UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              FORM 10-KSB/A NO. 2


[X]       Annual  report  pursuant  to  section  13  or  15(d) of the Securities
          Exchange Act of 1934.  FOR THE FISCAL YEAR ENDING JUNE 30, 2001. Or

[ ]       Transition report pursuant to Section 13 or 15(d) of the Securities
          Exchange  Act  of  1934.  For the transition period from _____to_____.

                        Commission file number 000-25839


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


MASSACHUSETTS                                           04-2837126
----------------------------------------                -----------------------
(State  or  other  jurisdiction                         (IRS  Employer
of incorporation or organization)                       Identification  number)

107  Audubon  Road,  #5  Wakefield,  MA                 01880
----------------------------------------                -----------------------
(Address of Principal Executive Offices)                (Zip  Code)


                                  781-246-0700
                                  ------------
              (Registrant's Telephone Number, Including Area Code)


Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------------                 -----------------------------------------
Common Stock, $.10 par value      American Stock Exchange, Boston Stock Exchange
Warrants                          American Stock Exchange, Boston Stock Exchange


     Indicate  by  check  mark  whether the registrant (1) has filed all reports
required  to  be  filed by Section 13 or 15(d) of the Securities Exchange Act of
1934  during  the  preceding  12  months  (or  for  such shorter period that the
registrant  was  required to file such reports) and (2) has been subject to such
filing  requirements  for  the  past  90  days.

                            YES  X              NO
                                ---                ---

     Check  if  there  is no disclosure of delinquent filers in response to Item
405  of  Regulation  S-B  contained  in  this  form,  and  no disclosure will be
contained,  to  the  best  of  registrant's  knowledge,  in  definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or  any  amendment  to  this  Form  10-KSB.

     State issuer's revenues for its most recent fiscal year: $4,368,000

     The  aggregate  market  value of the voting stock held by non-affiliates of
the registrant was approximately $17,800,000 as of August 15, 2001 (based on the
closing  price  for  such  stock  as  of  August  15,  2001).

     Indicate  the  number of shares outstanding of each of the issuer's classes
of  common  stock:


               Class                       Outstanding at June 30, 2001
    Common Stock, $.10 par value                    5,889,770


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<PAGE>


                                     PART 1

ITEM 1.     OUR BUSINESS

     In addition to historical information, this Annual Report on Form 10-KSB/A
No. 2 contains forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. The words "believe," "expect,"
"anticipate," "project," "estimate," "forecast," and similar expressions, among
others, identify forward looking statements. The forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the sections entitled "Business", "Risk Factors", and
"Managements Discussion and Analysis of Financial Condition and Results of
Operations." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date thereof. The Company undertakes no obligation to revise or publicly release
the results of any revision of these forward-looking statements. Readers should
carefully review the risk factors described in the Annual Report and in other
documents that the Company files from time to time with the Securities and
Exchange Commission.

     Implant Sciences Corporation (the "Company"), incorporated in August 1984
has, over the past seventeen years, developed core technologies using ion
implantation and thin film coatings for medical device applications and has
proprietary processes and equipment for the manufacture of medical radiation
therapeutic devices. This technology has been applied to the manufacture of
radioactive prostate seeds using a dry fabrication process which we believe will
be more cost-effective and less hazardous than conventional processes which use
radioactive wet chemistry. Our I-Plant seeds are made radioactive in a nuclear
reactor prior to shipment to customers. We believe that the opportunities for
radioactive prostate seeds will continue to grow as an attractive alternative to
other methods of treatment. Research and development on the radioactive prostate
seed commenced in approximately June 1988. We received Food and Drug
Administration 510(k) clearance to market our I-Plant(TM) Iodine-125 radioactive
seed for the treatment of prostate cancer in May 1999. On February 2, 2000 we
signed a distribution agreement with MED-TEC Iowa, Inc. ("MED-TEC") for the
exclusive U.S. distribution of our I-Plant Iodine-125 seed. From approximately
May 1999 through August 2000, we expended resources in the building of a
production facility to manufacture and sell the radioactive prostate seeds. We
recognized our first sales of radioactive prostate seeds in the first half of
fiscal 2001. The transition from research and development on the radioactive
prostate seeds to FDA approval and commercialization of this product represents
a critical stage in our growth from a provider of ion implantation services for
semiconductor and orthopedic applications to a manufacturer and seller of
product in the form of radioactive prostate seeds.

     In the interventional cardiology field, we are developing internally, as
well as with the support of Phase I and Phase II government grants, coronary
brachytherapy devices for the prevention of restenosis (reclosure of the artery)
after balloon angioplasty. We believe these implants, radioactive seeds used for
the treatment of prostate cancer and coronary brachytherapy devices used for the
prevention of restenosis (reclosure of the artery) after balloon angioplasty,
will have a significant competitive advantage over currently existing devices.

     We are currently developing our proprietary thin film coating technology in
order to apply it to radiopaque (visible by x-ray) coatings on stents,
guidewires, catheters and other devices used in interventional cardiology
procedures. In addition, we are applying our ion implantation technologies to
modify surfaces to reduce polyethylene wear generation in orthopedic joint
implants, manufactured by the Howmedica/Osteonics Division of Stryker
Corporation and Biomet Incorporated. We also supply ion implantation services to
numerous semiconductor manufacturers, research laboratories and universities. We
currently have seventeen issued United States patents and seven United States
patents pending covering our technologies and processes. We also have two
international patent applications pending.

     Since May 1999, we have been performing research to develop a trace
explosives detector, which could be used to detect hidden bombs in airports and
other public places. This technology is yet another application of our ion


                                        2
<PAGE>
source technology. In November 2001, a portable prototype was developed and
demonstrated to the Federal Aviation Administration's Technical Center in
Atlantic City, New Jersey. Following this demonstration, the Federal Aviation
Administration scientists encouraged us to pursue the technology and to apply
for a cooperative research and development agreement. A cooperative research and
development agreement would allow the Federal Aviation Administration to divulge
to us certain classified aspects of explosives detection and to convey the
specifications of equipment that the Federal Aviation Administration would
consider for purchase if available. We submitted a memorandum of understanding
to the Federal Aviation Administration Technical Center on January 24, 2002,
which allows us to move forward with the proposal for a joint research and
development arrangement.

     Although there are a wide range of commercial applications for our
proprietary technologies, we have chosen to focus initially on the medical
device industry. Within the medical device industry, we are concentrating on the
prostate cancer, interventional cardiology and orthopedic segments. We are also
performing research and development on technology that can be used in the
explosives detection industry and have developed a working prototype. Management
believes that such technology, if successfully developed and commercialized,
could provide us with additional business opportunities for growth.

     Although there are a wide range of commercial applications for our
proprietary technologies, we have chosen to focus initially on the medical
device industry. Within the medical device industry, we are concentrating on the
prostate cancer, interventional cardiology and orthopedic segments. We are also
performing research and development on technology that can be used in the
explosives detection industry and have developed a working prototype. Management
believes that such technology, if successfully developed and commercialized,
could provide us with additional business opportunities for growth.

TECHNOLOGIES

     General.  We use two core technologies, ion implantation and thin film
coatings, to provide enhanced surfaces to various medical implants and
semiconductor products.  With respect to each core technology, we have developed
proprietary processes and equipment for the purpose of improving or altering the
surfaces of medical implants and semiconductor wafers.

     Ion implantation and thin film coatings are techniques first developed in
the 1970's to improve the functional surface properties of metals, ceramics and
polymers, such as friction, wear, wetability and hardness. Ion implantation was
initially developed as a means to dope semiconductors in the fabrication of
integrated circuits. The accuracy, cleanliness and controllability of this
process has made it the standard for semiconductor manufacturing. Ion
implantation is generally preferred over other surface modification methods
because it does not delaminate, does not require high temperatures and does not
deform or alter the dimensions of the treated surface.

     Thin film coatings were initially developed to interconnect transistors on
semiconductor chips. Thin films modify surfaces by layering a desired metal or
ceramic coating on the substrate material. Common thin film coating techniques
include chemical vapor deposition and physical vapor deposition.

     Ion Implantation. Ion implantation is a process by which ions (electrically
charged atoms) are accelerated to high velocity in a vacuum and directed toward
a substrate or target material. The atoms become embedded just below the surface
of the material producing an alloy composed of the atoms and the substrate
material in the near-surface region of the target material. This surface alloy
may have new mechanical, electrical, chemical, optical and other properties. We
believe our proprietary technology, including high current ion sources and
specialized component holding fixtures, provides higher ion implant doses and
higher beam power and yields superior surface characteristics at lower cost than
commercially available equipment.

     Ion implantation can be used to embed single isotopes of radioactive or
non-radioactive elements into components. We are using our proprietary equipment
to manufacture radioactive seed implants for the treatment of prostate cancer
and other carcinomas which can be manufactured without expensive cyclotrons or
linear accelerators and without hazardous radioactive wet chemistry, the methods
currently employed by existing suppliers. We have seventeen United States
patents and seven United States patents pending on our processes. We also
believe we can cost-effectively implant ions of therapeutic radioisotopes
including phosphorous-32, palladium-103 or ytterbium-90 into a device such as a
coronary stent used to reduce restenosis following balloon angioplasty.


                                        3
<PAGE>
     Thin Film Coating. A thin film coating is grown upon a substrate in a
vacuum by the gradual deposition of atoms on the substrate. Our proprietary
unbalanced magnetron sputtering process results in coatings that are extremely
dense and free of voids, yielding good contrast and sharp edges under x-ray or
fluoroscopic examination. These coatings usually consist of gold or platinum for
radiopaque applications. Our proprietary manufacturing process allows for
efficient utilization of precious metals and for cost effective recovery and
recycling of these precious metals. We are also developing processes to coat
stents, guidewires and catheters used in interventional cardiology procedures
with substances, usually gold or platinum, that allow those stents, guidewires
and catheters to be visible under x-ray observation during a procedure. We
believe other techniques for applying thin film coatings are less desirable for
medical device applications because of their inability to apply a dense coating,
while continuing to be flexible and adhering to the substrate.

          Trace Explosives Detection. We have developed a prototype instrument
which can detect the vapor from trace amounts of explosive compounds including
plastic explosives such as RDX, the compound commonly found in C4 explosives.
The system works by ionizing explosive molecules in air using a laser beam and
then detecting the ionized molecules of the explosive using ion mobility
spectrometry.  The prototype instrument has successfully detected molecules of
five different types of explosives at the parts per trillion concentrations in
the air.  We believe this technology will provide commercial systems with
improved sensitivity and capabilities than equipment presently available.

CURRENT AND FUTURE PRODUCTS

Prostate Cancer Seeds

     General.  The alternatives generally presented to patients diagnosed with
early stage prostate cancer are surgical removal of the prostate (radical
prostatectomy) or external beam radiation.  Both techniques frequently have
significant side effects including impotence and incontinence.  Brachytherapy
has been an increasingly popular treatment technique whereby radioactive seeds
(each of which is approximately half the size of a grain of rice) are
permanently implanted into the prostate.  This technique allows the delivery of
highly concentrated yet confined doses of radiation directly to the prostate.
Surrounding healthy tissues and organs are spared significant radiation
exposure.  Advances in transrectal ultrasound and catscan imaging equipment
provide detailed and precise measurements of prostate size and shape, for seed
distribution and placement.

     Prostate Seeds. We have developed, and been granted two United States
patents covering radioactive seeds, implants and methods of manufacturing
radioactive seed implants by a proprietary process. We have received Food and
Drug Administration 510(k) clearance to market our I-Plant(TM) Iodine-125
radioactive seed for the treatment of prostate cancer. These seeds are used
primarily in the treatment of prostate cancer. Our 510k clearance permits
treatment of any localized tumors treatable by temporary or permanent
brachytherapy. Accordingly, we believe there is no liability for off-label use.
A twelve-year study conducted by the Northwest Hospital, Seattle, Washington
shows that this treatment has a twelve-year disease-free survival rate equal to
surgical removal of the prostate and may be superior to other early stage
treatments, with a substantial reduction in the negative side effects, impotence
and incontinence, frequently associated with surgery and external beam radiation
treatment. The National Cancer Institute and American Cancer Society have
reported that sexual potency after implantation of radioactive seeds has been
86% to 92%, which compares with rates of 10% to 40% for radical prostectomies
and 40% to 60% for external beam radiation therapy. Our production method,
involving a proprietary dry fabrication process, does not use radioactive wet
chemistry. On July 28, 1999 we received our Radioactive Sealed Source
Registration Certificate, a Nuclear Regulatory Commission requirement
administered by the Commonwealth of Massachusetts as a Nuclear Regulatory
Commission Agreement State. On February 2, 2000 we signed a distribution
agreement with MED-TEC for the exclusive U.S. distribution of our I-Plant
Iodine-125 seed.

     Manufacturing. Management believes that the Company's manufacturing process
results in lower capital equipment and manufacturing assembly costs and is less
hazardous than the manufacturing processes used by our competitors. Other
radioactive prostate seed manufacturers use radioactive wet chemistry during


                                        4
<PAGE>
seed assembly for Iodine-125 products. Our dry process, for which we have
patents issued and pending, uses a dry fabrication process, and we believe it
requires fewer personnel and yields faster throughput. Following seed core
assembly we send our seed cores to a nuclear reactor for activation. Using this
dry fabrication process, seed cores can be fabricated and inventoried in large
quantities and activated only when ordered. Due to the short half-life of
Iodine-125 (60 days), the competition must assemble and ship seeds on a tight
schedule so they can be implanted into the patient at the appropriate
radioactive strength. We maintain multiple source vendors for our raw materials
supplies in the construction of our radioactive prostate seeds including Trace
Sciences International, Isoflex USA, Inc., Specialty Glass Products, United
Silica Products, Uniform Tube Corporation, and Fraen Machining Corporation. In
addition, we maintain multiple nuclear reactor sources capable of activating the
radioactive prostate seeds, including Studsvik Nuclear Corporation and NRG
Petten.

     Sales. On February 2, 2000 we signed a distribution agreement with MED-TEC.
Under this agreement, MED-TEC has agreed to act as our exclusive distributor for
our Iodine-125 radioactive seed for the treatment of prostate cancer in the
United States, the District of Columbia, and Puerto Rico. This agreement has a
three year term and may be extended for a further two years by MED-TEC by giving
us 120 days written notice. Under this agreement, MED-TEC is obligated to
purchase a minimum number of seeds per week from us. The price paid by MED-TEC
for our seeds will vary depending upon market conditions. Either party may
terminate this agreement on 120 days written notice upon a material breach by
the other party. The agreement may also be terminated by either party if it is
deprived of the benefits of the agreement as a result of force majeure for a
period of more than 120 days. MED-TEC's sales of prostate seeds accounted for
17% of revenues for the year ended June 30, 2001.

Interventional Cardiology Devices

     General.  In cooperation with certain device manufacturers and with the
support of government research contracts and grants, we are in the process of
developing a number of devices to be used in interventional cardiology
procedures.  Among these devices are temporary coronary brachytherapy systems
and coronary stents that are used to reduce restenosis following balloon
angioplasty and stents, guidewires and catheters containing radiopaque markers.
Coronary stents are made of metals which are not radiopaque and in many cases
must be coated with dense precious metals for increased visibility that is
critical to their guiding, positioning, manipulation and placement.

Temporary Coronary Brachytherapy Systems

     With the support of a government research grant, we have begun an
initiative on a catheter-based brachytherapy system device for the prevention of
restenosis, reclosure of the artery, following balloon angioplasty. The catheter
is being designed to deliver localized radiation to the patient's artery, using
Iodine-125, a soft gamma ray emitter mounted on the tip of a delivery catheter.
Using our patented core technology for the I-Plant(TM) seed we are developing a
proprietary process to produce radioactive sources of sufficient strength to be
used in the vascular system. We expect that the use of this soft gamma ray
isotope within the catheterization laboratory will allow the physician and staff
to remain at the patients side during the treatment, which is currently not an
option with other gamma ray emitters. We anticipate that this soft gamma ray
should also make the procedure more acceptable to the interventional
cardiologist, compared to other systems currently in clinical development.

     Radioactive Stents. In fiscal 1998, we were awarded a grant from the
National Institutes of Health for the first phase of a possible two-phase
program to further develop radioactive stents on a commercial basis. In
September 1999 we were notified by the National Institutes of Health that we
were awarded a $750,000 Phase two grant, based on our successful phase I grant,
to further develop our radioactive stents.

     Radiopaque Coatings. We have developed proprietary methods for applying
radiopaque coatings onto a variety of medical devices manufactured by our
customers in order to increase the visibility of such devices during
interventional cardiology and other catheter-based procedures. These
biocompatible coatings are deposited using a proprietary unbalanced magnetron
sputtered coating process. The resulting coating is extremely dense and free of
voids yielding good contrast and sharp edges under x-ray or fluoroscopic
examination. We use this process to coat stents, guidewires and catheters. For a
fractional increase in the manufacturing cost of a stent, the Company believes
its coatings can provide significant added value and enhanced performance. The
Company's thin film coatings are being evaluated by certain customers for
stents, guidewires and catheters.


                                        5
<PAGE>
Orthopedic Total Joint Replacements

      General. We provide surface engineering technology to manufacturers of
orthopedic hip and knee total joint replacements. The majority of existing hip
and knee joint replacements are made of a cobalt chromium femoral component that
articulates against a polyethylene component. While offering excellent
biocompatibility and superior wear resistance over prior alloys and designs and
potentially longer average life than prior alloys, cobalt chromium devices still
suffer from particle generation where the metal and polyethylene components
articulate against each other. This particle generation has been identified as a
primary cause of implant loosening due to osteolysis requiring repeat surgery.

