Form of Secured Term Note


     

    THIS
      NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
      OR
      ANY STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED
      OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
      THIS
      NOTE UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION
      OF
      COUNSEL REASONABLY SATISFACTORY TO IMPLANT SCIENCES CORPORATION THAT SUCH
      REGISTRATION IS NOT REQUIRED.

     

    SECURED
      TERM NOTE

     

    FOR
      VALUE
      RECEIVED, IMPLANT SCIENCES CORPORATION, a Massachusetts corporation (the
“Company”),
      promises to pay to LAURUS MASTER FUND, LTD., c/o M&C Corporate Services
      Limited, P.O. Box 309 GT, Ugland House, South Church Street, George Town, Grand
      Cayman, Cayman Islands, Fax: 345-949-8080 (the “Holder”)
      or its
      registered assigns or successors in interest, the sum of One Million Five
      Hundred Thousand Dollars ($1,500,000), together with any accrued and unpaid
      interest hereon, on August 29, 2007 (the “Maturity
      Date”)
      if not
      sooner paid.

     

    Capitalized
      terms used herein without definition shall have the meanings ascribed to such
      terms in that certain Securities Purchase Agreement dated as of the date hereof
      by and between the Company and the Holder (as amended, modified and/or
      supplemented from time to time, the “Purchase
      Agreement”).

     

    The
      following terms shall apply to this Secured Term Note (this “Note”):

     

    ARTICLE
      I  

    CONTRACT
      RATE AND AMORTIZATION

     

    1.1  Contract
      Rate.
      Subject
      to Sections 4.2 and 5.10, interest payable on the outstanding principal amount
      of this Note (the “Principal
      Amount”)
      shall
      accrue at a rate per annum equal to the “prime rate” published in The
      Wall Street Journal
      from
      time to time (the “Prime
      Rate”),
      plus
      one percent (1.0%) (the “Contract
      Rate”).
      The
      Contract Rate shall be increased or decreased as the case may be for each
      increase or decrease in the Prime Rate in an amount equal to such increase
      or
      decrease in the Prime Rate; each change to be effective as of the day of the
      change in the Prime Rate. Interest shall be (i) calculated on the basis of
      a 360
      day year, and (ii) payable monthly in cash, in arrears, commencing on February
      1, 2007, on the first business day of each consecutive calendar month thereafter
      through and including the Maturity Date, and on the Maturity Date, whether
      by
      acceleration or otherwise.

     

    1.2  Principal
      Payments.
      All
      outstanding principal amounts together with any accrued and unpaid interest
      and
      any and all other unpaid amounts which are then owing by the Company to the
      Holder under this Note, the Purchase Agreement and/or any other Related
      Agreement shall be due and payable on the Maturity Date.

     

    ARTICLE
      II  

    NOTE
      ISSUANCE

     

    2.1  Issuance
      of New Note.
      Upon
      any loss or destruction of this Note, a new Note containing the same date and
      provisions of this Note shall, at the request of the Holder, be issued by the
      Company to the Holder for the principal balance of this Note and interest which
      shall not have been paid. The Company shall not pay any costs, fees or any
      other
      consideration to the Holder for the production and issuance of a new
      Note.

     

    ARTICLE
      III  

    EVENTS
      OF DEFAULT

     

    3.1  Events
      of Default.
      The
      occurrence of any of the following events set forth in this Section 3.1 shall
      constitute an event of default (“Event
      of Default”)
      hereunder:

     

    (a)  Failure
      to Pay.
      The
      Company fails to pay when due any installment of principal, interest or other
      fees hereon in accordance herewith, or the Company fails to pay any of the
      other
      Obligations (under and as defined in the Master Security Agreement) when due,
      and, in any such case, such failure shall continue for a period of three (3)
      days following the date upon which any such payment was due.

     

    (b)  Breach
      of Covenant.
      The
      Company or any of its Subsidiaries breaches any covenant contained in the
      Purchase Agreement in any material respect and such breach, if subject to cure,
      continues for a period of fifteen (15) days after the occurrence
      thereof.

     

    (c)  Breach
      of Representations and Warranties.
      Any
      representation, warranty or statement made or furnished by the Company under
      the
      Purchase Agreement or any other Related Agreement shall at any time be false
      or
      misleading in any material respect on the date as of which made or deemed
      made.

     

    (d)  Default
      Under Other Agreements.
      The
      occurrence of any default (or similar term) in the observance or performance
      of
      any other agreement or condition relating to any now existing or future
      indebtedness, preferred equity, or contingent obligation of the Company or
      any
      of its Subsidiaries to Holder or otherwise beyond the relevant stated period
      of
      grace (if any), the effect of which default is to cause, or permit the holder
      or
      holders of such indebtedness or beneficiary or beneficiaries of such contingent
      obligation to cause, such indebtedness to become due prior to its stated
      maturity or such contingent obligation to become payable; 

     

