Form of Securities Purchase Agreement


    SECURITIES
      PURCHASE AGREEMENT

     

    LAURUS
      MASTER FUND, LTD.

     

    and

     

    IMPLANT
      SCIENCES CORPORATION

     

    Dated:
      December 29, 2006

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    SECURITIES
      PURCHASE AGREEMENT

     

    THIS
      SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of
      December 29, 2006, by and between IMPLANT SCIENCES CORPORATION, a Massachusetts
      (the “Company”), and LAURUS MASTER FUND, LTD., a Cayman Islands company (the
“Purchaser”).

     

    RECITALS

     

    WHEREAS,
      the Company has authorized the sale to the Purchaser of a Secured Term Note
      in
      the aggregate principal amount of One Million Five Hundred Thousand Dollars
      ($1,500,000) in the form of Exhibit A hereto (as amended, modified and/or
      supplemented from time to time, the “Note”);

     

    WHEREAS,
      the Company wishes to issue to the Purchaser a warrant, on the date hereof,
      in
      the form of Exhibit B hereto (as amended, modified and/or supplemented from
      time
      to time, the “Warrant”) to purchase up to 458,000 shares of the Company’s Common
      Stock (subject to adjustment as set forth therein) in connection with the
      Purchaser’s purchase of the Note;

     

    WHEREAS,
      the Purchaser desires to purchase the Note and the Warrant on the terms and
      conditions set forth herein; and

     

    WHEREAS,
      the Company desires to issue and sell the Note and Warrant to the Purchaser
      on
      the terms and conditions set forth herein.

     

    AGREEMENT

     

    NOW,
      THEREFORE, in consideration of the foregoing recitals and the mutual promises,
      representations, warranties and covenants hereinafter set forth and for other
      good and valuable consideration, the receipt and sufficiency of which are hereby
      acknowledged, the parties hereto agree as follows:

     

    1.  Agreement
      to Sell and Purchase.
      Pursuant to the terms and conditions set forth in this Agreement, on the Closing
      Date (as defined in Section 3), the Company shall sell to the Purchaser, and
      the
      Purchaser shall purchase from the Company, the Note. The sale of the Note on
      the
      Closing Date shall be known as the “Offering.” The Note will mature on the
      Maturity Date (as defined in the Note). Collectively, the Note and Warrant
      and
      Common Stock issuable upon exercise of the Warrant are referred to as the
“Securities.”

     

    2.  Fees
      and Warrant.
      On the
      Closing Date:

     

    (a)  The
      Company will issue and deliver to the Purchaser the Warrant, on the date hereof,
      to purchase up to 458,000 shares of Common Stock (subject to adjustment as
      set
      forth therein) in connection with the Offering, pursuant to Section 1 hereof.
      All the representations, covenants, warranties, undertakings, and
      indemnification, and other rights made or granted to or for the benefit of
      the
      Purchaser by the Company are hereby also made and granted for the benefit of
      the
      holder of the Warrant and shares of the Company’s Common Stock issuable upon
      exercise of the Warrant (the “Warrant Shares”).

     

    (b)  Subject
      to the terms of Section 2(d) below, the Company shall pay to Laurus Capital
      Management, LLC, the manager of the Purchaser, a closing payment in an amount
      equal to four percent (4.00%) of the aggregate principal amount of the Note.
      The
      foregoing fee is referred to herein as the “Closing Payment.”

     

    (c)  The
      Closing Payment shall be paid at closing out of funds held pursuant to the
      Escrow Agreement (as defined below) and a disbursement letter (the “Disbursement
      Letter”).

     

    3.  Closing,
      Delivery and Payment.

     

    3.1  Closing.
      Subject
      to the terms and conditions herein, the closing of the transactions contemplated
      hereby (the “Closing”), shall take place on the date hereof, at such time or
      place as the Company and the Purchaser may mutually agree (such date is
      hereinafter referred to as the “Closing Date”).

     

    3.2  Delivery.
      Pursuant to the Escrow Agreement, at the Closing on the Closing Date, the
      Company will deliver to the Purchaser, among other things, the Note and the
      Warrant and the Purchaser will deliver to the Company, among other things,
      the
      amounts set forth in the Disbursement Letter by certified funds or wire
      transfer.

     

    4.  Representations
      and Warranties of the Company.
      The
      Company hereby represents and warrants to the Purchaser as follows 

     

    4.1  Organization,
      Good Standing and Qualification.
      Each of
      the Company and each of its Subsidiaries is a corporation, partnership or
      limited liability company, as the case may be, duly organized, validly existing
      and in good standing under the laws of its jurisdiction of organization. Each
      of
      the Company and each of its Subsidiaries has the corporate, limited liability
      company or partnership, as the case may be, power and authority to own and
      operate its properties and assets and, insofar as it is or shall be a party
      thereto, to (1) execute and deliver (i) this Agreement, (ii) the Note and
      the Warrant to be issued in connection with this Agreement, (iii) the Master
      Security Agreement dated as of the date hereof between the Company, certain
      Subsidiaries of the Company and the Purchaser (as amended, modified and/or
      supplemented from time to time, the “Master Security Agreement”), (iv) the Funds
      Escrow Agreement dated as of the date hereof among the Company, the Purchaser
      and the escrow agent referred to therein, substantially in the form of Exhibit
      D
      hereto (as amended, modified and/or supplemented from time to time, the “Escrow
      Agreement”) and (v) all other documents, instruments and agreements entered into
      in connection with the transactions contemplated hereby and thereby (the
      preceding clauses (ii) through (v), collectively, the “Related Agreements”); (2)
      issue and sell the Note; (3) issue and sell the Warrant and the Warrant
      Shares; and (4) carry out the provisions of this Agreement and the Related
      Agreements and to carry on its business as presently conducted. Each of the
      Company and its Subsidiaries is duly qualified and is authorized to do business
      and is in good standing as a foreign corporation, partnership or limited
      liability company, as the case may be, in all jurisdictions in which the nature
      or location of its activities and of its properties (both owned and leased)
      makes such qualification necessary, except for those jurisdictions in which
      failure to do so has not, or could not reasonably be expected to have,
      individually or in the aggregate, a material adverse effect on the business,
      assets, liabilities, condition (financial or otherwise), properties, operations
      or prospects of the Company and its Subsidiaries, taken individually and as
      a
      whole (a “Material Adverse Effect”).

     

    4.2  Subsidiaries.
      Each
      direct and indirect Subsidiary of the Company, the direct owner of such
      Subsidiary and its percentage ownership thereof, is set forth on Schedule 4.2.
      For the purpose of this Agreement, a “Subsidiary” of any person or entity means
      (i) a corporation or other entity whose shares of stock or other ownership
      interests having ordinary voting power (other than stock or other ownership
      interests having such power only by reason of the happening of a contingency)
      to
      elect a majority of the directors of such corporation, or other persons or
      entities performing similar functions for such person or entity, are owned,
      directly or indirectly, by such person or entity or (ii) a corporation or other
      entity in which such person or entity owns, directly or indirectly, more than
      50% of the equity interests at such time. 

     

     

    4.3  Capitalization;
      Voting Rights.

     

    (a)  The
      authorized capital stock of the Company, as of the date hereof consists of
      55,000,000 shares, of which 50,000,000 are shares of Common Stock, par value
      $0.10 per share, 11,800,811 shares of which are issued and outstanding, and
      5,000,000 are shares of preferred stock, par value $0.01 per share of which
      393.939 shares of preferred stock are issued and outstanding. The authorized,
      issued and outstanding capital stock of each Subsidiary of each of the Company
      and its Subsidiaries is set forth on Schedule 4.3.

     

    (b)  Except
      as
      disclosed on Schedule 4.3, or in Company’s Filings, other than: (i) the shares
      reserved for issuance under the Company’s stock option plans; and (ii) shares
      which may be granted pursuant to this Agreement and the Related Agreements,
      there are no outstanding options, warrants, rights (including conversion or
      preemptive rights and rights of first refusal), proxy or stockholder agreements,
      or arrangements or agreements of any kind for the purchase or acquisition from
      the Company of any of its securities. Except as disclosed on Schedule 4.3,
      neither the offer, issuance or sale of any of the Note or the Warrant, or the
      issuance of the Warrant Shares, nor the consummation of any transaction
      contemplated hereby will result in a change in the price or number of any
      securities of the Company outstanding, under anti-dilution or other similar
      provisions contained in or affecting any such securities.

     

    (c)  All
      issued and outstanding shares of the Company’s Common Stock: (i) have been
      duly authorized and validly issued and are fully paid and nonassessable; and
      (ii) were issued in compliance with all applicable state and federal laws
      concerning the issuance of securities.

     

    (d)  The
      rights, preferences, privileges and restrictions of the shares of the Common
      Stock are as stated in the Company’s Certificate of Incorporation (the
“Charter”). The Warrant Shares have been duly and validly reserved for issuance.
      When issued in compliance with the provisions of this Agreement and the
      Company’s Charter, the Securities will be validly issued, fully paid and
      nonassessable, and will be free of any liens or encumbrances; provided, however,
      that the Securities may be subject to restrictions on transfer under state
      and/or federal securities laws as set forth herein or as otherwise required
      by
      such laws at the time a transfer is proposed.

     

    4.4  Authorization;
      Binding Obligations.
      All
      corporate, partnership or limited liability company, as the case may be, action
      on the part of the Company and each of its Subsidiaries (including their
      respective officers and directors) necessary for the authorization of this
      Agreement and the Related Agreements, the performance of all obligations of
      the
      Company and its Subsidiaries hereunder and under the other Related Agreements
      at
      the Closing and, the authorization, sale, issuance and delivery of the Note
      and
      Warrant has been taken or will be taken prior to the Closing. This Agreement
      and
      the Related Agreements, when executed and delivered and to the extent it is
      a
      party thereto, will be valid and binding obligations of each of the Company
      and
      each
      of its Subsidiaries,
      enforceable in accordance with their terms, except:

     

    (a)  as
      limited by applicable bankruptcy, insolvency, reorganization, moratorium or
      other laws of general application affecting enforcement of creditors’ rights;
      and

     

    (b)  general
      principles of equity that restrict the availability of equitable or legal
      remedies.

