<PAGE>   1

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

                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                  FORM 10-KSB

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934.

                   FOR THE FISCAL YEAR ENDING JUNE 30, 2000.

                                       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)

<TABLE>
<S>                                            <C>
                MASSACHUSETTS                                    04-2837126
       (STATE OR OTHER JURISDICTION OF                         (IRS EMPLOYER
        INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NUMBER)
     107 AUDUBON ROAD, #5, WAKEFIELD, MA                           01880
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

                                  781-246-0700
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
             -------------------                 -----------------------------------------
<S>                                            <C>
         COMMON STOCK, $.10 PAR VALUE          AMERICAN STOCK EXCHANGE, BOSTON STOCK EXCHANGE
                   WARRANTS                    AMERICAN STOCK EXCHANGE, BOSTON STOCK EXCHANGE
</TABLE>

     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 no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is 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.  [X]

     State issuer's revenues for its most recent fiscal year: $3,973,059

     The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $57,794,330 as of June 30, 2000 (based on the
closing price for such stock as of June 30, 2000).

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

<TABLE>
<CAPTION>
                    CLASS                               OUTSTANDING AT JUNE 30, 2000
                    -----                               ----------------------------
<S>                                            <C>
         Common Stock, $.10 par value                            5,708,082
</TABLE>

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's Definitive Proxy Statement for its 2000 Annual
Meeting of Stockholders, expected to be filed with the Securities and Exchange
Commission on or before October 28, 2000, are incorporated by reference into
Items 9, 10, 11 and 12 of this Annual Report on Form 10-KSB.

                      This document consists of 42 pages.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2

                                     PART 1

ITEM 1.  OUR BUSINESS

     In addition to historical information, this Annual Report on Form 10-KSB
contains forward looking statements. The forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward-looking statements. 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 sixteen 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. We are applying this technology to manufacture 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 will be 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. On May 26, 1999, we
received notification of pre-market clearance for our Iodine-125 seed from the
Food and Drug Administration ("FDA"), and 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. In the interventional cardiology field, we are
developing internally, as well as with the support of Phase I and Phase II
government grants, temporary coronary brachytherapy devices and radioactive
coronary stents 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, temporary coronary brachytherapy devices and
radioactive coronary stents 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 sixteen issued United States patents and eight United States
patents pending covering our technologies and processes. We also have four
international patent applications pending.

     Although there are a wide range of commercial applications for our
proprietary technologies, we have chosen to focus on the medical device
industry. Within the medical device industry, we are concentrating on the
prostate cancer, interventional cardiology and orthopedic segments.

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, wettability 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
<PAGE>   3

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 sixteen patents issued and
eight 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.

     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.

CURRENT AND FUTURE PRODUCTS

  Prostate Cancer Seeds

     General.  The alternatives generally presented to patients diagnosed with
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 is 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. On May 26, 1999, we received
notification of pre-market clearance from the Food and Drug Administration for
our iodine-125 seed and have recently begun manufacturing seeds for commercial
distribution. These seeds are used primarily in the treatment of prostate
cancer. A twelve-year study conducted by the Northwest Hospital, Seattle,
Washington (the "Northwest Hospital Study") 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

                                        2
<PAGE>   4

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 ("NRC") requirement administered by the Commonwealth of
Massachusetts as a NRC Agreement State. 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.

     Manufacturing.  Management believes that the Company's manufacturing
process will result in lower capital equipment and manufacturing assembly costs
and will be less hazardous than the manufacturing processes used by our
competitors. Other radioactive prostate seed manufacturers use radioactive wet
chemistry during seed assembly for iodine-125 products. These technologies
require much higher capital equipment costs than the Company's technologies. The
Company's dry process, for which it has patents issued and pending, uses a dry
fabrication process, and we believe it requires fewer personnel and yields
faster throughput. Following seed assembly we send our seeds to a nuclear
reactor for activation. Using this dry fabrication process, seeds 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 strength.

     Sales.  We intend to manufacture and sell our radioactive prostate seeds to
distributors of medical products, major medical centers, purchasing groups and
hospitals. 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. We have
begun manufacturing in preparation of upcoming commercial sales.

  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
radioactive 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 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.  We have five issued patents and have applied for four
additional United States patents and have pending one international patent
application for, new methods of implanting radioactivity onto coronary stents
that we believe will reduce the incidence of restenosis. We have developed a
proprietary technique for the ion implantation of both pure beta and pure x-ray
emitters into stents, which management believes has significant advantages over
other methods. These radioisotopes produce short-range radiation that only
affect the targeted tissues, rather than the entire body or region.

                                        3
<PAGE>   5

     In fiscal 1998, we were awarded a grant from the National Institutes of
Health ("NIH") 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 NIH 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.

     Manufacturing.  For manufacture of radioactive stents, we use a proprietary
ion implanter that has been optimized for this application. We also have
developed a proprietary ion source which uses a relatively non-toxic form of
phosphorous as the radioactive phosphorous-32 source material. We believe our
proprietary equipment can be used for commercial production with the safety and
quality control required by the FDA. For manufacture of our radiopaque coatings,
we have developed a proprietary gold coating process and have built equipment
that uses unbalanced magnetron sputtering which provides adherent coatings on
implants with complex shapes (such as stents) and which allows for efficient
recovery of precious metals not consumed in the process.

  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 ("CoCr") 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, CoCr 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 CoCr 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 CoCr alloys. Laboratory tests and clinical studies have shown that nitrogen
ion-implanted CoCr 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 the Company's new
second generation orthopedic coating this equipment can provide a ceramic
coating with superior characteristics due to its patented "blended interface"
process.

     Sales.  We currently implant CoCr 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 CoCr
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.

     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 500,000 units in 1995 in the United
States. The Company treats approximately 55,000 units each year using its ion
implantation process for the Howmedica/Osteonics Division of Stryker Corporation
and Biomet,

                                        4
<PAGE>   6

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.

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 ten
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 iodine-125 radioactive seed is done through our
distribution partner MED-TEC Inc. and sales in the other medical device and
semiconductor areas are handled by three full time salespeople or product
managers. 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 recently partnered with MED-TEC, Inc. 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
implantation of radioactivity onto coronary stents directly to stent
manufacturers who will in turn sell the stents 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 and use
press releases. 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.

                                        5
<PAGE>   7

  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 and press releases. 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 ("NASA").

RESEARCH AND DEVELOPMENT

     Our technical staff of 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 ("SBIR") program. We have obtained over $5,500,000 in U.S.
government grants and contracts over the past 10 years.

PATENTS AND PROPRIETARY TECHNOLOGY

     It is our policy is to protect our proprietary position by, among other
methods, filing United States and foreign patent applications. We currently have
sixteen issued United States patents and eight United States patent applications
pending. We also have four international patent applications pending.

     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 and (ii) various types of
radioactive stents.

     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 processes infringe this patent. We plan
to implant radioactivity onto coronary stents manufactured by the patent holder,
its licensees or others. If our plans to implant radioactivity onto the patent
holder's stents do not succeed and/or if we implant radioactivity onto stents
that are not manufactured by the patent holder or its licensees there can be no
assurance that the holder of this patent will not seek to enforce the patent
against us or the manufacturer of the stents, or that we would prevail in any
such enforcement action.

     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.

                                        6
<PAGE>   8

GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS

     Although our core business itself is not directly regulated by the FDA, the
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's radioactive iodine-125 seed is subject to the FDA's 510(k)
notification of pre-market clearance which the Company received on May 26, 1999.
We have begun manufacturing of our iodine-125 radioactive seed and expect to
begin selling these seeds next quarter.