    (e)  Bankruptcy.
      The
      Company or any of its Subsidiaries shall (i) apply for, consent to or
      suffer to exist the appointment of, or the taking of possession by, a receiver,
      custodian, trustee or liquidator of itself or of all or a substantial part
      of
      its property, (ii) make a general assignment for the benefit of creditors,
      (iii) commence a voluntary case under the federal bankruptcy laws (as now or
      hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file
      a
      petition seeking to take advantage of any other law providing for the relief
      of
      debtors, (vi) acquiesce to, without challenge within ten (10) days of the filing
      thereof, or failure to have dismissed, within thirty (30) days, any petition
      filed against it in any involuntary case under such bankruptcy laws, or (vii)
      take any action for the purpose of effecting any of the foregoing;

     

    (f)  Judgments.
      Attachments or levies in excess of $100,000 in the aggregate are made upon
      the
      Company or any of its Subsidiary’s assets or a judgment is rendered against the
      Company’s property involving a liability of more than $100,000 which shall not
      have been vacated, discharged, stayed or bonded within thirty (30) days from
      the
      entry thereof;

     

    (g)  Insolvency.
      The
      Company or any of its Subsidiaries shall admit in writing its inability, or
      be
      generally unable, to pay its debts as they become due or cease operations of
      its
      present business;

     

    (h)  Change
      of Control.
      A
      Change of Control (as defined below) shall occur with respect to the Company,
      unless Holder shall have expressly consented to such Change of Control in
      writing. A “Change of Control” shall mean any event or circumstance as a result
      of which (i) any “Person” or “group” (as such terms are defined in Sections
      13(d) and 14(d) of the Exchange Act, as in effect on the date hereof), other
      than the Holder, is or becomes the “beneficial owner” (as defined in Rules
      13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of 35%
      or
      more on a fully diluted basis of the then outstanding voting equity interest
      of
      the Company, (ii) the Board of Directors of the Company shall cease to consist
      of a majority of the Parent’s board of directors on the date hereof (or
      directors appointed by a majority of the board of directors in effect
      immediately prior to such appointment) or (iii) the Company or any of its
      Subsidiaries merges or consolidates with, or sells all or substantially all
      of
      its assets to, any other person or entity;

     

    (i)  Indictment;
      Proceedings.
      The
      indictment or threatened indictment of the Company or any of its Subsidiaries
      or
      any executive officer of the Company or any of its Subsidiaries under any
      criminal statute, or commencement or threatened commencement of criminal
      proceeding against the Company or any of its Subsidiaries or any executive
      officer of the Company or any of its Subsidiaries pursuant to which statute
      or
      proceeding penalties or remedies sought or available include forfeiture of
      any
      of the property of the Company or any of its Subsidiaries;

     

    (j)  The
      Purchase Agreement and Related Agreements.
      (i) An
      Event of Default shall occur under and as defined in the Purchase Agreement
      or
      any other Related Agreement, (ii) the Company or any of its Subsidiaries shall
      breach any term or provision of the Purchase Agreement or any other Related
      Agreement in any material respect and such breach, if capable of cure, continues
      unremedied for a period of fifteen (15) days after the occurrence thereof,
      (iii)
      the Company or any of its Subsidiaries attempts to terminate, challenges the
      validity of, or its liability under, the Purchase Agreement or any Related
      Agreement, (iv) any proceeding shall be brought to challenge the validity,
      binding effect of the Purchase Agreement or any Related Agreement or (v) the
      Purchase Agreement or any Related Agreement ceases to be a valid, binding and
      enforceable obligation of the Company or any of its Subsidiaries (to the extent
      such persons or entities are a party thereto);

     

    (k)  Stop
      Trade.
      An SEC
      stop trade order or Principal Market trading suspension of the Common Stock
      shall be in effect for five (5) consecutive days or five (5) days during a
      period of ten (10) consecutive days, excluding in all cases a suspension of
      all
      trading on a Principal Market, provided that the Company shall not have been
      able to cure such trading suspension within thirty (30) days of the notice
      thereof or list the Common Stock on another Principal Market within sixty (60)
      days of such notice; or

     

    (l)  Failure
      to Deliver Replacement Note.
      The
      Company’s failure to deliver to issue and deliver a replacement Note as required
      by Section 2.2 hereof to the Holder within seven (7) business days of Holder’s
      written request therefor.

     

    3.2  Default
      Interest.
      Following the occurrence and during the continuance of an Event of Default,
      the
      Company shall pay additional interest on this Note in an amount equal to seventy
      five basis points (0.75%) per month, and all outstanding obligations under
      this
      Note, the Purchase Agreement and each other Related Agreement, including unpaid
      interest, shall continue to accrue interest at such additional interest rate
      from the date of such Event of Default until the date such Event of Default
      is
      cured or waived.

    .

     

    ARTICLE
      IV  

    MISCELLANEOUS

     

    4.1  Cumulative
      Remedies.
      The
      remedies under this Note shall be cumulative.

     

    4.2  Failure
      or Indulgence Not Waiver.
      No
      failure or delay on the part of the Holder hereof in the exercise of any power,
      right or privilege hereunder shall operate as a waiver thereof, nor shall any
      single or partial exercise of any such power, right or privilege preclude other
      or further exercise thereof or of any other right, power or privilege. All
      rights and remedies existing hereunder are cumulative to, and not exclusive
      of,
      any rights or remedies otherwise available.