     

    The
      sale
      of the Note is not and will not be subject to any preemptive rights or rights
      of
      first refusal that have not been properly waived or complied with. The issuance
      of the Warrant and the subsequent exercise of the Warrant for Warrant Shares
      are
      not and will not be subject to any preemptive rights or rights of first refusal
      that have not been properly waived or complied with. 

     

    4.5  Liabilities.
      Neither
      the Company nor any of its Subsidiaries has any liabilities, except current
      liabilities incurred in the ordinary course of business and liabilities
      disclosed in any of
      the
      Company’s filings under the Securities Exchange Act of 1934 (“Exchange Act”)
      made prior to the date of this Agreement (collectively, the “Exchange Act
      Filings”), copies of which have been provided to the Purchaser.

     

    4.6  Agreements;
      Action.
      Except
      as set forth on Schedule 4.6 or as disclosed in any Exchange Act
      Filings:

     

    (a)  there
      are
      no agreements, understandings, instruments, contracts, proposed transactions,
      judgments, orders, writs or decrees to which Each of the Company and its
      Subsidiaries is a party or by which it is bound which may involve: (i)
      obligations (contingent or otherwise) of, or payments to, the Company or any
      of
      its Subsidiaries in excess of $50,000 (other than obligations of, or payments
      to, the Company or any of its Subsidiaries arising from purchase or sale
      agreements entered into in the ordinary course of business); or (ii) the
      transfer or license of any patent, copyright, trade secret or other proprietary
      right to or from the Company or any of its Subsidiaries (other than licenses
      arising from the purchase of “off the shelf” or other standard products); or
      (iii) provisions restricting the development, manufacture or distribution of
      the
      Company’s or any of its Subsidiaries’ products or services; or (iv)
      indemnification by the Company or any of its Subsidiaries with respect to
      infringements of proprietary rights.

     

    (b)  Since
      September 30, 2006 (the “Balance Sheet Date”), neither the Company nor any of
      its Subsidiaries has: (i) declared or paid any dividends, or authorized or
      made
      any distribution upon or with respect to any class or series of its capital
      stock; (ii) incurred any indebtedness for money borrowed or any other
      liabilities (other than ordinary course obligations) individually in excess
      of
      $50,000 or, in the case of indebtedness and/or liabilities individually less
      than $50,000, in excess of $100,000 in the aggregate; (iii) made any loans
      or
      advances to any person or entity not in excess, individually or in the
      aggregate, of $100,000, other than ordinary course advances for travel expenses;
      or (iv) sold, exchanged or otherwise disposed of any of its assets or rights,
      other than the sale of its inventory in the ordinary course of
      business.

     

    (c)  For
      the
      purposes of subsections (a) and (b) above, all indebtedness, liabilities,
      agreements, understandings, instruments, contracts and proposed transactions
      involving the same person or entity (including persons or entities the Company
      or any of its Subsidiaries has reason to believe are affiliated therewith)
      shall
      be aggregated for the purpose of meeting the individual minimum dollar amounts
      of such subsections.

     

    (d)  The
      Company maintains disclosure controls and procedures (“Disclosure Controls”)
      designed to ensure that information required to be disclosed by the Company
      in
      the reports that it files or submits under the Exchange Act is recorded,
      processed, summarized, and reported, within the time periods specified in the
      rules and forms of the Securities and Exchange Commission (“SEC”).

     

    (e)  The
      Company makes and keep books, records, and accounts, that, in reasonable detail,
      accurately and fairly reflect the transactions and dispositions of the Company’s
      assets. The Company maintains internal control over financial reporting
      (“Financial Reporting Controls”) designed by, or under the supervision of, the
      Company’s principal executive and principal financial officers, and effected by
      the Company’s board of directors, management, and other personnel, to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles (“GAAP”), including that:

     

    (i)  transactions
      are executed in accordance with management’s general or specific
      authorization;

     

    (ii)  unauthorized
      acquisition, use, or disposition of the Company’s assets that could have a
      material effect on the financial statements are prevented or timely
      detected;

     

    (iii)  transactions
      are recorded as necessary to permit preparation of financial statements in
      accordance with GAAP, and that the Company’s receipts and expenditures are being
      made only in accordance with authorizations of the Company’s management and
      board of directors; 

     

    (iv)  transactions
      are recorded as necessary to maintain accountability for assets;
      and

     

    (v)  the
      recorded accountability for assets is compared with the existing assets at
      reasonable intervals, and appropriate action is taken with respect to any
      differences.

     

    (f)  There
      is
      no weakness in any of the Company’s Disclosure Controls or Financial Reporting
      Controls that is required to be disclosed in any of the Exchange Act Filings,
      except as so disclosed.

     

    4.7  Obligations
      to Related Parties.
      Except
      as set forth on Schedule 4.7, there are no obligations of the Company
or
      any of
      its Subsidiaries to
      officers, directors, stockholders or employees of the Company or
      any of
      its Subsidiaries other
      than:

     

    (a)  for
      payment of salary for services rendered and for bonus payments;

     

    (b)  reimbursement
      for reasonable expenses incurred on behalf of the Company and its
      Subsidiaries;

     

    (c)  for
      other
      standard employee benefits made generally available to all employees (including
      stock option agreements outstanding under any stock option plan approved by
      the
      Board of Directors of the Company or any of its Subsidiaries); and

     

    (d)  obligations
      listed in the Company’s and each of its Subsidiaries financial statements or
      disclosed in any of the Company’s Exchange Act Filings.

     

    Except
      as
      described above or set forth on Schedule 4.7, none of the officers, directors
      or, to the best of the Company’s knowledge, key employees or stockholders of the
      Company or any of its Subsidiaries or any members of their immediate families,
      are indebted to the Company or any of its Subsidiaries, individually or in
      the
      aggregate, in excess of $50,000 or have any direct or indirect ownership
      interest in any firm or corporation with which Each of the Company and its
      Subsidiaries is affiliated or with which the Company or any of its Subsidiaries
      has a business relationship, or any firm or corporation which competes with
      the
      Company or any of its Subsidiaries, other than passive investments in publicly
      traded companies (representing less than one percent (1%) of such company)
      which
      may compete with the Company or any of its Subsidiaries. Except as described
      above, no officer, director or stockholder of the Company or any of its
      Subsidiaries, or any member of their immediate families, is, directly or
      indirectly, interested in any material contract with the Company or any of
      its
      Subsidiaries and no agreements, understandings or proposed transactions are
      contemplated between the Company or any of its Subsidiaries and any such person.
      Except as set forth on Schedule 4.7, Each of the Company and its Subsidiaries
      is
      not a guarantor or indemnitor of any indebtedness of any other person or
      entity.

     

    4.8  Changes.
      Since
      the Balance Sheet Date, except as disclosed in any Exchange Act Filing or in
      any
      Schedule to this Agreement or to any of the Related Agreements, there has not
      been:

     

    (a)  any
      change in the business, assets, liabilities, condition (financial or otherwise),
      properties, operations or prospects of the Company or any of its Subsidiaries,
      which individually or in the aggregate has had, or could reasonably be expected
      to have, individually or in the aggregate, a Material Adverse
      Effect;

     

    (b)  any
      resignation or termination of any officer, key employee or group of employees
      of
      the Company or any of its Subsidiaries; 

     

    (c)  any
      material change, except in the ordinary course of business, in the contingent
      obligations of the Company or any of its Subsidiaries by way of guaranty,
      endorsement, indemnity, warranty or otherwise;

     

    (d)  any
      damage, destruction or loss, whether or not covered by insurance, which has
      had,
      or could reasonably be expected to have, individually or in the aggregate,
      a
      Material Adverse Effect;

     

    (e)  any
      waiver by the Company or any of its Subsidiaries of a valuable right or of
      a
      material debt owed to it;

     

    (f)  any
      direct or indirect loans made by the Company or any of its Subsidiaries to
      any
      stockholder, employee, officer or director of the Company or any of its
      Subsidiaries, other than advances made in the ordinary course of
      business;

     

    (g)  any
      material change in any compensation arrangement or agreement with any employee,
      officer, director or stockholder of the Company or any of its Subsidiaries;
      

     

    (h)  any
      declaration or payment of any dividend or other distribution of the assets
      of
      the Company or any of its Subsidiaries ;

     

    (i)  any
      labor
      organization activity related to the Company or any of its
      Subsidiaries;

     

    (j)  any
      debt,
      obligation or liability incurred, assumed or guaranteed by the Company or any
      of
      its Subsidiaries, except those for immaterial amounts and for current
      liabilities incurred in the ordinary course of business;

     

    (k)  any
      sale,
      assignment or transfer of any patents, trademarks, copyrights, trade secrets
      or
      other intangible assets owned by the Company or any of its Subsidiaries
      ;

     

    (l)  any
      change in any material agreement to which the Company or any of its Subsidiaries
      is a party or by which either the Company or any of its Subsidiaries is bound
      which either individually or in the aggregate has had, or could reasonably
      be
      expected to have, individually or in the aggregate, a Material Adverse
      Effect;

     

    (m)  any
      other
      event or condition of any character that, either individually or in the
      aggregate, has had, or could reasonably be expected to have, individually or
      in
      the aggregate, a Material Adverse Effect; or

     

    (n)  any
      arrangement or commitment by the Company or any of its Subsidiaries to do any
      of
      the acts described in subsection (a) through (m) above.