      Orthopedics. We implant cobalt chromium components of total joint
replacements manufactured by our customers with nitrogen ions. Nitrogen ion
implantation of these components reduces polyethylene wear by modifying the
native oxide present in cobalt chromium alloys. Laboratory tests and clinical
studies have shown that nitrogen ion-implanted cobalt chromium components offer
superior performance over untreated components, significantly reducing wear and
slowing the incidence of osteolysis which ultimately leads to revision surgery.

      Manufacturing. We believe we now operate one of the highest beam-current
ion implanters used in the medical field. This equipment has higher through-put
and lower cost than equipment with a lower beam-current. For our new second
generation orthopedic coating, this equipment can provide a ceramic coating with
superior characteristics due to its patented "blended interface" process. We
maintain multiple source vendors for our gas supplies, the primary raw material
used in the ion implantation process in providing this service, including Trace
Sciences International and Isoflex USA, Inc.

      Sales. We currently implant cobalt chromium components of total joint
replacements made by our customers with nitrogen ions and are developing ceramic
ion implantation techniques for total joint replacements. We receive untreated
cobalt chromium total joint replacements from our customers and implant them at
our facility. We then invoice and ship the implanted total joint replacements to
our customers. We maintain two major customers, the Howmedica/Osteonics Division
of Stryker, Corporation and Biomet, Incorporated, accounted for 34% of revenues
in the year ended June 30, 2001 and 44%, for the comparable prior year period.

     Markets. Osteoarthritis is a natural result of the aging process and is the
predominant cause of the need for joint replacement. We believe that longer life
expectancy as well as the growth in the number of people over age 50 will cause
the demand for total joint replacement to increase. According to the American
Academy of Orthopedic Surgeons, the hip and knee total joint replacement market
was estimated to be 1,100,000 units in 2000 in the United States. The Company
treats approximately 50,000 units each year using its ion implantation process
for the Howmedica/Osteonics Division of Stryker Corporation and Biomet,
Incorporated. Our research has shown that our ceramic coatings can decrease wear
debris generation by two-thirds, which we believe will reduce osteolysis and
thereby reduce the need for revision surgery.

Semiconductor Ion Implantation

     We supply ion implantation services to numerous semiconductor
manufacturers, research laboratories, and research universities. Ion
implantation of electronic dopants into silicon, the process by which silicon is
turned into a semiconductor, is an integral part of the integrated circuit
fabrication process. While many of our  customers have their own ion
implantation equipment, they often use our services and specialized expertise
for research and new product development because they do not want to interfere
with production or because they are unable to perform the services themselves.

     To serve this market, we offer the ion implantation of over 60 of the 92
natural elements for our customers' research programs. We offer all of the
necessary dopants for silicon as well as for new materials such as gallium
arsenide, silicon carbide, indium phosphide and other advanced compound
semiconductors. We also perform high dose ion-implantation of silicon and
germanium to improve the crystallinity and to modify the semiconductor
properties of these materials. We maintain multiple source vendors for our gas
supplies, the primary raw material used in the ion implantation process in
providing this service, including Trace Sciences International and Isoflex USA,
Inc.


                                        6
<PAGE>

Trace Explosives Detection Equipment.

     We are developing several explosive detection systems that could be used in
airports, public and government buildings, and sporting event facilities. The
systems use our proprietary technology, which includes the use of laser beams in
combination with ion mobility spectrometry, to electronically detect minute
quantities of explosive vapor molecules in the air.

     We are developing several versions of the systems to serve these markets.
We are developing a table-top unit, which can be used to screen passengers and
carry-on baggage in airports. We are also developing a portable system, which
can be used to replace bomb-sniffing dogs to clear buildings, aircrafts, or
ships where hidden bombs are believed to exist.

     We plan to first market these systems to U.S. government agencies for use
in airports and government buildings.

MARKETING AND SALES

     Our marketing and sales methods vary according to the characteristics of
each of our main business areas. Foreign sales have comprised less than five
percent of our total revenues. Sales and marketing to the medical device and
semiconductor markets are directed by the Company's Vice President of Marketing
and Sales who is assisted by product managers or sales representatives in each
area. U.S. sales of the I-Plant(TM) Iodine-125 radioactive seed is done through
our distribution partner MED-TEC and sales in the other medical device and
semiconductor areas are handled by three full time salespeople, product managers
or customer service. The solicitation and proposal process for research and
development contracts and grants are conducted by the Company's President, its
Chief Scientist, and its scientific staff.

Medical Sales and Marketing

     We have partnered with MED-TEC to market and sell our radioactive prostate
seeds within the United States. We plan to partner with another organization for
sales and marketing in Europe. We plan to market our coronary devices directly
to cardiovascular manufacturers who will in turn sell the products to hospitals.

     In the business of ion implantation for total joint replacements, we
concentrate on identifying and serving leading manufacturers. Where possible, we
attempt to become the sole provider of devices or surface engineering services
to each such manufacturer. Our marketing and sales efforts require considerable
direct contact and typically involve a process of customer education in the
merits of our technology. We accomplish this by first researching customer
needs, delivering scientific papers at orthopedic and biomaterial conferences,
and through presentations at customer sites. Our internal research and
government research grants are an integral part of the marketing process. Our
patent portfolio is also very important in this process.

     To promote sales of our radiopaque coatings, we attend trade shows, use
press releases, and our website at www.implantsciences.com. Once a customer's
                                   -----------------------
interest is established, the sales process proceeds with an initial
demonstration project funded by the customer. A set of developmental runs are
then performed to determine project feasibility and to roughly optimize a
parameter set for deposition. After testing of samples generated and considering
cost estimates for production quantities, the customer may authorize us to
proceed to pilot production.

     In pilot production, typically, several hundred units are produced in a
manner equivalent to the envisioned full production method. Pilot production may
be done on an existing piece of equipment with customer/device specific
fixturing, or a prototype machine depending on the complexity of the process and
device. Samples made in pilot production are fabricated into complete devices
and used by the customer for further testing, clinical studies, FDA submissions,
and marketing and sales efforts.


                                        7
<PAGE>

     We are aware of a U.S. patent of a third party having broad claims covering
radioactive stents and methods of using radioactive stents for the treatment of
restenosis.  We have not sought a formal opinion of counsel regarding the
validity of this patent or whether our process may infringe this patent.  At
this time we have no plans to implant radioactivity onto coronary stents
manufactured by the patent holder, its licensees or others.

Semiconductor Sales and Marketing

     Since semiconductor ion implantation is a standard process in all
integrated circuit fabrication, customers usually know what they want and little
education is necessary.  Our services are promoted and sold through trade shows,
advertising in trade magazines, direct mailings, press releases, and our website
at www.implantsciences.com.  Most sales are between $600 and $2,500 per order,
   ------------------------
take less than one day to complete, and the entire sales effort is often
conducted by telephone.  Most of our sales in this area are for outsourced
customer-specified ion implantation services which the customer's own ion
implantation department is unable or unwilling to perform.

Government Contracts

     Research and development contracts from the U.S. government must be won
through a competitive proposal process which undergoes peer review.  We are in
frequent contact with the National Institutes of Health, the Department of
Defense, the Department of Energy and other agencies at technical conferences to
stay informed of the government's needs.  We believe our management and senior
scientific staff have earned a strong reputation with these and other agencies.
To date we have been awarded research and development contracts by the National
Institute of Health, the Department of Defense, the National Science Foundation,
and the National Aeronautics and Space Administration.

RESEARCH AND DEVELOPMENT

     Our technical staff consists of eleven scientists and engineers, including
six with Ph.D. degrees, and five with Bachelor Degrees or with expertise in
physical sciences and engineering. All of our existing and planned products rely
on proprietary technologies developed in our research and development
laboratories. Our research and development efforts may be self-funded, funded by
corporate partners or by awards under the Small Business Innovative Research
program of the U.S. Government. Under the Small Business Innovative Research
program, we retain the right to patent anything developed pursuant to the
program, however, the US Government retains a royalty free license to use the
technology. We have obtained over $6 million in U.S. government grants and
contracts over the past 10 years. Each research and development agreement with
our corporate partners defines the rights to these agreements. Since September
2000, no corporate partner has funded research and development programs.

     We spent approximately $2,975,000 and $2,300,000 on research and
development in the fiscal years ended June 30, 2001 and 2000, respectively.
Approximately $747,000 and $788,000 of research and development activities were
borne directly by customers in 2001 and 2000, respectively.

     One of our research and development programs that we completely funded is
the development of our trace explosives detection systems. Since May 1999, we
have spent approximately $150,000 on this program.

PATENTS AND PROPRIETARY TECHNOLOGY

     It is our policy to protect our proprietary position by, among other
methods, filing United States and foreign patent applications. We currently have
seventeen issued United States patents and seven United States patents
applications pending. We also have two international patent applications
pending. Of the seventeen patents issued, four (4) are of material importance to
us and are in the field of brachytherapy. These four (4) material patents expire
in the years 2017 through 2019.

     We have exclusive rights inter-alia under patents covering the following
technologies: (i) methods of rendering coronary stents radioactive, (ii) a
radioactive, radiopaque stent device, (iii) methods of growing ceramic coatings
on orthopedic implants, (iv) methods of generating ion beams and (v) an
iodine-125 radioactive prostate seed. In addition, we also have patents pending
on (i) a palladium-103 radioactive prostate seed, (ii) vascular brachytherapy
devices, and (iii) drug eluting stents.


                                        8
<PAGE>
     We intend to seek further patents on our technologies, if appropriate.
However, there can be no assurance that patents will issue for any of our
pending or future applications or that any claim allowed from such applications
will be of sufficient scope or strength, or be issued in all countries where we
sell our products and services, to provide meaningful protection or any
commercial advantage to us.

     We also rely on unpatented proprietary technology, trade secrets and
know-how and we do not know if others will independently develop
substantially equivalent proprietary information, techniques or processes,
that such technology or know-how will not be disclosed or that we can
meaningfully protect our rights to such unpatented proprietary technology,
trade secrets or know-how.  Although we have entered into non-disclosure
agreements with our employees and consultants, we cannot be sure such
non-disclosure agreements will provide adequate protection for our trade
secrets or other proprietary know-how.

GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS

     Medical devices incorporating our technologies, such as radioactive
prostate seeds and interventional cardiology devices, are subject to FDA
regulation. The burden of securing FDA clearance or approval for these core
business medical devices rests with the Company's medical device manufacturers
or licensees. The Company has received Food and Drug Administration 510(k)
clearance to market its I-Plant(TM) Iodine-125 radioactive seed for the
treatment of prostate cancer.

     In the 510(k) clearance procedure, a company must show that its new product
is "substantially equivalent" to a medical device that is currently approved for
use. This process requires an application to the FDA for 510(k) clearance. If
the FDA determines that a product is in fact substantially equivalent to a
product that has already been approved for use, the FDA grants 510(k) clearance
for the sale of the new product. This process is quicker and less expensive than
obtaining approval for an entirely new product. We obtained 510(k) clearance for
our I-Plant(TM) prostate seed product in May 1999.

      Supplemental or full pre-market approval reviews require a significantly
longer period. A pre-market approval will be required for our interventional
cardiology devices. The pre-market approval process begins with an animal test
that leads to the preparation of an Investigational Device Exemption granted by
the FDA. The Investigational Device Exemption allows the company to do a small
clinical trial. If successful, a larger, multi-institutional clinical trial is
performed. The results of both clinical trials are then summarized in an
application to the FDA for approval to market the product.

      We currently have only one device under development that will require the
pre-market approval process. This proposed device is a polymer covered
drug-eluting stent. This device is now being tested within the animal trial
stage of the process. An application for an Investigational Device Exemption
will not be processed and submitted until completion of the animal trial and the
evaluation of the success and viability of moving this proposed device to the
Investigational Device Exemption stage.

      Significantly more time will be required to commercialize applications
subjected to pre-market approval calendar review. We believe our interventional
cardiology devices will not be available for commercial sale before 2003.
Furthermore, sales of medical devices outside the U.S. are subject to
international regulatory requirements that vary from country to country. The
time required to obtain clearance or approval for sale internationally may be
longer or shorter than that required for FDA approval.

     Our medical device manufacturing facility operates under the FDA Quality
Control Regulations. Our facility, located in Wakefield, Massachusetts, was
registered with the FDA in July 2000 prior to the introduction and commercial
sales of our radioactive prostate seed product. Our facility is subject to the
FDA's inspection at any time. To date, the FDA has not inspected the facility.
During an FDA inspection, however, the FDA has the authority to demand
corrective actions for any deficiencies in adherence to Quality Control
Regulations, order product recalls, and the cessation of operations and can
require that a factory cease operations until it is brought into compliance with
these regulations. We employ a senior quality control specialist to ensure
adherence to FDA Quality Control Regulations.

     In addition to FDA regulation, certain of our activities are regulated by,
and require approvals from, other federal and state agencies. For example,
aspects of our operations require the approval of the Massachusetts Department
of Public Health and registration with the Department of Labor and Industries.

     In order to ship our radioactive prostate seed product from our facility,
we are required to obtain a radioactive sealed source registration from the
Massachusetts Department of Health, Labor and Industries ("Mass DOH"). We
obtained this certificate prior to the commencement of the commercial sales of
our radioactive prostate seed product in the first half of fiscal 2001. This
certificate requires no maintenance or renewal as long as the design of the
radioactive prostate seed is not changed. The Mass DOH can, however, terminate
this certification in the event of an accident that would require a redesign of
the product. On July 28, 1999 we received our Radioactive Sealed Source
Registration Certificate, a Nuclear Regulatory Commission requirement,
administered by the Commonwealth of Massachusetts as a Nuclear Regulatory
Commission Agreement State.


                                        9
<PAGE>
     The State Radiation Control Program issued to us a license to manufacture
and distribute our radioactive prostate seed product. The State Radiation
Control Program performs annual inspections of our facility. Since the
commencement of commercial sales of our radioactive prostate seed product in the
first half of fiscal 2001, the State Radiation Control Program has performed two
(2) inspections of the facility and identified no violations or deficiencies.

     Furthermore, our use, management, transportation, and disposal of certain
chemicals and wastes are subject to regulation by several federal and state
agencies depending on the nature of the chemical or waste material. Certain
toxic chemicals and products containing toxic chemicals require special
reporting to the United States Environmental Protection Agency and/or its state
counterparts. We are not aware of any specific environmental liabilities that we
could incur. Our future operations may require additional approvals from federal
and/or state environmental agencies.

COMPETITION

     In radioactive products, such as prostate seed implants, radioactive
brachytherapy devices and coronary stents, we expect to compete with Nycomed
Amersham plc, Theragenics Corp., North American Scientific, Inc., Imagyn Medical
Technologies, Syncor International Corp., Uromed Corporation, UroCor, Inc,
Novoste Corporation and Radiance Medical Systems, Inc.  Of these, Nycomed
Amersham plc, Theragenics Corp., North American Scientific, Inc, and Imagyn
Medical Technologies serve substantially the entire radioactive prostate seed
market.  In addition, our proposed radioactive brachytherapy devices will
compete with alternative technologies such as Novoste Corporation's Beta-Cath
system, Johnson and Johnson and Radiance Medical Systems, Inc.'s radioactive
tipped guidewires and radioactive filled balloons.  The number and types of
procedures being performed on the prostate are increasingly drawing new entrants
into the market.  We believe that competition, and, in turn, pricing pressures,
may increase. Many of our competitors have substantially greater financial,
technical and marketing resources than we do.

     Many medical device manufacturers have developed or are engaged in efforts
to develop internal surface modification technologies for use on their own
products. Most companies that market surface modification to the outside
marketplace are divisions of organizations with businesses in addition to
surface modification. Overall, we believe the worldwide market for surface
modification technologies applicable to medical devices is very fragmented with
no competitor having more than a 10% market share. Many of our existing and
potential competitors (including medical device manufacturers pursuing coating
solutions through their own research and development efforts) have substantially
greater financial, technical and marketing resources than we do.

     With respect to ion implantation of orthopedic implants, we primarily
compete with Spire Corporation. Competition within the orthopedic implant
industry is primarily conducted on the basis of service and product design.
Price competition has abated somewhat in the case of first time and more
youthful patients where higher-cost and more durable reconstructive devices are
preferred. We attempt to differentiate ourselves from our competition by
providing what we believes are high value-added solutions to surface
modification. We believe that the primary factors customers consider in choosing
a particular surface modification technology are performance, ease of
manufacturing, ability to produce multiple properties from a single process,
compliance with manufacturing regulations, customer service pricing, turn around
time, and the ability to work with a variety of materials. We believe that our
process competes favorably with respect to these factors. We believe that the
cost and time required to acquire equipment and technical engineering talent, as
well as to obtain the necessary regulatory approvals, significantly reduces the
likelihood of a manufacturer changing the coating process it uses after a device
has been approved for marketing.

     Our primary competition in the semiconductor industry consists of three
companies: Ion Implant Services, The Implant Center, and Core Systems. These
companies are all located in Silicon Valley, California and primarily serve the
silicon wafer production needs of semiconductor factories in their local area,
although Ion Implant Corporation does research and development implants
nationwide. We primarily serve east coast factories with silicon production and
research and development laboratories worldwide.