     Supplemental or full pre-market approval ("PMA") reviews require a
significantly longer period. A PMA will be required for our interventional
cardiology devices. Thus, significantly more time will be required to
commercialize applications subjected to PMA 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.

     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.
On July 28, 1999 we received our Radioactive Sealed Source Registration
Certificate, a Nuclear Regulatory Commission ("NRC") requirement administered by
the Commonwealth of Massachusetts as a NRC Agreement State. Furthermore, the
Company's 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 may require special reporting to the United
States Environmental Protection Agency and/or its state counterparts. We 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, temporary
radioactive brachytherapy devices and radioactive coronary stents, we expect to
compete with Nycomed Amersham plc, Theragenics Corp., North American Scientific,
Inc., International Isotopes Inc., Uromed Corporation, UroCor, Inc, Novoste
Corporation and Radiance Medical Systems, Inc. Of these, Nycomed Amersham plc,
Theragenics Corp. and North American Scientific, Inc. serve substantially the
entire radioactive prostate seed market and International Isotopes Inc., Uromed
Corporation and UroCor. Inc. have announced their plans to or have recently
entered the seed market. In addition, our proposed temporary radioactive
brachytherapy devices and radioactive coronary stents 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
                                        7
<PAGE>   9

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 Ion Implant
Corporation. 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.

     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, 2000, we had 60 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.

EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

     Our senior management consists of the following:

<TABLE>
<CAPTION>
NAME                                        AGE                     POSITION
----                                        ---                     --------
<S>                                         <C>    <C>
Anthony J. Armini*........................  62     President, Chief Executive Officer and
                                                   Chairman of the Board of Directors
Stephen N. Bunker*........................  57     Vice President and Chief Scientist,
                                                   Director
Darlene M. Deptula-Hicks*.................  42     Vice President and Chief Financial
                                                   Officer, Treasurer
Alan D. Lucas.............................  44     Vice President of Marketing, Sales and
                                                   Business Development
</TABLE>

---------------
(*) Executive Officer

                                        8
<PAGE>   10

     DR. ANTHONY J. ARMINI has been the President, Chief Executive Officer, and
Chairman of the Board of Directors since the Company's incorporation. From 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. 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.

     DARLENE M. DEPTULA-HICKS joined the Company in July 1998 as Vice President
and Chief Financial Officer. Prior to joining the Company, from 1997 to 1998 Ms.
Deptula-Hicks was the Corporate Controller for ABIOMED, Inc., a medical device
manufacturer. From 1994 to 1997 Ms. Deptula-Hicks was an independent financial
consultant. From 1992 to 1994 Ms. Deptula-Hicks was the Vice President and Chief
Financial Officer of GCA, a division of General Signal Corporation, a
semiconductor equipment manufacturer. Ms. Deptula-Hicks holds a BS in Accounting
and an MBA.

     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.

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

     The Company is not currently a party to any legal proceedings.

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, 2000.

                                    PART II

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

MARKET PRICE

     As of June 30, 2000 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

                                        9
<PAGE>   11

range of high and low closing prices on the American Stock Exchange or Nasdaq
SmallCap Market during the fiscal year.

<TABLE>
<CAPTION>
                                                   JUNE 30, 1999    JUNE 30, 2000
                                                   -------------    -------------
FISCAL YEAR ENDED                                  HIGH     LOW     HIGH     LOW
-----------------                                  -----    ----    -----    ----
<S>                                                <C>      <C>     <C>      <C>
Quarter ended September 30.......................   --       --     7 7/8    3 5/8
Quarter ended December 31........................   --       --     7 3/8    4 1/4
Quarter ended March 31...........................   --       --     11 7/8   6 1/2
Quarter ended June 30............................  8 1/2    7 1/2   10 3/8   8 3/8
</TABLE>

NUMBER OF STOCKHOLDERS

     As of August 15, 2000, there were approximately 748 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

     On March 5, 2000 we sold 500,000 shares of restricted common stock to
MED-TEC Inc.

USE OF PROCEEDS

     We received approximately $3,000,000 in net proceeds from the March 2000
sale of restricted securities to MED-TEC Inc. and we intend to use the proceeds
to complete commercialization of our I-Plant radioactive seeds, for continued
research and development on future radioactive cardiology devices and general
corporate purposes.

                                       10
<PAGE>   12

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this document. This Annual Report on Form 10K-SB
contains forward looking statements. All 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 ot 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.

OUR BUSINESS

     Implant Sciences Corporation (the "Company"), incorporated in August 1984
has, over the past sixteen 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
theraputic devices. We are applying this technology to manufacture 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 will be 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. On May 26, 1999, we
received notification of pre-market clearance for our Iodine-125 seed from the
Food and Drug Administration ("FDA"), and 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. In the interventional cardiology field, we are
developing internally, as well as with the support of Phase I and Phase II
government grants, temporary coronary brachytherapy devices and radioactive
coronary stents 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, temporary coronary brachytherapy devices and
radioactive coronary stents 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 sixteen issued United States patents and eight United States
patents pending covering our technologies and processes. We also have four
international patent applications pending.

     Although there are a wide range of commercial applications for our
proprietary technologies, we have chosen to focus on the medical device
industry. Within the medical device industry, we are concentrating on the
prostate cancer, interventional cardiology and orthopedic segments.

                                       11
<PAGE>   13

RESULTS OF OPERATIONS

                            SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                 YEAR ENDED JUNE 30,
                                                              -------------------------
                                                                 1999          2000
                                                              ----------    -----------
                                                                (IN THOUSANDS, EXCEPT
                                                                   PER SHARE DATA)
<S>                                                           <C>           <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
  Product and contract research revenues....................  $2,753,488    $ 3,608,059
  Equipment revenues........................................          --        365,000
                                                              ----------    -----------
          Total revenues....................................   2,753,488      3,973,059
Costs and expenses:
  Cost of product and contract research revenues............   1,536,244      2,749,267
  Cost of equipment revenues................................          --        396,445
  Research and development..................................     385,555      1,345,492
  Selling, general and administrative.......................   1,083,742      2,187,604
                                                              ----------    -----------
          Total costs and expenses..........................   3,005,541      6,678,808
                                                              ----------    -----------
Operating loss..............................................    (252,053)    (2,705,749)
Other income (expense)......................................     (55,116)       217,238
                                                              ----------    -----------
Loss before benefit for income taxes........................    (307,169)    (2,488,511)
Benefit for income taxes....................................     (36,700)            --
                                                              ----------    -----------
  Net loss..................................................  $ (270,469)   $(2,488,511)
                                                              ==========    ===========
  Net loss per share -- basic...............................  $    (0.07)   $     (0.46)
                                                              ==========    ===========
  Net loss per share -- diluted.............................  $    (0.07)   $     (0.46)
                                                              ==========    ===========
  Weighted average common shares outstanding used for basic
     earnings per share.....................................   3,991,499      5,368,557
                                                              ==========    ===========
  Weighted average common shares outstanding used for
     diluted earnings per share.............................   3,991,499      5,368,557
                                                              ==========    ===========
<CAPTION>
                                                                      JUNE 30,
                                                              -------------------------
                                                                 1999          2000
                                                              ----------    -----------
<S>                                                           <C>           <C>
BALANCE SHEET DATA
Cash and cash equivalents...................................  $6,152,536    $ 4,837,939
Current assets..............................................   7,034,706      6,047,967
Working capital.............................................   5,324,430      4,413,262
Total assets................................................   8,463,396      9,468,757
Current portion of long term debt, including capital
  lease.....................................................     191,048        182,143
Long term debt, including capital lease, net of current.....     631,977        422,761
Stockholders' equity........................................   6,092,143      7,382,291
</TABLE>