     

    4.9  Title
      to Properties and Assets; Liens, Etc.
      Except
      as set forth on Schedule 4.9, each of the Company and each of
      its
      Subsidiaries
      has good
      and marketable title to its properties and assets, and good title to its
      leasehold interests, in each case subject to no mortgage, pledge, lien, lease,
      encumbrance or charge, other than:

     

    (a)  those
      resulting from taxes which have not yet become delinquent;

     

    (b)  minor
      liens and encumbrances which do not materially detract from the value of the
      property subject thereto or materially impair the operations of the Company
      or
      any of its Subsidiaries, so long as in each such case, such liens and
      encumbrances have no effect on the lien priority of the Purchaser in such
      property; and

     

    (c)  those
      that have otherwise arisen in the ordinary course of business, so long as they
      have no effect on the lien priority of the Purchaser therein.

     

    All
      facilities, machinery, equipment, fixtures, vehicles and other properties owned,
      leased or used by the Company or any of its Subsidiaries are in good operating
      condition and repair and are reasonably fit and usable for the purposes for
      which they are being used. Except as set forth on Schedule 4.9, the Company
      and
      each of its Subsidiaries is in compliance with all material terms of each lease
      to which it is a party or is otherwise bound.

     

    4.10  Intellectual
      Property.

     

    (a)  The
      Company and each of its Subsidiaries owns or possesses sufficient legal rights
      to all patents, trademarks, service marks, trade names, copyrights, trade
      secrets, licenses, information and other proprietary rights and processes
      necessary for its business as now conducted and, to the Company’s knowledge, as
      presently proposed to be conducted (the “Intellectual Property”), without any
      known infringement of the rights of others. There are no outstanding options,
      licenses or agreements of any kind relating to the foregoing proprietary rights,
      nor is the Company or any of its Subsidiaries bound by or a party to any
      options, licenses or agreements of any kind with respect to the patents,
      trademarks, service marks, trade names, copyrights, trade secrets, licenses,
      information and other proprietary rights and processes of any other person
      or
      entity other than such licenses or agreements arising from the purchase of
“off
      the shelf” or standard products.

     

    (b)  Neither
      the Company nor or any of its Subsidiaries has received any communications
      alleging that the Company has violated any of the patents, trademarks, service
      marks, trade names, copyrights or trade secrets or other proprietary rights
      of
      any other person or entity, nor is the Company or any of its Subsidiaries aware
      of any basis therefor.

     

    (c)  The
      Company does not believe it is or will be necessary to utilize any inventions,
      trade secrets or proprietary information of any of its employees made prior
      to
      their employment by the Company, except for inventions, trade secrets or
      proprietary information that have been rightfully assigned to the Company or
      any
      of its Subsidiaries.

     

    4.11  Compliance
      with Other Instruments.
      Each of
      the Company and its Subsidiaries is not in violation or default of (x) any
      term
      of its Charter or Bylaws, or (y) any provision of any indebtedness, mortgage,
      indenture, contract, agreement or instrument to which it is party or by which
      it
      is bound or of any judgment, decree, order or writ, which violation or default,
      in the case of this clause (y), has had, or could reasonably be expected to
      have, either individually or in the aggregate, a Material Adverse Effect. The
      execution, delivery and performance of and compliance with this Agreement and
      the Related Agreements to which it is a party, and the issuance and sale of
      the
      Note by the Company and the other Securities by the Company each pursuant hereto
      and thereto, will not, with or without the passage of time or giving of notice,
      result in any such material violation, or be in conflict with or constitute
      a
      default under any such term or provision, or result in the creation of any
      mortgage, pledge, lien, encumbrance or charge upon any of the properties or
      assets of the Company or
      any of
      its Subsidiaries
      or the
      suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
      license, authorization or approval applicable to the Company, its business
      or
      operations or any of its assets or properties. 

     

    4.12  Litigation.
      Except
      as set forth on Schedule 4.12 hereto, there is no action, suit, proceeding
      or
      investigation pending or, to the Company’s or
      any of
      its Subsidiaries’
      knowledge, currently threatened against the Company or
      any of
      its Subsidiaries
      that
      prevents the Company or
      any of
      its Subsidiaries
      from
      entering into this Agreement or the other Related Agreements, or from
      consummating the transactions contemplated hereby or thereby, or which has
      had,
      or could reasonably be expected to have, either individually or in the
      aggregate, a Material Adverse Effect or any change in the current equity
      ownership of the Company or
      any of
      its Subsidiaries,
      nor is
      the Company nor
      any of
      its Subsidiaries
      aware
      that there is any basis to assert any of the foregoing. Neither the Company
      nor
      any of
      its Subsidiaries
      is a
      party to or subject to the provisions of any order, writ, injunction, judgment
      or decree of any court or government agency or instrumentality. There is no
      action, suit, proceeding or investigation by the Company or
      any of
      its Subsidiaries
      currently pending or which the Company or
      any of
      its Subsidiaries
      intends
      to initiate.

     

    4.13  Tax
      Returns and Payments.
      Each of
      the Company and each of its Subsidiaries has timely filed all tax returns
      (federal, state and local) required to be filed by it. All taxes shown to be
      due
      and payable on such returns, any assessments imposed, and all other taxes due
      and payable by the Company or
      any of
      its Subsidiaries
      on or
      before the Closing, have been paid or will be paid prior to the time they become
      delinquent. Except as set forth on Schedule 4.13, neither the Company
      nor
      any of
      its Subsidiaries
      has been
      advised:

     

    (a)  that
      any
      of its returns, federal, state or other, have been or are being audited as
      of
      the date hereof; or

     

    (b)  of
      any
      adjustment, deficiency, assessment or court decision in respect of its federal,
      state or other taxes.

     

    The
      Company has no knowledge of any liability for any tax to be imposed upon its
      properties or assets as of the date of this Agreement that is not adequately
      provided for. 

     

    4.14  Employees.
      Except
      as set forth on Schedule 4.14, neither the Company nor
      any of
      its Subsidiaries
      has any
      collective bargaining agreements with any of its employees. There is no labor
      union organizing activity pending or, to the Company’s knowledge, threatened
      with respect to the Company
      or any
      of its Subsidiaries.
      Except
      as disclosed in the Exchange Act Filings or on Schedule 4.14, neither the
      Company nor
      any of
      its Subsidiaries
      is a
      party to or bound by any currently effective employment contract, deferred
      compensation arrangement, bonus plan, incentive plan, profit sharing plan,
      retirement agreement or other employee compensation plan or agreement. To the
      Company’s knowledge, no employee of the Company or
      any of
      its Subsidiaries,
      nor any
      consultant with whom the Company or
      any of
      its Subsidiaries
      has
      contracted, is in violation of any term of any employment contract, proprietary
      information agreement or any other agreement relating to the right of any such
      individual to be employed by, or to contract with, the Company or
      any of
      its Subsidiaries
      because
      of the nature of the business to be conducted by the Company
      or any
      of its Subsidiaries;
      and to
      the Company’s knowledge the continued employment by the Company or
      any of
      its Subsidiaries
      of their
      present employees, and the performance of the Company’s contracts with its
      independent contractors, will not result in any such violation. Neither the
      Company nor
      any of
      its Subsidiaries
      is aware
      that any of its employees is obligated under any contract (including licenses,
      covenants or commitments of any nature) or other agreement, or subject to any
      judgment, decree or order of any court or administrative agency that would
      interfere with their duties to the Company
      or any
      of its Subsidiaries.
      The
      Company nor
      any of
      its Subsidiaries
      has
      received any notice alleging that any such violation has occurred. Except for
      employees who have a current effective employment agreement with the Company,
      no
      employee of the Company has been granted the right to continued employment
      by
      the Company or to any material compensation following termination of employment
      with the Company. Except as set forth on Schedule 4.14, None of the Company
      nor
      its Subsidiaries is aware that any officer, key employee or group of employees
      intends to terminate his, her or their employment with the Company, nor does
      the
      Company have a present intention to terminate the employment of any officer,
      key
      employee or group of employees.

     

    4.15  Voting
      Rights.
      Except
      as set forth on Schedule 4.15 and except as disclosed in Exchange Act Filings,
      to the Company’s knowledge, no stockholder of the Company or
      any of
      its Subsidiaries
      has
      entered into any agreement with respect to the voting of equity securities
      of
      the Company
      or any
      of its Subsidiaries
      .

     

    4.16  Compliance
      with Laws; Permits.
      Neither
      of the Company nor its Subsidiaries is in violation of any provision of the
      Sarbanes-Oxley Act of 2002 or any SEC related regulation or rule or any rule
      of
      the Principal Market (as hereafter defined) promulgated thereunder or any other
      applicable statute, rule, regulation, order or restriction of any domestic
      or
      foreign government or any instrumentality or agency thereof in respect of the
      conduct of its business or the ownership of its properties which has had, or
      could reasonably be expected to have, either individually or in the aggregate,
      a
      Material Adverse Effect. No governmental orders, permissions, consents,
      approvals or authorizations are required to be obtained and no registrations
      or
      declarations are required to be filed in connection with the execution and
      delivery of this Agreement or any other Related Agreement and the issuance
      of
      any of the Securities, except such as have been duly and validly obtained or
      filed, or with respect to any filings that must be made after the Closing,
      as
      will be filed in a timely manner. Each of the Company and its Subsidiaries
      has
      all material franchises, permits, licenses and any similar authority necessary
      for the conduct of its business as now being conducted by it, the lack of which
      could, either individually or in the aggregate, reasonably be expected to have
      a
      Material Adverse Effect.

     

    4.17  Environmental
      and Safety Laws.
      Neither
      the Company or
      any of
      its Subsidiaries
      is in
      violation of any applicable statute, law or regulation relating to the
      environment or occupational health and safety, and to its knowledge, no material
      expenditures are or will be required in order to comply with any such existing
      statute, law or regulation. Except as set forth on Schedule 4.17, no Hazardous
      Materials (as defined below) are used or have been used, stored, or disposed
      of
      by the Company or
      any of
      its Subsidiaries
      or, to
      the Company’s or
      any of
      its Subsidiaries’
      knowledge, by any other person or entity on any property owned, leased or used
      by the Company. For the purposes of the preceding sentence, “Hazardous
      Materials” shall mean:

     

    (a)  materials
      which are listed or otherwise defined as “hazardous” or “toxic” under any
      applicable local, state, federal and/or foreign laws and regulations that govern
      the existence and/or remedy of contamination on property, the protection of
      the
      environment from contamination, the control of hazardous wastes, or other
      activities involving hazardous substances, including building materials;
      or

     

    (b)  any
      petroleum products or nuclear materials.

