**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-KSB/A**

 

**(AmendmentNo. 2)**

 
| **ý**                                                                                                                                                                                 | **Annual report pursuant to  section 13 or 15(d) of the Securities Exchange Act of 1934.**     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                 | ** **                                                                                     |
| **For the  fiscal year ending June 30, 2004.**                                                                                                                                             |
| ** **                                                                                                                                                                                 | ** **                                                                                     |
| **Or**                                                                                                                                                                                     |
| ** **                                                                                                                                                                                 | ** **                                                                                     |
| **o**                                                                                                                                                                                      | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.** |
| ** **                                                                                                                                                                                 | ** **                                                                                     |
| **For the  transition period from               to             .** |
| ** **                                                                                                                                                                                 | ** **                                                                                     |
| **Commission  file number 000-25839**                                                                                                                                                      |

 

**IMPLANTSCIENCES CORPORATION**

(Exact name ofregistrant as specified in its charter)

 
| **Massachusetts**                                                | ** ** | **04-2837126**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |       | (IRS Employer  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 registeredpursuant 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                      |
| Warrants                      |       | American  Stock Exchange                      |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.

YES   ý   NO   o

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB. 

NoDisclosure   ý

 

State issuer’s revenues forits most recent fiscal year: $8,566,000

 

The aggregate marketvalue of the voting stock held by non-affiliates of the registrant wasapproximately $67,994,000 as of August 31, 2004 (based on the closing price forsuch stock as of August 31, 2004).

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock:

 

| **Class**                     | ** ** | **Outstanding at August 31, 2004** |
|-------------------------------|------------|------------------------------------|
| Common Stock, $.10 par  value |       | 8,444,251                          |

 

 

----

# ***EXPLANATORY NOTE***

 

 

**               **ThisAmendment No. 2 is being filed solely to amend certain disclosures contained inthe Item 6 — Management’s Discussion and Analysis of Financial Condition andResults of Operations and Item 8A— Controls and Procedures, as required by the Securities and ExchangeCommission.  This amendment removesreferences to a non-GAAP measure relating to stock-based compensation, expandsthe discussion of cashflows inliquidity and capital resources section and expands and modifies otherfinancial disclosures in Item 6.  In accordance with the rules of theCommission, Items 6 and 8 are being filed in their entity.

 

                In order to preserve the nature and character of thedisclosures set forth in the Original Report and Amendment No. 1, this reportspeaks as of the date of the filing of the Original Report, October 12, 2004,and as amended on November 10, 2004, we have not updated the disclosures inthis report to speak as of a latter date. All information contained in this Amended Report is subject to updatingand supplementing as provided in our reports filed with the Securities andExchange Commission subsequent to the date of the original report and amendedreports.

 

The filing of this Amendment No. 2 or the previousfiling of Amendment No. 1 shall not be deemed an admission that the OriginalForm 10-KSB, when made, included any untrue statement of a material fact oromitted to state a material fact necessary to make a statement not misleading.

 

----

 

**ITEM6.****         MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

Over the pasttwenty years, Implant Sciences Corporation has developed core technologiesusing ion implantation and thin film coatings for medical device applicationsand has proprietary processes and equipment for the manufacture of medicaldevices for radiation therapy.  Thistechnology has been applied to the manufacture of our I-Plant radioactiveprostate seeds using a dry fabrication process which we believe is morecost-effective and less hazardous than conventional processes which useradioactive wet chemistry.  We believethat the opportunities for radioactive prostate seeds will continue to grow asan attractive alternative to other methods of treatment.  We have expanded our radiation therapyproducts to include a radiation delivery system, currently under development,to provide breast cancer treatment using accelerated partial breast irradiationtherapy.  We believe this system willbecome the treatment of choice for women following lumpectomy.  The Company is also developing a new devicefor the treatment of ocular melanoma using brachytherapy, which we believe willprovide a better distribution of radiation within the tumor while providingless discomfort for the patient.  TheCompany also has numerous other radiation therapy devices in various stages ofdevelopment including devices for biliary duct cancer, brain cancer andintravascular radiation therapy.

 

We are alsoapplying our ion implantation technologies to modify surfaces to reducepolyethylene wear generation in orthopedic joint implants, manufactured by theStryker-Orthopaedics Division of Stryker Corporation.  We also supply ion implantation services tonumerous semiconductor manufacturers, research laboratories and universities.

 

Since May 1999, wehave been performing research to develop a trace explosives detector, whichcould be used to detect hidden bombs in airports and other public places.  This technology is yet another application ofour ion source technology.  At present,we are developing both portable and bench-top systems for use in airports andDepartment of Defense facilities. Prototype units have been transported to the Department of Defense andDepartment of Transportation facilities for demonstration and evaluation.  We currently have one issued United Statespatent and seven United States patents pending covering these technologies andprocesses.

 

1

----

 

**RESULTSOF OPERATIONS**

 

The following is a discussion and analysis of thefinancial condition and results of operation of the Company for the years endedJune 30, 2004 and 2003.  It shouldbe read in conjunction with the financial statements and notes theretoappearing elsewhere herein.

 

*Year Ended June 30, 2004 vs. June 30, 2003*

 

*Revenues.*  Total revenues for the year endedJune 30, 2004 were $8,566,000 as compared to $6,696,000 for the comparableprior year period, an increase of $1,870,000 or 28%.  The increase is attributable primarily torevenue recognized from the performance of government research and developmentcontracts.  The revenue recognized fromgovernment contract and other increased by $1,811,000 or 135%, from $1,346,000in 2003 to $3,157,000 in 2004.  Thisincrease is primarily a result of new government contracts to developexplosives detection products using our Laser Ion Mobility Spectrometry (“IMS”)technology.  While the revenue from thesales of our radioactive prostate seeds increased by $113,000 or 4%, from$2,631,000 to $2,744,000 in 2003 and 2004, respectively, the actual seed volumedecreased by 18%.  The decrease in seedvolume was offset by an increase in the average seed price due to the valueadded items offered to our customers, such as preloaded needles with strandedor unstranded seeds.  Management believesthat this trend of decreased volume may continue.  This is due in part to competition in themarketplace and continued downward pressure.

 

In the first quarter of fiscal 2004, the Companyentered into a new agreement with MED-TEC, our former exclusive distributor ofI-Plant prostate seeds to replace the original Distributor Agreement, which hadexpired.  This new agreement outlined anorderly transition of the direct sales responsibilities for the I-Plantprostate seed to the Company.  MED-TECalso agreed not to compete with the Company for a period of three years.  Implant Sciences is paying MED-TEC an averageof approximately $39,000 per month over 28 months, beginning September 1,2003.