     In the trace explosives detection industry, Ion Track Instruments Corp. and
Barriger Division of Smiths Plc. are our two primary competitors. These two
companies also use ion mobility spectrometry, however, they use a radioactive
Nickel-63 source to ionize the explosive molecules. This technology differs from
our technology because we use an ultraviolet laser to ionize the vapor. We
believe our technology provides our device with greater capabilities.


                                        10
<PAGE>
     Many of our competitors and potential competitors have substantially
greater capital resources than we do and also have greater resources and
expertise in the areas of research and development, obtaining regulatory
approvals, manufacturing and marketing. There can be no assurance that our
competitors and potential competitors will not succeed in developing, marketing
and distributing technologies and products that are more effective than those
developed and marketed by us or that would render our technology and products
obsolete or noncompetitive. Additionally, there is no assurance that we will be
able to compete effectively against such competitors and potential competitors
in terms of manufacturing, marketing and sales.

PRODUCT LIABILITY AND INSURANCE

     Our business entails the risk of product liability claims.  Although we
have not experienced any product liability claims to date, there can be no
assurance that such claims will not be asserted or that we will have sufficient
resources to satisfy any liability resulting from such claims.  We have acquired
product liability insurance coverage.  There can be no assurance that product
liability claims will not exceed such insurance coverage limits, that such
insurance will continue to be available on commercially reasonable terms or at
all, or that a product liability claim would not materially adversely affect the
business, financial condition or our results of operations.

EMPLOYEES

     As of June 30, 2001, we had 55 full time employees.  We believe we maintain
good relations with our employees.  None of our employees is represented by a
union or covered by a collective bargaining agreement.

ITEM 2.     PROPERTIES

     We operate out of a 39,300 square foot leased facility in Wakefield,
Massachusetts.  The facility is located approximately 15 miles north of Boston.
The leases expire in March 2002 and March 2003 and one has an option to extend.
This facility houses all of our research and development, manufacturing and
administrative offices.

ITEM 3.     LEGAL PROCEEDINGS

     From time to time, the Company is subject to various claims, legal
proceedings and investigations covering a wide range of matters that arise in
the ordinary course of its business activities.  Each of these matters is
subject to various uncertainties.  On the basis of information presently
available, the Company is not currently aware of any legal proceedings or claims
that the Company believes are likely to have a material effect on the Company's
financial position or results of operations.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year ended June 30, 2001.


                                       11
<PAGE>
                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS

MARKET  PRICE

     As of June 30, 2001 the Company's Common Stock, $.10 par value, was traded
on the American Stock Exchange under the symbol IMX and on the Boston Stock
Exchange under the symbol IMX. On September 10, 1999 the Company was accepted
for listing and began trading on the American Stock Exchange. At that time the
listing on the Nasdaq SmallCap Market was dropped. The following sets forth the
range of high and low closing sales prices on the American Stock Exchange or
Nasdaq SmallCap Market during the fiscal year.

                                         HIGH     LOW
                                        -------  ------
      FISCAL YEAR ENDED JUNE 30, 2000:

      Quarter ended September 30        $ 7.875  $3.625
      Quarter ended December 31           7.375   4.250
      Quarter ended March 31             11.875   6.500
      Quarter ended June 30              10.375   8.375

      FISCAL YEAR ENDED JUNE 30, 2001:

      Quarter ended September 30        $ 9.875  $7.563
      Quarter ended December 31           8.250   6.375
      Quarter ended March 31              8.800   6.800
      Quarter ended June 30              10.200   7.750

NUMBER  OF  STOCKHOLDERS

     As  of August 31, 2001, there were approximately 757 shareholders of record
of  the  Company's  Common  Stock,  including  multiple  beneficial  holders  at
depositories, banks and brokers included as a single holder in the single street
name  of  each  respective  depository,  bank  or  broker.

DIVIDENDS

     We  have  never declared or paid any cash dividends on our Common Stock. We
currently  anticipate  that we will retain all future earnings for the expansion
and  operation  of  our business, and do not anticipate paying cash dividends in
the  foreseeable  future.  Our  revolving  credit  line, term loan and equipment
purchase  facilities with our principle lender prohibit the payment of dividends
other  than  common  stock  dividends.

SALES  OF  UNREGISTERED  SECURITIES

     None.


                                       12
<PAGE>
ITEM 6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Year Ended June 30, 2001 vs. June 30, 2000

     Revenues.  Total revenues for the year ended June 30, 2001 were $4,368,000
as compared to $3,973,000 for the comparable prior year period, an increase of
$395,000 or 10%.  We realized $365,000 in revenues in the prior year period on
the sale of a customized piece of equipment, which we manufactured for a
customer.  This customized piece of equipment does not represent one of our core
products and we do not actively seek to manufacture for sale such customized
equipment.  Net of the effect of this prior year equipment sale, our core
product and contract research sales increased to $4,368,000 for the year ended
June 30, 2001 from $3,608,000 for the comparable prior year period, an increase
of $760,000 or 21%.  The increase is attributable primarily to revenue
recognized from the new I-Plant seed which the company began shipping in the
first half of fiscal 2001.  I-Plant prostate seed sales for the year ended June
30, 2001 were approximately $714,000.  Over the nine (9) month period ended June
30, 2001, the I-Plant(TM) prostate seed sales have grown at a compounded average
rate of 29% per month.  Although management believes the prostate seed business
will maintain a trend of strong growth, it is unlikely that a 29% monthly growth
rate will be achieved as the product matures.  In addition to the marked
increase and growth in I-Plant seed sales since commercial introduction, we have
also recognized an approximate 7% increase in medical coating revenues, realized
primarily from two new customers, and a 47% increase in our semiconductors
business. The 47% increase in the semiconductor business is a result of the
addition of new customers who require outsourced ion implantation services for
research and development activities.  These gains were offset by a 31% decrease
in government contract and grant revenue.  The number of government grants
decreased because we completed certain grants in fiscal 2000 or in the beginning
of fiscal 2001.  Additionally, either we did not receive new grants to replace
the completed ones or we are still awaiting for approval on our grant proposals.

     Our two major customers, the Howmedica/Osteonics Division of Stryker,
Corporation and Biomet, Incorporated, accounted for 34% of revenue in the year
ended June 30, 2001 and 44%, for the comparable prior year period. Our sales to
these customers decreased solely due to reduced purchase orders. MED-TEC, our
exclusive distributor of prostate seeds accounted for 16% of revenues for the
year ended June 30, 2001. Our government contract and grant revenue accounted
for 17% and 27% of revenue for the years ended June 30, 2001 and 2000,
respectively. Our grant revenues, principally Small Business Innovative Research
programs, fluctuate due to: (a) our desire to obtain external funding for our
research and development efforts; (b) the availability of government funding;
and (c) the time required to obtain approval of a grant application. We have
been successful in obtaining Small Business Innovative Research grants in fiscal
2001 and 2000. We expect to continue to seek continuation or replacement of its
existing Small Business Innovative Research grants in fiscal 2002.

     Cost of Product and Contract Research Revenues. Cost of product and
contract research revenues for the year ended June 30, 2001 was $4,247,000 as
compared to $2,749,000 for the comparable prior year period, an increase of
$1,498,000 or 54%. As a percentage of revenues, the cost of product and contract
research revenues increased to 97% for the year ended June 30, 2001 as compared
to 69% for the comparable prior year period. This increase in cost is primarily
attributable to the increase in cost of product sales due to: (a) overall
increase in sales volume; (b) additional costs related to the introduction of
the radioactive prostate seed, principally personnel costs and depreciation
expense related to new equipment; and (c) costs incurred by us in connection
with its research grants. During fiscal 2001 and 2000, we utilized Small
Business Innovative Research grants as a significant source of funding for our
research and development efforts. Our obligation with respect to these grants is
to perform the research on a best-efforts basis. Periodically, we may continue
our research and development efforts related to these projects at our own
expense. During fiscal 2001 and 2000, we incurred approximately $728,000 and
$170,000, respectively, in excess of amounts received under the terms of the
Small Business Innovative Research grants. We have classified such costs as cost
of product and contract research revenues to permit comparability between
periods. This cost is considered company-funded research and development.

     Research and Development.  Research and development expense for the year
ended June 30, 2001 was $1,500,000 as compared to $1,345,000 for the comparable
prior year period, an increase of $155,000 or 12%.  This increase is primarily a
result of the significant costs incurred in the first half of fiscal 2001 in
connection with the I-Plant seed development.  The costs associated with the
development of the I-Plant seed have ceased as a result of the commercialization
of the I-Plant seed.

     Selling, General and Administrative.  Selling, general and administrative
expenses for the year ended June 30, 2001 were $2,319,000 as compared to
$2,188,000 for the comparable prior year period, an increase of $131,000 or 6%.
Included in selling, general and administrative costs, was approximately
$320,000 related to stock based compensation.  Of the $320,000, $259,000 of


                                       13
<PAGE>
these costs reflect non-cash charges that were not included in the prior year's
costs and relate to a separation agreement with a former officer (See Note 12).
Accordingly, selling, general and administrative costs, net of the charges for
stock based compensation, decreased to $1,999,000 for the year ended June 30,
2001, a decrease of $189,000 or 9% as compared to the comparable prior year
period. This decrease reflects our cost containment measures implemented during
the second half of fiscal 2001. Cost containment measures included, but were not
limited to, the elimination of discretionary spending not essential to achieving
critical business objectives, replacement of certain members of senior staff and
management with consultants experienced in a manufacturing environment focused
on operational efficiencies, reduction of legal expenses associated with patent
application preparation, cancellation of the Company's public relations firm's
contract, and a reduction of purchases of spare parts inventory.

     Other Income and Expenses, Net.  Other income, net for the year ended June
30, 2001 was $118,000 as compared to $217,000 for the comparable prior year
period, a decrease of $99,000 or 46%.  The decrease is primarily a result of a
$133,000 decrease in interest income on available cash balances offset by a
$31,000 decrease in interest payments on outstanding debt.

     Net Loss.  Net loss for the year ended June 30, 2001 was $3,580,000 as
compared to $2,488,000 for the comparable prior year period, an increase of
$1,092,000 or 44%.  This increase is attributable, in part, to the costs
associated with the production start-up associated with the commercialization of
the I-Plant seed, noncash charges for stock based compensation, and research
associated with the development of the I-Plant seed.  The basic and diluted net
loss per share for the year ended June 30, 2001 was $.62 per share as compared
to $.46 per share for the comparable prior year period, an increase of $.16 or
35%.

LIQUIDITY AND CAPITAL RESOURCES

     The accompanying financial statements have been presented on the assumption
that we are a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. During fiscal
2000 and 2001, we incurred significant operating losses and utilized significant
amounts of cash to fund operations. Research and development on the radioactive
prostate seed commenced in approximately June 1988. We received Food and Drug
Administration 510(k) clearance to market its I-Plant(TM) Iodine-125 radioactive
seed for the treatment of prostate cancer in May 1999. On February 2, 2000 we
signed a distribution agreement with MED-TEC Inc. for the exclusive U.S.
distribution of our I-Plant Iodine-125 seed. From approximately May 1999 through
August 2000, we expended resources in the building of a production facility to
manufacture and sell the radioactive prostate seeds. We recognized its first
sales of radioactive prostate seeds in the first half of fiscal 2001. Our
transition from research and development on the radioactive prostate seeds to
FDA approval and commercialization of this product represents a critical stage
in our growth whereby we are transforming from a provider of ion implantation
services for semiconductor and orthopedic applications to a manufacturer and
seller of product in the form of radioactive prostate seeds.

     The completion of our research and development on the radioactive prostate
seeds resulted in the discontinuance of research and development expenditures
for the current radioactive prostate seed product being marketed and sold.  The
building and commissioning of the operating facility to manufacture the
radioactive prostate seeds will result in ongoing operating expenditures to
operate and maintain the facility to meet current production needs.  However,
management believes that expenditures for capital equipment purchases associated
with the manufacture of the radioactive prostate seeds will not be required to
meet the demand for product in the foreseeable future.  Management believes that
the cost structure of our radioactive prostate seed is driven by significant
fixed costs, of which capital resources have already been expended prior to
initial production, therefore our gross margins as they relate to the sale of
radioactive prostate seeds should improve with the increasing volume of
radioactive prostate seeds.

     During the second half of fiscal 2001, we implemented a number of programs
to reduce its consumption of cash, including operating expense reductions. Our
management has outlined a plan of appropriate action steps to attempt to ensure
that we have adequate sources of cash to meet its working capital needs and
research and development activities for at least the next twelve months. In May
2001, our management received approval from the board of directors to implement
this action plan. The key elements of the plan are as follows:


                                       14
<PAGE>
          -    Further operating expense reductions to eliminate certain
               expenditures that are not essential to achieving critical
               business objectives at this time (e.g., discretionary spending,
               further development efforts);

          -    Pursuit of strategic financing alternatives including additional
               financing through the form of a $500,000 working capital line of
               credit with a related party;

          -    Replaced certain members of senior management with consultants
               experienced in a manufacturing environment focused on operational
               efficiencies. These consultants also come at a much reduced cost
               that will save us approximately $150,000 in salary and benefits;

          -    Introduced its new radioactive prostate seed product;

          -    Discontinued nonessential research and development efforts, other
               than grants and contracts, that will reduce significantly the
               costs incurred during fiscal 2001.

     In addition to the key elements of our plan, MED-TEC executed a contract in
August 2001 with a hospital in the Southeast US, which requires our use as its
sole provider of Iodine-125 prostate seeds. This could increase our planned
prostate seed sales for fiscal 2002. The agreement terminates on August 14, 2003
and may be extended at the option of the hospital for one or more additional
terms of two years.

     As a result of implementing the above actions, management believes that its
existing cash resources and cash from operations will meet working capital and
research and development requirements over the next twelve months and improve
operating results.  However, unanticipated decreases in operating revenues,
delays in government funding of grants, increases in expenses or further delays
in product development may adversely impact our cash position and require
further cost reductions.  No assurance can be given that we will be able to
operate profitably on a consistent basis.

     As of June 30, 2001 we had approximately $1,232,000 (including $167,000 of
restricted cash) in cash in the form of cash and short-term investments.  We
have an equipment purchase facility with a commercial bank, under which
approximately $412,000 was outstanding at June 30, 2001.

     During the year ended June 30, 2001, operating activities used cash of
approximately $2,801,000.  Net cash used by operating activities primarily
reflects the $3,580,000 net loss, a $248,000 increase in inventories, a $290,000
decrease in accounts payable, and a $55,000 decrease in accrued expenses.  These
uses of cash were offset by $280,000 provided by an increase in accounts
receivable and depreciation and amortization of $653,000.

     During the year ended June 30, 2001, investing activities used cash of
approximately $1,023,000.  Net cash used by investing activities included
$977,000 in purchases of property and equipment.

     During the year ended June 30, 2001, financing activities provided
approximately $218,000 in cash.  Net cash provided by financing activities
primarily includes proceeds from the exercise of stock options offset by
payments on our equipment term loan.  Additionally, in May 2001, we repurchased
23,000 shares of our common stock from a former officer at a cost of $207,000,
the fair market value of the common stock on the date of the transaction.

     We financed our operations utilizing a revolving credit facility and an
equipment term loan under a loan agreement with our bank.  The revolving credit
facility are unsecured and the equipment term loan is cross-collateralized and
cross-defaulted. The loan agreement has a first lien on substantially all of our
assets.

     On September 30, 2000, our credit facility expired.  We chose not to renew
the credit facility and are currently seeking a new credit facility on terms
more favorable to us.  There were no borrowings on the credit facility during
the year ended June 30, 2001 and no balances outstanding as of June 30, 2001.

     We have a term loan facility of $1,500,000 at June 30, 2000, of which we
had utilized $750,000.  Interest is payable monthly at 1% above the banks base
rate commencing February 1998 (8.8% weighted average interest rate for fiscal
2001).  As of June 30, 2001, the balance outstanding was $412,000.


                                       15
<PAGE>

     Our loan agreement requires compliance with two financial covenants
including minimum levels of net worth and net loss limits. At June 30, 2001, our
net loss covenant was greater than the required amount. On September 28, 2001,
we and Stephen N. Bunker, one of our directors and officers, fully
collateralized the term loan with $167,000 and $200,000 of cash, respectively,
and executed pledge agreements with respect to the collateral. Our bank has
waived its rights under the loan agreement with respect to this financial
covenant at June 30, 2001 through and including June 30, 2002.

     On October 10, 2001, we entered into a $500,000 line of credit facility
with CardioTech International, Inc. ("CardioTech"), a related party (See Note
10). The line of credit provides for funding at our discretion and is subject to
a security agreement providing a second lien on substantially all of our assets.
The line of credit bears interest at the prime rate (5.5% as of October 10,
2001) plus 2% and expires October 12, 2002. All amounts due under the Line of
Credit are due on October 12, 2002.

     We will require substantial funds for further research and development,
future pre-clinical and clinical trials, regulatory approvals, continued
expansion of commercial-scale manufacturing capabilities, and the marketing of
our products.  Our capital requirements depend on numerous factors, including
but not limited to, the progress of its research and development programs; the
progress of pre-clinical and clinical testing; the time and costs involved in
obtaining regulatory approvals; the cost of filing, prosecuting, defending and
enforcing any intellectual property rights; competing technological and market
developments; changes in our development of commercialization activities and
arrangements; and the purchase of additional facilities and capital equipment.