     

    4.18  Valid
      Offering.
      Assuming the accuracy of the representations and warranties of the Purchaser
      contained in this Agreement, the offer, sale and issuance of the Securities
      will
      be exempt from the registration requirements of the Securities Act of 1933,
      as
      amended (the “Securities Act”), and will have been registered or qualified (or
      are exempt from registration and qualification) under the registration, permit
      or qualification requirements of all applicable state securities
      laws. 

     

    4.19  Full
      Disclosure.
      Each of
      the Company and each of its Subsidiaries has provided the Purchaser with all
      information requested by the Purchaser in connection with its decision to
      purchase the Note and Warrant, including all information the Company and its
      Subsidiaries believe is reasonably necessary to make such investment decision.
      Neither this Agreement, the Related Agreements, the exhibits and schedules
      hereto and thereto nor any other document delivered by the Company or
      any of
      its Subsidiaries
      to
      Purchaser or its attorneys or agents in connection herewith or therewith or
      with
      the transactions contemplated hereby or thereby, contain any untrue statement
      of
      a material fact nor omit to state a material fact necessary in order to make
      the
      statements contained herein or therein, in light of the circumstances in which
      they are made, not misleading. Any financial projections and other estimates
      provided to the Purchaser by the Company or
      any of
      its Subsidiaries
      were
      based on the Company’s and its Subsidiaries’ experience in the industry and on
      assumptions of fact and opinion as to future events which the
      Company
      or any
      of its Subsidiaries,
      at the
      date of the issuance of such projections or estimates, believed to be
      reasonable. 

     

    4.20  Insurance.
      Each of
      the Company and each of its Subsidiaries has general commercial, product
      liability, fire and casualty insurance policies with coverages which the Company
      and
      of
      its Subsidiaries
      believes
      are customary for companies similarly situated to the Company and its
      Subsidiaries in the same or similar business.

     

    4.21  SEC
      Reports.
      Except
      as set forth on Schedule 4.21, the Company has filed all proxy statements,
      reports and other documents required to be filed by it under the Securities
      Exchange Act 1934, as amended (the “Exchange Act”). The Company has furnished
      the Purchaser copies of: (i) its Annual Reports on Form 10-KSB for its fiscal
      years ended June 30, 2006; and (ii) its Quarterly Reports on Form 10-QSB for
      its
      fiscal quarter ended September 30, 2006, and the Form 8-K filings which it
      has
      made during the fiscal year 2006 to date (collectively, the “SEC Reports”).
      Except as set forth on Schedule 4.21, each SEC Report was, at the time of its
      filing, in substantial compliance with the requirements of its respective form
      and none of the SEC Reports, nor the financial statements (and the notes
      thereto) included in the SEC Reports, as of their respective filing dates,
      contained any untrue statement of a material fact or omitted to state a material
      fact required to be stated therein or necessary to make the statements therein,
      in light of the circumstances under which they were made, not
      misleading.

     

    4.22  Listing.
      The
      Company’s Common Stock is listed or quoted, as applicable, on a Principal Market
      (as hereafter defined) and satisfies and at all times hereafter will satisfy,
      all requirements for the continuation of such listing or quotation, as
      applicable. The Company has not received any notice that its Common Stock will
      be delisted from, or no longer quoted on, as applicable, the Principal Market
      or
      that its Common Stock does not meet all requirements for such listing or
      quotation,
      as
      applicable. For purposes hereof, the term “Principal Market” means the NASD Over
      The Counter Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Markets
      System, American Stock Exchange or New York Stock Exchange (whichever of the
      foregoing is at the time the principal trading exchange or market for the Common
      Stock).

     

    4.23  No
      Integrated Offering.
      Neither
      the Company, nor affiliates, nor any person acting on its or their behalf,
      has
      directly or indirectly made any offers or sales of any security or solicited
      any
      offers to buy any security under circumstances that would cause the offering
      of
      the Securities pursuant to this Agreement or any of the Related Agreements
      to be
      integrated with prior offerings by the Company for purposes of the Securities
      Act which would prevent the Company from selling the Securities pursuant to
      Rule
      506 under the Securities Act, or any applicable exchange-related stockholder
      approval provisions, nor will the Company or any of its affiliates or
      Subsidiaries take any action or steps that would cause the offering of the
      Securities to be integrated with other offerings.

     

    4.24  Stop
      Transfer.
      The
      Securities are restricted securities as of the date of this Agreement. The
      Company shall not issue any stop transfer order or other order impeding the
      sale
      and delivery of any of the Securities at such time as the Securities are
      registered for public sale or an exemption from registration is available,
      except as required by state and federal securities laws.

     

    4.25  Dilution.
      The
      Company specifically acknowledges that its obligation to issue the shares of
      Common Stock upon exercise of the Warrant is binding upon the Company and
      enforceable regardless of the dilution such issuance may have on the ownership
      interests of other shareholders of the Company. 

     

    4.26  Patriot
      Act.The
      Company certifies that, to the best of Company’s knowledge, neither the Company
      nor
      any of
      its Subsidiaries
      has been
      designated, nor is or shall be owned or controlled, by a “suspected terrorist”
as defined in Executive Order 13224. The Company hereby acknowledges that the
      Purchaser seeks to comply with all applicable laws concerning money laundering
      and related activities. In furtherance of those efforts, the Company hereby
      represents, warrants and covenants that: (i) none of the cash or property that
      the Company or
      any of
      its Subsidiaries
      will pay
      or will contribute to the Purchaser has been or shall be derived from, or
      related to, any activity that is deemed criminal under United States law; and
      (ii) no contribution or payment by the Company or
      any of
      its Subsidiaries
      to the
      Purchaser, to the extent that they are within the Company’s and/or its
      Subsidiaries’ control shall cause the Purchaser or
      any of
      its Subsidiaries
      to be in
      violation of the United States Bank Secrecy Act, the United States International
      Money Laundering Control Act of 1986 or the United States International Money
      Laundering Abatement and Anti-Terrorist Financing Act of 2001. The Company
      shall
      promptly notify the Purchaser if any of these representations, warranties or
      covenants ceases to be true and accurate regarding the Company
      or any
      of its Subsidiaries.
      The
      Company shall provide the Purchaser all additional information regarding the
      Company or
      any of
      its Subsidiaries
      that the
      Purchaser deems necessary or convenient to ensure compliance with all applicable
      laws concerning money laundering and similar activities. The Company understands
      and agrees that if at any time it is discovered that any of the foregoing
      representations, warranties or covenants are incorrect, or if otherwise required
      by applicable law or regulation related to money laundering or similar
      activities, the Purchaser may undertake appropriate actions to ensure compliance
      with applicable law or regulation, including but not limited to segregation
      and/or redemption of the Purchaser’s investment in the Company. The Company
and
      its
      Subsidiaries
      further
      understand that the Purchaser may release confidential information about the
      Company and its Subsidiaries and, if applicable, any underlying beneficial
      owners, to proper authorities if the Purchaser, in its sole discretion,
      determines that it is in the best interests of the Purchaser in light of
      relevant rules and regulations under the laws set forth in subsection (ii)
      above.

     

    4.27  ERISA.
      Based
      upon the Employee Retirement Income Security Act of 1974 (“ERISA”),
      and
      the regulations and published interpretations thereunder: (i) neither the
      Company nor
      any of
      its Subsidiaries
      has
      engaged in any Prohibited Transactions (as defined in Section 406 of ERISA
      and
      Section 4975 of the Internal
      Revenue Code of 1986, as amended (the “Code”));
      (ii)
      each of the Company and each of its Subsidiaries has met all applicable minimum
      funding requirements under Section 302 of ERISA in respect of its plans; (iii)
      neither the Company nor
      any of
      its Subsidiaries
      has any
      knowledge of any event or occurrence which would cause the Pension Benefit
      Guaranty Corporation to institute proceedings under Title IV of ERISA to
      terminate any employee benefit plan(s); (iv) neither the Company nor
      any of
      its Subsidiaries
      has any
      fiduciary responsibility for investments with respect to any plan existing
      for
      the benefit of persons other than the Company’s or such Subsidiary’s employees;
      and (v) neither the Company nor
      any of
      its Subsidiaries
      has
      withdrawn, completely or partially, from any multi-employer pension plan so
      as
      to incur liability under the Multiemployer Pension Plan Amendments Act of
      1980.

     

    5.  Representations
      and Warranties of the Purchaser.
      The
      Purchaser hereby represents and warrants to the Company as follows (such
      representations and warranties do not lessen or obviate the representations
      and
      warranties of the Company set forth in this Agreement):

     

    5.1  No
      Shorting.
      The
      Purchaser or any of its affiliates and investment partners has not, will not
      and
      will not cause any person or entity, to directly engage in “short sales” of the
      Company’s Common Stock as long as the Note shall be outstanding.

     

    5.2  Requisite
      Power and Authority.
      The
      Purchaser has all necessary power and authority under all applicable provisions
      of law to execute and deliver this Agreement and the Related Agreements and
      to
      carry out their provisions. All corporate action on the Purchaser’s part
      required for the lawful execution and delivery of this Agreement and the Related
      Agreements have been or will be effectively taken prior to the Closing. Upon
      their execution and delivery, this Agreement and the Related Agreements will
      be
      valid and binding obligations of the Purchaser, enforceable in accordance with
      their terms, except:

     

    (a)  as
      limited by applicable bankruptcy, insolvency, reorganization, moratorium or
      other laws of general application affecting enforcement of creditors’ rights;
      and

     

    (b)  as
      limited by general principles of equity that restrict the availability of
      equitable and legal remedies.