 

Revenues from medical and industrial coatings were$1,731,000 as compared to $1,832,000 for the prior year, a decline of $101,000or 6%.  The decrease in revenues frommedical and industrial coatings is due primarily to a $95,000 decrease inmedical coating sales resulting from certain customers pursuing differentproduct processes not requiring radiopacity and the completion of a research anddevelopment program for a customer in fiscal 2003.  The medical coating revenue has been verystable.  We are currently constructing anew piece of capital equipment to increase our processing capacity andrevenue.  This is expected to becompleted within the next nine months. The sales of our semiconductor services increased $82,000 or 9% in theyear ended June 30, 2004.

 

Combined sales to our two major customers, the UnitedStates government and the Stryker-Orthopaedics Division of Stryker Corporation,accounted for 53% and 45% of gross revenues in the years ended June 30,2004 and 2003, respectively.  Our salesto these customers increased as a percentage of total revenues as a result ofthe growth in our government contract and grant revenue.  Our government contract and grant revenueaccounted for 35% and 20% of revenue for the years ended June 30, 2004 and2003, respectively.  This increase is aresult of our receiving several new grants and contracts, primarily related toour explosives detection product development. Our grant revenues, principally Small Business Innovative Researchprograms, fluctuate due to: (a) our desire to obtain external funding for ourresearch 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 SmallBusiness Innovative Research grants in fiscal 2004 and 2003.  We expect to continue to seek continuation orreplacement of our existing Small Business Innovative Research grants in fiscal2005.

 

*Cost of Product and Contract Research Revenues*.  Cost of revenues for the year endedJune 30, 2004 was $6,186,000 as compared to $5,363,000 for the comparableprior year period, an increase of $823,000 or 15%.  The overall increase in cost is primarily aresult of the expenses relating to the performance of the many new governmentcontracts and grants awarded in the year ended June 30, 2004.  This represents an overall improvement ingross margin of 40%, from 20% in 2003 to 28% in 2004.  Cost of product revenues for the year endedJune 30, 2004 was $3,976,000 as compared to $4,147,000 for the comparableprior year period, a decrease of $171,000 or 4%.  This results in improved gross margins of 26%for the year ended June 30, 2004 as compared to 22% for the comparableprior year period.  The improvement inthe gross margin from product revenue is attributable to higher prices earnedon prostate seed sales and improved utilization in our semiconductorbusiness.  Cost of government contractsand other for the year ended June 30, 2004 was $2,210,000 as compared to$1,216,000 for the comparable prior year period, an increase of $994,000 or82%.  This increase is primarily relatedto the costs associated with the increase in contract research revenue, whichwas funded by the U.S. government. During fiscal 2004 and 2003, we utilized Small Business InnovativeResearch grants as a source of funding for our research and developmentefforts.  Our obligation with respect tothese grants is to perform the research on a best-efforts basis.  Periodically, we may

 

2

----

 

continue our research and development efforts related to these projectsat our own expense.  This cost isconsidered company-funded research and development.

 

*Research and Development*.  Researchand development expense for the year ended June 30, 2004 was $1,631,000 ascompared to $1,776,000 for the comparable prior year period, a decrease of145,000 or 8%.  The decrease is the resultof the increased government contract and grant awards which allowed us todecrease Company funded research and development expenses.  The Company continues to work in the areas ofexplosives and toxic substance detection, temporary brachytherapy and radioactiveprostate seed product compliments.

 

*Selling, General andAdministrative*.  Selling,general and administrative expenses for the year ended June 30, 2004 were$4,634,000 as compared to $2,326,000 for the comparable prior year period, anincrease of  $2,308,000 or 99%.  This increase is primarily related to theexpenses associated with the addition of four (4) regional salesrepresentatives to promote the sales of our I-Plant radioactive seed as well asa Director of Marketing for our trace detection technology.  In addition, travel to trade shows andadvertising expenses increased as we continue to market these products.

 

*Other Income and Expenses, Net*.  For the year ended June 30, 2004, werecorded other expense, net, of $127,000 as compared to $0, in the comparableprior year period.  The increase in otherexpense, net, is primarily attributable the interest expense relating theAxcelis financing combined with the losses realized from the investment inCorNova and the impairment of the Epsilon Medical investment.

 

*NetLoss.*  Net loss for theyear ended June 30, 2004 was $4,012,000 as compared with $2,769,000 forthe comparable prior year period, an increase in net loss of $1,243,000 or45%.  Net loss for June 30, 2004includes an approximate charge of $1,668,000 related to stock-basedcompensation as compared to $308,000 in the comparable prior year period.  Accordingly, the net loss for the year endedJune 30, 2004, before giving effect to the charge for stock-basedcompensation is $2,433,000 as compared to $2,461,000 for the comparable prioryear period.  This decrease in net lossis attributable, in part, to the marked increase in government contract andgrant revenue received relating to the continued development work in the areasof explosives and toxic substance detection, temporary brachytherapy andradioactive prostate seed product compliments.

 

Additionally, during the fiscal year endedJune 30, 2004, we recognized approximately $2,527,000 as a preferreddistribution, which included accretion of dividends, the beneficial conversionfeature and amortization of warrants for each of the Series A, B, and CPreferred Stock, in the amounts of $564,000, $1,287,000 and $638,000,respectively, and $38,000 relating to the estimated fair value of the extensionof certain warrants issued in connection with our initial public offering.  During the year ended June 30, 2003, werecognized approximately $891,000 as a preferred distribution, which includedthe accretion of dividends, the beneficial conversion feature and theamortization of warrants for the Series A Preferred Stock in the amount of$696,000 and $195,000 relating to estimated fair value of the extension ofcertain warrants issued in connection with our initial public offering.  The effect of these transactions had nooverall effect on stockholders’ equity or cash, but increased net loss pershare applicable to common shareholders by $0.35 and $0.14 per share for theyears ended June 30, 2004 and 2003, respectively.  The basic and diluted net loss per shareapplicable to common shareholders for the period ended June 30, 2004 was($0.90) per share as compared to ($0.58) per share for the comparable prioryear period, an increase in net loss applicable to common shareholders pershare of $0.32 or 55%.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of June 30, 2004,we had approximately $6,906,000 in the form of cash and cash equivalents.  During the year ended June 30, 2004 we used$2,647,000 of cash to fund our operations. This is approximately $1,210,000more than the cash used to fund operations in the year ended June 30,2003.  The primary use of cash duringboth periods was to fund continued development of our explosives detectionproducts.  The primary change from theyear ended June 30, 2003 was related to the timing of payment on certaingovernment contracts. Much of our government contract work must adhere toprecise milestones for billing purposes. As such, the work is funded from internal sources until the governmentis billed and cash payment is received. Unbilled revenues recognized under government contracts accounts formost of the $1,365,000 increase in our accounts receivable.  During the year we also transitioned our prostateseeds business from a distributor based sales model to a direct, in-house salesforce.  This resulted in a short-termadditional expense while our sales force ramped up their efforts to cover thecustomer accounts formally serviced by the distributor.

