative Convertible Preferred Stock.                                         
|10.1*       |  | Securities Purchase Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd., dated October 7, 2002. 
|10.2*       |  | Security Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd., dated October 7, 2002.            
|10.3*       |  | Common Stock Purchase Warrant for 55,000 Shares Issued to Laurus Master Fund, Ltd., dated October 7, 2002.              

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SIGNATURES

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

|                        |  | IMPLANT SCIENCES CORPORATION
|----------------------- |  | ----------------------------
|Date: February 14, 2003 |  | By:                         
|                        |  | By:                         

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CERTIFICATIONS

I,
Anthony J. Armini, President and Chief Executive Officer of Implant Sciences Corporation, certify that:





| |  | Date: February 14, 2003                                                    
| |  | ---------------------------------------------------------------------------
| |  | /s/ANTHONY J. ARMINIAnthony J. Armini
President and Chief Executive Officer

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I, David C. Volpe, Acting Chief Financial Officer of Implant Sciences Corporation, certify that:





| |  | Date: February 14, 2003                                       
| |  | --------------------------------------------------------------
| |  | /s/DAVID C. VOLPEDavid C. Volpe
Acting Chief Financial Officer

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Exhibit Index

|Exhibit No. |  | Description                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------
|3.1*        |  | Certificate of Vote of Directors establishing Series A 7% Cumulative Convertible Preferred Stock, dated October 7, 2002.
|4.1*        |  | Specimen Certificate of the Series A 7% Cumulative Convertible Preferred Stock.                                         
|10.1*       |  | Securities Purchase Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd., dated October 7, 2002. 
|10.2*       |  | Security Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd., dated October 7, 2002.            
|10.3*       |  | Common Stock Purchase Warrant for 55,000 Shares Issued to Laurus Master Fund, Ltd., dated October 7, 2002.              

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