     As of June 30, 2001, we were conducting our operations with approximately
$1,232,000 in cash and cash equivalents (including $167,000 of restricted cash).
We estimate such amounts combined with our cash flow from operations and
borrowing arrangements will be sufficient to fund our working capital and
research and development activities in the next twelve months.  Future
expenditures for product development, especially relating to outside testing and
clinical trials, are discretionary and, accordingly, can be adjusted, as can
certain selling, general and administrative expenses, based on the availability
of cash.


ITEM 7.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Company's Financial Statements and Related Report of Independent
Auditors are presented in the following pages.  The Financial Statements filed
in this Item 7 are as follows:

                                                                            Page
                                                                            ----
     Report of Independent Auditors                                           19
     Balance Sheet as of June 30, 2001                                        20
     Statements of Operations for the Years Ended June 30, 2000 and 2001      21
     Statements  of  Changes  in  Stockholders'  Equity  for  the Years
       Ended  June  30,  2000  and  2001                                      22
     Statements of Cash Flows for the Years Ended June 30, 2000 and 2001      23
     Notes to Financial Statements                                       24 - 34

ITEM  8.     CHANGES  IN  AND  DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL  DISCLOSURE

     There  were  no  disagreements  on  accounting  principles  or practices or
financial  statement  disclosure  between the Company and its accountants during
the  fiscal  year  ended  June  30,  2001.


                                        16
<PAGE>
                                    PART III

ITEM 9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
            COMPLIANCE  WITH  SECTION  16(A)  OF  THE  EXCHANGE  ACT.

          Section  16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers, directors and persons who beneficially own more than 10%
of a registered class of  our equity securities  ("ten  percent stockholders")
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission.  Officers, directors and ten percent stockholders are
charged by the SEC regulations to furnish us with copies of all Section 16(a)
forms they file.

     Based solely upon a review of Forms 3, 4, and 5 and amendments thereto
furnished  to  us during  the past fiscal year, and, if applicable, written
representations that Form 5 was not required, we believe that all Section 16(a)
filing requirements applicable to our officers, directors and ten percent
stockholders were  fulfilled in a timely manner.

Name                Age                 Position                 Director Since
------------------  ---  --------------------------------------  --------------
Anthony J. Armini*   63  President, Chief Executive Officer and            1984
                         Chairman of the Board

Stephen N. Bunker*   58  Vice President and Chief Scientist,               1988
                         Director

Alan D. Lucas        45  Vice President of Marketing, Sales and           _____
                         Business Development

David C. Volpe       46  Acting Chief Financial Officer                   _____

Shunkichi Shimizu    56  Director                                          1998

Michael Szycher      63  Director                                          1999

Pasquale Ruggieri    68  Director                                          2001

     *  Executive  Officer

     Dr. Anthony J. Armini has been the President, Chief Executive Officer, and
Chairman of the Board of Directors since the Company's incorporation.  Form 1972
to  1984, prior to founding the Company, Dr. Armini was Executive Vice President
at  Spire  Corporation.  From 1967 to 1972, Dr. Armini was a Senior Scientist at
McDonnell Douglas Corporation.  Dr. Armini received his Ph.D. in nuclear physics
from  the  University  of  California,  Los  Angeles in 1967.  Dr. Armini is the
author  of  eighteen  patents  and  five patents pending in the field of implant
technology  and fourteen publications in this field.  Dr. Armini has over thirty
years  of  experience  working  with  cyclotrons  and  linear  accelerators, the
production  and  characterization of radioisotopes, and fifteen years experience
with  ion  implantation in the medical and semiconductor fields.  Dr. Armini has
been  on  the  Board  of Directors of CardioTech International, Inc., a publicly
traded  company  of  which Dr. Szycher is President and Chief Executive Officer,
since  October  2000.

     Dr. Stephen N. Bunker has served as the Vice President and Chief Scientist
of  the  Company  since  1987  and Director of the Company since 1988.  Prior to
joining  the  Company,  from  1972  to 1987, Dr. Bunker was a Chief Scientist at
Spire  Corporation.  From  1971 to 1972, Dr. Bunker was an Engineer at McDonnell
Douglas  Corporation.  Dr. Bunker received his Ph.D. in nuclear physics from the
University  of California, Los Angeles in 1969.  Dr. Bunker is the author of ten
patents  in  the  field  of  implant  technology.

     Alan  D.  Lucas  joined  the  Company  in  March 1998 as Vice President of
Marketing,  Sales  and  Business Development.  Prior to joining the Company, Mr.
Lucas  accumulated  over  20  years experience in various marketing and business
development positions for medical device companies.  Most recently, from 1996 to
1998, Mr. Lucas was the Director of Corporate Development at ABIOMED, Inc.  From
1994  to  1996, Mr. Lucas was a strategic marketing and sales consultant focused
on  medical  technology.  From  1991  to  1994,  Mr.  Lucas  was the Director of
Marketing at Vision Sciences, Inc. a developmental stage medical device company.


                                        17
<PAGE>
     David  C. Volpe has served as the Company's Acting Chief Financial Officer
since  May  2001.  Mr. Volpe has also been serving as the Acting Chief Financial
Officer  of CardioTech International, Inc. since June 1999.  Since May 1996, Mr.
Volpe  has  been the Managing Director of VC Advisors, Inc., providing financial
management,  business  development  and  financing  expertise  to  a  variety of
companies  in  the  Internet,  medical,  telecommunications,  software  and high
technology  fields.  From  1991  through  2000, Mr. Volpe was a senior financial
executive  with  several  private  venture-backed  and publicly held, technology
based  companies,  including Chief Financial Officer of Cynosure Inc. and FaxNet
Corporation.  Prior  to  that,  Mr.  Volpe  was  a  Manager  at Price Waterhouse
focusing  his efforts on emerging growth, technology-based companies.  Mr. Volpe
holds  a  B.S.  degree  from  California State University and is a member of the
AICPA.

     Shunkichi  Shimizu  joined the Company's Board of Directors in March 1998.
He  has  been  the  Executive Vice President of TK Holdings, Inc. of Delaware, a
subsidiary  of  Takata  Corporation  since  1997.  Takata  Corporation  is  a
manufacturer of seat belts and airbags.  Prior to joining Takata Corporation, he
served  as  Head of International Financial Institutions Division at the Bank of
Tokyo-Mitsubishi,  Ltd.,  Headquarters.

     Michael  Szycher joined the Company's Board of Directors in December 1999.
He  has  been  President  and Chief Executive Officer and Director of CardioTech
International,  Inc.,  a  publicly  traded  manufacturer  of medical devices and
biocompatible  polymers since 1996.  From 1988 to 1996, Dr. Szycher was Chairman
and  Chief  Technology  Officer  of  Polymedica  Industries.  Dr.  Szycher  is a
recognized  authority on polyurethanes and blood compatible polymers.  He is the
editor  of  six  books  on  various  subjects  in blood compatible materials and
devices  and  the  author  of eighty original research articles.  Dr. Szycher is
also  Editor-in-Chief  of  the  quarterly  publication  Journal  of  Biomaterial
Applications.

     Pasquale Ruggieri has been on the Company's Board of Directors since
December 2001.  He has served as the Vice President of Investment Banking for
Schneider Securities, Inc., a full service broker dealer, since 1991.  Prior to
that Mr. Ruggieri was Executive Vice President and Director of Investment
Banking for Jonathan Alan, Inc., a full service broker dealer.  He holds a B.S.
in Business Administration from Bryant College.

ITEM  10.     EXECUTIVE  COMPENSATION

     The following table sets forth the aggregate cash compensation  paid by us
with respect to the three fiscal years ended June 30, 1999, 2000 and 2001 to our
chief executive officer and each of the three other most highly compensated
executive officers in fiscal 2001.  We have no other executive officers.

<TABLE>
<CAPTION>
                                      SUMMARY COMPENSATION TABLE

                                                                                  Long-Term
                                                                               Compensation
                                       Annual Compensation                           Awards
                                       -------------------                           ------
                                                                                     Shares
                                                                   Other Annual  Underlying
                                                                  Compensation($)   Options
Name and Principal Position          Year  Salary($)   Bonus ($)        (1)       Granted(#)
-----------------------------------  ----  ----------  ----------  ------------- -----------
<S>                                  <C>   <C>         <C>         <C>            <C>
Antohy J. Armini*                    2001  $  129,133  $   25,000  $       6,255      90,000
 President, Chief Executive Officer  2000  $  129,837  $   25,000  $      19,386           -
 and Chairman of the Board           1999  $  124,334  $   35,000  $       9,188           -

Stephen N. Bunker*                   2001  $  101,545           -  $       4,872           -
Vice President,                      2000  $  118,213           -  $       6,514           -
Chief Scientist and Director         1999  $   96,135           -  $       2,963           -

Alan D. Lucas                        2001  $  135,434  $   15,000  $       6,370      50,000
Vice President of Sales, Marketing   2000  $  123,478  $   45,000  $       6,465      50,000
and Business Development             1999  $  105,694  $   35,000  $         456           -


                                       18
<PAGE>
Darlene M. Deptula-Hicks**           2001  $  132,762  $   15,000  $  39,490 (2)      25,000
Former Vice President, Chief         2000  $  121,477  $   40,000  $       6,401      20,000
Financial Officer and Treasurer      1999  $   94,344  $   40,000  $         569      25,200
<FN>
-------------------
     *     Executive  Officer
     **    The former vice president, chief financial officer and treasurer (the
"Former Officer") resigned her position pursuant to a separation agreement
effective May 1, 2001. The separation agreement provided for a six month
severance payment in the aggregate amount of $68,019 (which amount is included
in the $132,762 salary amount set forth in the table above), the acceleration of
vesting of options for 21,736 shares of our common stock and the repurchase by
us from the Former Officer of an additional 23,000 shares of our common stock
acquired by the Former Officer through the exercise of stock options resulting
in net cash proceeds of $33,120 to the Former Officer. As of June 30, 2001, the
former officer exercised and sold 32,464 shares and had 14,736 shares vested and
exercisable. We recognized $259,000 of non-cash, stock-based compensation
related to this agreement.

     (1)  Other annual compensation consists of life and disability insurance
          premiums and 401(k) plan benefits paid by us on behalf of these
          executive officers.

     (2)  Other annual compensation consists of life and disability insurance
          premiums, 401(k) plan benefits paid by us on behalf of these executive
          officers, and $33,120 paid in cash as a net payment to repurchase
          23,000 shares of our common stock acquired through the exercise of
          stock options.
</TABLE>

     EMPLOYMENT AGREEMENTS

     Anthony J. Armini.  On September 26, 1998, we entered into an employment
agreement, with an initial term of five years.  Under this employment agreement,
Dr. Armini serves as our president and chief executive officer at a base salary
of $125,000.  In addition, Dr. Armini may participate in our employee fringe
benefit plans or programs generally available to employees of comparable status
and position.  We and Dr. Armini and are entitled to terminate his employment
for any material breach of his employment agreement at any time upon at least 30
days' written notice.  In the event we terminate Dr. Armini without cause, we
will pay him 12 months salary.  Under his employment agreement, he is subject to
restrictive covenants, including confidentiality provisions.  Also, during his
employment and for a period of two years after the term of the employment
agreement, Dr. Armini is subject to a non-competition provision.

     Stephen N. Bunker.  On September 26, 1998, we entered into an employment
agreement with Dr. Bunker in substantially the same form as that described for
Dr. Armini.  Dr. Bunker serves as our vice president and chief scientist at a
base annual salary of $100,000.

     Alan D. Lucas. We entered into a letter agreement with Mr. Lucas, with an
effective date of July 1, 2001, which has an initial term of one year. Under
this employment agreement, Mr. Lucas serves as our vice president of sales,
marketing and business development at a base annual salary of $165,000. In
addition, Mr. Lucas may participate in our employee fringe benefit plans or
programs generally available to employees of comparable status and position. Mr.
Lucas is eligible to receive a $16,000 bonus at the discretion of the board of
directors if he exceeds certain performance goals. He was also granted options
to purchase an additional 25,000 shares of common stock, which vested
immediately. In the event that we terminate Mr. Lucas without cause, we will pay
him four months salary and the vesting of his options will accelerate. Under his
employment agreement, he is subject to restrictive covenants, including
confidentiality provisions. Also, during his employment and for a period of 12
months after termination of employment with us, Mr. Lucas is subject to a
non-competition provision.

     DIRECTOR  COMPENSATION

     Our directors who are our employees do not receive any compensation for
service on the board of directors.  Directors who are not our employees, other
than Mr. Shimizu, are paid a yearly stipend of $2,500 and are reimbursed for
reasonable travel expenses incurred in connection with attendance at board and
committee meetings.


                                       19
<PAGE>
     Under the 1998 incentive and nonqualified stock option plan, each director
who is not our employee, other than Mr. Shimizu, automatically receives an
annual grant of options to purchase 2,000 shares of our common stock at an
exercise price equal to the closing price of the common stock on that date for
each year of service. Each such option will have a term of five years and will
vest in full on the date of the grant.

     The following table sets forth certain information regarding stock options
held as of June 30, 2001 by the executive officers.

<TABLE>
<CAPTION>
                                       OPTIONS GRANTS IN FISCAL 2001

                                       Number of
                                       Securities     % of Total Granted
                                       Underlying       to Employees in      Exercise
Name and Principal Position          Options Granted      Fiscal Year      Price ($/Sh)   Expiration  Date
-----------------------------------  ---------------  -------------------  -------------  ----------------
<S>                                  <C>              <C>                  <C>            <C>
Antohy J. Armini                              40,000                21.9%  $        7.56              2005
 President, Chief Executive Officer           50,000                27.3%  $        8.53              2006
 and Chairman of the Board

Alan D. Lucas                                 25,000                13.7%  $        7.56              2010
Vice President of Sales, Marketing            25,000                13.7%  $        8.50              2011
and Business Development

Darlene M. Deptula-Hicks                      25,000                13.7%  $        7.56              2010
Former Vice President, Chief
Financial Officer and Treasurer
</TABLE>

<TABLE>
<CAPTION>
                     AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
                                FISCAL YEAR END OPTION VALUES

                                       Number of Securities        Value of Unexercised
                                      Underlying Unexercised       In-the-Money Options
                                     Options at June 30, 2001      at June 30, 2001 (1)
                                    --------------------------  ---------------------------
Name and Principal Position         Exercisable  Unexercisable  Exercisable   Unexercisable
----------------------------------  -----------  -------------  ------------  --------------
<S>                                 <C>          <C>            <C>           <C>
Alan D. Lucas                           111,866         13,334  $    304,131  $       56,670
Vice President of Sales, Marketing
and Business Development

Darlene M. Deptula-Hicks                 14,736              -  $     64,030  $            -
Former Vice President, Chief
Financial Officer and Treasurer
</TABLE>

(1)  As of June 30, 2001, the market value of a share of common stock was $9.25.


ITEM  11.     SECURITY  OWNERSHIP  OF  CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth information as of November 9, 2001, with
respect to the beneficial ownership of our common stock of each director and
nominee for director, each named executive officer in the executive compensation
table above, all of our directors and current officers as a group, and each
person known by us to be a beneficial owner of five percent or more of our
common stock.  This information is based upon information received from or on
behalf of the individuals named therein.


                                       20
<PAGE>
<TABLE>
<CAPTION>
                                                      Number of Shares     Percent of
Name of Beneficial Owner                           Beneficially Owned (1)   Class (2)
-------------------------------------------------  ----------------------  -----------
<S>                                                <C>                     <C>
Patricia A. Armini                                                781,122        13.2%
5 Skytop Drive
Manchester, MA 01944

Casparin Corporation (3)                                          776,418        13.1%
Gorsiraweg 14
P.O. Box 3889
Willemstad, Curacao
Netherland Antilles

MedTec Iowa, Inc.                                                 500,000         8.4%
1401 8th Street
Orange City, Iowa 51041

Anthony J. Armini                                               1,215,122        20.5%

Stephen N. Bunker                                                 636,348        10.7%

Shunkichi Shimizu (4)                                                ____       _____

Michael Szycher                                                     4,000           *

Pasquale Ruggieri                                                   7,348           *

Alan D. Lucas (5)                                                 118,532         2.0%

All Directors and Officers as a group (6 persons)               1,978,350        33.4%
</TABLE>

-------------------
* Less than 1%.

     (1)  Unless otherwise noted, each person identified possesses sole voting
          and investment power over the shares listed.

     (2)  The calculation of percent of class is based on the number of shares
          of common stock outstanding as of November 9, 2001, excluding shares
          held by or for us.

     (3)  Casparin Corporation is a wholly-owned subsidiary of TREC (Holland)
          Amsterdam B.V., a sister company of NAR Holding Corporation. Casparin
          Corporation is a wholly-owned subsidiary of Trec (Holland) Amsterdam
          B.V. The Company believes that the principal beneficial owner of Trec
          (Holland) Amsterdam B.V. is Takata Corporation and that its principal
          beneficial owner is Juchiro Takada.

     (4)  Mr. Shimizu is an employee of Casparin Corporation and is not
          permitted by Casparin Corporation to personally hold any stock or
          receive any stipend.

     (5)  Includes those options exercisable within 60 days of the date hereof.

ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     CardioTech, a public company, is a related party with us by virtue of its
significant business relationships. During fiscal 2001, Mr. Volpe, the acting
chief financial officer of CardioTech, provided certain financial and accounting
services to us on a consulting basis. He was owed $21,000 for all such services
rendered through June 30, 2001 and received no payments for services during
fiscal 2001.


                                       21
<PAGE>
     In March 2000, we entered into a $250,000 joint research agreement with
CardioTech to develop a proprietary porous polymer biocompatible coating
technology as a platform for our proprietary radioactive brachytherapy
technology. During fiscal 2001, we paid $50,000 pursuant to the aforementioned
agreement. The joint research and development agreement provides for CardioTech
to develop the polyurethane coating instrumental in the development of a
polyurethane coated drug-eluting stent and for CarioTech to grant us a perpetual
worldwide exclusive license to use, sublicense and otherwise deal in any
technology developed by CardioTech in connection with the development of the
stents. In consideration of the research, development and technology transfer,
we will pay Cardiotech $150,000 in cash pursuant to a milestone schedule. In
addition, CardioTech will sell to us 100,000 shares of CardioTech's common stock
at a price of $1.00 per share pursuant to the achievement of certain milestones
related to the research and development. The owner of the technology used in
connection with the stent will be CardioTech, however such technology will be
transferred to us pursuant to a technology license as described above. The
developed technology represents a "platform" in the sense that the polyurethane
developed by CardioTech and utilized to cover the stent will be the medium in
which specific anti-restenosis drugs will be implanted and therefore becomes the
key technological component of this drug-eluting stent. The research and
development agreement provides for 6 phases including the design of equipment
necessary to produce prototypes of the stent, development of a series of
prototypes, production of a limited number of prototypes and the delivery of
prototypes to us. The material deadline is therefore the delivery of an
operative prototype. We are obligated to pay the entire $250,000 if all
milestone conditions are met. Through September 20, 2001 we have made cash
payments of $115,000 to CardioTech.

     Certain of our directors hold positions as directors of CardioTech.  Our
chief executive officer and chairman of the board of directors is also a
director of CardioTech.  The chief executive officer and chairman of the board
of directors of CardioTech is also a one of our directors.  Our acting chief
financial officer is also the acting chief financial officer of CardioTech.

     On October 10, 2001, CardioTech provided us a $500,000 line of credit
facility. The line of credit provides for funding at our discretion is subject
to a security agreement providing a second lien on substantially all of our
assets, and provides for a $15,000 commitment fee payable on the earlier of the
date we first draw down on the line of credit or April 15, 2001. The line of
credit bears interest at the prime rate (5.5% as of October 10, 2001) plus 2%
and expires October 12, 2002. All amounts borrowed under the line of credit are
due on October 12, 2002. As of June 30, 2001 and October 10, 2001, there were no
amounts drawn on the line of credit and no borrowings outstanding.

     Accounts receivable from related parties as of June 30, 2001 consisted of a
loan of $138,000 to Dr. Armini.  This loan was used to exercise options for
50,000 shares of our common stock on December 9, 1997.  The loan is due and
payable upon the disposal of the 50,000 shares and the loan bears interest at 6%
per annum.  Additionally, loans totaling $55,000 were also made to five
employees to exercise stock options.  These loans are due and payable on January
7, 2002 and bear interest at 6%.  These transactions were reported as a
reduction of stockholders' equity.

     Our loan agreement requires compliance with two financial covenants
including minimum levels of net worth and net loss limits. At June 30, 2001, our
net loss covenant was greater than the required amount. On September 28, 2001,
we and Stephen N. Bunker, one of our directors and officers, fully
collateralized the Term Loan with $167,000 and $200,000 of cash, respectively,
and executed pledge agreements with respect to the collateral. Mr. Bunker
provided the $200,000 from personal funds. We are not obligated to provide any
additional consideration to Mr. Bunker as a result of his collateralization of
the Term Loan. We deposited the collateral with our bank in an interest bearing
account. The collateral must remain with our bank in an amount that is
sufficient to collateralize only the balance outstanding on the term loan at any
point in time until such term loan is paid in full. The pledge agreements allows
our bank to use the collateral to fulfill the obligations of the term loan in
the event of a default by us in payment of the principal or interest of the term
loan. Our bank has waived its rights under the loan agreement with respect to
this financial covenant at June 30, 2001 through and including June 30, 2002.


                                       22
<PAGE>
     In January 2000, we received notice of the award of a joint research grant.
Funding is provided through a $100,000 Phase I grant by the U.S. Department of
Health and Human Services, National Heart, Lung & Blood Institute to CardioTech
and sub-grants to us and Stanford University. The material terms of the sub
contract required us to provide ion implantation services to CardioTech. The
services required ion implantation of radioactivity into polyurethane grafts.
The sub contract work began in February 2000 and was completed in June 2000. We
received $25,000 as payment in full for the sub contract work in September 2000.

<TABLE>
<CAPTION>
ITEM 13.     EXHIBIT INDEX

The following are filed as part of this report.

(a)  The following are filed as part of this Form 10-KSB:

<S>         <C>
(1)         Financial Statements: For a list of financial statements which are filed
            as part of this Form 10-KSB, See Page 11
(2)         Exhibits

Exhibit Number:

*3.2         By-Laws  of  the  Company
*3.3         Articles  of  Amendment to the Articles of Organization of the Company,
             dated  June  9,
             1999
*3.4         Restated  Articles  of  Organization of the Company, dated June 9. 1999
**4.1        Specimen  certificate  for  the  Common  Stock  of  the  Company
**4.2        Specimen  certificate  for  the  Redeemable  Warrants  of  the Company
***4.3       Specimen  certificate  for  the  Units  of  the  Company
**10.1       Employment Agreement with Anthony J. Armini, dated September 26, 1998
**10.2       Employment Agreement with Stephen N. Bunker, dated September 26, 1998
*10.3        Employment  Offer Letter to Darlene Deptula-Hicks, dated June 15, 1998
*10.4        Employment  Offer  Letter  to  Alan  Lucas,  dated  March  20,  1998
*10.5        Amendment  to  Employment  Offer Letter to Alan Lucas, dated September
             24,  1998
*10.6        Form  of  Employee  Agreement  on  Ideas, Inventions, and Confidential
             Information used between 1993 and 1995
*10.7        Form  of  Employee  Agreement  on  Ideas, Inventions, and Confidential
             Information used  in  1993
*10.8        Form  of  Employee  Agreement  on  Ideas, Inventions, and Confidential
             Information used between 1997 and 1998
*10.9        Loan  Agreement  between  the  Company and US Trust, dated May 1, 1996
*10.10       $100,000 Commercial Promissory Note signed by the Company in favor of
             US  Trust, dated May 1, 1996
*10.11       $300,000 Commercial Promissory Note signed by the Company in favor of
             US  Trust, dated May 1, 1996
*10.12       Guaranty  of  Loan  Agreement  between  the  Company and US Trust, by
             Anthony  J. Armini, dated May  1,  1996
*10.13       Security  Agreement  between  the  Company and US Trust, dated May 1,
             1996
*10.14       Lessor's  Subordination and Consent between the Company and Teacher's
             Insurance
             and  Annuity  Association  of  America,  dated  May  1,  1996
*10.15       First  Amendment  to Loan Agreement between the Company and US Trust,
             dated  July 24, 1997


                                       23
<PAGE>
*10.16       $300,000 Commercial Promissory Note signed by the Company in favor of
             US  Trust, dated July 24, 1997
*10.17       $94,444.40  Commercial Promissory Note signed by the Company in favor
             of  US  Trust,  dated  August  12,  1997
*10.18       Second  Amendment to Loan Agreement between the Company and US Trust,
             dated January 16, 1998
*10.19       $750,000 Commercial Promissory Note signed by the Company in favor of
             US  Trust, dated January 16, 1998
*10.20       Promissory  Note signed by Anthony J. Armini in favor of the Company,
             dated September 26, 1998
*10.21       Shareholders Agreement between NAR Holding Corporation and Anthony J.
             Armini, dated July 15, 1987
*10.22       Lease  between  the  Company  and  Teachers  Insurance  and  Annuity
             Association of America, dated September 29, 1995
*10.23       First  Amendment to Lease and Expansion Agreement between the Company
             and Teachers Insurance and Annuity Association of America,
             dated July 29, 1998
*10.24       Standard  Cooperative  Research and Development Agreement between the
             Company and the Naval Research Laboratory, dated January 21, 1997
*10.25       Cooperative  Agreement  between  the Company and the United States of
             America US Army Tank-Automotive and Armaments Command Armament
             Research, Development and Engineering Center, dated
             September 30, 1997(1)
*10.26       Vendor  Agreement Memorandum between the Company and Osteonics, dated
             February 2, 1998(1)
*10.27       Sample Purchase  Order  between the Company and MicroSpring Company,
             Inc., dated October 24, 19961
*10.28       Asset  Purchase  Agreement between the Company and Falex Corporation,
             dated November 17, 1995(1)
*10.29       Settlement  between  the  Company and Erik Akhund, dated July 1, 1998
*10.30       1992  Stock  Option  Plan
*10.31       Form  of  Stock  Option  Agreement  under  the 1992 Stock Option Plan
*10.32       1998  Incentive  and  Nonqualified  Stock  Option  Plan
**10.33      Form  of  Incentive  Stock  Option  under  the  1998  Incentive  and
             Nonqualified  Stock Option  Plan
**10.34      Form  of  Nonqualified  Stock  Option  under  the 1998 Incentive and
             Nonqualified Stock Option Plan
**10.35      Form  of  Nonqualified Stock Option for Non-Employee Directors under
             the 1998 Incentive and Nonqualified Stock Option  Plan
*10.36       Form  of  Lock-Up  Agreement
**10.37      Agreement  Appointing  Transfer  Agent  and  Registrar  between  the
             Company and American Securities and Transfer & Trust, Inc., dated
             October 19, 1998
**10.38      Certification  of  Corporate  Secretary  dated  October  19,  1998
             concerning  Agreement Appointing Transfer Agent and Registrar between
             the Company and American Securities Transfer & Trust, Inc.
**10.39      Research  and  Development Agreement between the Company and Guidant
             Corporation, dated May 20, 1998
**10.40      Letter  Agreement between the Company and Guidant Corporation, dated
             September 29, 1998(1)
***10.41     Form  of  Medical  Advisory  Board  Agreement
***10.42     Form of Loan Agreement, dated January 7, 1999, between the Company
             and the following employees in  the following amounts: Donald J.
             Dench ($12,500), Diane  J. Ryan ($12,500), Mark and Kathleen Gadarowski
             ($12,500), Gregory Huntington, Sr.($12,500),  Leonard DeMild
             ($25,000),  Michael Nelson ($12,500), Richard Sahagian ($12,500),
             Darryl Huntington ($12,500), Dennis Gadarowski ($12,500) and David
             Santos  ($12,500)


                                       24
<PAGE>
***10.43     Terms and Conditions from Sample Purchase Order between the Company
             and Biomet, Incorporated
****10.44    Unit and Warrant Agreement between the Company and American
             Securities Transfer & Trust, Inc., dated April 9, 1999
*10.45       Agreement between the Company and U.S. Army Space and Missile Defense
             Command, dated May 27, 1999
*****10.46   Second  Amendment  to  Lease  and  Extension  Agreement
*****10.47   Sublease  Agreement
*****10.48   Consent  to  Sublease  Agreement
******10.52  Distribution  Agreement,  dated January 26, 2000, by and between
             Implant  Sciences Corporation  and  MedTec  Iowa,  Inc.1
******10.53  Stock  Purchase  Agreement,  dated March 2, 2000, by and between
             Implant  Sciences Corporation  and  MedTec  Iowa,  Inc.
******10.54  Research and Development Agreement, dated March 13, 2000, by and
             between Implant  Sciences  Corporation  and  Cardiotech  International
******10.55  Amendment  to  Distributorship  Agreement  between Med-Tec Iowa,
             Inc.,  and  Implant Sciences  Corporation  dated  26  January  2000
*******10.56 Line of Credit Letter Agreement, dated October 10, 2001, by and
             between  Implant Sciences Corporation and Cardiotech International Inc.
*******10.57 $500,000 Line of Credit Term Grid Note, dated October 10, 2001,
             by and between Implant Sciences Corporation and Cardiotech
             International Inc.
*******10.58 Security  Agreement,  dated  October  10,  2001, by and between
             Implant Sciences Corporation and Cardiotech International Inc.
*******10.59 Guaranty of Line of Credit between Implant Sciences Corporation
             and Cardiotech International Inc. by Anthony J. Armini, dated
             October 10, 2001.
*******10.60 Subordination and Intercreditor Agreement by and between
             Cardiotech International Inc. and Anthony J. Armini,, Mark Gadarowski,
             Dennis Gadarowski, Richard Sahagian, and Daryl Huntington, dated
             October 10, 2001.
*******10.61 Consent of Citizens Bank to Line of Credit Agreement by and between Implant
             Sciences Corporation and Cardiotech International, Inc., dated October 10,
             2001
*******10.62 Modification Agreement by and between Implant Sciences Corporation and
             Citizens Bank of Massachusetts, dated October 11, 2001.
*******10.63 Deposit Pledge Agreement by and between Implant Sciences Corporation and
             Citizens Bank of Massachusetts, dated October 11, 2001.
*******10.64 Deposit Pledge Agreement by and between Stephen Bunker and Citizens Bank
             of Massachusetts, dated October 11, 2001.
*******10.65 Limited  Guaranty of Commercial Promissory Note between Implant
             Sciences Corporation and Citizens Bank of Massachusetts by Stephen Bunker,
             Dated October 11, 2001.
*******10.66 Deposit  Account  Control  Agreement  by  and  between  Implant Sciences
             Corporation and Citizens Bank of Massachusetts, dated October 11, 2001.
*******10.67 Deposit Account Control Agreement by and between Stephen Bunker
             and Citizens Bank of Massachusetts, dated October 11, 2001.
10.68        Letter Agreement between Implant Sciences Corporation and Darlene
             Deptula-Hicks dated May 1, 2001
*21.1        Subsidiaries of the Company
23.1         Consent  of  Independent  Auditors
*23.2        Consent  of  Foley,  Hoag  &  Eliot  LLP
*24.1        Power  of  Attorney
</TABLE>

-------------------

        * Previously filed in the Registration Statement on Form SB-2
          (Registration No. 333- 64499) filed on September 29, 1998, and is
          incorporated herein by reference.
       ** Previously filed in Amendment No. 1 to the Registration Statement,
          filed on December 21, 1998, and is incorporated herein by reference.


                                       25
<PAGE>
      *** Previously filed in Amendment No. 2 to the Registration Statement,
          filed on February 11, 1999, and is incorporated herein by reference.
     **** Previously filed in Amendment No. 3 to the Registration Statement,
          filed on April 30 , 1999, and is incorporated herein by reference.
    ***** Previously filed in Quarterly Report on Form 10-QSB for the quarter
          ended December 31, 1999, filed on February 14, 2000, and is
          incorporated herein by reference.
   ****** Previously filed in Quarterly Report on Form 10-QSB for the quarter
          ended March 31, 2001, filed on May 11, 2000, and is incorporated
          herein by reference.
  ******* Previously filed in Annual Report on Form 10-KSB for the fiscal
          year ended June 30, 2001, filed on October 15, 2001, and is
          incorporated herein by reference.

        1 Filed under application for confidential treatment.

(b)  Reports on Form 8-K:

          Current Report on form 8-K, dated May 15, 2001 as filed on May 18,
          2001, reporting the resignation of Mr. Robert Hoisington as a director
          of the Company.



                                       26
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Implant  Sciences  Corporation


We  have  audited the accompanying balance sheet of Implant Sciences Corporation
as  of  June  30,  2001  and the related statements of operations, stockholders'
equity  and  cash  flows  for each of the two years in the period ended June 30,
2001.  These  financial  statements  are  the  responsibility  of  the Company's
management.  Our  responsibility  is  to  express  an opinion on these financial
statements  based  on  our  audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to  obtain  reasonable assurance about whether the financial statements are free
of  material  misstatement.  An  audit  includes  examining,  on  a  test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit  also  includes  assessing  the accounting principles used and significant
estimates  made  by  management,  as  well  as  evaluating the overall financial
statement  presentation.  We  believe that our audits provide a reasonable basis
for  our  opinion.

In  our  opinion,  the financial statements referred to above present fairly, in
all material respects, the financial position of Implant Sciences Corporation at
June  30, 2001, and the results of its operations and its cash flows for each of
the  two  years in the period ended June 30, 2001, in conformity with accounting
principles  generally  accepted  in  the  United  States.