 

In order to fund our continuing investment in ourgrowing businesses, we raised $9,891,000, net of issuance costs, in privateplacements of preferred and common stock and an additional $559,000 through theexercise of employee stock options and issuances from the Employee StockPurchase Plan.  We expect to use thiscash to help fund our operations and to invest in new businessopportunities.  In addition, we used$1,579,000 of the cash raised to repay the loan on semiconductor manufacturingequipment purchased in 2002.

 

We expect the cash we haveon hand combined with our cash flow from operations will be sufficient to fundour working capital in the next twelve months.

 

3

----

 

On October 7, 2002, the Company issued 250,000shares of Series A 7% Cumulative Convertible Preferred Stock (“Series A”)having a stated value of $10 per share, pursuant to a Securities PurchaseAgreement executed on October 7, 2002 with the Laurus Master Fund, Ltd(Laurus). The Company received $2,500,000 in gross proceeds, less a managementand placement agent fee of approximately $300,000, and related transactioncosts of approximately $101,000.  .  The Company also granted the investor asecurity interest in substantially all of the Company’s assets.  In connection with the issuance of the SeriesA, the investor received a warrant to purchase 55,000 shares of the Company’scommon stock.  The common stock purchasewarrant may be exercised at any time and is valid for five years from the dateof issuance at an exercise price of $6.23 per share.

 

In accordance with the provisions of Emerging IssuesTask Force (EITF) Issue 00-27, “Application of EITF Issue No. 98-5 ‘Accountingfor Convertible Securities with Beneficial Conversion Features of ContingentlyAdjustable Conversion Ratios’, to Certain Convertible Securities”, which becameeffective in November 2000, the allocated value of the Series A containeda beneficial conversion feature calculated based on the difference between theeffective conversion price of the proceeds allocated to the Series A and the fairmarket value of the common stock at the date of issuance.  The discount arising from the beneficialconversion feature aggregated $537,000. The discount was being amortized and recorded as a preferred dividendduring the period from the issuance of the preferred stock to the mandatoryredemption date of April 7, 2004 or the actual conversion date, whicheveris earlier.

 

The Company valued the Series A at issuance at$1,434,000 based on the relative fair market values of the financialinstruments issued in connection with this placement, net of offering costs andthe beneficial conversion feature.  Theamounts recorded in the financial statements represent the amounts attributedto the sale of the preferred stock, net cash proceeds of $2,099,000 ($401,000of issuance costs incurred), amount allocated to warrants of $128,000, and theamount of the discount related to the value of beneficial conversion feature of$537,000.  The Company was accretingthese discounts on the carrying value of the preferred stock to its redemptionvalue of $2,500,000 at April 7, 2004, or the actual conversion date,whichever is earlier.  The accretion ofthese amounts is being recorded as a preferred dividend during the period ofredemption.

 

As of June 30, 2004, all amounts were fully accretedand the principal balance of the Series A has been fully converted.  All Series A shares have been converted into672,458 shares of common stock.  Duringthe years ended June 30, 2004 and 2003, approximately $564,000 and$696,000, respectively, were accreted.

 

On August 28,2003, the Company issued 200,000 shares of Series B 5% Cumulative ConvertiblePreferred Stock (“Series B”) having a stated value of $10 per share, pursuantto a Securities Purchase Agreement executed on August 28, 2003 with Laurus..  The Company received $2,000,000 ingross proceeds, less a management and placement agent fee of approximately$108,000, and related transaction costs of approximately $70,000.  The terms of the Series B provide forrepayment with shares of the Company’s common stock or in cash, pursuant to anamortization schedule.  The Company alsoissued to Laurus a warrant to purchase 25,000 shares of common stock at $6.88per share and 45,000 shares of common stock at $8.25 per share.  The Securities Purchase Agreement alsoprovides for a security interest in substantially all of the Company’s assetsand provides Laurus a right of first refusal on future financing arrangementsduring the Term of the agreement.

 

In accordance with the provisions of EITF Issue 00-27,the allocated value of the Series B contained a beneficial conversion featurecalculated based on the difference between the effective conversion price ofthe proceeds allocated to the Series B and the fair market value of the commonstock at the date of issuance.  Thediscount arising from the beneficial conversion feature aggregated$826,000.  The discount was beingamortized and recorded as a preferred dividend during the period from theissuance of the preferred stock to the mandatory redemption date ofMarch 1, 2005, or the actual conversion date, whichever is earlier.

 

The Company valued the Series B at issuance to be$812,000 based on the relative fair market values of the financial instrumentsissued in connection with this placement, net of offering costs, and thebeneficial conversion feature.  Theamounts recorded in the financial statements represent the amounts attributedto the sale of the preferred stock, net cash proceeds of $1,822,000 ($178,000of issuance costs incurred), amount allocated to warrants of $184,000, and theamount of the discount related to the value of beneficial conversion feature of$826,000.  The

 

4

----

 

Company accreted these discounts on the carrying value of the preferredstock to its redemption value of $2,000,000. The accretion of these amounts was being recorded as a preferreddividend in the period of redemption.  Asof June 30, 2004, all amounts were fully accreted and the principalbalance of the Series B has been fully converted.  During the year ended June 30, 2004, theCompany accrued approximately $63,000 of dividends. All Series B shares andrelated accrued dividends had been converted into 371,336 shares of commonstock.  During the year endedJune 30, 2004, approximately $1,287,000 was accreted. 

