Use these links to rapidly review the documentIMPLANT SCIENCES CORPORATION

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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 September 30, 2002
|or                                                
|o                                                  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
|For the transition period from
 to                

Commission file number 000-25839

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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 ý    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 October 31, 2002
|---------------------------- |  | -------------------------------
|Common Stock, $.10 par value |  | 6,216,080                      

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

This
document consists of 19 pages.

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IMPLANT SCIENCES CORPORATION

INDEX



|                              |         |                                                                                                      |                                                                                       | Page No.
|----------------------------- | ------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | --------
|PART I. FINANCIAL INFORMATION |         |                                                                                                     
|                              | Item 1. |                                                                                                      | Financial Statements:                                                                 |         
|                              |         | Condensed Balance Sheets as of September 30, 2002 and June 30, 2002 (unaudited)                      |                                                                                       | 3       
|                              |         | Condensed Statement of Operations for the Three Months Ended September 30, 2002 and 2001 (unaudited) |                                                                                       | 4       
|                              |         | Condensed Statement of Cash Flows for the Three Months Ended September 30, 2002 and 2001 (unaudited) |                                                                                       | 5       
|                              |         | Notes to Condensed Financial Statements (including data applicable to unaudited periods)             |                                                                                       | 6       
|                              | Item 2. |                                                                                                      | Management's Discussion and Analysis of Financial Condition and Results of Operations |         
|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                                                                                           |                                                                                       | 17      

2

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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

IMPLANT SCIENCES CORPORATION

CONDENSED BALANCE SHEETS    (Unaudited)

|                                           |                                                                                                                                                                     | September 30,
2002         |           | June 30,
2002 |          
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ------------- | ---------
|ASSETS                                     |                                                                                                                                                                     |                            |           |               |          
|Current Assets:                            |                                                                                                                                                                     |                            |           |               |          
|                                           | Cash and cash equivalents (including $35,000 of restricted cash)                                                                                                    |                            | $         | 588,000       |          
|                                           | Accounts receivable, net                                                                                                                                            |                            |           | 829,000       |          
|                                           | Inventories                                                                                                                                                         |                            |           | 577,000       |          
|                                           | Investmentsavailable for sale securities                                                                                                                           |                            |           | 84,000        |          
|                                           | Prepaid and other current assets, net                                                                                                                               |                            |           | 134,000       |          
|                                           |                                                                                                                                                                     |                            |           |               |          
|                                           |                                                                                                                                                                     | Total Current Assets       |           |               | 2,212,000
|Property and equipment, net                |                                                                                                                                                                     |                            | 3,669,000 |               |          
|Other non-current assets, net              |                                                                                                                                                                     |                            | 167,000   |               |          
|                                           |                                                                                                                                                                     |                            |           |               |          
|                                           |                                                                                                                                                                     | Total Assets               |           | $             | 6,048,000
|                                           |                                                                                                                                                                     |                            |           |               |          
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                                                                                                                     |                            |           |               |          
|Current Liabilities:                       |                                                                                                                                                                     |                            |           |               |          
|                                           | Accounts payable                                                                                                                                                    |                            | $         | 840,000       |          
|                                           | Accrued expenses                                                                                                                                                    |                            |           | 707,000       |          
|                                           | Current portion of long-term debt                                                                                                                                   |                            |           | 176,000       |          
|                                           | Non-current obligations under capital leases                                                                                                                        |                            |           | 9,000         |          
|                                           |                                                                                                                                                                     |                            |           |               |          
|                                           |                                                                                                                                                                     | Total Current Liabilities  |           |               | 1,732,000
|                                           |                                                                                                                                                                     |                            |           |               |          
|Long-term Liabilities:                     |                                                                                                                                                                     |                            |           |               |          
|                                           | Long-term debt, net of current portion                                                                                                                              |                            |           | 15,000        |          
|                                           | Obligations under capital lease                                                                                                                                     |                            |           | 14,000        |          
|                                           | Deferred income taxes                                                                                                                                               |                            |           | 29,000        |          
|                                           |                                                                                                                                                                     |                            |           |               |          
|                                           |                                                                                                                                                                     |                            | 58,000    |               |          
|                                           |                                                                                                                                                                     |                            |           |               |          
|                                           |                                                                                                                                                                     |                            | 1,790,000 |               |          
|                                           |                                                                                                                                                                     |                            |           |               |          
|Stockholders' equity:                      |                                                                                                                                                                     |                            |           |               |          
|                                           | Common stock, $.01 par value; 20,000,000 shares authorized; 6,216,080 and 6,200,901 issued and outstanding as of September 30, 2002 and June 30, 2002, respectively |                            |           | 622,000       |          
|                                           | Additional paid-in capital                                                                                                                                          |                            |           | 13,678,000    |          
|                                           | Accumulated deficit                                                                                                                                                 |                            |           | (9,919,000    | )        
|                                           | Deferred compensation                                                                                                                                               |                            |           | (9,000        | )        
|                                           | Accumulated other comprehensive income                                                                                                                              |                            |           | 24,000        |          
|                                           | Notes receivable from employees                                                                                                                                     |                            |           | (138,000      | )        
|                                           |                                                                                                                                                                     |                            |           |               |          
|                                           |                                                                                                                                                                     | Total stockholders' equity |           |               | 4,258,000
|                                           |                                                                                                                                                                     |                            |           |               |          
|Total Liabilities and Stockholders' Equity |                                                                                                                                                                     | $                          | 6,048,000 |               | $        
|                                           |                                                                                                                                                                     |                            |           |               |          