                                            /s/  ERNST  &  YOUNG  LLP


Boston,  Massachusetts
September  7,  2001,  except
for the fifth paragraph of Note 8,
as  which  the  date  is
October  12,  2001


                                       27
<PAGE>
<TABLE>
<CAPTION>
                                IMPLANT SCIENCES CORPORATION
                                        BALANCE SHEET


                                                                                  JUNE 30,
                                                                                    2001
                                                                                ------------
<S>                                                                             <C>
ASSETS

Current assets:
  Cash and cash equivalents (includes $167,000 of restricted cash)              $ 1,232,000
  Accounts receivable, less allowance of $40,000                                    706,000
  Inventories                                                                       349,000
  Deferred income taxes                                                              62,000
  Prepaid expenses                                                                   36,000
                                                                                ------------
    Total current assets                                                          2,385,000

Property and equipment, net                                                       3,514,000
Investment in Epsilon Medical, Inc.                                                  42,000
Other assets, net                                                                   141,000
                                                                                ------------

  Total assets                                                                  $ 6,082,000
                                                                                ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                                              $   322,000
  Accrued expenses                                                                  786,000
  Current portion of long-term debt                                                 176,000
  Current portion of obligations under capital lease                                  6,000
                                                                                ------------
    Total current liabilities                                                     1,290,000
                                                                                ------------

Long-term liabilities:
  Long-term debt, net of current portion                                            236,000
  Non current obligations under capital lease                                         5,000
  Deferred income taxes                                                              29,000
                                                                                ------------
                                                                                    270,000
                                                                                ------------
    Total liabilities                                                             1,560,000
                                                                                ------------

Stockholders' equity:
  Common stock, $0.10 par value; 20,000,000 shares authorized; 5,912,770
    shares issued; 5,889,770 shares outstanding                                     591,000
  Additional paid-in capital                                                     10,930,000
  Accumulated deficit                                                            (6,604,000)
  Notes receivable from employees                                                  (188,000)
                                                                                ------------
                                                                                  4,729,000
Less: treasury stock, 23,000 shares at cost                                        (207,000)
                                                                                ------------
    Total stockholders' equity                                                    4,522,000
                                                                                ------------

    Total liabilities and stockholders' equity                                  $ 6,082,000
                                                                                ============
</TABLE>

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


                                       28
<PAGE>
<TABLE>
<CAPTION>
                            IMPLANT SCIENCES CORPORATION
                              STATEMENTS OF OPERATIONS

                                                            YEARS ENDED JUNE 30,
                                                         --------------------------
                                                             2000          2001
                                                         ------------  ------------
<S>                                                      <C>           <C>
Revenues:
  Product and contract research revenues:
    Medical                                              $ 3,082,000   $ 3,596,000
    Semiconductor                                            526,000       772,000
  Equipment                                                  365,000             -
                                                         ------------  ------------
    Total revenues                                         3,973,000     4,368,000
                                                         ------------  ------------

Costs and expenses:
  Cost of product and contract research revenues           2,749,000     4,247,000
  Cost of equipment revenue                                  396,000             -
  Research and development                                 1,345,000     1,500,000
  Selling, general and administrative, including
    $320,000 of stock-based compensation                   2,188,000     2,319,000
                                                         ------------  ------------
      Total costs and expenses                             6,678,000     8,066,000
                                                         ------------  ------------

Loss from operations                                      (2,705,000)   (3,698,000)
                                                         ------------  ------------

Other income (expense):
  Interest income                                            300,000       167,000
  Interest expense                                           (78,000)      (47,000)
  Other                                                        1,000             -
  Equity in loss of Epsilon Medical, Inc.                     (6,000)       (2,000)
                                                         ------------  ------------
    Other income                                             217,000       118,000
                                                         ------------  ------------

Net loss                                                 $(2,488,000)  $(3,580,000)
                                                         ============  ============

Net loss per common share - basic and diluted            $     (0.46)  $     (0.62)
                                                         ============  ============

Shares used in computing net loss per common share -
  basic and diluted                                        5,368,557     5,817,212
                                                         ============  ============
</TABLE>

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


                                       29
<PAGE>
<TABLE>
<CAPTION>
                                                IMPLANT SCIENCES CORPORATION
                                        STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                                          Common  Stock                                                   Notes     Treasury
                                       -------------------   Additional                                 Receivable   Stock
                                       Number of              Paid-In      Deferred       Accumulated      from     --------
                                        Shares     Amount     Capital     Compensation      Deficit      Employees   Shares
                                       ---------  --------  -----------  --------------  -------------  -----------  ------
<S>                                    <C>        <C>       <C>          <C>             <C>            <C>          <C>

Balance at June 30, 1999               5,069,320  $507,000  $ 6,517,000  $    (121,000)  $   (536,000)  $ (275,000)       -

Issuance of common stock pursuant to
  exercise of stock options              138,000    14,000      721,000
Issuance of common stock pursuant to
  private placement                      500,000    50,000    2,929,000
Issuance of common stock pursuant to
  employee stock purchase plan               762         -        4,000
Amortization of deferred compensation                                           60,000
Net loss                                                                                   (2,488,000)
                                       ---------  --------  -----------  --------------  -------------  -----------  ------

Balance at June 30, 2000               5,708,082   571,000   10,171,000        (61,000)    (3,024,000)    (275,000)       -

Issuance of common stock pursuant to
  exercise of stock options              195,797    20,000      491,000
Issuance of common stock pursuant to
   exercise of warrants                    7,288         -            -
Issuance of common stock pursuant to
   employee stock purchase plan            1,603         -        9,000
Stock-based compensation                                        259,000
Amortization of deferred compensation                                           61,000
Repayment of notes receivable
  from employees                                                                                            87,000
Repurchase of common stock                                                                                           23,000
Net loss                                                                                   (3,580,000)
                                       ---------  --------  -----------  --------------  -------------  -----------  ------

Balance at June 30, 2001               5,912,770  $591,000  $10,930,000  $           -   $ (6,604,000)  $ (188,000)  23,000
                                       =========  ========  ===========  ==============  =============  ===========  ======


                                        Treasury
                                          Stock        Total
                                       ----------  Stockholders'
                                         Amount       Equity
                                       ----------  ------------
<S>                                    <C>         <C>
Balance at June 30, 1999               $       -   $ 6,092,000

Issuance of common stock pursuant to
  exercise of stock options                            735,000
Issuance of common stock pursuant to
  private placement                                  2,979,000
Issuance of common stock pursuant to
  employee stock purchase plan                           4,000
Amortization of deferred compensation                   60,000
Net loss                                            (2,488,000)
                                       ----------  ------------

Balance at June 30, 2000                       -     7,382,000

Issuance of common stock pursuant to
  exercise of stock options                            511,000
Issuance of common stock pursuant to
   exercise of warrants                                      -
Issuance of common stock pursuant to
   employee stock purchase plan                          9,000
Stock-based compensation                               259,000
Amortization of deferred compensation                   61,000
Repayment of notes receivable
  from employees                                        87,000
Repurchase of common stock              (207,000)     (207,000)
Net loss                                            (3,580,000)
                                       ----------  ------------

Balance at June 30, 2001               $(207,000)  $ 4,522,000
                                       ==========  ============
</TABLE>

   The accompanying notes are an integral part of these financial statements


                                       30
<PAGE>
<TABLE>
<CAPTION>
                             IMPLANT SCIENCES CORPORATION
                               STATEMENT OF CASH FLOWS

                                 YEARS ENDED JUNE 30,
                                 --------------------

                                                               2000          2001
                                                           ------------  ------------
<S>                                                        <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                 $(2,488,000)  $(3,580,000)
  Adjustments to reconcile net loss to net cash provided by
    (used in) operating activities:
    Depreciation and amortization                              270,000       653,000
    Amortization of deferred compensation                       61,000        61,000
    Non-cash stock compensation expense                              -       259,000
    Equity in loss of Epsilon Medical, Inc.                      6,000         2,000
    Impairment of patents                                            -        80,000
    Write-off of patent costs                                   15,000             -
    Write-off loan financing fees                                    -        11,000
    Changes in operating assets and liabilities:
      Accounts receivable                                     (546,000)      280,000
      Inventories                                              267,000      (248,000)
      Prepaid income taxes                                       9,000             -
      Prepaid expenses                                         (33,000)       18,000
      Notes receivable                                         (25,000)        3,000
      Other noncurrent assets                                  (15,000)        5,000
      Accounts payable                                         512,000      (290,000)
      Accrued expenses                                        (424,000)      (55,000)
                                                           ------------  ------------
        Net cash used in operating activities               (2,391,000)   (2,801,000)
                                                           ------------  ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Investment in Epsilon Medical, Inc.                          (50,000)            -
  Purchase of property and equipment                        (2,174,000)     (977,000)
  Capitalized patent costs                                     (45,000)      (46,000)
                                                           ------------  ------------
    Net cash used in investing activities                   (2,269,000)   (1,023,000)
                                                           ------------  ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from common stock issuance                        3,718,000       607,000
  Repurchase of common stock                                         -      (207,000)
  Repayments of long-term debt                                (218,000)     (182,000)
  Repayments of revolving credit line                         (155,000)            -
                                                           ------------  ------------
    Net cash provided by  financing activities               3,345,000       218,000
                                                           ------------  ------------

  Net decrease in cash and cas equivalents                  (1,315,000)   (3,606,000)
  Cash and cash equivalents, beginning                       6,153,000     4,838,000
                                                           ------------  ------------
  Cash and cash equivalents, ending                        $ 4,838,000   $ 1,232,000
                                                           ============  ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid                                            $    78,000   $    47,000
  Obligations under capital lease                               17,000        11,000
</TABLE>

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


                                       31
<PAGE>
                          IMPLANT SCIENCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

1.   DESCRIPTION  OF  BUSINESS

          Implant  Sciences  Corporation (the Company) develops products for the
     medical  device  industry  using ion implantation and thin film coatings of
     radioactive  and  non-radioactive  materials. The Company has received Food
     and  Drug  Administration 510(k) clearance to market its I-Plant Iodine-125
     radioactive seed for the treatment of prostate cancer. The Company also has
     under  development interventional cardiology devices and temporary coronary
     brachytherapy  systems  for  the prevention of restenosis (reclosure of the
     artery  after  balloon  angioplasty). In addition, the Company modifies the
     surface characteristics of orthopedic joint implants to reduce polyethylene
     wear  and  thereby  increasing  the  life  of  the implant and provides ion
     implantation  of  electronic  dopants  for  the  semiconductor  industry.

          The accompanying financial statements have been presented on the
     assumption that the Company is a going concern, which contemplates the
     realization of assets and the satisfaction of liabilities in the normal
     course of business. During fiscal 2000 and 2001, the Company incurred
     significant operating losses and utilized significant amounts of cash to
     fund operations. The Company is reaching a critical stage in its growth as
     it transforms from a research and development company to a commercial
     company with complete sales, marketing and production capabilities. The
     Company received Food and Drug Administration 510(k) clearance to market
     its I-Plant(TM) Iodine-125 radioactive seed for the treatment of prostate
     cancer. On February 2, 2000, the Company signed a distribution agreement
     with MED-TEC Inc. for the exclusive U.S. distribution of our I-Plant
     Iodine-125 seed. During this time the Company increased its overall
     operating expenses and overhead to be positioned to further increase its
     sales and production capabilities.

          During  the  second  half of 2001, the Company implemented a number of
     programs  to  reduce  its  consumption of cash, including operating expense
     reductions.  Management  of  the Company has outlined a plan of appropriate
     action  steps to attempt to ensure that the Company has adequate sources of
     cash to meet its working capital needs for at least the next twelve months.
     In  May 2001, management of the Company received approval from the Board of
     directors  to  implement this action plan. The key elements of the plan are
     as  follows:

          -    Further  operating  expense  reductions  to  eliminate  certain
               expenditures  that  are  not  essential  to  achieving  critical
               business  objectives  at this time (e.g., discretionary spending,
               further  development  efforts);

          -    Pursuit  of strategic financing alternatives including additional
               financing  through the form of a $500,000 working capital line of
               credit  with  a  related  party;

          -    Replaced  certain  members  of senior management with consultants
               experienced in a manufacturing environment focused on operational
               efficiencies.  These consultants also come at a much reduced cost
               that  will  save the Company approximately $150,000 in salary and
               benefits;

          -    Introduced  its  new  radioactive  prostate  seed  product;

          -    Execution  of  a  key contract by MED-TEC Inc. with a hospital in
               the  Southeast  US,  requiring the use of the Company as its sole
               provider of Iodine-125 prostate seeds, that could have the affect
               of  increasing  the  Company's  planned  prostate  seed sales for
               Fiscal  2002;  and

          -    Discontinued nonessential research and development efforts, other
               than  grants  and  contracts,  that will reduce significantly the
               costs  incurred  during  fiscal  2001.

          As  a  result  of  implementing the above actions, management believes
     that its existing cash resources and cash from operations will meet working
     capital  and  research  and  development  requirements over the next twelve
     months  and  improve operating results. However, unanticipated decreases in
     operating  revenues,  delays  in government funding of grants, increases in
     expenses  or further delays in product development may adversely impact the
     Company's  cash  position and require further cost reductions. No assurance
     can  be  given  that  the  Company  will be able to operate profitably on a
     consistent  basis.


                                       32
<PAGE>
                          IMPLANT SCIENCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

2.   SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES

     Cash  and  Cash  Equivalents

          The  Company considers any security with a maturity of 90 days or less
     at  the  time  of  investment  to be cash equivalents. Pursuant to a pledge
     agreement  with  the Company's bank, the Company has restricted $167,000 of
     cash  to  collateralize  a  loan  with  the  bank  (See  Note  8).

     Short-term  Investments

          The  Company classifies any security, including marketable securities,
     with  a  maturity  of  greater  than  90  days  as  short-term investments.

     Inventories

          Inventory  consists  of  raw  materials,  work-in process and finished
     goods  and are stated at the lower of cost (first in, first out) or market.

     Property  and  Equipment  and  Capital  Lease

          Equipment  and leasehold improvements are stated at cost. Equipment is
     depreciated  using the straight-line method over the estimated useful lives
     of  the  assets,  ranging  from five to seven years. Capitalized leases and
     leasehold  improvements  are amortized based upon the lesser of the term of
     the  lease  or the useful life of the asset and such expense is included in
     depreciation  expense. Expenditures for repairs and maintenance are charged
     to  expense  as  incurred.

     Warranty  Costs

          The  Company  accrues warranty costs in the period the related revenue
     is  recognized.  Warranty  costs  are  not  material  to operating results.

     Income  Taxes

          The liability method is used to account for income taxes. Deferred tax
     assets  and  liabilities  are  determined  based on differences between the
     financial  reporting and income tax basis of assets and liabilities as well
     as  net operating loss and tax credit carry forwards and are measured using
     the  enacted tax rates and laws that will be in effect when the differences
     reverse.  Deferred  tax  assets  may be reduced by a valuation allowance to
     reflect  the  uncertainty  associated  with  their  ultimate  realization.

     Patent  Costs

          The costs to obtain patents are capitalized. The Company amortizes the
     costs of patents ratably over the shorter of their useful or legal life. As
     of  June 30, 2001 there were 17 patents issued. Accumulated amortization at
     June  30,  2001  was  approximately  $52,000.

     Advertising  Costs

          Advertising  costs  are  expensed  as  incurred  in  accordance  with
     Statement  of  Position  93-7,  "Reporting  on  Advertising  Costs" and are
     included  in  selling,  general  and  administrative  expenses. Advertising
     expenses  approximated  $34,000  and  $12,000,  for  fiscal  2000 and 2001,
     respectively.

     Impairment  of  Long-Lived  Assets

          In accordance with the provisions of Statement of Financial Accounting
     Standards  No. 121, "Accounting for the Impairment of Long-Lived Assets and
     for  Long-Lived  Assets  to  be  Disposed  of",  if facts and circumstances
     suggest  that  an impairment may have occurred, the unamortized balances of
     these  assets  are  reviewed.  Facts  and  circumstances  indicative  of an
     impairment may include factors such as significant decrease in demand for a
     product  related to an asset, a history of operating cash flow losses, or a
     projection  or forecast that demonstrates continuing losses associated with
     a  revenue  producing  asset.  In  the year ended June 30, 2001, certain of
     these  assets were determined to be impaired, and the carrying amounts were
     reduced,  as  appropriate. Accordingly, assets with a net carrying value of
     approximately  $80,000  were  impaired  and written-off by the Company. The
     aggregate  charge  is included in the accompanying statements of operations
     as  research  and  development.


                                       33
<PAGE>
                          IMPLANT SCIENCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

     Concentration  of  Credit  Risk

          The  Company  grants  credit  to  its  customers,  primarily  large
     corporations  in  the medical device, semiconductor industries and the U.S.
     government.  The  Company  performs periodic credit evaluations of customer
     financial conditions and generally does not require collateral. Receivables
     are  generally due within thirty days. Credit losses have historically been
     minimal,  which  is consistent with management's expectations. Reserves are
     provided  for  estimated  amounts  of  accounts receivable which may not be
     collected.  Financial  instruments  that potentially subject the Company to
     concentration  of  credit  risk  consist  of  trade  receivables.

          The  Company  has  five  (5)  major  customers  that accounted for the
     following  annual  revenue:

                                  YEAR ENDED JUNE 30,
                                ----------------------
                                   2000        2001
                                ----------  ----------
             Company A          $1,501,000  $1,418,000
             Company B           1,023,000     747,000
             Company C                   -     726,000
             Company D             260,000      64,000
             Company E             365,000           -

          The  accounts  receivable  at June 30, 2000 and 2001 for Company A was
     approximately  $196,000 and $185,000, respectively. Accounts receivable for
     Company  B  at  June  30,  2000  and  2001  was  $408,000  and  $107,000,
     respectively.  The  accounts  receivable at June 30, 2001 for Company C was
     approximately  $156,000.

     Stock  Based  Compensation

          The  Company  accounts  for  its stock based compensation arrangements
     under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to
     Employees",  rather  than  the  alternative  fair  value  accounting method
     provided  for  under FAS No. 123, "Accounting for Stock-Based Compensation.
     Under  APB 25", when the exercise price of options granted to employees and
     non-employee  directors  under  these  plans equals the market price of the
     underlying  stock  on  the  date  of  the grant, no compensation expense is
     recorded.