                                       12
<PAGE>   14

     The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total revenues:

<TABLE>
<CAPTION>
                                                              YEAR ENDED JUNE 30,
                                                              --------------------
                                                               1999         2000
                                                              -------      -------
<S>                                                           <C>          <C>
Revenues:
  Product and contract research revenues:
     Medical................................................    82.9%        77.6%
     Semiconductor..........................................    17.1         13.2
  Equipment revenues........................................                  9.2
                                                               -----        -----
          Total revenues....................................   100.0        100.0
Costs and Expenses:
  Cost of product and contract research revenues............    55.8         69.2
  Cost of equipment revenues................................      --         10.0
  Research and development..................................    14.0         33.9
  Selling, general and administrative.......................    39.4         55.0
                                                               -----        -----
          Total costs and expenses..........................   109.2        168.1
                                                               -----        -----
Operating loss..............................................    (9.2)       (68.1)
Other (expense) income, net.................................    (2.0)         5.5
                                                               -----        -----
Loss before benefit for income taxes........................   (11.2)       (62.6)
  Benefit for taxes.........................................    (1.4)          --
                                                               -----        -----
Net loss....................................................    (9.8)%      (62.6)%
                                                               =====        =====
</TABLE>

     Revenues.  Total revenues increased to approximately $3,973,000 in the
twelve months ended June 30, 2000 from approximately $2,753,000 in the twelve
months ended June 30, 1999. The 44.3% increase in total revenue was primarily
attributable to a 207.3% increase in government contract and grant revenue in
support of the Company's internal research and development activities, a 100.0%
increase in equipment revenue as the Company built and shipped a customized
piece of manufacturing equipment, a 11.7% increase in semiconductor revenue and
a 6.7% increase in orthopedic medical revenues. Less than 10% of all revenues
were derived from foreign sources.

     The Company's two major customers, the Howmedica/Osteonics Division of
Stryker Corporation and Biomet, Incorporated, accounted for 44.3% of revenue in
the twelve months ended June 30, 2000 and 61.6% in the twelve months ended June
30, 1999. The Company's government contract and grant revenue accounted for
27.1% and 12.7% of revenue for the twelve months ended June 30, 2000 and 1999,
respectively.

     Cost of Product and Contract Research Revenues.  Cost of product and
contract research revenues increased to approximately $2,749,000 from
approximately $1,536,000 for the twelve months ended June 30, 2000 and increased
as a percentage of revenues to 69.2% from 55.8% the previous year. This increase
in cost is primarily attributable to increased manufacturing and personnel as
the Company accelerated its manufacturing capabilities to commercialize its
I-Plant radioactive prostate seeds, increased depreciation expense and
regulatory costs and expenses associated with implementing quality systems and
preparing for ISO9001 and CE Mark certifications for the I-Plant seed.

     Research and Development.  Research and development expenses increased to
approximately $1,345,000 from approximately $386,000 in the twelve months ended
June 30, 2000, a 249.0% increase, due primarily to accelerated current product
development of the I-Plant radioactive prostate seed and ongoing future product
development. The Company anticipates in future periods its research and
development expenses will continue to increase in total dollars expended as a
result of its product development plans.

     Selling, General and Administrative.  Selling, general and administrative
expenses increased to approximately $2,187,000 from approximately $1,084,000 in
the twelve months ended June 30, 2000. The 101.8%

                                       13
<PAGE>   15

increase in selling, general and administrative expenses is primarily
attributable to increased personnel and benefit costs, depreciation expense and
new investor relations and shareholder services expenses. The Company
anticipates that in future periods its selling, general and administrative
expenses will increase in total dollars expended as a result of its plans to
commercialize new products.

     Other Income and Expenses, Net.  Other income and expenses, net consists
primarily of interest earned on the Company's short-term investments and
interest expense on loans. Other income and expenses, net increased to
approximately $217,000, in fiscal 2000, from approximately ($55,000) in fiscal
1999. The increase primarily reflects a $284,000 increase in interest income
earned on the Company's short term investments offset by a $6,000 increase in
interest expense on loans and a $6,000 loss on the investment in Epsilon
Medical.

     Liquidity and Capital Resources.  As of June 30, 2000 the Company had
approximately $4,838,000 in cash and cash equivalents in the form of cash and
marketable securities, a decrease of $1,315,000 over the twelve months ended
June 30, 1999. The Company has a $750,000 revolving line of credit from a
commercial bank at a rate of prime, of which the entire balance was available at
June 30, 2000. The Company also has two $750,000 equipment purchase facilities
with a commercial bank, under which approximately $588,000 and zero,
respectively, were outstanding as of June 30, 2000. Under the provisions of its
loan agreements the Company is required to maintain compliance with two
financial covenants, minimum tangible net worth and net losses. At June 30, 2000
the Company's net loss covenant exceeded the required amount. The Company's bank
waived its rights under the Loan Agreement with respect to compliance with this
financial covenant for a period of one year from June 30, 2000.

     During fiscal 2000, cash used in operating approximated $2,391,000. Net
cash used by operating activities in fiscal 2000 primarily reflects the net loss
for the fiscal year, an increase in accounts receivable and a decrease in
accrued expenses offset by an increase in accounts payable and a decrease in
inventory.

     During the twelve months ended June 30, 2000, financing activities provided
cash of approximately $3,345,000. Net cash provided by financing activities
principally represents the exercise by the underwriters of the overallotment
option of 138,000 units associated with the Company's Initial Public Offering
and the sale to MedTec Iowa, Inc. of 500,000 shares of restricted common stock,
offset by the repayment of the revolving line of credit and payments against the
Company's equipment loan. Although the Company does not have significant capital
commitments, the Company intends to make significant capital commitments over
the next several years to support the development and commercialization of its
new products and the expansion of its manufacturing facilities and equipment.

     During the twelve months ended June 30, 2000, cash used in investing
activities approximated $2,269,000. Net cash used by investing activities
primarily includes the purchases of property and equipment. The Company plans to
further increase its expenditures to complete development and commercialize
products, to increase its manufacturing capacity, to ensure compliance with the
FDA's Quality System Regulations and to broaden its sales and marketing
capabilities.

                                  RISK FACTORS

WE DO NOT OPERATE AT A PROFIT AND DO NOT EXPECT TO BE PROFITABLE FOR SOME TIME.

     During the twelve months ended June 30, 2000, the Company had a net loss of
approximately $2,489,000. We plan to further increase our expenditures to
complete development and commercialization of our new products, to increase our
manufacturing capacity and equipment, to ensure compliance with the FDA's
Quality System Regulations and broaden our sales and marketing capabilities. As
a result, we believe that we will likely incur losses over the next several
quarters. The accumulated deficit as of June 30, 2000 approximated $3,024,000.

INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE COULD HARM OUR FINANCIAL
PERFORMANCE.