 

OnNovember 25, 2003, the Company issued 250,000 shares of Series C 5%Cumulative Convertible Preferred Stock (“Series C”) having a stated value of$10 per share, pursuant to a Securities Purchase Agreement executed on November 25,2003 with Laurus .  The Company received$2,500,000 in gross proceeds, less a management and placement agent fee ofapproximately $125,000, and related transaction costs of approximately $86,000.  The terms of the Series C provide forrepayment with shares of the Company’s common stock or in cash, pursuant to anamortization schedule.  Repayment of theSeries C commenced on March 31, 2004. The Company has the sole option to determine whether to satisfy paymentof the monthly amount in full on each repayment date either in cash or inshares of common stock, or a combination of both.  If the payment of the monthly amount is madein common stock, the fixed conversion price is $6.75.  The Company also issued to Laurus a warrantto purchase 50,000 shares of common stock at $8.44 per share and 50,000 sharesof common stock at $10.13 per share.  TheSecurities Purchase Agreement also provides for a security interest insubstantially all of the Company’s assets and provides Laurus a right of firstrefusal on future financing arrangements during the Term of the agreement.  In the event Laurus declines to exercise itsright of first refusal, Laurus hereby agrees to enter into such documentationas shall be reasonably requested by the Company in order to subordinate itsrights under the Series C agreement to the subsequent financier.  The Company is utilizing the proceeds of thisfinancing to purchase an ion implanter and for general working capitalpurposes.

 

In accordance with the provisions of EITF Issue 00-27,the allocated value of the Series C contained a beneficial conversion featurecalculated based on the difference between the effective conversion price ofthe proceeds allocated to the Series C and the fair market value of the commonstock at the date of issuance.  Thediscount arising from the beneficial conversion feature aggregated$700,000.  The discount is being accretedand recorded as a preferred dividend during the period from the issuance of thepreferred stock to the mandatory redemption date of June 1, 2005, or theactual conversion date, whichever is earlier using the effective interestmethod.

 

The Company valued the Series C at issuance to be$1,284,000 based on the relative fair market values of the financialinstruments issued in connection with this placement, net of offering costs andthe beneficial conversion feature.  Theamounts recorded in the financial statements represent the amounts attributedto the sale of the preferred stock, net cash proceeds of $2,289,000 ($211,000of issuance costs incurred), the amount allocated to warrants of $305,000, andthe amount of the discount related to the value of beneficial conversionfeature of $700,000.  The Company isaccreting these discounts on the carrying value of the preferred stock to its redemptionvalue of $2,500,000 through June 1, 2005, or the actual conversion date,whichever is earlier.  The accretion ofthese amounts is being recorded as a preferred dividend in the period ofredemption.

 

As of June 30, 2004, 118,125 shares of Series Cwere converted into 175,000 shares of common stock at the price of $6.75 pershare.  The outstanding principal atJune 30, 2004, is $1,318,750. During the year ended June 30, 2004,approximately $638,000 was accreted. During the year ended June 30, 2004, the Company accruedapproximately $64,000 of dividends.

 

We are developing several explosive detection systemsthat could be used in airports, public and government buildings, and sportingevent facilities.  The systems use ourproprietary Laser IMS technology, which includes the use of laser beams incombination with ion mobility spectrometry, to electronically detect minutequantities of explosive vapor molecules in the air.  This project has been ongoing since approximatelyMay 1999.  In November 2001, wedeveloped a portable prototype and in December 2001 we demonstrated it tothe U.S. Department of Transportation. Following this demonstration, we decided to pursue the technology.  At present, we are developing both portableand bench-top systems for use in airports and Department of Defensefacilities.  Prototype units have beentransported to the Department of Defense and Department of Transportationfacilities for demonstration and evaluation.

 

This project is currently being undertaken by both ourinternal scientists and outside contractors. The development of new applications is typically funded throughgovernment grants or internal funding. Originally, we funded a research and development program for theelectronic detection system to produce enough data to write grant proposals forthe Department of Defense to detect unexploded bombs and mines.  Since March 2000, we have

 

5

----

 

received seven contracts totaling $1,789,000 for detection of toxicchemicals or explosives from agencies such as the Departments of the Army, AirForce, Marine Corps and Navy; as well as the National Institutes of Health andthe Department of Homeland Security.  Inaddition, on August 12, 2002, we signed a Cooperative Research andDevelopment Agreement with an agency of the Department of Homeland Securitywhich will permit us and the government to exchange critical test data and forus to deliver a certain number of units to the Department of Homeland Securityfor independent evaluation and field testing.

 

In June 2000, we developed our first generationdevice, which demonstrated sensitivity to the explosive TNT.  In June 2001, we developed a secondgeneration prototype with increased sensitivity and selectivity.  This device can detect and specify anincreasing number of compounds within various explosive materials.  The explosives that have been tested to dateare TNT, RDX, PETN, EGDN, and DNT.  RDXis the primary component of C3 and C4 explosives, such as Datasheet and Semtex,as well as certain types of black powder explosives.  We believe these explosives represent themajority of the explosives presently used in terrorist activities.  After the attack on the World Trade Centeroccurred on September 11, 2001, management made the decision to continuethe internal funding of the project rather than await funding throughgovernment grants.  Our electronicdetection system has been subjected to controlled testing by third parties andsuccessfully detected C4.  As a result ofthe successful demonstration, we believed it was appropriate to further pursuethe commercial development of our electronic detection system device.

 

Consistent with our policy to protect our proprietarytechnologies, we have submitted six patent applications to the United StatesPatent and Trademark Office.  Thesepatent applications will cover specific design configurations that areresponsible for our improved vapor detection sensitivity.

 

We are developing several versions of our explosivesdetection systems, including: (i) a table-top unit, which can be used to screenpassengers and carry-on baggage in airports; and (ii) a portable system, whichcan be used to replace bomb-sniffing dogs to clear buildings, aircrafts, orships where hidden bombs are believed to exist. We received $600,000 from the U.S. Navy in November 2002 forfurther development of the portable device. This device was delivered to the U.S. Navy for testing in May 2003.  Tests were successfully completed and inDecember 2003, the U. S. Navy awarded the Company an additional $1,300,000to turn this prototype into a manufacturable unit and deliver three units fortesting. We plan to first market these systems to U.S. government agencies foruse in airports, government buildings and facilities.

 

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

 

We will require substantial funds for further researchand development, regulatory approvals and continued expansion ofcommercial-scale manufacturing capabilities, and the marketing of ourproducts.  Our capital requirementsdepend on numerous factors, including but not limited to, the progress of ourresearch and development programs; the cost of filing, prosecuting, defendingand enforcing any intellectual property rights; competing technological andmarket developments; changes in our development of commercialization activitiesand arrangements; and the purchase of additional facilities and capitalequipment.

 

As of June 30, 2004, we were conducting ouroperations with approximately $6,906,000 in cash and cash equivalents.  We estimate such amounts combined with ourcash flow from operations will be sufficient to fund our working capital in thenext twelve months.  Future expendituresfor research and product development, especially relating to outside testing,are discretionary and, accordingly, can be adjusted, as can certain selling,general and administrative expenses, based on the availability of cash.