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

3

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IMPLANT SCIENCES CORPORATION

CONDENSED STATEMENTS OF OPERATIONS    (Unaudited)

|                                                                               |                                     | Three Months Ended
September 30, |          
|------------------------------------------------------------------------------ | ----------------------------------- | -------------------------------- | ---------
|
|Revenues:                                                                      |                                     |                                  |          
|                                                                               | Medical                             |                                  | $        
|                                                                               | Semiconductor                       |                                  |          
|                                                                               | Government contracts                |                                  |          
|                                                                               |                                     |                                  |          
|                                                                               |                                     | Total revenues                   |          
|                                                                               |                                     |                                  |          
|Cost of sales:                                                                 |                                     |                                  |          
|                                                                               | Cost of medical and semiconductor   |                                  |          
|                                                                               | Cost of government contracts        |                                  |          
|                                                                               |                                     |                                  |          
|                                                                               |                                     | Total cost of sales              |          
|                                                                               |                                     |                                  |          
|Gross margin                                                                   |                                     |                                  | 348,000  
|Operating expenses:                                                            |                                     |                                  |          
|                                                                               | Research and development            |                                  |          
|                                                                               | Selling, general and administrative |                                  |          
|                                                                               |                                     |                                  |          
|                                                                               |                                     | Total costs and expenses         |          
|                                                                               |                                     |                                  |          
|Loss from operations                                                           |                                     |                                  | (590,000 
|                                                                               |                                     |                                  |          
|Other income (expense)                                                         |                                     |                                  |          
|                                                                               | Interest income                     |                                  |          
|                                                                               | Interest expense                    |                                  |          
|                                                                               | Other income (expense)              |                                  |          
|                                                                               |                                     |                                  |          
|                                                                               |                                     |                                  | (1,000   
|                                                                               |                                     |                                  |          
|Net loss                                                                       |                                     | $                                | (591,000 
|                                                                               |                                     |                                  |          
|Net loss per sharebasic                                                       |                                     | $                                | (0.10    
|                                                                               |                                     |                                  |          
|Net loss per sharediluted                                                     |                                     | $                                | (0.10    
|                                                                               |                                     |                                  |          
|Weighted average common shares outstanding used for basic earnings per share   |                                     |                                  | 6,216,080
|                                                                               |                                     |                                  |          
|Weighted average common shares outstanding used for diluted earnings per share |                                     |                                  | 6,216,080
|                                                                               |                                     |                                  |          