     The medical device industry is characterized by rapidly evolving technology
and intense competition. Among the most closely competing products in
intracoronary radiation therapy are radioactive tipped
                                       14
<PAGE>   16

guidewires and radioactive fluid-filled balloons. Many of our competitors have
substantially greater capital resources, greater research and development,
manufacturing and marketing resources and experience and greater name
recognition than we do. There can be no assurance that our competitors will not
succeed in developing or marketing technologies and products that are more
effective than our products or that would render our products obsolete or
noncompetitive. Moreover, there can be no assurance that we will be able to
price our products at or below the prices of competing products and technologies
in order to facilitate market acceptance. In addition, new procedures and
medications could be developed that replace or reduce the importance of
procedures that use our products. Accordingly, our success will depend, in part,
on our ability to respond quickly to medical and technological changes through
the development and introduction of new products and enhancements. Product
development involves a high degree of risk, and there can be no assurance that
our new product development efforts will result in any commercially successful
products. Our failure to compete or respond to technological change in an
effective manner would have a material adverse effect on our business.

OUR PRODUCTS AND TECHNOLOGIES MAY NOT BE ACCEPTED BY THE MEDICAL COMMUNITY WHICH
COULD HARM OUR FINANCIAL PERFORMANCE.

     There can be no assurance that our radioactive prostate seeds and coronary
stents, orthopedic ceramic coatings, or radiopaque coatings will achieve
acceptance, or continue to receive acceptance, by the medical community and
market acceptance generally. The degree of market acceptance for our products
and services will also depend upon a number of factors, including the receipt
and timing of regulatory approvals and the establishment and demonstration in
the medical community and among health care payers of the clinical safety,
efficacy and cost effectiveness of our products. Certain of the medical
indications that can be treated by our devices or devices treated using our
coatings can also be treated by other medical procedures. Decisions to purchase
our products will primarily be influenced by members of the medical community,
who will have the choice of recommending medical treatments, such as
radiotherapeutic seeds, or the more traditional alternatives, such as surgery
and external beam radiation therapy. Many alternative treatments currently are
widely accepted in the medical community and have a long history of use. There
can be no assurance that our devices or technologies will be able to replace
such established treatments or that physicians, health care payers, patients or
the medical community in general will accept and utilize our devices or any
other medical products that may be developed or treated by us even if regulatory
and reimbursement approvals are obtained. Long-term market acceptance of our
products and services will depend, in part, on the capabilities, operating
features and price of the our products and technologies as compared to those of
other available products and services. Failure of our products and technologies
to gain market acceptance would have a material adverse effect on our business.

WE HAVE LIMITED INTERNAL MARKETING AND SALES RESOURCES AND MAY NOT BE ABLE TO
MARKET OR DISTRIBUTE OUR PRODUCTS SUCCESSFULLY.

     Because our medical products will be targeted to the medical community, we
will have limited options in distributing our products and may incur additional
requirements imposed on us by the FDA or our customers or distribution partners
with respect to product characteristics and quality. A significant portion of
our sales to date have depended on our ability to provide products that meet the
requirements of other medical product companies. There can be no assurance that
we will be able to market our products successfully or that we will be able to
enter into contracts for distribution of our products. We have limited internal
marketing and sales resources and personnel. In order to market and sell our
products and services, we expect to enter into distribution agreements. There
can be no assurance that we will be able to enter into such agreements.

OUR FUTURE PROFITABILITY DEPENDS ON OUR ABILITY TO COMPLETE DEVELOPMENT OF OUR
PRODUCTS.

     We currently market or plan to market products, including radioactive
prostate seeds, radioactive tipped guidewires and radioactive coronary stents,
orthopedic ceramic coatings, and radiopaque coatings that may require
substantial further investment in research, product development, preclinical and
clinical testing and governmental regulatory approvals prior to being marketed
and sold. Our ability to increase revenues and

                                       15
<PAGE>   17

achieve profitability and positive cash flow will depend, in part, on our
ability to complete such product development efforts, obtain such regulatory
approvals, and establish manufacturing and marketing programs and gain market
acceptance for such proposed products.

     In particular, our radioactive coronary stents are in an early stage of
development. There can be no assurance that the clinical trials will ever be
undertaken or, if undertaken, will conclude that the radioactive coronary stents
have a sufficient degree of safety and efficacy. In addition, there can be no
assurance that the radioactive coronary stents will reduce the frequency of
restenosis outside of test conditions.

     Our product development efforts are subject to the risks inherent in the
development of such products. These risks include the possibility that our
products will be found to be ineffective or unsafe, or will otherwise fail to
receive necessary regulatory approvals; that the products will be difficult to
manufacture on a large scale or be uneconomical to market; that the proprietary
rights of third parties will interfere with our product development; or that
third parties will market superior or equivalent products which achieve greater
market acceptance. Furthermore, there can be no assurance that we will be able
to conduct our product development efforts within the time frames currently
anticipated or that such efforts will be completed successfully.

WE OWN PATENTS, TRADE SECRETS AND OTHER INTELLECTUAL PROPERTY AND KNOW-HOW THAT
WE BELIEVE ALLOWS US TO COMPETE EFFECTIVELY. LIMITATIONS ON OUR ABILITY TO
PROTECT OUR INTELLECTUAL PROPERTY OR CONTINUE TO USE OUR INTELLECTUAL PROPERTY
COULD HARM OUR FINANCIAL PERFORMANCE.

     Our ability to compete effectively will depend, to a significant extent, on
our ability to operate without infringing the intellectual property rights of
others. Many participants in the medical device area aggressively seek patent
protection and have increasing numbers of patents, and have frequently
demonstrated a readiness to commence litigation based on patent infringement.
Third parties may assert exclusive patent rights to technologies that are
important to us.

     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 processes may infringe this patent. We
plan to implant radioactivity onto coronary stents manufactured by the patent
holder, its licensees or others. If our plans to implant radioactivity onto the
patent holder's stents do not succeed, and/or if we implant radioactivity onto
stents that are not manufactured by the patentholder or its licensees, there can
be no assurance that the holder of this patent will not seek to enforce the
patent against us or the manufacturer of the stents, or that we would prevail in
any such enforcement action.

     If the patent holder seeks to enforce the patent against us, we may be
required to engage in costly and protracted litigation; discontinue the
manufacture or activation of radioactive stents; develop non-infringing
technology; or enter into a license arrangement with respect to the patent.
There can be no assurance that we would be able to develop non-infringing
technology, or that any necessary licenses would be available, or that, if
available, such licenses could be obtained on commercially reasonable terms.
There can be no assurance that any such litigation would not result in the
patent holder obtaining an injunction which would prevent us from implanting
radioactivity onto stents. In addition, the costs associated with defending a
patent infringement claim are significant, even if we ultimately prevails, and
we would be required to commit considerable financial and management resources
in defending such claim which would have a material adverse effect on our
business, financial condition, and results of operations.

OUR SUCCESS WILL DEPEND ON OUR ABILITY TO OBTAIN NEW PATENTS AND OPERATE WITHOUT
INFRINGING ON THE PROPRIETARY RIGHTS OF OTHERS.

     Although we have sixteen United States patents issued and eight United
States and four international patent applications pending for our technology and
processes, our success will depend, in part, on our ability to obtain the
patents applied for and maintain trade secret protection for our technology and
operate without infringing on the proprietary rights of third parties. The
validity and breadth of claims in medical technology patents involve complex
legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any pending patent applications or any future patent
application will issue as patents, that the
                                       16
<PAGE>   18

scope of any patent protection obtained will be sufficient to exclude
competitors or provide competitive advantages to us, that any of our patents
will be held valid if subsequently challenged or that others will not claim
rights in or ownership of the patents and other proprietary rights held us.
Furthermore, there can be no assurance that others have not or will not develop
similar products, duplicate any of our products or design around any patents
issued or that may be issued in the future to us. In addition, whether or not
patents are issued to us, others may hold or receive patents which contain
claims having a scope that covers products or processes developed by us.