 

The Company’s future minimum payments undercontractual obligations related to capital leases, operating leases and termnotes as of June 30, 2004 are as follows:

 

6

----

 
| ** **                 | ** ** | **Capital  Leases** | ** ** | **Operating  Lease** | ** ** | **Axcelis  Technologies,  Inc. (1)** | ** ** | **MED-TEC (2)** | ** ** | **Total** | ** ** |
|----------------------------|------------|---------------------|------------|----------------------|------------|--------------------------------------|------------|-----------------|------------|-----------|------------|
| Year ending  June 30: |       |                |       |                 |       |                                 |       |            |       |      |       |
| 2005                       |       | $                   | 4,000      |                 | $          | 557,000                              |       | $               | 97,000     |      | $          | 394,000 |   | $ | 1,052,000 |   |
| 2006                       |       | 5,000               |       | 609,000              |       |                                 |       | 212,000         |       | 826,000   |       |
| 2007                       |       | 1,000               |       | 610,000              |       |                                 |       |            |       | 611,000   |       |
| 2008                       |       |                |       | 611,000              |       |                                 |       |            |       | 611,000   |       |
| 2009                       |       |                |       | 306,000              |       |                                 |       |            |       | 306,000   |       |
|                       |       |                |       |                 |       |                                 |       |            |       |      |       |
| Total                      |       | $                   | 10,000     |                 | $          | 2,693,000                            |       | $               | 97,000     |      | $          | 606,000 |   | $ | 3,406,000 |   |

 

----

(1)  Should theCompany fail to pay the balance in full, Axcelis has the right to recover thesystem from the Company.  As ofSeptember 30, 2004, this obligation has been paid in full.

 

(2) Relates to MED-TEC payment obligation (See Note 15of financial statements).

 

On June 30, 2004, weentered into an employment agreement with Dr. Anthony J. Armini, the Company’sPresident and CEO, with an initial term of three years and an automatic renewalfor a successive period of three years, unless the we or Dr. Armini give theother party not less than three months written notice of non-renewal.  Under this employment agreement, Dr. Arminiserves as our president and chief executive officer at a base salary of up to$210,000.  In addition, Dr. Armini mayparticipate in our employee fringe benefit plans or programs generallyavailable to employees of comparable status and position.  We are entitled to terminate his employmentfor any material breach of his employment agreement at any time upon at least30 days written notice.  In the event weterminate Dr. Armini’s employment without cause, we will pay him 12 monthssalary.  Under his employment agreement,he is subject to restrictive covenants, including confidentialityprovisions.  Also, during his employmentand for a period of two years after the term of the employment agreement, Dr.Armini is subject to a non-competition provision.

 

On June 30, 2004, we entered into an employmentagreement Dr. Stephen Bunker, the Company’s Vice President and Chief Scientist,with an initial term of three years and an automatic renewal for a successiveperiod of three years, unless the we or Dr. Bunker give the other party notless than three months written notice of non-renewal.  Under this employment agreement, Dr. Bunkerserves as our vice president and chief executive scientist at a base salary ofup to $150,000.  In addition, Dr. Bunkermay participate in our employee fringe benefit plans or programs generallyavailable to employees of comparable status and position.  We are entitled to terminate his employmentfor any material breach of his employment agreement at any time upon at least30 days’ written notice.  In the event weterminate Dr. Bunker’s employment without cause, we will pay him 12 monthssalary.  Under his employment agreement,he is subject to restrictive covenants, including confidentialityprovisions.  Also, during his employmentand for a period of two years after the term of the employment agreement, Dr.Bunker is subject to a non-competition provision.

 

*Critical Accounting Policies*

 

Our significantaccounting policies are described in Note 2 to the financial statementsincluded in Item 7 of our Form 10-KSB as of June 30, 2004.  Our discussion and analysis of our financialcondition and results of operations are based upon the financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  On an on-going basis,we evaluate our estimates, including those related to bad debts, productreturns, inventories, investments, intangible assets and warrantyobligations.  We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. In the past, actual results have not been materially different from ourestimates.  However, results may differfrom these estimates under different assumptions or conditions.  There has been no change to our criticalaccounting policies during the year ended June 30, 2004.

 

The Company hasidentified the following as critical accounting policies, based on thesignificant judgments

 

7

----

 

and estimates used in determining the amounts reported in its financialstatements:

 

•                  *Revenue Recognition –Product and Government Contract Revenues*

 

The Companyrecognizes revenue when there is persuasive evidence of an arrangement with thecustomer which states a fixed and determinable price and terms, delivery of theproduct has occurred or the service performed in accordance with the terms ofthe sale, and collectibility of the sale is reasonably assured.

 

Government contract revenue under cost-sharingresearch and development agreements is recognized as eligible research anddevelopment expenses are incurred.  TheCompany’s obligation with respect to these agreements is to perform theresearch on a best-efforts basis.  Forgovernment contracts with a deliverable, revenue is recognized on a percentageof completion basis.

 

•                  *Accounts Receivable and Allowance for DoubtfulAccounts*

 

The Company maintains allowances for estimated losses resulting fromthe inability of its customers to make required payments.  Judgments are used in determining theallowance for doubtful accounts and are based on a combination of factors.  Such factors include historical collectionexperience, credit policy and specific customer collection issues.  In circumstances where the Company is awareof a specific customer’s inability to meet its financial obligations to us(e.g., bankruptcy filings), we record a specific reserve for bad debts againstamounts due to reduce the net recognized receivable to the amount we reasonablybelieve will be collected.  We performongoing credit evaluations of our customers and continuously monitorcollections and payments from our customers. While actual bad debts have historically been within our expectationsand the provisions established, we cannot guarantee that we will continue toexperience the same bad debt rates that we have in the past.  A significant change in the liquidity orfinancial position of any of our customers could result in the uncollectibilityof the related accounts receivable and could adversely impact our operatingcash flows in that period.

 

•                  *Sales Returns and Allowances*

 

The Company records reductions to revenue for estimated customerreturns and allowances. We record estimated allowances against revenues in thesame period the revenue is recorded. These estimates are based upon historical analysis of our credit memodata and other known factors for pricing and disputes that arise in the normalcourse of business.  To date, allowanceshave not been significant.  Actualreturns may differ significantly from our estimates if factors such as economicconditions or competitive conditions differ from our expectations.