     

    5.3  Investment
      Representations.
      The
      Purchaser understands that the Securities are being offered and sold pursuant
      to
      an exemption from registration contained in the Securities Act based in part
      upon the Purchaser’s representations contained in this Agreement, including,
      without limitation, that the Purchaser is an “accredited investor” within the
      meaning of Regulation D under the Securities Act of 1933, as amended (the
“Securities Act”). The Purchaser confirms that it has received or has had full
      access to all the information it considers necessary or appropriate to make
      an
      informed investment decision with respect to the Note and the Warrant to be
      purchased by it under this Agreement and the Warrant Shares acquired by it
      upon
      the exercise of the Warrant, respectively. The Purchaser further confirms that
      it has had an opportunity to ask questions and receive answers from the Company
      regarding the Company’s and its Subsidiaries’ business, management and financial
      affairs and the terms and conditions of the Offering, the Note, the Warrant
      and
      the Securities and to obtain additional information (to the extent the Company
      possessed such information or could acquire it without unreasonable effort
      or
      expense) necessary to verify any information furnished to the Purchaser or
      to
      which the Purchaser had access.

     

    5.4  The
      Purchaser Bears Economic Risk.
      The
      Purchaser has substantial experience in evaluating and investing in private
      placement transactions of securities in companies similar to the Company so
      that
      it is capable of evaluating the merits and risks of its investment in the
      Company and has the capacity to protect its own interests. The Purchaser must
      bear the economic risk of this investment until the Securities are sold pursuant
      to: (i) an effective registration statement under the Securities Act; or (ii)
      an
      exemption from registration is available with respect to such sale.

     

    5.5  Acquisition
      for Own Account.
      The
      Purchaser is acquiring the Note and Warrant and the Warrant Shares for the
      Purchaser’s own account for investment only, and not as a nominee or agent and
      not with a view towards or for resale in connection with their
      distribution.

     

    5.6  The
      Purchaser Can Protect Its Interest.
      The
      Purchaser represents that by reason of its, or of its management’s, business and
      financial experience, the Purchaser has the capacity to evaluate the merits
      and
      risks of its investment in the Note, the Warrant and the Securities and to
      protect its own interests in connection with the transactions contemplated
      in
      this Agreement and the Related Agreements. Further, the Purchaser is aware
      of no
      publication of any advertisement in connection with the transactions
      contemplated in the Agreement or the Related Agreements.

     

    5.7  Accredited
      Investor.
      The
      Purchaser represents that it is an accredited investor within the meaning of
      Regulation D under the Securities Act.

     

    5.8  Legends.

     

    (a)  The
      Note
      shall bear substantially the following legend: 

     

    “THIS
      NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
      OR
      ANY APPLICABLE 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 OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE
      SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IMPLANT
      SCIENCES CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.”

     

    (b)  The
      Warrant Shares shall bear a legend which shall be in substantially the following
      form until such shares are covered by an effective registration statement filed
      with the SEC:

     

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

     

    (c)  The
      Warrant shall bear substantially the following legend:

     

    “THIS
      WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
      BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
      STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
      OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED
      IN
      THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE
      UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES
      LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IMPLANT SCIENCES
      CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.”

     

    6.  Covenants
      of the Company.
      The
      Company covenants and agrees with the Purchaser as follows:

     

    6.1  Stop-Orders.
      The
      Company will advise the Purchaser, promptly after it receives notice of issuance
      by the SEC, any state securities commission or any other regulatory authority
      of
      any stop order or of any order preventing or suspending any offering of any
      securities of the Company, or of the suspension of the qualification of the
      Common Stock of the Company for offering or sale in any jurisdiction, or the
      initiation of any proceeding for any such purpose.

     

    6.2  Listing.
      The
      Company will maintain the listing or quotation, as applicable, of its Common
      Stock on the Principal Market, and will comply in all material respects with
      the
      Company’s reporting, filing and other obligations under the bylaws or rules of
      the National Association of Securities Dealers (“NASD”) and such exchanges, as
      applicable. 

     

    6.3  Market
      Regulations.
      The
      Company shall notify the SEC, NASD and applicable state authorities, in
      accordance with their requirements, of the transactions contemplated by this
      Agreement, and shall take all other necessary action and proceedings as may
      be
      required and permitted by applicable law, rule and regulation, for the legal
      and
      valid issuance of the Securities to the Purchaser and promptly provide copies
      thereof to the Purchaser.

     

    6.4  Reporting
      Requirements.
      The
Company
      will deliver, or cause to be delivered to the Purchaser or make available to
      the
      Purchaser through its timely Exchange Act Filings, each of the following, which
      shall be in form and detail acceptable to the Purchaser:

     

    (a)  As
      soon
      as available, and in any event within ninety (90) days after the end of each
      fiscal year of the Company, each of the Company’s and each of its Subsidiaries’
audited financial statements with a report of independent certified public
      accountants of recognized standing selected by the Company and acceptable to
      the
      Purchaser (the “Accountants”),
      which
      annual financial statements shall be without qualification and shall include
      each of the Company’s and each of its Subsidiaries’ balance sheet as at the end
      of such fiscal year and the related statements of each of the Company’s and each
      of its Subsidiaries’ income, retained earnings and cash flows for the fiscal
      year then ended, prepared on a consolidating and consolidated basis to include
      the Company, each Subsidiary of the Company and each of their respective
      affiliates, all in reasonable detail and prepared in accordance with GAAP,
      together with (i) if and when available, copies of any management letters
      prepared by the Accountants; and (ii) a certificate of the Company’s President,
      Chief Executive Officer or Chief Financial Officer stating that such financial
      statements have been prepared in accordance with GAAP and whether or not such
      officer has knowledge of the occurrence of any Event of Default (as defined
      in
      the Note) and, if so, stating in reasonable detail the facts with respect
      thereto;

     

    (b)  As
      soon
      as available and in any event within forty five (45) days after the end of
      each
      fiscal quarter of the Company, an unaudited/internal balance sheet and
      statements of income, retained earnings and cash flows of the Company and each
      of its Subsidiaries as at the end of and for such quarter and for the year
      to
      date period then ended, prepared on a consolidating and consolidated basis
      to
      include all the Company, each Subsidiary of the Company and each of their
      respective affiliates, in reasonable detail and stating in comparative form
      the
      figures for the corresponding date and periods in the previous year, all
      prepared in accordance with GAAP, subject to year-end adjustments and
      accompanied by a certificate of the Company’s President, Chief Executive Officer
      or Chief Financial Officer, stating (i) that such financial statements have
      been
      prepared in accordance with GAAP, subject to year-end audit adjustments, and
      (ii) whether or not such officer has knowledge of the occurrence of any Event
      of
      Default (as defined in the Note) not theretofore reported and remedied and,
      if
      so, stating in reasonable detail the facts with respect thereto; 

     

    (c)  The
      Company shall timely file with the SEC all reports required to be filed pursuant
      to the Exchange Act and refrain from terminating its status as an issuer
      required by the Exchange Act to file reports thereunder even if the Exchange
      Act
      or the rules or regulations thereunder would permit such termination.
;
      and

     

    (d) The
      Company shall deliver, or cause the applicable Subsidiary of the Company to
      deliver, such other information as the Purchaser shall reasonably
      request.

     

    6.5  Use
      of
      Funds.
      The
      Company shall use the proceeds of the sale of the Note and the Warrant for
      general working capital purposes.

     

    6.6  Access
      to Facilities.
      Each of
      the Company and each of its Subsidiaries will permit any representatives
      designated by the Purchaser (or any successor of the Purchaser), upon reasonable
      notice and during normal business hours, at such person’s expense and
      accompanied by a representative of the Company or any Subsidiary (provided
      that
      no such prior notice shall be required to be given and no such representative
      of
      the Company or any Subsidiary shall be required to accompany the Purchaser
      in
      the event the Purchaser believes such access is necessary to preserve or protect
      the Collateral (as defined in the Master Security Agreement) or following the
      occurrence and during the continuance of an Event of Default (as defined in
      the
      Note)), to:

     

    (a)  visit
      and
      inspect any of the properties of the Company or any of its
      Subsidiaries;

     

    (b)  examine
      the corporate and financial records of the Company or any of its Subsidiaries
      (unless such examination is not permitted by federal, state or local law or
      by
      contract) and make copies thereof or extracts therefrom; and

     

    (c)  discuss
      the affairs, finances and accounts of the Company or any of its Subsidiaries
      with the directors, officers and independent accountants of the Company or
      any
      of its Subsidiaries .

     

    Notwithstanding
      the foregoing, neither the Company nor any of its Subsidiaries will provide
      any
      material, non-public information to the Purchaser unless the Purchaser signs
      a
      confidentiality agreement and otherwise complies with Regulation FD, under
      the
      federal securities laws.

     

    6.7  Taxes.
      Each of
      the Company and each of its Subsidiaries will promptly pay and discharge, or
      cause to be paid and discharged, when due and payable, all taxes, assessments
      and governmental charges or levies imposed upon the income, profits, property
      or
      business of the Company and its Subsidiaries; provided, however, that any such
      tax, assessment, charge or levy need not be paid currently if (i) the validity
      thereof shall currently and diligently be contested in good faith by appropriate
      proceedings, (ii) such tax, assessment, charge or levy shall have no effect
      on
      the lien priority of the Purchaser in any property of the Company and (iii)
      if
      the Company and/or such Subsidiary shall have set aside on its books adequate
      reserves with respect thereto in accordance with GAAP; and provided, further,
      that the Company and its Subsidiaries will pay all such taxes, assessments,
      charges or levies forthwith upon the commencement of proceedings to foreclose
      any lien which may have attached as security therefor.