     Moreover, there can be no assurances that patents issued to us will not be
challenged, invalidated or circumvented or that the rights thereunder will
provide any competitive advantage. We could incur substantial costs in defending
any patent infringement suits or in asserting any patent rights, including those
granted to third parties. Patents and patent applications in the United States
may be subject to interference proceedings brought by the U.S. Patent &
Trademark Office, or to opposition proceedings initiated in a foreign patent
office by third parties. We may incur significant costs defending such
proceedings. In addition, we may be required to obtain licenses to patents or
proprietary rights from third parties. There can be no assurance that such
licenses will be available on acceptable terms if at all. If we do not obtain
required licenses, we could encounter delays in product development or find that
the development, manufacture or sale of products requiring such licenses could
be foreclosed.

     We also rely on unpatented proprietary technology, trade secrets and
know-how and no assurance can be given that others will not 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, there can be no assurance that such non-
disclosure agreements will provide adequate protection for our trade secrets or
other proprietary know-how.

IF WE ARE NOT SUCCESSFUL IN MANAGING OUR FUTURE GROWTH, OUR BUSINESS WILL
SUFFER.

     We have very limited experience in the commercial production of radioactive
prostate seeds and radioactive tipped guidewires or the commercial implantation
of therapeutic radiation onto coronary stents. Our future success will depend
upon, among other factors, our ability to recruit, hire, train and retain highly
educated, skilled and experienced management and technical personnel, to
generate capital from operations, to scale-up our manufacturing process and
expand our facilities and to manage the effects of growth on all aspects of our
business, including research, development, manufacturing, distribution, sales
and marketing, administration and finance. Our failure to identify and exploit
new product and service opportunities, attract or retain necessary personnel,
generate adequate revenues or conduct our expansion or manage growth effectively
could have a material adverse effect on our business.

WE ARE DEPENDENT ON A SMALL NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR
SALES. THE LOSS OF BUSINESS FROM THESE CUSTOMERS WOULD HARM OUR FINANCIAL
PERFORMANCE.

     Approximately 44.3% of our sales in the twelve months ended June 30, 2000
were made to two customers. These sales were of nitrogen ion implantation that
enhance orthopedic joint implants. We have no significant purchase commitments
from these or other customers extending beyond one year. There can be no
assurance that these customers will continue to purchase our products and
services at the same levels as in previous years or that such relationships will
continue in the future. The loss of a significant amount of business from any of
these customers would have a material adverse effect on the sales and operating
results. We have an agreement to supply an ion implantation process to a
customer through January 2001.

OUR MEDICAL DEVICE PRODUCTS AND SERVICES ARE SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION. IF WE FAIL TO OBTAIN OR ARE DELAYED IN OBTAINING THE APPROVAL OF THE
NECESSARY FEDERAL AND STATE GOVERNMENT AGENCIES, OUR BUSINESS COULD BE
MATERIALLY AFFECTED.

     The manufacture and sale of our medical device products and services are
subject to extensive regulation principally by the Food and Drug Administration
(the "FDA") in the United States and corresponding

                                       17
<PAGE>   19

foreign regulatory agencies in each country in which it sells its products.
These regulations affect product approvals, product standards, packaging
requirements, design requirements, manufacturing and quality assurance,
labeling, import restrictions, tariffs and other tax requirements. Securing FDA
authorizations and approvals requires submission of extensive clinical data and
supporting information. In most instances, the manufacturers or licensees of
medical devices that are treated by us will be responsible for securing
regulatory approval for medical devices incorporating our technology. However,
we plan on preparing and maintaining Device Master Files which may be accessed
by the FDA. We expect to incur substantial product development, clinical
research and other expenses in connection with obtaining final regulatory
clearance or approval for and commercialization of our products.

     There can be no assurance that our medical device manufacturers or
licensees will be able to obtain regulatory clearance or approval for devices
incorporating our technology on a timely basis, or at all. Regulatory clearance
or approvals, if granted, may include significant limitations of the indicated
uses for which the product may be marketed. In addition, product clearance or
approval could be withdrawn for failure to comply with regulatory standards or
the occurrence of unforeseen problems following initial marketing. Changes in
existing regulations or adoption of new governmental regulations or policies
could prevent or delay regulatory approval of products incorporating our
technology or subject us to additional regulation.

     In addition to FDA regulation, certain of our activities are regulated by,
and require approvals from, other federal and state agencies. The use,
management, transportation, and disposal of certain materials and wastes are
subject to regulation by several federal and state agencies depending on the
nature of the materials or waste material. Certain toxic chemicals and products
containing toxic chemicals may require special reporting to the United States
Environmental Protection Agency and/or its state counterparts. Our future
operations may require additional approvals from federal and/or state
environmental agencies. There can be no assurance that we will be able to obtain
necessary government approvals, or that we will be able to operate with the
conditions that may be attached to future regulatory approvals. Moreover, there
can be no assurance that we will be able to maintain previously-obtained
approvals. While it is our policy to comply with applicable regulations, failure
to comply with existing or future regulatory requirements and failure to obtain
or maintain necessary approvals could have a material adverse effect on our
business, financial condition, and results of operations.

     Failure or delay of our medical device manufacturers in obtaining FDA and
other necessary regulatory clearance or approval, the loss of previously
obtained clearance or approvals, as well as failure to comply with other
existing or future regulatory requirements could have a material adverse effect
on our business, financial condition and results of operations.

     Because certain of our products utilize radiation sources, their
manufacture, distribution, transportation, import/export, use and disposal will
also be subject to federal, state and/or local laws and regulations relating to
the use, handling, procurement and storage of radioactive materials. We must
also comply with U.S. Department of Transportation regulations on the labeling
and packaging requirements for shipment of radiation sources to hospitals or
other users of our products. We expect that there will be comparable regulatory
requirements and/or approvals in markets outside the United States. If any of
the foregoing approvals are significantly delayed or not obtained, our business
could be materially adversely affected.

OUR RESEARCH AND MANUFACTURING ACTIVITIES INVOLVE THE USE OF HAZARDOUS
MATERIALS. ANY LIABILITY RESULTING FROM THE MISUSE OF SUCH HAZARDOUS MATERIALS
COULD ADVERSELY AFFECT OUR BUSINESS.

     Our research and manufacturing activities sometimes involve the use of
various hazardous materials. Although we believe that our safety procedures for
handling, manufacturing, distributing, transporting and disposing of such
materials comply with the standards for protection of human health, safety, and
the environment, prescribed by local, state, federal and international
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. Nor can we eliminate the risk that one or more
of our hazardous material or hazardous waste handlers may cause contamination
for which, under laws imposing strict liability, we could be held liable. While
we currently maintain insurance in amounts which we believe are appropriate in
light of the risk of accident, we could be held liable for any damages that
might

                                       18
<PAGE>   20

result from any such event. Any such liability could exceed our insurance and
available resources and could have a material adverse effect on our business.

OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT STRATEGIC PARTNERS.

     We intend to continue pursuing a strategy of researching, developing and
commercializing new products using the financial and technical support of
corporate partners. Our success will depend, in part, on our ability to attract
additional partners. There can be no assurance that we can successfully enter
into additional strategic alliances or that such alliances will result in
increased commercialization of our products.

WE DEPEND ON THIRD PARTY REIMBURSEMENT TO OUR CUSTOMERS FOR MARKET ACCEPTANCE OF
OUR PRODUCTS. IF THIRD PARTY PAYORS FAIL TO PROVIDE APPROPRIATE LEVELS OF
REIMBURSEMENT FOR OUR PRODUCTS, OUR PROFITABILITY WOULD BE ADVERSELY AFFECTED.