 

•                  *Inventories*

 

We value our inventories at lower of cost or market.  Cost is determined by the first-in, first-out(FIFO) method, including material, labor and factory overhead.  In assessing the ultimate realization ofinventories, management judgment is required to determine the reserve forobsolete or excess inventory.  Inventoryon hand may exceed future demand either because the product is excess, orbecause the amount on hand is more than can be used to meet future need.  We provide for the total value of inventoriesthat we determine to be obsolete or excess based on criteria such as customerdemand and changing technologies.  AtJune 30, 2004, our inventory consisted of:

 
| Raw materials      |   | $       | 308,000 |   |
|--------------------|--------|---------|---------|--------|
| Work-in-progress   |   | 97,000  |    |
| Finished goods     |   | 157,000 |    |
| Inventory  Reserve |   | (81,000 | )       |
|               |   | $       | 481,000 |   |

 

•                  *Warranties*

 

We provide for the estimated cost of product warranties at the timerevenue is recognized.  We record anestimate for warranty related costs at the time of sale based on our actualhistorical return rates and repair costs. While our warranty costs have historically been within our expectationsand

 

8

----

 

the provisions established, we cannot guarantee that we will continueto experience the same warranty return rates or repair costs that we have inthe past.  A significant increase inwarranty return rates or costs to repair our products could have a materialadverse impact on our operating results for the period or periods in which suchreturns or additional costs materialize.

 

•                  *Valuation of Certain Marketable Equity Securities*

 

The Company currently classifies its investment securities asavailable-for-sale securities. Pursuant to Statement of Financial AccountingStandards (SFAS) No. 115, “Accounting for Certain Investments in Debt andEquity Securities” such securities are measured at fair market value in thefinancial statements with unrealized gains or losses recorded in accumulatedother comprehensive income until the securities are sold or otherwise disposedof.  However, in accordance with SFAS No.115, a decline in fair market value below cost that is other than temporary isaccounted for as a realized loss.  Todate, we have not experienced any realized losses.

 

•      *Income Taxes*

 

The income tax accounting process involves estimating our actualcurrent exposure together with assessing temporary differences resulting fromdiffering treatment of items for tax and accounting purposes.  These differences result in the recognitionof deferred tax assets and liabilities. We must then record a valuation allowance to reduce our deferred taxassets to the amount that is more likely than not to be realized.

 

Significant management judgment is required in determining ourprovision for income taxes, our deferred tax assets and liabilities and anyvaluation allowance recorded against deferred tax assets.  We have recorded a full valuation allowanceagainst our deferred tax assets of $6,359,000 as of June 30, 2004, due touncertainties related to our ability to utilize these assets.  The valuation allowance is based on ourestimates of taxable income and the period over which our deferred tax assetswill be recoverable.  In the event thatactual results differ from these estimates or we adjust these estimates infuture periods we may need to adjust our valuation allowance which couldmaterially impact our financial position and results of operations.

 

Recent Accounting Pronouncements

 

In December 2003, the Securities and Exchange Commission (“SEC”)published Staff Accounting Bulletin (“SAB”) No. 104, “RevenueRecognition.”  SAB No. 104 was effectiveupon issuance.  The adoption of SAB No.104 did not have an effect on the Company’s financial position, results ofoperations, or cash flows. 

 

9

----

 

**ITEM 8          Changes In and Disagreements WithAccountants on Accounting and Financial Disclosure**

** **

None

** **

**ITEM 8A. CONTROLS AND PROCEDURES**

 

EVALUATION OF OUR DISCLOSURE CONTROLS AND INTERNAL CONTROLS

 

As of the end of the period covered by this AnnualReport, we evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures (“Disclosure Controls”) and our internalcontrols and procedures 

 

10

----

 

for financial reporting (“Internal Controls”). This evaluation (the“Controls Evaluation”) was done under the supervision and with theparticipation of our management, including our Chief Executive Officer (“CEO”)and Chief Financial Officer (“CFO”). Rules adopted by the SEC require that inthis section of the Annual Report, we present the conclusions of our CEO andthe CFO about the effectiveness of our Disclosure Controls and InternalControls based on and as of the date of the Controls Evaluation.

 

CEO AND CFO CERTIFICATIONS

 

Appearing as exhibits to this Annual Report are“Certifications” of the CEO and the CFO. The Certifications are requiredpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (the “Section 302Certifications”). This section of the Annual Report contains informationconcerning the Controls Evaluation referred to in the Section 302Certifications and this information should be read in conjunction with theSection 302 Certifications for a more complete understanding of the topicspresented.

 

DISCLOSURE CONTROLS AND INTERNAL CONTROLS

 

Disclosure Controls are procedures that are designedwith the objective of ensuring that information required to be disclosed in ourreports filed under the Securities Exchange Act of 1934 (“Exchange Act”), suchas this Annual Report, is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms. Disclosure Controlsare also designed with the objective of ensuring that such information isaccumulated and communicated to our management, including the CEO and CFO, asappropriate to allow timely decisions regarding required disclosure. InternalControls are procedures which are designed with the objective of providingreasonable assurance that (1) our transactions are properly authorized,recorded and reported; and (2) our assets are safeguarded against unauthorizedor improper use, to permit the preparation of our financial statements inconformity with generally accepted accounting principles.

 

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS

 

Our management, includingthe CEO and CFO, have concluded that our disclosure controls and procedures aredesigned to provide reasonable assurance of achieving their objectives and haveconcluded that the controls and procedures are effective at that reasonableassurance level.

 

SCOPE OF THE CONTROLS EVALUATION

 

The CEO/CFO evaluation of our Disclosure Controls andInternal Controls included a review of the controls’ objectives and design, thecontrols’ implementation by us and the effect of the controls on theinformation generated for use in this Annual Report. In the course of theControls Evaluation, management sought to identify data errors, controlsproblems or acts of fraud and to confirm that appropriate corrective action,including process improvements, were being undertaken. This type of evaluationwill be done on a quarterly basis so that the conclusions concerning controlseffectiveness can be reported in our Quarterly Reports on Form 10-QSB andAnnual Report on Form 10-KSB. The overall goals of these various review andevaluation activities are to monitor our Disclosure Controls and InternalControls and to make modifications as necessary; our intent in this regard isthat the Disclosure Controls and the Internal Controls will be maintained asdynamic systems that change (including with improvements and corrections) asconditions warrant.

 

Among other matters, management sought in itsevaluation to determine whether there were any “significant deficiencies” or“material weaknesses” in our Internal Controls, or whether we had identifiedany acts of fraud involving personnel who have a significant role in ourInternal Controls. In the professional auditing literature, “significantdeficiencies” are referred to as “reportable conditions”; these are controlissues that could have a significant adverse effect on the ability to record,process, summarize and report financial data in the financial statements. A“material weakness” is defined in the auditing literature as a particularly seriousreportable condition 

 

11

----

 

where the internal control does not reduce to a relatively low levelthe risk that misstatements caused by error or fraud may occur in amounts thatwould be material in relation to the financial statements and not be detectedwithin a timely period by employees in the normal course of performing theirassigned functions.