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)

|                                                                            |                                    | Three Months Ended
September 30, |                                          
|--------------------------------------------------------------------------- | ---------------------------------- | -------------------------------- | -----------------------------------------
|
|Cash flows from operating activities                                        |                                    |                                  |                                          
|Net loss                                                                    |                                    | $                                | (591,000                                 
|Adjustments to reconcile net loss to net cash used in operating activities: |                                    |                                  |                                          
|                                                                            | Depreciation and amortization      |                                  |                                          
|                                                                            | Equity in loss in Epsilon Medical  |                                  |                                          
|                                                                            | Changes in assets and liabilities: |                                  |                                          
|                                                                            |                                    | Accounts receivable              |                                          
|                                                                            |                                    | Inventories                      |                                          
|                                                                            |                                    | Prepaid and other current assets |                                          
|                                                                            |                                    | Accounts payable                 |                                          
|                                                                            |                                    | Accrued expenses                 |                                          
|                                                                            |                                    |                                  |                                          
|                                                                            |                                    |                                  | Net cash used by operating activities    
|                                                                            |                                    |                                  |                                          
|Cash flows from investing activities                                        |                                    |                                  |                                          
|Purchase of property and equipment                                          |                                    |                                  | (157,000                                 
|Other non-current assets                                                    |                                    |                                  | (17,000                                  
|                                                                            |                                    |                                  |                                          
|                                                                            |                                    |                                  | Net cash used by investing activities    
|                                                                            |                                    |                                  |                                          
|Cash flows from financing activities                                        |                                    |                                  |                                          
|Proceeds from common stock                                                  |                                    |                                  | 50,000                                   
|Repayments of long-term debt                                                |                                    |                                  | (47,000                                  
|                                                                            |                                    |                                  |                                          
|                                                                            |                                    |                                  | Net cash provided by financing activities
|                                                                            |                                    |                                  |                                          
|Net decrease in cash and cash equivalents                                   |                                    |                                  | (426,000                                 
|Cash and cash equivalents, beginning                                        |                                    |                                  | 979,000                                  
|                                                                            |                                    |                                  |                                          
|Cash and cash equivalents, ending                                           |                                    | $                                | 553,000                                  
|                                                                            |                                    |                                  |                                          
|Supplemental disclosure of cash flow information:                           |                                    |                                  |                                          
|Interest paid                                                               |                                    | $                                | 3,000                                    
|Fixed assets acquired through capital lease                                 |                                    |                                  |                                         

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

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IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS    September 30, 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 provides 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 months ended September 30, 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 months ended September 30, 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 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 FASB issued 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

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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 the Company will adopt this statement for any costs relating to
restructuring or disposal activities initiated after the effective date.

4.    Earnings Per Share

Basic earnings per share is 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 issuable through the exercise of stock options (common stock
equivalents) unless their inclusion would be antidilutive.

5.    Comprehensive Income

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

Three Months Ended
September 30,2002

2001Net loss

$
(591,000
)
$
(509,000
)Other comprehensive income


24,000


Comprehensive loss

$
(567,000
)
$
(509,000
)


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

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receivable. At September 30, 2002 unbilled accounts receivable represented approximately 5.0% of total accounts receivable. Generally, there are no prerequisites necessary to bill.

7.    Credit Arrangement

The Company financed its operations utilizing a Revolving Credit Facility ("Credit Facility") and an Equipment Term Loan ("Term Loan") under a Loan Agreement with
its bank. The Revolving Credit Facility is unsecured and the Equipment Term Loan is cross-collateralized and cross-defaulted. The Loan Agreement has a first lien on substantially all of the Company's
assets.

On
September 30, 2000, the Company's Credit Facility expired and the Company chose not to renew the Credit Facility. There were no balances outstanding as of September 30,
2002.

The
Company has a term loan facility of $1,500,000, of which it had utilized $750,000 at September 30, 2002. Interest is payable monthly at 1% above the bank's base rate
commencing February 1998. As of September 30, 2002, the balance outstanding was approximately $191,000.