     Medicare, Medicaid and other government insurance programs, as well as
private insurance reimbursement programs greatly affect suppliers of health care
products. Several of the products produced or processed by us, including our
orthopedic implants, prostate seeds, radioactive stents, and interventional
cardiology instruments and devices, are currently being reimbursed by third
party payers. Our customers rely on third-party reimbursements to cover all or
part of the costs of most of the procedures in which our products are used.
Third party payers (including health maintenance organizations) may affect the
pricing or relative attractiveness of our products by regulating the maximum
amount of reimbursement provided by such payers to the physicians, hospitals and
clinics using our devices, or by taking the position that such reimbursement is
not available at all. The amounts of reimbursement by third party payers in
those states that do provide reimbursement varies considerably. Major third
party payers reimburse inpatient medical treatment, including all or most
operating costs and all or most furnished items or services, including devices
such as ours, at a prospectively fixed rate based on the diagnostic-related
group ("DRG") that covers such treatment as established by the federal Health
Care Financing Administration. For interventional cardiology procedures, the
fixed rate of reimbursement is based on the procedure or procedures performed
and is unrelated to the specific devices used in such procedure. Therefore, the
amount of profit realized by suppliers of health care services in connection
with the procedure may be reduced by the use of our devices if they prove to be
costlier than competing products. If a procedure is not covered by a DRG,
certain third party payers may deny reimbursement.

     Alternatively, a DRG may be assigned that does not reflect the costs
associated with the use of our devices or devices treated using our services,
resulting in limited reimbursement. If, for any reason, the cost of using our
products or services was not to be reimbursed by third party payers, our ability
to sell our products and services would be materially adversely affected. In the
international market, reimbursement by private third party medical insurance
providers and governmental insurers and providers varies from country to
country. In certain countries, our ability to achieve significant market
penetration may depend upon the availability of third party governmental
reimbursement.

PRODUCT LIABILITY CLAIMS COULD DAMAGE OUR REPUTATION AND HURT OUR FINANCIAL
RESULTS.

     To date no product liability claims have been asserted against us; however,
the testing, marketing and sale of implantable devices and materials entail an
inherent risk that product liability claims will be asserted against us, if the
use of our devices is alleged to have adverse effects on a patient, including
exacerbation of a patient's condition, further injury, or death. A product
liability claim or a product recall could have a material adverse effect on our
business. Certain of our devices are designed to be used in treatments of
diseases where there is a high risk of serious medical complications or death.
Although we have obtained product liability insurance coverage, there can be no
assurance that in the future we will be able to obtain such coverage on
acceptable terms or that insurance will provide adequate coverage against any or
all potential claims. Furthermore there can be no assurance that we will avoid
significant product liability claims and the attendant adverse publicity. Any
product liability claim or other claim with respect to underinsured liabilities
could have a material adverse effect on our business.

                                       19
<PAGE>   21

IF OUR SUPPLIERS CANNOT PROVIDE THE COMPONENTS OR SERVICES WE REQUIRE, OUR
ABILITY TO MANUFACTURE OUR PRODUCTS COULD BE HARMED.

     We rely on a limited number of suppliers to provide materials and services
used to manufacture our products. If we cannot obtain adequate quantities of
necessary materials and services from our suppliers, there can be no assurance
that we would be able to access alternative sources of supply within a
reasonable period of time or at commercially reasonable rates. Moreover, in
order to maintain our relationship with major suppliers, we may be required to
enter into preferred supplier agreements that will increase the cost of
materials obtained from such suppliers, thereby also increasing the prices of
our products. The limited sources, the unavailability of adequate quantities,
the inability to develop alternative sources, a reduction or interruption in
supply or a significant increase in the price of raw materials or services could
have a material adverse effect on our business.

IF WE WERE TO LOSE THE SERVICES OF EITHER OUR PRESIDENT OR OUR CHIEF SCIENTIST,
OUR BUSINESS WOULD BE ADVERSELY AFFECTED.

     We are substantially dependent, for the foreseeable future, upon our
Chairman of the Board, President and Chief Executive Officer, Dr. Anthony J.
Armini and our Vice President and Chief Scientist, Dr. Stephen N. Bunker, both
of whom currently devote their full time and efforts to management. We have
entered into an employment agreement with each of these officers. If we were to
lose the services of Dr. Armini or Dr. Bunker for any significant period of
time, our business would be materially adversely affected. We maintain a key man
life insurance policy of $1,000,000 insuring the life of Dr. Armini.

IF WE CANNOT ATTRACT AND RETAIN THE MANAGEMENT, SALES AND OTHER PERSONNEL WE
NEED, WE WILL NOT BE SUCCESSFUL.

     There is intense competition for qualified personnel in the medical device
field, and there can be no assurance that we will be able to continue to attract
and retain qualified personnel necessary for the development of our business.
The loss of the services of existing personnel as well as the failure to recruit
additional qualified scientific, technical and managerial personnel in a timely
manner would be detrimental to our anticipated growth and expansion into areas
and activities requiring additional expertise such as marketing. The failure to
attract and retain such personnel could adversely affect our business.

OUR QUARTERLY RESULTS MAY FLUCTUATE SIGNIFICANTLY WHICH COULD ADVERSELY AFFECT
OUR STOCK PRICE.

     We believe that our operating results may be subject to substantial
quarterly fluctuations due to several factors, some of which are outside our
control, including fluctuating market demand for, and declines in the average
selling price of our products, the timing of significant orders from customers,
delays in the introduction of new or improved products, delays in obtaining
customer acceptance of new or changed products, the cost and availability of raw
materials, and general economic conditions. We plan to further increase our
expenditures to complete development and commercialize our new products, to
increase our manufacturing capacity, to ensure compliance with the FDA's Quality
Systems Regulations and to broaden our sales and marketing capabilities. A
substantial portion of our revenue in any quarter historically has been derived
from orders booked in that quarter, and historically, backlog has not been a
meaningful indicator of revenues for a particular period. Accordingly, our sales
expectations currently are based almost entirely on its internal estimates of
future demand and not from firm customer orders.

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Our 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:

        Report of Independent Auditors
        Balance Sheets as of June 30, 1999 and 2000
       Statements of Operations for the Years Ended June 30, 1999 and 2000
       Statements of Changes in Stockholders' Equity for the Years Ended June
       30, 1999 and 2000
       Statements of Cash Flows for the Years Ended June 30, 1999 and 2000
        Notes to Financial Statements

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, 2000.

                                       20
<PAGE>   22

                          IMPLANT SCIENCES CORPORATION

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Auditors..............................   22
Balance Sheets at June 30, 1999 and 2000....................   23
Statements of Operations for the Years Ended June 30, 1999
  and 2000..................................................   24
Statements of Changes in Stockholders' Equity for the Years
  Ended June 30, 1999 and 2000..............................   25
Statements of Cash Flows for the Years Ended June 30, 1999
  and 2000..................................................   26
Notes to Financial Statements...............................   27
</TABLE>

                                       21
<PAGE>   23

                          IMPLANT SCIENCES CORPORATION

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Implant Sciences Corporation

     We have audited the accompanying balance sheets of Implant Sciences
Corporation as of June 30, 1999 and 2000, and the related statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended June 30, 2000. 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, 1999 and 2000, and the results of its operations and its cash flows
for each of the two years in the period ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States.