 

In accordance with SECrequirements, the CEO and CFO note that, during the fiscal year covered by thisAnnual Report it was discovered thatthere was an error in calculation of the fair value of certain warrants issuedto non-employees and warrants issued in connection with the Series B and SeriesC preferred stock issuance, which were used to determine charges to ourstatement of operations during the three and nine months ended March 31,2004.  Our chief executive officer andchief financial officer concluded that the weakness that lead to these errorsdid not constitute a material weakness in internal control.  These amounts were corrected as of August 31,2004 and the financial statements for the third quarter of fiscal 2004 wererestated accordingly.  Managementconcluded that our disclosure controls and procedures were effective becausethe errors were not related to material deficiencies in the design or operationof our internal controls.  Our disclosurecontrols and procedures, which include supervisory review were followed,however the error was not identified.   The independent review and verification procedures, designed to uncoverweaknesses in the Disclosure Controls and Procedures, did not uncover theerror.  Management concluded that theerrors were inadvertent and isolated and related to insufficient supervisorystaff experienced with complicated equity matters.  We have addressed this weakness by updatingour pricing model to ensure the correct tax rate is utilized, educating thestaff and committing to hiring an experienced controller.

 

CONCLUSIONS

 

Based upon the Controls Evaluation, including an assessmentof the weaknesses identified, our CEO and CFO have concluded that, as of theend of the period covered by this Annual Report, our Disclosure Controls areeffective and that our Internal Controls are effective to provide reasonableassurance that our financial statements are fairly presented in conformity withgenerally accepted accounting principles.

 

Subsequent to March 31,2004 and in connection with our year-end audit, it was discovered that therewas an error in the calculation of the fair value of certain warrants issued tonon-employees and warrants issued in connection with the Series B and Series Cpreferred stock issuances, which were used to determine charges to ourstatement of operations during the three and nine months ended March 31,2004.  Our chief executive officer andchief financial officer concluded that the weakness that led to these errorsdid not constitute a material weakness in internal control.  These amounts were corrected as of August 31,2004 and the financial statements for the third quarter of fiscal 2004 wererestated accordingly.  Managementconcluded that our disclosure controls and procedures were effective becausethe errors were not related to material deficiencies in the design or operationof our internal controls.  Our disclosurecontrols and procedures, which include supervisory review were followed,however the error was not identified.   The independent review and verification procedures, designed to uncoverweaknesses in the Disclosure Controls and Procedures, did not uncover theerror.  Management concluded that theerrors were inadvertent and isolated and related to insufficient supervisorystaff experienced with complicated equity matters.  We have addressed this weakness by updatingour pricing model to ensure the correct tax rate is utilized, educating thestaff and committing to hiring an experienced controller.

 

Our independent auditors have reported to our AuditCommittee certain matters involving internal controls that our independentauditors considered to be a reportable condition, but not a material weakness,under standards established by the American Institute of Certified PublicAccountants. The reportable condition relates to the June 30, 2004 financialclose process, including financial statement account analysis.  The reportable conditionprimarily resulted from inadequate staffing and supervision over the review andfinancial statement close function.  Thisreportable condition led to the untimely reconciliation of certain accountbalances and financial information, which contributed to numerous fourthquarter adjustments.  The nature of theseadjustments related to the review of certain equity matters and the impact ofan incorrect tax rate used in the calculation of non-cash compensation usingthe Black Scholes model.  In addition,several other Balance Sheet accounts were reclassified to comply with GAAP,having no impact on the net income.

The reportable conditionhas been discussed in detail among management, our Audit Committee and our independentauditors, and we are committed to resolvingthe underlying weakness which led to this reportable condition.  Management has committed to increase thestaff by hiring an experienced controller to review the account balances andfinancial statement close process prior to review by the CFO.

 

In addition, the company has made changes in itsinternal controls as a result of the reportable condition.  These changes include our commitment to putin place the appropriate resources to support our financial close processes. Aspart of this commitment, we have begun the process to identify and hireadditional personnel to assist with the financial close process.  In the interim, to mitigate the weakness, wehave contracted with an experienced independent accountant to assist with thefinancial close process until we identify a permanent hire for the financedepartment.  We expect to complete thisinterview process by the end of the second quarter of fiscal year 2005.

 

12

----

**ITEM13.****                      EXHIBITINDEX**

** **

The following are filedas part of this Form 10-KSB/AAmendment No 2

** **
| **Exhibit  No.** | ** ** | **Ref.  No.** | ** ** | ** **                                                                                                                           |
|------------------|------------|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|
|             |       |          |       |                                                                                                                                 |
| 3.2              |       | 1             |       | By-Laws of the  Company                                                                                                              |
| 3.3              |       | 1             |       | Articles of  Amendment to the Articles of Organization of the Company, dated June 9, 1999                                            |
| 3.4              |       | 1             |       | Restated  Articles of Organization of the Company, dated June 9, 1999                                                                |
| 3.5              |       | 5             |       | Certificate of  Vote of Directors establishing Series A 7% Cumulative Convertible Preferred  Stock, dated October 7, 2002            |
| 3.6              |       | 6             |       | Certificate of  Vote of Directors establishing Series B 5% Cumulative Convertible Preferred  Stock, dated August 26, 2003            |
| 3.7              |       | 1             |       | Certificate of  Vote of Directors establishing Series C 5% Cumulative Convertible Preferred  Stock, dated November 25, 2003.         |
| 4.1              |       | 2             |       | Specimen  certificate for the Common Stock of the Company                                                                            |
| 4.2              |       | 2             |       | Specimen  certificate for the Redeemable Warrants of the Company                                                                     |
| 4.3              |       | 3             |       | Specimen  certificate for the Units of the Company                                                                                   |
| 4.4              |       | 5             |       | Specimen  Certificate of the Series A 7% Cumulative Convertible Preferred Stock                                                      |
| 10.3             |       | 1             |       | 1992 Stock  Option Plan                                                                                                              |
| 10.31            |       | 1             |       | Form of Stock  Option Agreement under the 1992 Stock Option Plan                                                                     |
| 10.32            |       | 1             |       | 1998 Incentive  and Nonqualified Stock Option Plan                                                                                   |
| 10.33            |       | 2             |       | Form of  Incentive Stock Option under the 1998 Incentive and Nonqualified Stock Option  Plan                                         |
| 10.34            |       | 2             |       | Form of  Nonqualified Stock Option under the 1998 Incentive and Nonqualified Stock  Option Plan                                      |
| 10.35            |       | 2             |       | Form of  Nonqualified Stock Option for Non-Employee Directors under the 1998 Incentive  and Nonqualified Stock Option Plan           |
| 10.54            |       | 4             |       | Research and  Development Agreement, dated March 13, 2000, by and between Implant Sciences  Corporation and Cardiotech International |
| 10.55            |       | 4             |       | Amendment to  Distributorship Agreement between Med-Tec Iowa, Inc., and Implant Sciences  Corporation dated 26 January 2000          |
| 10.69            |       | 5             |       | Securities  Purchase Agreement between Implant Sciences Corporation and Laurus Master  Fund, Ltd. Dated October 7, 2002              |
| 10.69.1          |       | 6             |       | Amendment #1 to  Item 10.69                                                                                                          |
| 10.70            |       | 5             |       | Security  Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd.  Dated October 7, 2002.                        |
| 10.71            |       | 5             |       | Common Stock  Purchase Warrant for 55,000 shares issued to Laurus Master Fund, Ltd. Dated  October 7, 2002.                          |
| 10.72            |       | 6             |       | Securities  Purchase Agreement between Implant Sciences Corporation and Laurus Master Fund,  Ltd. Dated August 28, 2003.             |
| 10.73            |       | 6             |       | Security  Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd.  Dated August 28, 2003.                        |