The
Company's Loan Agreement requires compliance with two financial covenants including minimum levels of net worth and net loss limits. At June 30, 2002, the Company's net loss
covenant was greater than the required amount. On September 28, 2001, the Company and a director and officer of the Company had fully collateralized the Term Loan and executed pledge agreements
with respect to the collateral. As of September 30, 2002, the Company and the director collateralized the Term Loan with $35,000 and $200,000 of cash, respectively. The Company's bank has
waived its rights under the Loan Agreement with respect to this financial covenant at June 30, 2002 through and including June 30, 2003.

On
October 7, 2002, the Company 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.    Private Placement

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 fee and placement agent fee
of approximately $300,000, and related transaction costs of approximately $100,000. 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.

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9.    Related Party Transactions

Statement of Financial Accounting Standards 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 the Company by virtue of its significant business relationships.

Certain
directors of the Company hold positions as directors of CardioTech. The CEO and Chairman of the Board of Directors of the Company is also a director of CardioTech. The CEO and
Chairman of the Board of Directors of CardioTech is also a director of the Company. The acting Chief Financial Officer of the Company is also the acting Chief Financial Officer of CardioTech. As of
September 30, 2002, approximately $18,000 was due and payable to the Company's acting Chief Financial Officer.

Accounts
receivable from related parties as of September 30, 2002 consisted of a loan of $138,000 to the Company's chief executive officer, which was used to exercise options for
50,000 shares of the Company's common stock on December 9, 1997. The loan is due and payable upon the disposal of the 50,000 shares and the loan bears interest at 6% per annum. This transaction
was reported as a reduction of stockholders' equity.

In
December 2001, we completed a private placement with Generation Capital Associates in which it purchased 145,349 units for $1,500,000. Each unit consists of one share of common
stock and one common stock purchase warrant. Investors Capital Corp. acted as one of the placement agents in this transaction and received common stock purchase warrants to purchase 8,000 shares of
our common stock at an exercise price of $12.90 per share. Mr. Pasquale Ruggieri is a member of our Board of Directors and also serves as an investment banker for Investors Capital Corp.

On
October 10, 2001, CardioTech provided the Company a $500,000 Line of Credit Facility, which was subsequently terminated by mutual agreement on March 29, 2002.

In
March 2000, the Company entered into a $250,000 joint research agreement with CardioTech to develop a proprietary porous polymer biocompatible coating technology as a platform
for the Company's proprietary radioactive brachytherapy technology. Through September 30, 2002, the Company paid CardioTech $115,000 pursuant to the aforementioned agreement. Additionally, the
Company acquired 60,000 shares of the common stock of CardioTech at a price of $1.00 per share. As of September 30, 2002, the fair market value of the CardioTech shares held as investment is
$84,000. 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
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 the Company in fiscal 2002 and 2003.

Results of Operations

Comparison for the three months ended September 30, 2002 and 2001

Revenues.Total revenues for the three months ended September 30, 2002 were $1,575,000 as compared to $1,353,000 for
the comparable prior year period, an increase of $222,000 or 16%. The increase is attributable primarily to revenue recognized from the I-Plant prostate seed, which we began shipping in
the first quarter of fiscal 2001. I-Plant prostate seed sales for the three months ended September 30, 2002 were approximately $698,000 as compared to $524,000 for the comparable
prior year period, an increase of $174,000 or 33%. Revenues from medical and industrial coatings for the three months ended September 30, 2002 were $494,000 as compared to $490,000 for the
comparable prior year period, an increase of of $4,000 or 1%. While medical coatings revenues for the three months ended September 30, 2002 increased by $37,000 or 10% as compared with the
comparable prior year period, the industrial coating sales were down by $33,000 or 29%. This decrease in industrial coatings related to certain customers pursuing different product processes not
requiring radiopacity at this time. Revenues from semiconductors for the three months ended September 30, 2002 were $209,000 as compared to $236,000 for the comparable prior year period, a
decrease of $27,000 or 11%. The
decrease in the semiconductor business is a result of reduced sales to one customer during the current quarter. We believe that slight fluctuations in sales in our semiconductor business from
quarter-to-quarter are normal occurrences, however we believe that moderate growth will continue to be achieved. Contract and grant revenues for the three months ended September 30, 2002 were
$172,000 as compared to $100,000 for the comparable prior year period, an increase of $72,000 or 72%. This increase is attributable to the receipt of two new awards from the US Army and the US Air
Force. Our government contract and grant revenues accounted for 11% and 7% of revenue for the three months ended September 30, 2002 and 2001, respectively. Our 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. We expect to continue to seek
continuation or replacement of our existing SBIR grants during fiscal 2003 and beyond. Less than 5% of all revenues were derived from foreign sources.