                                          ERNST & YOUNG SIGNATURE

Boston, Massachusetts
August 31, 2000

                                       22
<PAGE>   24

                          IMPLANT SCIENCES CORPORATION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                               JUNE 30,      JUNE 30,
                                                                 1999          2000
                                                              ----------    -----------
<S>                                                           <C>           <C>
                                        ASSETS
Current assets:
  Cash and cash equivalents.................................  $6,152,536    $ 4,837,939
  Accounts receivable, less allowances of $2,000 and $11,602
    at June 30, 1999 and 2000, respectively.................     402,583        948,432
  Inventories...............................................     367,386        100,726
  Deferred income taxes.....................................      62,000         62,000
  Notes receivable from employees...........................       1,736         39,464
  Prepaid expenses..........................................      31,047         54,265
                                                              ----------    -----------
         Total current assets...............................   7,017,288      6,042,826
Property and equipment, at cost:
  Machinery and equipment...................................   1,802,011      3,515,369
  Leasehold improvements....................................      71,356        218,551
  Computers and software....................................      47,757        272,709
  Furniture and fixtures....................................      60,509        149,268
  Motor vehicles............................................      14,822         14,822
  Leased property under capital lease.......................      28,360         28,360
                                                              ----------    -----------
                                                               2,024,815      4,199,079
    Less accumulated depreciation...........................    (811,240)    (1,063,342)
                                                              ----------    -----------
  Net property and equipment................................   1,213,575      3,135,737
Other assets:
  Patent costs, net of accumulated amortization of $22,629
    and $34,629 at June 30, 1999 and 2000, respectively.....     177,194        194,235
  Investment in Epsilon Medical, Inc........................          --         44,030
  Notes receivable from employees...........................      17,418          5,141
  Other noncurrent assets, net..............................      37,921         46,788
                                                              ----------    -----------
                                                                 232,533        290,194
                                                              ----------    -----------
         Total assets.......................................  $8,463,396    $ 9,468,757
                                                              ==========    ===========

                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Revolving line of credit..................................  $  155,000    $        --
  Accounts payable..........................................      99,868        612,003
  Accrued expenses..........................................   1,264,360        840,559
  Current portion of long-term debt.........................     185,376        176,471
  Obligations under capital lease...........................       5,672          5,672
                                                              ----------    -----------
                                                               1,710,276      1,634,705
Long-term liabilities:
  Long-term debt, net of current portion....................     615,781        411,765
  Obligations under capital lease...........................      16,196         10,996
  Deferred income taxes.....................................      29,000         29,000
                                                              ----------    -----------
                                                                 660,977        451,761
Stockholders' equity:
  Common stock, $0.10 par value; 20,000,000 authorized;
    5,069,320 outstanding at June 30, 1999 and 5,708,082
    outstanding at June 30, 2000............................     506,932        570,808
  Additional paid-in capital................................   6,242,194      9,896,399
  Deferred compensation.....................................    (121,154)       (60,576)
  Accumulated deficit.......................................    (535,829)    (3,024,340)
                                                              ----------    -----------
         Total stockholders' equity.........................   6,092,143      7,382,291
                                                              ----------    -----------
         Total liabilities and stockholders' equity.........  $8,463,396    $ 9,468,757
                                                              ==========    ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       23
<PAGE>   25

                          IMPLANT SCIENCES CORPORATION

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED JUNE 30,
                                                              -------------------------
                                                                 1999          2000
                                                              ----------    -----------
<S>                                                           <C>           <C>
Revenues:
  Product and contract research revenues
    Medical.................................................  $2,282,511    $ 3,081,780
    Semiconductor...........................................     470,977        526,279
  Equipment.................................................          --        365,000
                                                              ----------    -----------
         Total revenues.....................................   2,753,488      3,973,059
Costs and expenses:
  Cost of product and contract research revenues............   1,536,244      2,749,267
  Cost of equipment revenue.................................          --        396,445
  Research and development..................................     385,555      1,345,492
  Selling, general and administrative.......................   1,083,742      2,187,604
                                                              ----------    -----------
         Total costs and expenses...........................   3,005,541      6,678,808
Operating loss..............................................    (252,053)    (2,705,749)
Other income (expense):
  Interest income...........................................      16,002        299,831
  Interest expense..........................................     (71,564)       (77,837)
  Other.....................................................         446          1,214
  Equity loss in Epsilon Medical, Inc. .....................          --         (5,970)
                                                              ----------    -----------
Loss before benefit for income taxes........................    (307,169)    (2,488,511)
Benefit for income taxes....................................     (36,700)            --
                                                              ----------    -----------
  Net loss..................................................  $ (270,469)   $(2,488,511)
                                                              ==========    ===========
  Net loss per share -- basic...............................  $    (0.07)   $     (0.46)
                                                              ==========    ===========
  Net loss per share -- diluted.............................  $   ( 0.07)   $     (0.46)
                                                              ==========    ===========
  Weighted average common shares outstanding used for basic
    earnings per share......................................   3,991,499      5,368,557
                                                              ==========    ===========
  Weighted average common shares outstanding used for
    diluted earnings per share..............................   3,991,499      5,368,557
                                                              ==========    ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       24
<PAGE>   26

                          IMPLANT SCIENCES CORPORATION

                 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                  ADDITIONAL                                    TOTAL
                            NUMBER       PAR       PAID-IN       DEFERRED     ACCUMULATED   STOCKHOLDERS'
                           OF SHARES    VALUE      CAPITAL     COMPENSATION     DEFICIT        EQUITY
                           ---------   --------   ----------   ------------   -----------   -------------
<S>                        <C>         <C>        <C>          <C>            <C>           <C>
Balance at June 30,
  1998...................    622,613   $ 62,261   $1,380,555           --     $  (265,360)   $ 1,177,456
  Net loss*..............         --         --           --           --        (270,469)      (270,469)
Issuance of common
  stock -- IPO, net......  1,000,000    100,000    5,034,570           --              --      5,134,570
  Issuance of common
     stock -- other......      2,000        200       20,219                                      20,419
  Adjustment to reflect
     6-for-1 stock
     split...............  3,069,458    306,946     (306,946)          --              --             --
  Exercise of stock
     options for notes
     receivable..........    375,249     37,525      (37,525)          --              --             --
  Deferred
     compensation........         --         --      151,321     (121,154)             --         30,167
                           ---------   --------   ----------    ---------     -----------    -----------
Balance at June 30,
  1999...................  5,069,320    506,932    6,242,194     (121,154)       (535,829)     6,092,143
  Net loss*..............         --         --           --           --      (2,488,511)    (2,488,511)
  Issuance of common
     stock, net..........    138,000     13,800      721,268           --              --        735,068
  Issuance of common
     stock, net..........    500,000     50,000    2,929,211           --              --      2,979,211
  Issuance of common
     stock -- other......        762         76        3,726                           --          3,802
  Amortization of
     deferred
     compensation........         --         --           --       60,578              --         60,578
                           ---------   --------   ----------    ---------     -----------    -----------
Balance at June 30,
  2000...................  5,708,082   $570,808   $9,896,399    $ (60,576)    $(3,024,340)   $ 7,382,291
                           =========   ========   ==========    =========     ===========    ===========
</TABLE>

---------------
* Net loss: equals comprehensive income for each period presented

   The accompanying notes are an integral part of these financial statements.
                                       25
<PAGE>   27