 

13

----

 
| **Exhibit  No.** | ** ** | **Ref.  No.** | ** ** | ** **                                                                                                                                                                   |
|------------------|------------|---------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.74            |       | 6             |       | Common Stock Purchase  Warrant for 70,000 shares issued to Laurus Master Fund, Ltd. Dated August 28,  2003.                                                                  |
| 10.75            |       | 7             |       | Securities  Purchase Agreement between Implant Sciences Corporation and Laurus Master  Fund, Ltd, Dated November 25, 2003.                                                   |
| 10.76            |       | 7             |       | Security  Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd.  Dated November 25, 2003.                                                              |
| 10.77            |       | 7             |       | Common Stock  Purchase Warrant for 100,000 shares issued to Laurus Master Fund, Ltd. Dated  November 25, 2003.                                                               |
| 10.78            |       | 8             |       | Exchange and  Venture agreement between Implant Sciences Corporation, CardioTech  International, and CorNova, Inc. dated March 5, 2004.                                      |
| 10.78            |       | 9             |       | Form of  Securities Purchase Agreement between Implant Sciences and certain investors                                                                                        |
| 10.79            |       | 9             |       | Form of Warrant  dated June, 17, 2004                                                                                                                                        |
| 10.80            |       | 9             |       | Form of  Additional Investors Rights Agreement dated June 17, 2004 between Implant  Sciences and certain investors                                                           |
| 10.81            |       | 9             |       | Form of  Registration Rights Agreement dated June 17, 2004 between Implant Sciences  and certain investors                                                                   |
| 10.82            |       | 10            |       | Employment  Agreement with Anthony J. Armini, dated June 30, 3004                                                                                                            |
| 21.1             |       | 1             |       | Subsidiaries of  the Company                                                                                                                                                 |
| 23.1             |       |          |       | Consent of BDO  Seidman, LLP, independent registered public accounting firm                                                                                                  |
|             |       |          |       |                                                                                                                                                                         |
| 31.1             |       |          |       | Certification of  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                        |
| 31.2             |       |          |       | Certification of  the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                    |
| 32.1             |       |          |       | Certification of  the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.  1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|             |       |          |       |                                                                                                                                                                         |
|             |       | 1             |       | 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.             |
|             |       | 2             |       | Previously filed  in Amendment No. 1 to the Registration Statement, filed on December 21, 1998,  and is incorporated herein by reference.                                    |
|             |       | 3             |       | Previously filed  in Amendment No. 2 to the Registration Statement, filed on February 11, 1999,  and is incorporated herein by reference.                                    |
|             |       | 4             |       | 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.                  |
|             |       | 5             |       | Previously filed  in the Annual Report on Form 10 KSB for the fiscal year ended June 30, 2002  filed on October 15, 2002 and is incorporated herein by reference             |
|             |       | 6             |       | Previously filed  in the Annual Report on Form 10 KSB for the fiscal year ended June 30, 2003  filed on September 29, 2003 and is incorporated herein by reference           |
|             |       | 7             |       | Previously filed  on Form 8-K on December 12, 2003, and is incorporated herein by reference                                                                                  |
|             |       | 8             |       | Previously filed  on Form 8-K on March 18, 2004, and is incorporated herein by reference                                                                                     |
|             |       | 9             |       | Previously filed  on Form S-3 on July 14, 2004, and is incorporated herein by reference                                                                                      |
|             |       | 10            |       | Previously filed in the Annual Report on Form  10-KSB for the fiscal year ended June 30, 2004, and is incorporated herein by  reference.                                     |

 

14

----

 

**SIGNATURES**

 

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

 
|                 |   | Implant Sciences Corporation        |
|----------------------|--------|-------------------------------------|
|                 |   |                                |
| Date: June  29, 2005 |   | /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 hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| Date: June  29, 2005      |   | /s/ Anthony J. Armini                        |   |
|---------------------------|--------|----------------------------------------------|--------|
|                      |   | Anthony J. Armini                            |
|                      |   | President, Chief Executive Officer,          |
|                      |   | Chairman of the Board of Directors           |
|                      |   | (Principal Executive Officer)                |
|                      |   |                                         |
|                      |   |                                         |
| Date: June  29, 2005      |   | /s/ Diane J. Ryan                            |   |
|                      |   | Diane J. Ryan                                |
|                      |   | VP Finance and CFO                           |
|                      |   | (Principal Financial and Accounting Officer) |
|                      |   |                                         |
|                      |   |                                         |
| Date: June  29, 2005      |   | /s/ Stephen N. Bunker                        |   |
|                      |   | Stephen N. Bunker                            |
|                      |   | Vice President and Chief Scientist,          |
|                      |   | Director                                     |
|                      |   |                                         |
| Date:  June 29, 2005 |   | /s/ Michael Szycher                          |   |
|                      |   | Michael Szycher, Director                    |
|                      |   |                                         |
|                      |   |                                         |
| Date:  June 29, 2005 |   | /s/ David Eisenhaure                         |   |
|                      |   | David Eisenhaure, Director                   |
|                      |   |                                         |
|                      |   |                                         |
| Date:  June 29, 2005 |   | /s/ Gerald Entine                            |   |
|                      |   | Gerald Entine, Director                      |

 

15

----