Two
of our major customers, the Howmedica/Osteonics Division of Stryker Corporation and Biomet, Incorporated, combined, accounted for 26% of revenue for the three months ended
September 30, 2002 and 28% for the comparable prior year period. Our sales to these customers decreased as a percentage of total revenues as a result of the affect of the overall increase in
total revenues resulting from growth in our prostate seed sales. MED-TEC Inc., our exclusive distributor of prostate seeds, accounted for 44% of revenues for the three months ended
September 30, 2002 and 39% for the comparable prior year period.

10

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Cost of Sales.Cost of sales for the three months ended September 30, 2002 was $1,227,000 as compared to $1,163,000
for the comparable prior year period, an increase of $64,000 or 6%. This increase in cost is primarily attributable to the increase in cost of product sales due to: (a) overall increase in
sales volume; and (b) additional costs related to the growth in radioactive prostate seed sales, principally personnel costs and depreciation expense related to new equipment. As a percentage
of revenues, the cost of medical and semiconductor product revenues decreased to 75% for the three months ended September 30, 2002 as compared to 82% for the comparable prior year period. The
decrease in cost as a percentage of revenues is primarily attributable to the overall increase in sales volume, principally the growth in volume of prostate seed sales which have the affect of
absorbing the fixed costs associated with the production of prostate seeds. Cost of government contracts for the three month period ended September 30, 2002 was $172,000 as compared to $139,000
for the comparable prior year period, an increase of $33,000 or 24%. During the fiscal quarters ended September 30, 2002 and 2001, we utilized Small Business Innovative Research grants as a
source of funding for our research and development efforts. Our obligation with respect to these grants is to perform the research on a best-efforts basis.

Research and Development.Research and development expense for the three months ended September 30, 2002 was $416,000
as compared to $291,000 for the comparable prior year period, an increase of $125,000 or 43%. This increase is primarily a result of the development costs associated with the explosives detection
device, and to a lesser extent, internal funding of the development of the polyurethane coated drug-eluting coronary stent. We anticipate increases in future expenditures resulting from new product
development plans, especially the development and commercialization of our explosives detection device.

Selling, General and Administrative.Selling, general and administrative expenses for the three months ended
September 30, 2002 were $522,000 as compared to $413,000 for the comparable prior year period, an increase of $109,000 or 26%. This increase reflects our addition of certain administrative
personnel needed 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 and Expenses, Net.For the three month period ended September 30, 2002, we recorded other expense, net of
$1,000 as compared to other income, net of $5,000 in the comparable prior year period. The decrease is primarily a result of a lower available cash balance upon which to generate interest income.

Net Loss.Net loss for the three months ended September 30, 2002 was $591,000 as compared to $509,000 for the
comparable prior year period, an increase of $82,000 or 16%. The increase in net loss is primarily attributable to the increased spending on research and development expenses, especially those costs
expended in connection with the explosives detection device development and commercialization efforts. These costs were, however, offset by increased revenues and improved gross margins from the sale
of our I-Plant prostate seeds. Our earnings before interest, taxes, depreciation, amortization and other non-cash items ("Adjusted EBITDA") for the three months ended September 30,
2002 was a negative Adjusted EBITDA of $379,000 as compared to a negative Adjusted EBITDA of $341,000 for the comparable prior year period, an increase in negative Adjusted EBITDA of $38,000 or 11%.
We calculated Adjusted EBITDA by adding depreciation and amortization of $211,000 and $173,000 to the loss from operations of $590,000 and $514,000 for the three months ended September 30, 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

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principles. This increase in negative Adjusted EBITDA primarily reflects the impact of the expenditures for ongoing research and development efforts tnecessary to bring new products to market. The
basic and diluted net loss per share for the three months ended September 30, 2002 was $0.10 per share as compared to $0.09 per share for the comparable prior year period, an increase in net
loss of $0.01 or 11%.