     

    4.3  Notices.
      Any
      notice herein required or permitted to be given shall be in writing and shall
      be
      deemed effectively given: (a) upon personal delivery to the party notified,
      (b)
      when sent by confirmed telex or facsimile if sent during normal business hours
      of the recipient, if not, then on the next business day, (c) five days after
      having been sent by registered or certified mail, return receipt requested,
      postage prepaid, or (d) one day after deposit with a nationally recognized
      overnight courier, specifying next day delivery, with written verification
      of
      receipt. All communications shall be sent to the Company at the address provided
      in the Purchase Agreement executed in connection herewith, and to the Holder
      at
      the address provided in the Purchase Agreement for such Holder, with a copy
      to
      John E. Tucker, Esq., 825 Third Avenue, 14th
      Floor,
      New York, New York 10022, facsimile number (212) 541-4434, or at such other
      address as the Company or the Holder may designate by ten days advance written
      notice to the other parties hereto. 

     

    4.4  Amendment
      Provision.
      The
      term “Note” and all references thereto, as used throughout this instrument,
      shall mean this instrument as originally executed, or if later amended or
      supplemented, then as so amended or supplemented, and any successor instrument
      as such successor instrument may be amended or supplemented.

     

    4.5  Assignability.
      This
      Note shall be binding upon the Company and its successors and assigns, and
      shall
      inure to the benefit of the Holder and its successors and assigns, and may
      be
      assigned by the Holder in accordance with the requirements of the Purchase
      Agreement. The Company may not assign any of its obligations under this Note
      without the prior written consent of the Holder, any such purported assignment
      without such consent being null and void.

     

    4.6  Cost
      of Collection.
      In case
      of any Event of Default under this Note, the Company shall pay the Holder
      reasonable costs of collection, including reasonable attorneys’
fees.

     

    4.7  Governing
      Law, Jurisdiction and Waiver of Jury Trial.

     

    (a)  THIS
      NOTE
      SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS
      OF
      THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
      LAW.

     

    (b)  THE
      COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED
      IN
      THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION
      TO
      HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY, ON THE ONE HAND,
      AND THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS NOTE OR ANY OF THE OTHER
      RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE
      OR
      ANY OF THE RELATED AGREEMENTS; PROVIDED,
      THAT
      THE COMPANY ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
      HEARD
      BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND
      FURTHER PROVIDED,
      THAT
      NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO PRECLUDE THE HOLDER FROM
      BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT
      THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
      OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE
      HOLDER. THE COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
      JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND THE COMPANY
      HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL
      JURISDICTION, IMPROPER VENUE OR FORUM
      NON CONVENIENS.
      THE
      COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
      PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
      SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
      MAIL
      ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN THE PURCHASE AGREEMENT
      AND
      THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S
      ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
      POSTAGE PREPAID.

     

    (c)  THE
      COMPANY DESIRES THAT ITS DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
      APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
      OF
      THE JUDICIAL SYSTEM AND OF ARBITRATION, THE COMPANY HERETO WAIVES ALL RIGHTS
      TO
      TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
      WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE HOLDER AND THE
      COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
      RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS NOTE, ANY OTHER
      RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.

     

    4.8  Severability.
      In the
      event that any provision of this Note is invalid or unenforceable under any
      applicable statute or rule of law, then such provision shall be deemed
      inoperative to the extent that it may conflict therewith and shall be deemed
      modified to conform with such statute or rule of law. Any such provision which
      may prove invalid or unenforceable under any law shall not affect the validity
      or enforceability of any other provision of this Note.

     

    4.9  Maximum
      Payments.
      Nothing
      contained herein shall be deemed to establish or require the payment of a rate
      of interest or other charges in excess of the maximum permitted by applicable
      law. In the event that the rate of interest required to be paid or other charges
      hereunder exceed the maximum rate permitted by such law, any payments in excess
      of such maximum rate shall be credited against amounts owed by the Company
      to
      the Holder and thus refunded to the Company.

     

    4.10  Security
      Interest.
      The
      Holder has been granted a security interest in certain assets of the Company
      as
      more fully described in the Master Security Agreement dated as of the date
      hereof. The obligations of the Company under this Note are guaranteed by certain
      Subsidiaries of the Company pursuant to the Subsidiary Guaranty dated as of
      the
      date hereof.

     

    4.11  Construction.
      Each
      party acknowledges that its legal counsel participated in the preparation of
      this Note and, therefore, stipulates that the rule of construction that
      ambiguities are to be resolved against the drafting party shall not be applied
      in the interpretation of this Note to favor any party against the
      other.

     

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    IN
      WITNESS WHEREOF,
      the
      Company has caused this Secured Term Note to be signed in its name effective
      as
      of this ___ day of December, 2006.

     

    IMPLANT
      SCIENCES CORPORATION

     

    By:
      /s/
      Diane J. Ryan

    Name:
      Diane J. Ryan

    Title:
      VP
      and CFO

     

     

    WITNESS:
      /s/ Stephen N. Bunker