     

    6.8  Insurance.
      Each of
      the Company and its Subsidiaries will keep its assets which are of an insurable
      character insured by financially sound and reputable insurers against loss
      or
      damage by fire, explosion and other risks customarily insured against by
      companies in similar business similarly situated as the Company and its
      Subsidiaries; and the Company and its Subsidiaries will maintain, with
      financially sound and reputable insurers, insurance against other hazards and
      risks and liability to persons and property to the extent and in the manner
      which the Company reasonably believes is customary for companies in similar
      business similarly situated as the Company and its Subsidiaries and to the
      extent available on commercially reasonable terms. The Company, and each of
      its
      Subsidiaries, will jointly and severally bear the full risk of loss from any
      loss of any nature whatsoever with respect to the assets pledged to the
      Purchaser as security for their respective obligations hereunder and under
      the
      Related Agreements. At the Company’s and each of its Subsidiaries’ joint and
      several cost and expense in amounts and with carriers reasonably acceptable
      to
      the Purchaser, each of the Company and each of its Subsidiaries shall (i) keep
      all its insurable properties and properties in which it has an interest insured
      against the hazards of fire, flood, sprinkler leakage, those hazards covered
      by
      extended coverage insurance and such other hazards, and for such amounts, as
      is
      customary in the case of companies engaged in businesses similar to the
      Company’s or the respective Subsidiary’s including business interruption
      insurance; (ii) maintain a bond in such amounts as is customary in the case
      of
      companies engaged in businesses similar to the Company’s or the respective
      Subsidiary’s insuring against larceny, embezzlement or other criminal
      misappropriation of insured’s officers and employees who may either singly or
      jointly with others at any time have access to the assets or funds of the
      Company either directly or through governmental authority to draw upon such
      funds or to direct generally the disposition of such assets; (iii) maintain
      public and product liability insurance against claims for personal injury,
      death
      or property damage suffered by others; (iv) maintain all such worker’s
      compensation or similar insurance as may be required under the laws of any
      state
      or jurisdiction in which the Company or the respective Subsidiary is engaged
      in
      business; and (v) furnish the Purchaser with (x) copies of all policies and
      evidence of the maintenance of such policies at least thirty (30) days before
      any expiration date, (y) excepting the Company’s workers’ compensation policy,
      endorsements to such policies naming the Purchaser as “co-insured” or
“additional insured” and appropriate loss payable endorsements in form and
      substance satisfactory to the Purchaser, naming the Purchaser as loss payee,
      and
      (z) evidence that as to the Purchaser the insurance coverage shall not be
      impaired or invalidated by any act or neglect of the Company or any Subsidiary
      and the insurer will provide the Purchaser with at least thirty (30) days notice
      prior to cancellation. The Company and each Subsidiary shall instruct the
      insurance carriers that in the event of any loss thereunder, the carriers shall
      make payment for such loss to the Company and/or the Subsidiary and the
      Purchaser jointly. In the event that as of the date of receipt of each loss
      recovery upon any such insurance, the Purchaser has not declared an event of
      default with respect to this Agreement or any of the Related Agreements, then
      the Company and/or such Subsidiary shall be permitted to direct the application
      of such loss recovery proceeds toward investment in property, plant and
      equipment that would comprise “Collateral” secured by the Purchaser’s security
      interest pursuant to the Master Security Agreement or such other security
      agreement as shall be required by the Purchaser, with any surplus funds to
      be
      applied toward payment of the obligations of the Company to the Purchaser.
      In
      the event that the Purchaser has properly declared an event of default with
      respect to this Agreement or any of the Related Agreements, then all loss
      recoveries received by the Purchaser upon any such insurance thereafter may
      be
      applied to the obligations of the Company hereunder and under the Related
      Agreements, in such order as the Purchaser may determine. Any surplus (following
      satisfaction of all Company obligations to the Purchaser) shall be paid by
      the
      Purchaser to the Company or applied as may be otherwise required by law. Any
      deficiency thereon shall be paid by the Company or the Subsidiary, as
      applicable, to the Purchaser, on demand. 

     

    6.9  Intellectual
      Property.
      Each of
      the Company and each of its Subsidiaries shall maintain in full force and effect
      its existence, rights and franchises and all licenses and other rights to use
      Intellectual Property owned or possessed by it and reasonably deemed to be
      necessary to the conduct of its business.

     

    6.10  Properties.
      Each of
      the Company and each of its Subsidiaries will keep its properties in good
      repair, working order and condition, reasonable wear and tear excepted, and
      from
      time to time make all needful and proper repairs, renewals, replacements,
      additions and improvements thereto; and each of the Company and each of its
      Subsidiaries will at all times comply with each provision of all leases to
      which
      it is a party or under which it occupies property if the breach of such
      provision could, either individually or in the aggregate, reasonably be expected
      to have a Material Adverse Effect.

     

    6.11  Confidentiality.
      The
      Company will not, and will not permit any of its Subsidiaries to, disclose,
      and
      will not include in any public announcement, the name of the Purchaser, unless
      expressly agreed to by the Purchaser or unless and until such disclosure is
      required by law or applicable regulation, and then only to the extent of such
      requirement. Notwithstanding the foregoing, the Company may disclose the
      Purchaser’s identity and the terms of this Agreement to its current and
      prospective debt and equity financing sources.

     

    6.12  Required
      Approvals.
      (I) For
      so long as twenty-five percent (25%) of the principal amount of the Note is
      outstanding, the Company, without the prior written consent of the Purchaser,
      shall not, and shall not permit any of its Subsidiaries to:

     

    (a)  (i)
      directly or indirectly declare or pay any dividends, other than dividends paid
      to the Company or any of its wholly-owned Subsidiaries, (ii) issue any
      preferred stock that is manditorily redeemable prior to the one year anniversary
      of Maturity Date (as defined in the Note or (iii) redeem any of its preferred
      stock or other equity interests;

     

    (b)  liquidate,
      dissolve or effect a material reorganization (it being understood that in no
      event shall the Company dissolve, liquidate or merge with any other person
      or
      entity (unless, in the case of such a merger, the Company or, in the case of
      merger not involving the Company, such Subsidiary, as applicable, is the
      surviving entity);

     

    (c)  become
      subject to (including, without limitation, by way of amendment to or
      modification of) any agreement or instrument which by its terms would (under
      any
      circumstances) restrict the Company’s, right to perform the provisions of this
      Agreement, any Related Agreement or any of the agreements contemplated hereby
      or
      thereby; 

     

    (d)  materially
      alter or change the scope of the business of the Company and its Subsidiaries
      taken as a whole; and

     

    (e)  (i)
      create, incur, assume or suffer to exist any indebtedness (exclusive of trade
      debt and debt incurred to finance the purchase of equipment (not in excess of
      five percent (5%) of the fair market value of the Company’s and its
      Subsidiaries’ assets)) whether secured or unsecured other than (x) the Company’s
      obligations owed to the Purchaser, (y) indebtedness set forth on Schedule
      6.12(e) attached hereto and made a part hereof and any refinancings or
      replacements thereof on terms no less favorable to the Purchaser than the
      indebtedness being refinanced or replaced, and (z) any indebtedness incurred
      in
      connection with the purchase of assets (other than equipment) in the ordinary
      course of business, or any refinancings or replacements thereof on terms no
      less
      favorable to the Purchaser than the indebtedness being refinanced or replaced,
      so long as any lien relating thereto shall only encumber the fixed assets so
      purchased and no other assets of the Company ; (ii) cancel any indebtedness
      owing to it in excess of $50,000 in the aggregate during any 12 month period;
      (iii) assume, guarantee, endorse or otherwise become directly or contingently
      liable in connection with any obligations of any other person or entity, except
      the endorsement of negotiable instruments by the Company or any Subsidiary
      thereof for deposit or collection or similar transactions in the ordinary course
      of business or guarantees of indebtedness otherwise permitted to be outstanding
      pursuant to this clause (e); and

     

    (f)  The
      Company, without the prior written consent of the Purchaser, shall not, and
      shall not permit any of its Subsidiaries to, create or acquire any Subsidiary
      after the date hereof unless (i) such Subsidiary is a wholly-owned Subsidiary
      of
      the Company and (ii) such Subsidiary becomes a party to the Master Security
      Agreement, the Stock Pledge Agreement and the Subsidiary Guaranty (either by
      executing a counterpart thereof or an assumption or joinder agreement in respect
      thereof) and, to the extent required by the Purchaser, satisfies each condition
      of this Agreement and the Related Agreements as if such Subsidiary were a
      Subsidiary on the Closing Date; provided, however, that this Section 6.12(f)
      shall not be applicable to any joint venture in which the Company has less
      than
      a fifty (50%) percent interest.

     

    6.13  Reissuance
      of Securities.
      The
      Company agrees to reissue certificates representing the Securities without
      the
      legends set forth in Section 5.8 above at such time as:

     

    (a)  the
      holder thereof is permitted to dispose of such Securities pursuant to Rule
      144(k) under the Securities Act; or

     

    (b)  upon
      resale subject to an effective registration statement if such Securities are
      registered under the Securities Act.

     

    The
      Company agrees to cooperate with the Purchaser in connection with all resales
      pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary
      to
      allow such resales provided the Company and its counsel receive reasonably
      requested representations from the Purchaser and broker, if any.

     

    6.14  Opinion.
      On the
      Closing Date, the Company will deliver to the Purchaser an opinion acceptable
      to
      the Purchaser from the Company’s external legal counsel. The Company will
      provide, at the Company’s expense, such other legal opinions in the future as
      are deemed reasonably necessary by the Purchaser (and acceptable to the
      Purchaser) in connection with the conversion of the Note and exercise of the
      Warrant.

     

    6.15  Margin
      Stock.The
      Company will not permit any of the proceeds of the Note or the Warrant to be
      used directly or indirectly to “purchase” or “carry” “margin stock” or to repay
      indebtedness incurred to “purchase” or “carry” “margin stock” within the
      respective meanings of each of the quoted terms under Regulation U of the Board
      of Governors of the Federal Reserve System as now and from time to time
      hereafter in effect.