Liquidity and Capital Resources

As of September 30, 2002 we had approximately $588,000 in cash, including $35,000 in restricted cash, in the form of cash and short-term investments.
During the three months ended September 30, 2002, operating activities used cash of approximately $255,000. Net cash used by operating activities primarily reflects the $591,000 net loss, a
$125,000 increase in inventory, a $33,000 increase in prepaid and other current assets, and a $71,000 decrease in accrued expenses; offset by an $87,000 decrease in accounts
receivable, a $267,000 increase in accounts payable, and depreciation and amortization of $211,000. During the three months ended September 30, 2002, investing activities used cash of
approximately $174,000, primarily attributable to the purchase of approximately $157,000 of property and equipment. During the three months ended September 30, 2002, financing activities
provided approximately $3,000 in cash. Net cash provided by financing activities primarily includes proceeds from the exercise of stock options offset by payments on our equipment term loan.

We
had a Revolving Credit Facility ("Credit Facility") and have an Equipment Term Loan ("Term Loan") pursuant to a Loan Agreement with our bank. The Revolving Credit Facility was
unsecured and the Equipment Term Loan is cross-collateralized and cross-defaulted. The Loan Agreement has a first lien on substantially all of our assets.

On
September 30, 2000, our Credit Facility expired. We chose not to renew the Credit Facility and we have no further borrowing rights or availability. Additionally, there were no
borrowings on the Credit Facility during the three month period ended September 30, 2002 and we have no balances outstanding with respect to the expired Credit Facility as of
September 30, 2002.

Our
Term Loan provided a facility of $1,500,000, of which we utilized $750,000. Interest is payable monthly at 1% above the bank's base rate commencing February 1998. As of
September 30, 2002, the balance outstanding was $191,000 and no further borrowings are permitted on the Term Loan.

Our
Loan Agreement requires compliance with two financial covenants including minimum levels of net worth and net loss limits. At June 30, 2002, our net loss covenant was greater
than the required amount. On September 28, 2001, we and Stephen Bunker, one of our directors and officers, fully collateralized the Term Loan and executed pledge agreements with respect to the
collateral. As of September 30, 2002, we and one of our directors collateralized the Term Loan with $35,000 and $200,000 of cash, respectively. Our bank has waived its rights under the Loan
Agreement with respect to this financial covenant at June 30, 2002 through and including June 30, 2003.

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
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, management decided to pursue the technology and to prepare for submission a research and development agreement by June 2002. At present, we are developing both portable and
bench-top systems for use in airports and

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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 involved a certain amount of one our employee's time and certain outside contractors. This project was undertaken by our research personnel who are constantly researching
new applications for this technology. 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.

The
Department of Transportation has stated that the U.S. could spend between $1.9 billion and $2.5 billion on equipment for the detection of bulk amounts and trace amounts
of explosives. However, we do not know how much will be allocated to each of trace and bulk equipment or how much allocated to equipment for the detection of trace amounts of explosives will be
allocated to devices like ours.

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 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 a sample of 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. We are developing a pre-production electronic detection system that we believe
will be completed prior to the end of calendar year 2002. This pre-production electronic detection system will form the basis of a commercial unit and we will submit it to the Transportation Security
Administration for evaluation.