     Use  of  Estimates

          The  preparation  of  these  financial  statements  in conformity with
     generally  accepted  accounting  principles  requires  management  to  make
     estimates  and  assumptions  that affect the reported amounts of assets and
     liabilities and disclosure of contingent assets and liabilities at the date
     of  the  financial  statements  and  the  reported  amounts of revenues and
     expenses  during  the  reporting  periods.  Some  of  the  more significant
     estimates  include  allowance  for  doubtful  accounts, allowance for sales
     returns,  inventory  valuation,  sub-contractor  expenses  and  warranty
     reserves.  Management's  estimates are based on the facts and circumstances
     available  at the time estimates are made, past historical experience, risk
     of  loss,  general  economic  conditions  and  trends  and  management's
     assessments  of the probable future outcome of these matters. Consequently,
     actual  results  could  differ  from  such  estimates.

     Revenue  Recognition

          The Company recognizes revenue when there is persuasive evidence of an
     arrangement  with  the customer which states a fixed and determinable price
     and terms, delivery of the product has occurred or the service performed in
     accordance  with  the  terms of the sale, and collectibility of the sale is
     reasonably  assured. The Company provides for estimated returns at the time
     of  shipment  based  on  historical  data.

          Contract  revenue  under  cost-sharing  research  and  development
     agreements  is recognized as eligible research and development expenses are
     incurred.  The  Company's obligation with respect to these agreements is to
     perform  the  research  on  a  best-efforts  basis.


                                       34
<PAGE>
                          IMPLANT SCIENCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

     Shipping  and  Handling  Costs

          Shipping  and  handling  costs,  such  as  freight  to  customers'
     destinations,  are  included  in  cost  of  sales  in  the  statements  of
     operations.  Total  shipping  and handling costs was $39,000 as of June 30,
     2001.  These  costs, when included in the sales price charged for products,
     are  recognized  in  net  sales.

     Research  and  Development  Costs

          All  costs  of  research  and  development  activities are expensed as
     incurred.  The  Company  performs  research  and development for itself and
     under  contracts with others, primarily the U.S. government. Company funded
     research  and  development includes the excess of expenses over revenues on
     its  commercial  research  contracts and, therefore, is included in cost of
     product  and  contract  research  revenues in the accompanying statement of
     operations.

          The  Company funded and customer funded research and development costs
     were  as  follows:

                                                     JUNE 30,
                                              ----------------------
                                                 2000        2001
                                              ----------  ----------
            Company funded                    $1,512,000  $2,228,000
            Customer funded                      788,000     747,000
                                              ----------  ----------

              Total research and development  $2,300,000  $2,975,000
                                              ==========  ==========

     Earnings  per  Share

          Basic  earnings  per  share  is  computed  based  only on the weighted
     average  number  of  common  shares  outstanding during the period. Diluted
     earnings  per  share  is  computed  by using the weighted average number of
     common  shares  outstanding during the period, plus the dilutive effects of
     shares  issuable  through  the  exercise  of  stock  options  (common stock
     equivalents)  unless  their inclusion would be antidilutive. In calculating
     diluted  earnings  per  share,  the  dilutive  effect  of  stock options is
     computed using the average market price for the period. The following table
     sets  forth  the  computation  of  basic  and  diluted  earnings per share:


                                                       JUNE 30,
                                            --------------------------
                                                 2000          2001
                                            ------------  ------------
            Basic:
              Net loss                      $(2,488,000)  $(3,580,000)
              Weighted shares outstanding     5,368,557     5,817,212
              Net loss per share - basic    $     (0.46)  $     (0.62)

            Diluted:
              Net loss                      $(2,488,000)  $(3,549,000)
              Weighted shares outstanding     5,368,557     5,817,212
              Net loss per share - diluted  $     (0.46)  $     (0.61)

     New  Accounting  Standards

          In  December 1999, the Securities and Exchange Commission issued Staff
     Accounting  Bulletin  101,  (SAB  101),  "Revenue  Recognition in Financial
     Statements."  SAB  101  interprets  the  application  of generally accepted
     accounting  principals  to revenue recognition in financial statements. The
     Company  adopted  SAB  101 in fiscal 2001 and such adoption of SAB 101 does
     not  have  a  material  effect  on  its  financial  position  or results of
     operations.


                                       35
<PAGE>
                          IMPLANT SCIENCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

3.   INVENTORY

          Inventory at June 30, 2001 consists of the following:

          Raw materials          $    209,000
          Work-in-process              75,000
          Finished goods               65,000
                                  -----------

                                  $   349,000
                                  ===========


4.   PROPERTY  AND  EQUIPMENT

          Property and equipment at June 30, 2001 consists of the following:

          Machinery and equipment                                $   4,471,000
          Computers and software                                       291,000
          Furniture and fixtures                                       149,000
          Motor vehicles                                                15,000
          Leased property under capital leases                          28,000
          Leasehold improvements                                       222,000
                                                                 --------------
                                                                     5,176,000
          Less: accumualted depreciation and amortization           (1,662,000)
                                                                 --------------

                                                                 $    3,514,000
                                                                 ==============

5.   ACCRUED  EXPENSES

          Accrued expenses at June 30, 2001 consists of the following:

          Accrued compensation and benefits            $       314,000
          Subcontractor costs                                  328,000
          Deferred revenue                                      18,000
          Accrued legal, accounting and printing               109,000
          Other                                                 15,000
          Warranty                                               2,000
                                                       ---------------

                                                       $       786,000
                                                       ===============

          Included  in  accrued compensation and benefits as of June 30, 2001 is
     severance  of  $45,000  for  a  former  officer.

6.   INVESTMENT  IN  AFFILIATE

          On October 6, 1999, the Company acquired 38% of the outstanding shares
     of  Epsilon  Medical,  Inc.  for  $50,000.  The  Company accounts for their
     investment  in  Epsilon  Medical,  Inc.  under  the  equity  method and the
     carrying  amount  of  their investment is adjusted to reflect the Company's
     share  of all gains and losses. For the years ended June 30, 2000 and 2001,
     the  Company recognized its share of equity losses in Epsilon Medical, Inc.
     of  approximately  $6,000  and  $2,000,  respectively. Summarized financial
     information  is  not  presented  as  it  is  not  material  to the Company.


                                       36
<PAGE>
                          IMPLANT SCIENCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

7.   RESEARCH  AND  DEVELOPMENT  ARRANGEMENTS

          The  Company  is  the  recipient  of  several  grants  under  the U.S.
     Government's  Small  Business  Innovative  Research  (SBIR)  Program. These
     grants  are  firm-fixed priced contracts and generally range in length from
     six  to  twenty  four  months.  Revenues  under  such  arrangements  were
     approximately $1,023,000 and $746,000 for the years ended June 30, 2000 and
     2001,  respectively.  Unbilled  accounts  receivable  relating  to  such
     arrangements  was  approximately $250,000 and $111,000 for the fiscal years
     ended  June  30,  2000  and  2001,  respectively.

          The  Company also conducts research and development under cost-sharing
     arrangements  with  its  commercial  customers.  Revenues  under  such
     arrangements  were approximately $30,000 for the fiscal year ended June 30,
     2000.  There  were  no revenues under such arrangements for the fiscal year
     ended  June  30,  2001.

8.   BANK  BORROWINGS

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

          On  September  30,  2000,  the  Company's Credit Facility expired. The
     Company  chose  not to renew the Credit Facility and is currently seeking a
     new  credit  facility on terms more favorable to the Company. There were no
     borrowings  on  the Credit Facility during the year ended June 30, 2001 and
     no  balances  outstanding  as  of  June  30,  2001.

          The Company has a term loan facilities of $1,500,000 at June 30, 2000,
     of  which it had utilized $750,000. Interest is payable monthly at 1% above
     the  banks  base  rate  commencing  February  1998  (8.8%  weighted average
     interest  rate  for  fiscal  2001).  As  of  June  30,  2001,  the  balance
     outstanding  was $412,000.

          The  Company's  Loan  Agreement requires compliance with two financial
     covenants  including  minimum  levels  of net worth and net loss limits. At
     June  30,  2001,  the  Company's  net  loss  covenant  was greater than the
     required  amount.  On  September  28,  2001, the Company and a director and
     officer of the Company fully collateralized the Term Loan with $167,000 and
     $200,000 of cash, respectively, and executed pledge agreements with respect
     to  the collateral. The Company's bank has waived its rights under the Loan
     Agreement  with respect to this financial covenant at June 30, 2001 through
     and  including  June  30,  2002.

          On  October  10,  2001,  the  Company  entered into a $500,000 Line of
     Credit  Facility  ("Line  of  Credit")  with CardioTech International, Inc.
     ("CardioTech"),  a related party (See Note 10). The Line of Credit provides
     for  funding  at  the  discretion  of the Company, is subject to a security
     agreement  providing  a  second  lien on substantially all of the Company's
     assets.  The  Line  of  Credit bears interest at the prime rate (5.5% as of
     October  10,  2001)  plus  2%  and  expires  October  12, 2002. All amounts
     borrowed  under  the  Line  of  Credit  are  due  on  October  12,  2002.

9.   RELATED  PARTY  TRANSACTION

          Statement  of  Financial  Accounting  Standards No. 57, "Related Party
     Disclosures,"  specifies the nature of information that should be disclosed
     in  financial  statements  regarding related party transactions. CardioTech
     International  Inc.  ("CardioTech"),  a  public company, is a related party
     with  the  Company  by  virtue  of  its significant business relationships.
     During fiscal 2001, CardioTech's corporate staff provided certain financial
     and  accounting  services  to  the  Company. Amounts of $21,000 are due and
     payable  at  June  30,  2001  related  to  such  services.

          In  March  2000,  the  Company  entered into a $250,000 joint research
     agreement  with  CardioTech  International  to develop a proprietary porous
     polymer  biocompatible  coating  technology as a platform for the Company's
     proprietary  radioactive  brachytherapy technology. During fiscal 2001, the
     Company  paid  $50,000  pursuant  to  the  aforementioned  agreement.

          Certain  directors  of  the  Company  hold  positions  as directors of
     CardioTech.  The  CEO and Chairman of the Board of Directors of the Company
     is  also  a  director  of  CardioTech. The CEO and Chairman of the Board of
     Directors of CardioTech is also a director of the Company. The acting Chief
     Financial Officer of the Company is also the acting Chief Financial Officer
     of  CardioTech.


                                       37
<PAGE>
                          IMPLANT SCIENCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

          On  October  10, 2001, CardioTech provided the Company a $500,000 Line
     of  Credit  Facility  (See  Note  8).

          Accounts receivable from related parties as of June 30, 2001 consisted
     of  a  loan  of  $138,000  to  a  principal  shareholder  and loans to five
     employees,  totaling  $55,000  all  of  which  bear  interest  at 6%. These
     transactions  were  reported  as  a  reduction  of  stockholders'  equity.

          In  January  2000, the Company received notice of the award of a joint
     research grant. Funding is provided through a $100,000 Phase I grant by the
     U.S.  Department of Health and Human Services, National Heart, Lung & Blood
     Institute  to  CardioTech  International  and sub-grants to the Company and
     Stanford  University.

10.  LEASE  OBLIGATION

          The  Company  has a twenty-two month operating lease for 21,992 square
     feet  of  its manufacturing, research and office space which expires on May
     31,  2002  and  a  three  and one half year sublease for 17,300 square feet
     which  expires  on  March 31, 2003. The Company has an option to extend the
     operating  lease  for  two additional years. Under the terms of the leases,
     the  Company  is  responsible  for their proportionate share of real estate
     taxes  and  operating  expenses  relating  to  this  facility. Total rental
     expense  for the fiscal years ended June 30, 2000 and 2001 was $281,000 and
     $531,000,  respectively.

          Included  in  property  and  equipment  at  June 30, 2001 is equipment
     recorded  under  a  capital  lease  with  a  net  book  value  of  $11,000.
     Amortization  of  assets  under  capital  lease  obligations is included in
     depreciation  expense.

          Future  minimum  rental  payments  required  under  capital leases and
     operating leases with noncancelable terms in excess of one year at June 30,
     2001,  together with the present value of net minimum lease payments are as
     follows:

                                                        CAPITAL   OPERATING
                                                         LEASE      LEASE
                                                        --------  ----------
           Year ending June 30:
           2002                                         $  7,000  $  317,000
           2003                                            6,000     104,000
                                                        --------  ----------
           Net minimum lease payments                     13,000  $  421,000
                                                                  ==========

           Less: finance charges                           2,000
                                                        --------

           Present value of net minimum lease payments  $ 11,000
                                                        ========

11.  INCOME  TAXES

          The  Company's  effective income tax rate as of June 30, differed from
     the  U.S.  federal  statutory  income  tax  rate  as  set  forth  below:

                                                        YEARS ENDED JUNE 30,
                                                      ------------------------
                                                         2000         2001
                                                      ----------  ------------
          Expected federal tax rate                   $(846,000)  $(1,205,000)
          State income taxes, net of federal benefit   (193,000)     (214,000)
          Stock compensation expense                     21,000        21,000
          Tax credits                                         -       (55,000)
          Effect of valuation allowance                 958,000     1,381,000
          Non-deductible expenses and other              61,000        72,000
                                                      ----------  ------------

          Effective tax rate                          $   1,000   $         -
                                                      ==========  ============


                                       38
<PAGE>
                          IMPLANT SCIENCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

          Significant  components  of  the  Company's deferred tax assets are as
     follows:

          Deferred tax assets:
            Net operating loss and tax credit carryforwards  $ 2,351,000
            Accrued expenses                                      37,000
            Other                                                 67,000
                                                             ------------
          Total deferred tax assets                            2,455,000
            Valuation allowance                               (2,386,000)
                                                             ------------
          Net deferred tax assets                                 69,000
                                                             ------------

          Deferred tax liabilities:
            Tax over book depreciation                           (36,000)
                                                             ------------
          Total deferred tax liabilities                         (36,000)
                                                             ------------

          Net deferred tax asset                             $    33,000
                                                             ============

          At  June  30,  2001  the  Company  has  unused  net  operating  loss
     carryfowards  of  approximately $5,655,000, available to reduce federal and
     state  taxable income, and tax credit carryfowards of $75,000, available to
     offset federal and state taxable income, both of which expire through 2021.
     A  valuation  allowance has been established for a portion of the Company's
     tax assets as their use is dependent on the generation of sufficient future
     taxable  income.

12.  STOCKHOLDERS'  EQUITY

          In September 1998, the Company adopted the 1998 Stock Option Plan (the
     "1998  Plan").  The  1998  Plan  provides  for the grant of incentive stock
     options  and  nonqualified  stock  options to employees and affiliates. The
     exercise  price  of the options equals 100% of the fair market value on the
     date  of  the  grant.  Options expire ten years from the date of the option
     grant  and vest ratably over a three-year period commencing with the second
     year.  A total of 240,000 options were reserved for issuance under the 1998
     Plan.  Upon  adoption  of  the  1998  Plan,  the 1992 Stock Option Plan was
     terminated.  No  new  stock  options  will  be granted under the 1992 Stock
     Option  Plan, which has been superseded by the 1998 Plan. In December 2000,
     the  Company adopted the 2000 Incentive and Non Qualified Stock Option Plan
     (the  "2000 Plan"). The 2000 Plan provides for the grant of incentive stock
     options  and  nonqualified  stock  options to employees and affiliates. The
     exercise  price  of the options equals 100% of the fair market value on the
     date  of  the  grant.  Options expire ten years from the date of the option
     grant  and vest ratably over a three-year period commencing with the second
     year.  A total of 300,000 options were reserved for issuance under the 2000
     Plan.


                                       39
<PAGE>
                          IMPLANT SCIENCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

          The  following  table presents the activity of the 1992, 1998 and 2000
     Stock  Option  Plans  for  the  years  ended  June  30,  2000,  and  2001:

<TABLE>
<CAPTION>
                                                2001                 2000
                                        ---------------------  -------------------
                                                   WEIGHTED-            WEIGHTED-
                                                    AVERAGE              AVERAGE
                                                    EXERCISE             EXERCISE
                                         SHARES      PRICE     SHARES     PRICE
                                        ---------  ----------  -------  ----------
<S>                                     <C>        <C>         <C>      <C>
Outstanding at beginning of period       435,690   $     2.99  320,190  $     1.85

Granted                                  183,000         7.97  115,500        6.16
Exercised                               (195,797)        2.61        -
Canceled                                  (8,000)        8.41        -
                                        ---------  ----------  -------  ----------

Outstanding at end of period             414,893         5.26  435,690        2.99
                                        =========  ==========  =======  ==========

Options exercisable at end of period     361,581         5.05  326,699        2.12
                                        =========  ==========  =======  ==========

Weighted-average fair value of options
   granted during the year                               3.71                 3.95
                                                   ==========           ==========
</TABLE>

          In  May  2001,  the Company entered into a separation agreement with a
     former  officer,  that  provided for the acceleration of vesting of options
     for  21,736  shares  of the Company's common stock and the repurchase of an
     additional  23,000  shares  of  the  Company's common stock. As of June 30,
     2001,  the  former  officer exercised and sold 32,464 shares and had 14,736
     shares  vested  and exercisable. The Company recognized $259,000 of expense
     related  to  this  agreement.