     

    6.16  Authorization
      and Reservation of Shares.
      The
      Company shall at all times have authorized and reserved a sufficient number
      of
      shares of Common Stock to provide for the exercise of the Warrants.

     

    6.17 Each
      of C
      Acquisition Corporation and Accurel Systems International Corporation,
      subsidiaries of the Company, shall execute and deliver to Purchaser on the
      date
      hereof a Master Security Agreement and a subsidiary guaranty, each in form
      and
      substance satisfactory to the Purchaser.

     

    7.  Covenants
      of the Purchaser.
      The
      Purchaser covenants and agrees with the Company as follows:

     

    7.1  Confidentiality.
      The
      Purchaser will not disclose, and will not include in any public announcement,
      the name of the Company, unless expressly agreed to by the Company or unless
      and
      until such disclosure is required by law or applicable regulation, and then
      only
      to the extent of such requirement.

     

    7.2  Non-Public
      Information.
      The
      Purchaser will not effect any sales in the shares of the Company’s Common Stock
      while in possession of material, non-public information regarding the Company
      if
      such sales would violate applicable securities law.

     

    7.3  Limitation
      on Acquisition of Common Stock of the Company.
      Notwithstanding anything to the contrary contained in this Agreement, any
      Related Agreement or any document, instrument or agreement entered into in
      connection with any other transactions between the Purchaser and the Company,
      the Purchaser may not acquire stock in the Company (including, without
      limitation, pursuant to a contract to purchase, by exercising an option or
      warrant, by converting any other security or instrument, by acquiring or
      exercising any other right to acquire, shares of stock or other security
      convertible into shares of stock in the Company, or otherwise, and such
      contracts, options, warrants, conversion or other rights shall not be
      enforceable or exercisable) to the extent such stock acquisition would cause
      any
      interest (including any original issue discount) payable by the Company to
      the
      Purchaser not to qualify as “portfolio interest” within the meaning of Section
      881(c)(2) of the Code, by reason of Section 881(c)(3) of the Code, taking
      into account the constructive ownership rules under Section 871(h)(3)(C) of
      the
      Code (the “Stock Acquisition Limitation”). The Stock Acquisition Limitation
      shall automatically become null and void without any notice to the Company
      upon
      the existence of an Event of Default (as defined in the Note) at a time when
      the
      average closing price of the Company’s common stock as reported by Bloomberg,
      L.P. on the Principal Market for the immediately preceding five trading days
      is
      greater than or equal to 150% of the Fixed Conversion Price (as defined in
      the
      any preferred stock issued by the Company to the Holder).

     

    8.  Covenants
      of the Company and the Purchaser Regarding Indemnification.

     

    8.1  Company
      Indemnification.
      The
      Company agrees to indemnify, hold harmless, reimburse and defend the Purchaser,
      each of the Purchaser’s officers, directors, agents, affiliates, control
      persons, and principal shareholders, against all claims, costs, expenses,
      liabilities, obligations, losses or damages (including reasonable legal fees)
      of
      any nature, incurred by or imposed upon the Purchaser which result, arise out
      of
      or are based upon: (i) any misrepresentation by the Company or
      any of
      its Subsidiaries
      or
      breach of any warranty by the Company or
      any of
      its Subsidiaries
      in this
      Agreement, any other Related Agreement or in any exhibits or schedules attached
      hereto or thereto; or (ii) any breach or default in performance by Company
      or
      any of
      its Subsidiaries
      of any
      covenant or undertaking to be performed by Company or
      any of
      its Subsidiaries
      hereunder, under any other Related Agreement or any other agreement entered
      into
      by the Company or
      any of
      its Subsidiaries
      and/ and
      the Purchaser relating hereto or thereto.

     

    8.2  Purchaser’s
      Indemnification.
      The
      Purchaser agrees to indemnify, hold harmless, reimburse and defend the Company
      and each of the Company’s officers, directors, agents, affiliates, control
      persons and principal shareholders, at all times against any claims, costs,
      expenses, liabilities, obligations, losses or damages (including reasonable
      legal fees) of any nature, incurred by or imposed upon the Company which result,
      arise out of or are based upon: (i) any misrepresentation by the Purchaser
      or
      breach of any warranty by the Purchaser in this Agreement or in any exhibits
      or
      schedules attached hereto or any Related Agreement; or (ii) any breach or
      default in performance by the Purchaser of any covenant or undertaking to be
      performed by the Purchaser hereunder, or any other agreement entered into by
      the
      Company and the Purchaser relating hereto.

     

    9. Miscellaneous.

     

    9.1 Severability.
      Wherever possible each provision of this Agreement and the Related Agreements
      shall be interpreted in such manner as to be effective and valid under
      applicable law, but if any provision of this Agreement or any Related Agreement
      shall be prohibited by or invalid or illegal under applicable law such provision
      shall be ineffective to the extent of such prohibition or invalidity or
      illegality, without invalidating the remainder of such provision or the
      remaining provisions thereof which shall not in any way be affected or impaired
      thereby.

     

    9.1 Survival.
      The
      representations, warranties, covenants and agreements made herein shall survive
      any investigation made by the Purchaser and the closing of the transactions
      contemplated hereby to the extent provided therein. All statements as to factual
      matters contained in any certificate or other instrument delivered by or on
      behalf of the Company pursuant hereto in connection with the transactions
      contemplated hereby shall be deemed to be representations and warranties by
      the
      Company hereunder solely as of the date of such certificate or
      instrument.
      All
      indemnities set forth herein shall survive the execution, delivery and
      termination of this Agreement and the Note and the making and repayment of
      the
      obligations arising hereunder, under the Note and under the other Related
      Agreements.

    


    9.3 Successors.
      Except
      as otherwise expressly provided herein, the provisions hereof shall inure to
      the
      benefit of, and be binding upon, the successors, heirs, executors and
      administrators of the parties hereto and shall inure to the benefit of and
      be
      enforceable by each person or entity which shall be a holder of the Securities
      from time to time, other than the holders of Common Stock which has been sold
      by
      the Purchaser pursuant to Rule 144 or an effective registration statement.
      The
      Purchaser shall not be permitted to assign its rights hereunder or under any
      Related Agreement to a competitor of the Company unless an Event of Default
      (as
      defined in the Note) has occurred and is continuing.

     

    9.4 Entire
      Agreement; Maximum Interest.
      This
      Agreement, the Related Agreements, the exhibits and schedules hereto and thereto
      and the other documents delivered pursuant hereto constitute the full and entire
      understanding and agreement between the parties with regard to the subjects
      hereof and no party shall be liable or bound to any other in any manner by
      any
      representations, warranties, covenants and agreements except as specifically
      set
      forth herein and therein. Nothing contained in this Agreement, any Related
      Agreement or in any document referred to herein or delivered in connection
      herewith shall be deemed to establish or require the payment of a rate of
      interest or other charges in excess of the maximum rate permitted by applicable
      law. In the event that the rate of interest or dividends required to be paid
      or
      other charges hereunder exceed the maximum rate permitted by such law, any
      payments in excess of such maximum shall be credited against amounts owed by
      the
      Company to the Purchaser and thus refunded to the Company.

     

    9.5 Amendment
      and Waiver. This
      Agreement may be amended or modified only upon the written consent of the
      Company and the Purchaser. The obligations of the Company and the rights of
      the
      Purchaser under this Agreement may be waived only with the written consent
      of
      the Purchaser. The obligations of the Purchaser and the rights of the Company
      under this Agreement may be waived only with the written consent of the
      Company.

    


    9.6 Delays
      or Omissions.
      It is
      agreed that no delay or omission to exercise any right, power or remedy accruing
      to any party, upon any breach, default or noncompliance by another party under
      this Agreement or the Related Agreements, shall impair any such right, power
      or
      remedy, nor shall it be construed to be a waiver of any such breach, default
      or
      noncompliance, or any acquiescence therein, or of or in any similar breach,
      default or noncompliance thereafter occurring. All remedies, either under this
      Agreement or the Related Agreements, by law or otherwise afforded to any party,
      shall be cumulative and not alternative.

     

    9.7 Notices.
      All
      notices required or permitted hereunder shall be in writing and shall be deemed
      effectively given: upon
      personal delivery to the party to be notified; when sent by confirmed facsimile
      if sent during normal business hours of the recipient, if not, then on the
      next
      business day; three (3) business days after having been sent by registered
      or
      certified mail, return receipt requested, postage prepaid; or one (1) day after
      deposit with a nationally recognized overnight courier, specifying next day
      delivery, with written verification of receipt.

    All
      communications shall be sent as follows:

    


    
      	
              If
                to the Company, to:

            	
              IMPLANT
                SCIENCES CORPORATION

              107
                Audubon Road, #5

              Wakefield,
                MA 01880

              Attention: Chief
                Financial Officer

              Facsimile: 781-246-3561

            
	 	
              with
                a copy to:

            
	 	
              Ellenoff
                Grossman & Schole

              370
                Lexington Avenue

              NY,
                NY 10017

              Attention:
                Attorney David Selengut

              Facsimile:
                212-370-7889 

               

            
	
              If
                to the Purchaser, to:

            	
              Laurus
                Master Fund, Ltd.

              c/o
                M&C Corporate Services Limited

              P.O.
                Box 309 GT

              Ugland
                House 

              George
                Town

              South
                Church Street

              Grand
                Cayman, Cayman Islands

              Facsimile: 345-949-8080

            
	 	
              with
                a copy to:

            
	 	
              John
                E. Tucker, Esq.

              825
                Third Avenue 14th Floor

              New
                York, NY 10022

              Facsimile: 212-541-4434

            


    

    


    or
      at
      such other address as the Company or the Purchaser may designate by written
      notice to the other parties hereto given in accordance herewith.

     

    9.8 Attorneys’
      Fees.
      In the
      event that any suit or action is instituted to enforce any provision in this
      Agreement or any Related Agreement, the prevailing party in such dispute shall
      be entitled to recover from the losing party all fees, costs and expenses of
      enforcing any right of such prevailing party under or with respect to this
      Agreement and/or such Related Agreement, including, without limitation, such
      reasonable fees and expenses of attorneys and accountants, which shall include,
      without limitation, all fees, costs and expenses of appeals.