The
electronic detection system detects microscopic quantities of explosive molecules in the air. The device does not use X-rays and does not produce a danger to personnel operating the
device or scanned by the device. The device is a sensor that receives signals that are already in the environment. Two companies market trace electronic detection systems (Ion Track Instruments, a
subsidiary of General Electric, and Smiths Plc, a U.K. publicly held company). Both of these competitors use Ion Mobility Spectrometry in their respective devices for the detection and classification
of explosive molecules. Additionally, both of these competitors use Nickel-63, a radioactive source, to ionize the explosive vapors. Our electronic detection system also uses Ion Mobility Spectrometry
technology to detect and classify explosives molecules, however, our electronic detection system uses a laser beam to ionize the explosive molecules. The laser yields greater sensitivity than
Nickel-63 and has the potential
to detect explosives without physically rubbing or swiping the outside of a container or luggage. Currently, the trace electronic detection systems require the operator to physically rub or swipe the
articles to be tested. The swab or cloth is then placed into electronic detection system, heated to evaporate some of the explosive particles, and then directs these vapors into the Ion Mobility
Spectrometry device. Our electronic detection system uses a sensor that does not require physical contact to screen the article to detect trace residues and detects the explosives from the vapor
alone. Since our device does not use any radioactive source, management believes it is safer than trace explosives residue detection systems currently in use.

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We
believe its explosives detection system is roughly 833 to 4,500 times more sensitive than an explosives-sniffing dog. This belief is based on the assumption that an
explosives-sniffing dog is as sensitive to explosives as it is to narcotics.

We
have tested for false positives and false negatives by using numerous non-explosive organic vapors. The electronic detection system properly did not register the existence of
non-explosives. The accepted testing methodology for false positives requires testing on a commercially available electronic detection system and is usually performed in the context of a specific
application, such as baggage screening, personnel screening, locating bombs in buildings, and cargo or auto screening. The official false positive and false negative testing must be done by an
independent third party agency, however, such independent testing has not yet been performed.

Management
believes the material competitive disadvantage of our electronic detection system is the cost. We believe that our device will be 30% to 40% more expensive than Ion Mobility
Spectrometry based electronic detection systems, which are approximately $40,000 to $50,000 per unit. However, we believe that the efficiency of our electronic detection system and the resultant
improvement in throughput of the quantity of carry-on articles and personnel that can be screened will provide a cost justification.

Consistent
with our policy to protect our proprietary technologies, we have submitted three preliminary 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 the systems to serve these markets. We are developing a table-top unit, which can be used to screen passengers and carry-on baggage in airports. We
are also developing 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 and government buildings. We have 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.

The
electronic detection system does not change our current operational and spending focus. Our operations and spending continue to focus on the sales of our semiconductor, medical
coatings and prostate seed products. Additionally, we continue to fund research and development through government grants in accordance with the provisions of the respective grant awards. We may
require additional funding in order to advance the commercial development of the electronic detection system. If such additional funding is required, we will attempt to obtain such financing by:
(i) a government grant, (ii) the exercise of the redeemable common stock purchase warrants, or (iii) private financing. However, there can be no assurance that we will be
successful in our attempts to raise such additional financing.

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 fee and placement agent fee of approximately $300,000,
and related transaction costs of approximately $100,000. 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

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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.

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 September 30, 2002, we were conducting our operations with approximately $588,000 in cash and cash equivalents (including $35,000 of restricted cash). We estimate such
amounts combined with our cash flow from operations and financing arrangements concluded on October 7, 2002 will be sufficient to fund our working capital and research and development
activities in the next twelve months. Future expenditures for 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 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, 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 September 30, 2002.

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PART II:    OTHER INFORMATION

Item 1.    Legal Proceedings

Not Applicable

Item 2.    Changes in Securities and Use of Proceeds

Not Applicable

Item 3.    Defaults Upon Senior Securities

Not Applicable

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

Not Applicable

Item 5.    Other Information

Not Applicable

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





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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: November 14, 2002 | /s/ANTHONY J. ARMINIAnthony J. Armini
President and CEO                                                    
|                        | /s/DAVID C. VOLPEDavid C. Volpe
Acting Chief Financial Officer
(Principal Financial and
Accounting Officer)

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CERTIFICATIONS

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



| | Date: November 14, 2002                                                    
| | ---------------------------------------------------------------------------
| | /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: November 14, 2002                                       
| | --------------------------------------------------------------
| | /s/DAVID C. VOLPEDavid C. Volpe
Acting Chief Financial Officer

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