          The  following  table  presents  weighted  average  price  and  life
     information  about  significant option groups outstanding at June 30, 2001:

<TABLE>
<CAPTION>
                       OPTIONS OUTSTANDING           OPTIONS EXERCISABLE
                ----------------------------------  --------------------
                             WEIGHTED
                             AVERAGE     WEIGHTED              WEIGHTED
     RANGE OF               REMAINING     AVERAGE               AVERAGE
     EXERCISE    NUMBER    CONTRACTUAL   EXERCISE    NUMBER    EXERCISE
      PRICES    OF SHARES   LIFE (YRS)     PRICE    OF SHARES    PRICE
     ---------  ---------  ------------  ---------  ---------  ---------
<S>             <C>        <C>           <C>        <C>        <C>
     $    1.37    126,358          4.69  $    1.37    126,358  $    1.37
          4.00     26,602          6.68       4.00     26,602       4.00
          5.00     53,501          8.33       5.00     28,000       5.00
          6.50     30,000          8.51       6.50     30,000       6.50
          6.63      2,000          8.42       6.63        666       6.63
          6.75      2,000          8.44       6.75      2,000       6.75
          7.00      3,432          7.45       7.00      2,288       7.00
          7.56     75,000          9.07       7.56     65,000       7.56
          7.81      3,000          9.56       7.81          -       7.81
          8.00      5,000          9.40       8.00      4,000       8.00
          8.50     25,000          9.92       8.50     25,000       8.50
          8.53     50,000          9.54       8.53     50,000       8.53
          9.12      8,000          8.97       9.12          -       9.12
          9.50      5,000          8.73       9.50      1,667       9.50
                ---------                           ---------
                  414,893                             361,581
                =========                           =========
</TABLE>


                                       40
<PAGE>
                          IMPLANT SCIENCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

          The Company has adopted the disclosure provisions only of Statement of
     Financial  Accounting  Standards  No.  123,  Accounting  for  Stock-based
     Compensation  (FAS  123). If the compensation cost for the option plans had
     been  determined  based  on  the fair value at the grant date for grants in
     2000 and 2001, consistent with the provisions of FAS 123, the pro forma net
     loss  per share-diluted for 2000 and 2001, would have decreased by $239,000
     and  $740,000  respectively,  and  $0.49  per  share  and  $0.70 per share,
     respectively.

          The  1998  Employee Stock Purchase Plan ("purchase plan") provides for
     the  issuance  of  141,000  shares  of  common  stock thereunder. Under the
     purchase plan, eligible employees may purchase common shares at a price per
     share  equal  to  85%  of  the lower of the fair market value of the common
     stock  on  the  first  or  last  day  of  two  six  month offering periods.
     Participation  in the offering period is limited to $25,000 in any calendar
     year.

          The  fair  value  of  options and warrants issued at the date of grant
     were  estimated  using  the  Black-Schols model with the following weighted
     average  assumptions:

                                                 OPTIONS GRANTED
                                        ----------------------------
                                            2000           2001
                                        -------------  -------------
              Volatility                     72%            47%
              Expected life (years)           5              5
              Risk free interest rate   6.10% - 6.49%  4.91% - 6.21%
              Dividend yield                  0%             0%

          The  Company has never declared nor paid dividends and does not expect
     to  do  so  in  the  foreseeable  future.

          The  effects  on  2000  and 2001 pro forma net income of expensing the
     estimated fair value of stock options are not necessarily representative of
     the  effects  on  the results of operations for future years as the periods
     presented  include  only  one and two years, respectively, of option grants
     under  the  Company's  plans.

          In  June  1999,  the Company issued 1,000,000 Units, consisting of one
     share  of common stock, and one redeemable common stock purchase warrant in
     connection with its initial public offering. Each Unit carries the right to
     purchase  one  share  of  common  stock  at $9.00, and is redeemable by the
     Company  at  $0.20 per warrant if the closing bid price of the common stock
     averages  in  excess of $10.50 for a period of 20 consecutive trading days.
     These  warrants  expire  in  June  2002.  The  Company  also  issued to the
     Representative  of  the  Underwriters,  for  nominal  consideration,  the
     Representative's  Warrants  to  purchase 100,000 shares of common stock and
     100,000  redeemable  warrants  at  an  exercise  price  of  $12.00.  The
     Representative's  Warrants  expire  in  June  2004.  All  of  the Company's
     warrants  remain  outstanding  at  June  30,  2001.

13.  ROYALTY  AGREEMENT

          Under  the  terms of the sale of a former product line, the Company is
     entitled  to  minimum  annual  royalties which aggregate $175,000 over four
     years.  During  2000,  the  Company  recognized  approximately  $25,000  of
     royalties  under  this arrangement. No royalties were recognized under this
     arrangement  in  2001.

14.  401K  PLAN

          The  Company has a defined contribution retirement plan which contains
     a  401(k)  program.  All  employees  who  are  21 years of age and who have
     completed one year of service during which they worked at least 1,000 hours
     are eligible for participation in the plan. The Company makes discretionary
     contributions  to the plan. The Company made cash contributions to the plan
     of  $61,000  and  $73,000  in  2000  and  2001,  respectively.


                                       41
<PAGE>
                          IMPLANT SCIENCES CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

15.  LEGAL  PROCEEDINGS

          From  time  to  time,  the Company is subject to various claims, legal
     proceedings  and investigations covering a wide range of matters that arise
     in the ordinary course of its business activities. Each of these matters is
     subject  to  various  uncertainties.  On the basis of information presently
     available,  the  Company is not currently aware of any legal proceedings or
     claims  that  the  Company believes are likely to have a material effect on
     the  Company's  financial  position  or  results  of  operations.


                                       42
<PAGE>
                                   SIGNATURES

     In  accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                   Implant  Sciences  Corporation

Date:  March 15, 2002              /s/  Anthony  J.  Armini
                                   ---------------------------------------
                                   Anthony  J.  Armini
                                   President,  Chief  Executive  Officer,
                                   Chairman  of  the  Board  of  Directors
                                   (Principal  Executive  Officer)

     In  accordance  with the Exchange Act, this report has been signed below by
the  following  persons on behalf of the registrant and in the capacities and on
the  dates  indicated.


Date:  March 15, 2002              /s/  Anthony  J.  Armini
                                   ---------------------------------------
                                   Anthony  J.  Armini
                                   President,  Chief  Executive  Officer,
                                   Chairman  of  the  Board  of  Directors
                                   (Principal  Executive  Officer)


Date:  March 15, 2002              /s/  David  C.  Volpe
                                   ---------------------------------------
                                   David  C.  Volpe
                                   Acting  Chief  Financial  Officer
                                   (Principal  Financial and Accounting Officer)


Date:  March 15, 2002              /s/  Stephen N. Bunker
                                   ---------------------------------------
                                   Stephen  N.  Bunker
                                   Vice  President  and  Chief  Scientist,
                                   Director

Date:  March 15, 2002              /s/  Michael Szycher
                                   ---------------------------------------
                                   Michael Szycher
                                   Director



                                       43
<PAGE>
<TABLE>
<CAPTION>
                                  EXHIBIT INDEX
                                  -------------

Exhibit
Number      Description
----------  -----------
<S>         <C>

*3.2         By-Laws  of  the  Company
*3.3         Articles  of  Amendment to the Articles of Organization of the Company,
             dated  June  9,
             1999
*3.4         Restated  Articles  of  Organization of the Company, dated June 9. 1999
**4.1        Specimen  certificate  for  the  Common  Stock  of  the  Company
**4.2        Specimen  certificate  for  the  Redeemable  Warrants  of  the Company
***4.3       Specimen  certificate  for  the  Units  of  the  Company
**10.1       Employment Agreement with Anthony J. Armini, dated September 26, 1998
**10.2       Employment Agreement with Stephen N. Bunker, dated September 26, 1998
*10.3        Employment  Offer Letter to Darlene Deptula-Hicks, dated June 15, 1998
*10.4        Employment  Offer  Letter  to  Alan  Lucas,  dated  March  20,  1998
*10.5        Amendment  to  Employment  Offer Letter to Alan Lucas, dated September
             24,  1998
*10.6        Form  of  Employee  Agreement  on  Ideas, Inventions, and Confidential
             Information used between 1993 and 1995
*10.7        Form  of  Employee  Agreement  on  Ideas, Inventions, and Confidential
             Information used  in  1993
*10.8        Form  of  Employee  Agreement  on  Ideas, Inventions, and Confidential
             Information used between 1997 and 1998
*10.9        Loan  Agreement  between  the  Company and US Trust, dated May 1, 1996
*10.10       $100,000 Commercial Promissory Note signed by the Company in favor of
             US  Trust, dated May 1, 1996
*10.11       $300,000 Commercial Promissory Note signed by the Company in favor of
             US  Trust, dated May 1, 1996
*10.12       Guaranty  of  Loan  Agreement  between  the  Company and US Trust, by
             Anthony  J. Armini, dated May  1,  1996
*10.13       Security  Agreement  between  the  Company and US Trust, dated May 1,
             1996
*10.14       Lessor's  Subordination and Consent between the Company and Teacher's
             Insurance
             and  Annuity  Association  of  America,  dated  May  1,  1996
*10.15       First  Amendment  to Loan Agreement between the Company and US Trust,
             dated  July 24, 1997
*10.16       $300,000 Commercial Promissory Note signed by the Company in favor of
             US  Trust, dated July 24, 1997
*10.17       $94,444.40  Commercial Promissory Note signed by the Company in favor
             of  US  Trust,  dated  August  12,  1997
*10.18       Second  Amendment to Loan Agreement between the Company and US Trust,
             dated January 16, 1998
*10.19       $750,000 Commercial Promissory Note signed by the Company in favor of
             US  Trust, dated January 16, 1998
*10.20       Promissory  Note signed by Anthony J. Armini in favor of the Company,
             dated September 26, 1998
*10.21       Shareholders Agreement between NAR Holding Corporation and Anthony J.
             Armini, dated July 15, 1987
*10.22       Lease  between  the  Company  and  Teachers  Insurance  and  Annuity
             Association of America, dated September 29, 1995
*10.23       First  Amendment to Lease and Expansion Agreement between the Company
             and Teachers Insurance and Annuity Association of America,
             dated July 29, 1998
*10.24       Standard  Cooperative  Research and Development Agreement between the
             Company and the Naval Research Laboratory, dated January 21, 1997
*10.25       Cooperative  Agreement  between  the Company and the United States of
             America US Army Tank-Automotive and Armaments Command Armament
             Research, Development and Engineering Center, dated
             September 30, 1997(1)
*10.26       Vendor  Agreement Memorandum between the Company and Osteonics, dated
             February 2, 1998(1)


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*10.27       Sample Purchase  Order  between the Company and MicroSpring Company,
             Inc., dated October 24, 19961
*10.28       Asset  Purchase  Agreement between the Company and Falex Corporation,
             dated November 17, 1995(1)
*10.29       Settlement  between  the  Company and Erik Akhund, dated July 1, 1998
*10.30       1992  Stock  Option  Plan
*10.31       Form  of  Stock  Option  Agreement  under  the 1992 Stock Option Plan
*10.32       1998  Incentive  and  Nonqualified  Stock  Option  Plan
**10.33      Form  of  Incentive  Stock  Option  under  the  1998  Incentive  and
             Nonqualified  Stock Option  Plan
**10.34      Form  of  Nonqualified  Stock  Option  under  the 1998 Incentive and
             Nonqualified Stock Option Plan
**10.35      Form  of  Nonqualified Stock Option for Non-Employee Directors under
             the 1998 Incentive and Nonqualified Stock Option  Plan
*10.36       Form  of  Lock-Up  Agreement
**10.37      Agreement  Appointing  Transfer  Agent  and  Registrar  between  the
             Company and American Securities and Transfer & Trust, Inc., dated
             October 19, 1998
**10.38      Certification  of  Corporate  Secretary  dated  October  19,  1998
             concerning  Agreement Appointing Transfer Agent and Registrar between
             the Company and American Securities Transfer & Trust, Inc.
**10.39      Research  and  Development Agreement between the Company and Guidant
             Corporation, dated May 20, 1998
**10.40      Letter  Agreement between the Company and Guidant Corporation, dated
             September 29, 1998(1)
***10.41     Form  of  Medical  Advisory  Board  Agreement
***10.42     Form of Loan Agreement, dated January 7, 1999, between the Company
             and the following employees in  the following amounts: Donald J.
             Dench ($12,500), Diane  J. Ryan ($12,500), Mark and Kathleen Gadarowski
             ($12,500), Gregory Huntington, Sr.($12,500),  Leonard DeMild
             ($25,000),  Michael Nelson ($12,500), Richard Sahagian ($12,500),
             Darryl Huntington ($12,500), Dennis Gadarowski ($12,500) and David
             Santos  ($12,500)
***10.43     Terms and Conditions from Sample Purchase Order between the Company
             and Biomet, Incorporated
****10.44    Unit and Warrant Agreement between the Company and American
             Securities Transfer & Trust, Inc., dated April 9, 1999
*10.45       Agreement between the Company and U.S. Army Space and Missile Defense
             Command, dated May 27, 1999
*****10.46   Second  Amendment  to  Lease  and  Extension  Agreement
*****10.47   Sublease  Agreement
*****10.48   Consent  to  Sublease  Agreement
******10.52  Distribution  Agreement,  dated January 26, 2000, by and between
             Implant  Sciences Corporation  and  MedTec  Iowa,  Inc.1
******10.53  Stock  Purchase  Agreement,  dated March 2, 2000, by and between
             Implant  Sciences Corporation  and  MedTec  Iowa,  Inc.
******10.54  Research and Development Agreement, dated March 13, 2000, by and
             between Implant  Sciences  Corporation  and  Cardiotech  International
******10.55  Amendment  to  Distributorship  Agreement  between Med-Tec Iowa,
             Inc.,  and  Implant Sciences  Corporation  dated  26  January  2000
*******10.56 Line of Credit Letter Agreement, dated October 10, 2001, by and
             between  Implant Sciences Corporation and Cardiotech International Inc.
*******10.57 $500,000 Line of Credit Term Grid Note, dated October 10, 2001,
             by and between Implant Sciences Corporation and Cardiotech
             International Inc.
*******10.58 Security  Agreement,  dated  October  10,  2001, by and between
             Implant Sciences Corporation and Cardiotech International Inc.
*******10.59 Guaranty of Line of Credit between Implant Sciences Corporation
             and Cardiotech International Inc. by Anthony J. Armini, dated
             October 10, 2001.


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*******10.60 Subordination and Intercreditor Agreement by and between
             Cardiotech International Inc. and Anthony J. Armini,, Mark Gadarowski,
             Dennis Gadarowski, Richard Sahagian, and Daryl Huntington, dated
             October 10, 2001.
*******10.61 Consent of Citizens Bank to Line of Credit Agreement by and between Implant
             Sciences Corporation and Cardiotech International, Inc., dated October 10,
             2001
*******10.62 Modification Agreement by and between Implant Sciences Corporation and
             Citizens Bank of Massachusetts, dated October 11, 2001.
*******10.63 Deposit Pledge Agreement by and between Implant Sciences Corporation and
             Citizens Bank of Massachusetts, dated October 11, 2001.
*******10.64 Deposit Pledge Agreement by and between Stephen Bunker and Citizens Bank
             of Massachusetts, dated October 11, 2001.
*******10.65 Limited  Guaranty of Commercial Promissory Note between Implant
             Sciences Corporation and Citizens Bank of Massachusetts by Stephen Bunker,
             Dated October 11, 2001.
*******10.66 Deposit  Account  Control  Agreement  by  and  between  Implant Sciences
             Corporation and Citizens Bank of Massachusetts, dated October 11, 2001.
*******10.67 Deposit Account Control Agreement by and between Stephen Bunker
             and Citizens Bank of Massachusetts, dated October 11, 2001.
10.68        Letter Agreement between Implant Sciences Corporation and Darlene
             Deptula-Hicks dated May 1, 2001
*21.1        Subsidiaries of the Company
23.1         Consent  of  Independent  Auditors
*23.2        Consent  of  Foley,  Hoag  &  Eliot  LLP
*24.1        Power  of  Attorney
</TABLE>
-------------------

        * Previously filed in the Registration Statement on Form SB-2
          (Registration No. 333- 64499) filed on September 29, 1998, and is
          incorporated herein by reference.
       ** Previously filed in Amendment No. 1 to the Registration Statement,
          filed on December 21, 1998, and is incorporated herein by reference.
      *** Previously filed in Amendment No. 2 to the Registration Statement,
          filed on February 11, 1999, and is incorporated herein by reference.
     **** Previously filed in Amendment No. 3 to the Registration Statement,
          filed on April 30 , 1999, and is incorporated herein by reference.
    ***** Previously filed in Quarterly Report on Form 10-QSB for the quarter
          ended December 31, 1999, filed on February 14, 2000, and is
          incorporated herein by reference.
   ****** Previously filed in Quarterly Report on Form 10-QSB for the quarter
          ended March 31, 2001, filed on May 11, 2000, and is incorporated
          herein by reference.
  ******* Previously filed in Annual Report on Form 10-KSB for the fiscal
          year ended June 30, 2001, filed on October 15, 2001, and is
          incorporated herein by reference.
        1 Filed  under  application  for  confidential  treatment.



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