     

    9.9 Titles
      and Subtitles.
      The
      titles of the sections and subsections of this Agreement are for convenience
      of
      reference only and are not to be considered in construing this
      Agreement.

     

    9.10 Facsimile
      Signatures; Counterparts.
      This
      Agreement may be executed by facsimile signatures and in any number of
      counterparts, each of which shall be an original, but all of which together
      shall constitute one agreement.

     

    9.11 Broker’s
      Fees.
      Except
      as set forth on Schedule 11.12 hereof, each party hereto represents and warrants
      that no agent, broker, investment banker, person or firm acting on behalf of
      or
      under the authority of such party hereto is or will be entitled to any broker’s
      or finder’s fee or any other commission directly or indirectly in connection
      with the transactions contemplated herein. Each party hereto further agrees
      to
      indemnify each other party for any claims, losses or expenses incurred by such
      other party as a result of the representation in this Section 11.13 being
      untrue.

     

    9.12 Construction.
      Each
      party acknowledges that its legal counsel participated in the preparation of
      this Agreement and the Related Agreements 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 Agreement or any
      Related Agreement to favor any party against the other.

     

    10. Offering
      Restrictions.
      Except
      as previously disclosed in the SEC Reports or in the Exchange Act Filings,
      or
      stock or stock options granted to employees or directors of the Company (these
      exceptions hereinafter referred to as the “Excepted Issuances”), the Company
      nor
      any of
      its Subsidiaries
      will
      not, prior to the full repayment of the Note (together with all accrued and
      unpaid interest and fees related thereto), (x) enter into any equity line of
      credit agreement or similar agreement or (y) issue, or enter into any agreement
      to issue, any securities with a variable/floating conversion and/or pricing
      feature which are or could be (by conversion or registration) free-trading
      securities (i.e. common stock subject to a registration statement).

     

    11.  Miscellaneous.

     

    11.1  Governing
      Law, Jurisdiction and Waiver of Jury Trial.

     

    (a)  THIS
      AGREEMENT AND THE OTHER RELATED AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED
      AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE
      TO
      CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF
      CONFLICTS OF LAWS.

     

    (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 PURCHASER, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF
      THE
      RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT
      OR ANY OF THE OTHER RELATED AGREEMENTS; PROVIDED,
      THAT
      THE PURCHASER AND THE COMPANY ACKNOWLEDGE 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 AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE PURCHASER
      FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO
      COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL (AS DEFINED IN THE MASTER
      SECURITY AGREEMENT) OR ANY OTHER SECURITY FOR THE OBLIGATIONS (AS DEFINED IN
      THE
      MASTER SECURITY AGREEMENT), OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN
      FAVOR OF THE PURCHASER. 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 SECTION 11.9 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.

     

    THE
      PARTIES DESIRE THAT THEIR 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 PARTIES HERETO WAIVE 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 PURCHASER AND/OR
      THE
      COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
      RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
      OTHER RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR
      THERETO

     

    


     

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    IN
      WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE
      AGREEMENT as of the date set forth in the first paragraph hereof.

     

    
      	
               

              COMPANY:

               

            	
               

              PURCHASER:

               

            
	
               

              IMPLANT
                SCIENCES CORPORATION

               

            	
               

              LAURUS
                MASTER FUND, LTD.

               

            
	
               

              By:
                /s/ Diane J. Ryan

               

            	
               

              By:
                

               

            
	
               

              Name:
                Diane J. Ryan

               

            	
               

              Name:
                

               

            
	
               

              Title:
                VP and CFO

               

            	
               

              Title:
                

               

            


    

    


     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


     

    



    Schedules
      

    


    4.2 Subsidiaries:

    


    Name/Address     Percent
      of Ownership

    C
      Acquisition Corp     100%

    dba
      Core
      Systems 

    1050
      Kifer Road

    Sunnyvale,
      CA 94086

    


    


    Accurel
      Systems International Corp.   100%

    485
      Lucerne Drive

    Sunnyvale,
      CA 94085

    


    
      	4.3  	
              Capitalization:
                Voting Rights

            


    

     

    The
      authorized capital stock of the Company, as of the date hereof consists of
      55,000,000 shares, of which 50,000,000 are shares of Common Stock, par value
      $0.10 per share, 11,800,811 shares of which are issued and outstanding, and
      5,000,000 are shares of preferred stock, par value $0.10 per share of which
      393,939 shares of preferred stock are issued and outstanding. 

     

    Subject
      to certain exceptions, investors in a March 2005 private placement have
      the
      right of first refusal, subject to Laurus Master Fund, Ltd.’s prior right of
      first refusal. 

     

    The
      authorized, issued and outstanding capital stock of each Subsidiary of the
      Company is:

     

    
           

        
          	
                   

                   

                  Name

                	
                   

                   

                  #
                    Shares Authorized

                	
                   

                   

                  Par
                    Value

                	
                   

                   

                  Issued
                    and Outstanding

                
	
                  C
                    Acquisition Corp.

                	
                  1,000

                	
                  .001

                	
                  100

                
	
                   

                	
                   

                	
                   

                	
                   

                
	
                  Accurel
                    Systems

                	
                  15,000,000

                	
                  none

                	
                  2,000,000

                
	
                   

                	
                   

                	
                   

                	 


        


        
           

          
            
            

          

          
            
            

          

        



       

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


     

     

     

    Other
      shares subject to issue:

    


    
      	
              2004
                Stock Option Plan

            	 
	
              Balance
                available to Grant

            	
              350,000
                

            
	
              Granted
                but unexercised

            	
              650,000
                

            
	 	 
	
              2000
                Stock Option Plan 

            	 
	
              Balance
                available to Grant

            	
              47,402
                

            
	
              Granted
                but unexercised

            	
              1,266,938
                

            
	 	 
	
              1998
                Stock Option Plan 

            	 
	
              Balance
                available to Grant

            	
              129,003
                

            
	
              Granted
                but unexercised

            	
              8,000
                

            
	 	 
	
              Warrants

            	 
	
              Balance
                Outstanding

            	
              1,663,828
                

            
	
              AIR's

            	
              611,765
                

            
	
               

              2006
                Employee Stock Purchase Plan

            	
              500,000

            
	
               

              1998
                Employee Stock Purchase Plan

            	
              45,519

            
	 	 


    

    


    



    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


     

    
      	4.5  	
              Term
                Note with Comerica Bank

            


    

    Line
      of
      Credit with Bridge Bank

    Various
      capital and operating leases

    Series
      D
      with Laurus Master Fund

    


    
      	4.6  	
              a)
                Manufacturing and Distribution Agreement with Rapiscan Systems (See
                legal)

            


    

    
      	b)  	
              Dividends
                paid to Laurus Master fund

            


    

    Amended
      and Restated revolving credit facility with Bridge Bank to be executed January
      2007.

    New
      capital leases at Accurel Systems

    See
      schedule 4.5

    


    
      	4.7  	
              Short
                term loan to employee with 6/30/07 maturity
                date

            


    

    


       4.8  
      See
      4.5
      and 4.6 

    


      4.9   
      See
      4.5
      and 4.6 

                  
      Lease
      schedules as of 9/30/06

    


    
      	
               

            	
               

            	
              Capital
                Lease Payments

            	
               

            	
              Operating
                Lease Payments

            
	
              Year
                ending June 30:

            	
               

            	
               

            	
               

            
	
              2007
                remaining 9 months

            	
               

            	
              $
                107,000 

            	
               

            	
              $
                1,267,000 

            
	
              2008

            	
               

            	
              132,000
                

            	
               

            	
              1,713,000
                

            
	
              2009

            	
               

            	
              117,000
                

            	
               

            	
              1,454,000
                

            
	
              2010

            	
               

            	
              106,000
                

            	
               

            	
              838,000
                

            
	
              2011
                and remaining

            	
               

            	
              91,000
                

            	
               

            	
              150,000
                

            
	
              Total
                future minimum lease payments

            	
              $553,000
                

            	
               

            	
               $
                5,422,000 

            
	
              Less:
                amounts representing interest

            	
               (138,000)
                

            	
               

            	
               

            
	
              Present
                value of future minimum lease payments

            	
              415,000

            	
               

            	
               

            
	
              Less:
                current portion

            	
              (90,000)

            	
               

            	
               

            
	
              Capital
                lease obligation, net of current portion

            	
              $325,000

            	
               

            	
               

            


    

    


    
      	4.10  	
              Intellectual
                property royalty agreement with SPEC Med
                LLC.

            


    

    


    
      	4.12
              	
                 
                Litigation

            


    

    


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

    


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

    


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

    


    The
      arbitration is now in the discovery phase, and the hearing is scheduled for
      February 2007.

    


    At
      this
      early stage of the proceedings, particularly before the commencement of
      depositions, it is difficult to assess the final outcome of this arbitration.
      However, the Company believes that the counterclaims have no merit, and will
      vigorously defend itself against such counterclaims.

    


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

    


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

    


    On
      March
      27, 2006, the Company received notice that Rapiscan filed a complaint against
      the Company and its contract manufacturer, Columbia Tech, in the United States
      District Court for the Central District of California, regarding the Rapiscan
      Agreement. Rapiscan’s complaint against the Company is based upon claims of
      breach of contract and breach of warranty and is requesting a decree for
      specific performance, declaratory relief and injunctive relief. Rapiscan’s
      complaint against Columbia Tech is based upon injunctive relief, declaratory
      relief and tortuous interference with contractual relations. On April 12, 2006,
      Rapiscan dismissed all claims against Columbia Tech. 

    


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

     

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

     

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

     

    
      	4.17  	
              a)
                All locations use approved toxic chemicals in semiconductor
                services

            


    

    b)
      Wakefield has radioactive materials, regulated by Commonwealth of
      MA