                          IMPLANT SCIENCES CORPORATION

                            STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 YEAR ENDED JUNE 30,
                                                              -------------------------
                                                                 1999          2000
                                                              ----------    -----------
<S>                                                           <C>           <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
  Net loss..................................................  $ (270,469)   $(2,488,511)
Adjustments to reconcile net loss to net cash provided by
  (used in) operating activities:
  Depreciation and amortization.............................     125,362        269,971
  Amortization of deferred compensation.....................      30,167         60,578
  Equity in loss of Epsilon Medical, Inc....................          --          5,970
  Write off of patent costs.................................          --         15,598
  Deferred income tax benefit...............................     (27,300)            --
Changes in operating assets and liabilities:
  Increase in accounts receivable...........................     (13,708)      (545,849)
  (Increase) decrease in inventories........................    (336,048)       266,660
  Decrease in prepaid income taxes..........................      93,996          9,582
  Increase in prepaid expenses..............................      (2,516)       (32,800)
  Increase in notes receivable..............................     (19,794)       (25,451)
  Increase in other noncurrent assets.......................      (8,808)       (14,736)
  Increase (decrease) in accounts payable...................      (7,491)       512,135
  Increase (decrease) in accrued expenses...................     696,925       (423,801)
                                                              ----------    -----------
     Net cash provided by (used in) operating activities....     260,316     (2,390,654)
CASH FLOWS USED IN INVESTING ACTIVITIES:
  Investment in Epsilon Medical.............................          --        (50,000)
  Purchase of property and equipment........................    (518,062)    (2,174,264)
  Capitalized patent costs..................................     (66,386)       (44,639)
                                                              ----------    -----------
     Net cash used in investing activities..................    (584,448)    (2,268,903)
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
  Proceeds from common stock................................   5,489,387      3,718,081
  Proceeds from long-term debt..............................     521,092             --
  Repayments of long-term debt..............................          --       (218,121)
  Proceeds from revolving credit line.......................     155,000             --
  Repayments of revolving credit line.......................          --       (155,000)
                                                              ----------    -----------
     Cash provided by financing activities..................   6,165,479      3,344,960
  Net increase (decrease) in cash...........................   5,841,347     (1,314,597)
  Cash at beginning of year.................................     311,189      6,152,536
                                                              ----------    -----------
  Cash at end of year.......................................  $6,152,536    $ 4,837,939
                                                              ==========    ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Interest paid.............................................  $   68,810    $    77,837
  Obligations under capital lease...........................      21,868         16,668
</TABLE>

                       See notes to financial statements.
                                       26
<PAGE>   28

                          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(TM)Iodine-125
radioactive seed for the treatment of prostate cancer. The Company also has
under development interventional cardiology devices, radioactive coronary stents
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.

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.

  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 gold and other precious metal raw material used in
the manufacturing process which are carried at actual costs as well as the
standard material, labor and overhead cost of medical product inventory.
Inventories are valued at the lower of cost (first in, first out) or market.

  Property and Equipment and Capital Lease

     Property and equipment are stated at cost and depreciated using the
straight-line method over the useful lives of the respective assets as follows:

<TABLE>
<S>                                                       <C>
Leasehold improvements..................................  life of lease
Furniture and fixtures..................................  5-7 years
Machinery and equipment.................................  7 years
</TABLE>

     Equipment under the capital lease is being amortized over the life of the
lease. Depreciation and amortization expense related to depreciable assets was
approximately $118,000 and $252,000 for fiscal 1999 and 2000, respectively.

  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 carryforwards and are measured using the enacted
tax rates and

                                       27
<PAGE>   29
                          IMPLANT SCIENCES CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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 their legal lives commencing with the month in
which the patents are issued. As of June 30, 2000 there were 20 patents issued.
Accumulated amortization at June 30, 1999 and 2000 was approximately $23,000 and
$35,000, respectively.

  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 $3,000
and $34,000, at June 30, 1999 and 2000, respectively.

  Concentration of Credit Risk

     The Company grants credit to its customers, primarily large corporations in
the medical device and semiconductor industries. 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. Financial instruments that potentially subject the Company to
concentration of credit risk consist of trade receivables.

     The Company has three major customers which accounted for the following
annual revenue:

<TABLE>
<CAPTION>
                                                         1999          2000
                                                      ----------    ----------
<S>                                                   <C>           <C>
Company A...........................................  $1,471,652    $1,500,678
Company B...........................................     221,940       260,333
Company C...........................................          --       365,000
</TABLE>

     The accounts receivable at June 30, 1999 and 2000 for Company A was
approximately $169,000 and $196,000 respectively.

  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 financial statements in conformity with accounting
principals generally accepted in the United States 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. Actual results could differ from those
estimates.

                                       28
<PAGE>   30
                          IMPLANT SCIENCES CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

  Reclassifications

     Certain reclassifications have been made to the prior year's financial
statements to conform to the 2000 presentation, including reclassification for
notes receivable from employees.

  Revenue Recognition

     Revenues are recognized at the time product is shipped. During fiscal 1999,
the Company accepted a purchase order to build a piece of customized
manufacturing equipment. The Company completed and shipped the equipment during
fiscal 2000. Accordingly, the Company recognized revenue and related cost of
goods sold during fiscal 2000.

     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.

  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 for
1999 and 2000 were as follows:

<TABLE>
<CAPTION>
                                                              JUNE 30,
                                                       ----------------------
                                                         1999         2000
                                                       --------    ----------
<S>                                                    <C>         <C>
Company funded.......................................  $600,084    $1,511,810
Customer funded......................................   291,812       788,471
                                                       --------    ----------
Total research and development.......................  $891,896    $2,300,281
                                                       ========    ==========
</TABLE>

                                       29
<PAGE>   31
                          IMPLANT SCIENCES CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

  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:

<TABLE>
<CAPTION>
                                                             JUNE 30,
                                                     -------------------------
                                                        1999          2000
                                                     ----------    -----------
<S>                                                  <C>           <C>
Basic:
  Net loss.........................................  $ (270,469)   $(2,488,511)
  Weighted shares outstanding......................   3,991,499      5,368,557
  Earnings per share:
     Net loss per share -- basic...................  $    (0.07)   $     (0.46)
Diluted:
  Net loss.........................................  $ (270,469)   $(2,488,511)
  Weighted shares outstanding......................   3,991,499      5,368,557
  Earnings per share:
     Net loss per share -- diluted.................  $    (0.07)   $     (0.46)
</TABLE>

  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 will
adopt SAB 101 in fiscal 2001 and does not expect SAB 101 to have a material
effect on its financial position or results of operations.

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, as amended by Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities" (collectively SFAS 133), which is effective for fiscal years
beginning after June 15, 2000. SFAS 133 provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. We do not believe that the adoption of this standard will have a
material impact on our financial position or results of operations.

                                       30
<PAGE>   32
                          IMPLANT SCIENCES CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. ACCRUED EXPENSES

     Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                              JUNE 30,
                                                       ----------------------
                                                          1999         2000
                                                       ----------    --------
<S>                                                    <C>           <C>
Accrued compensation and benefits....................  $  204,932    $311,902
Deferred revenue.....................................     270,970     290,550
Accrued legal, accounting and printing...............     641,350      54,573
Warranty.............................................      11,541      35,587
Accrued consulting fees..............................       4,127          --
Other................................................     131,440     147,947
                                                       ----------    --------
                                                       $1,264,360    $840,559
                                                       ==========    ========
</TABLE>

4. 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 year ended June 30, 2000, the Company recognized its share of equity
losses in Epsilon Medical, Inc. of approximately $6,000. Summarized financial
information is not presented as it is not material to the Company.

5. 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 $351,000 and $1,023,000 for
the year ended June 30, 1999 and 2000, respectively. Unbilled accounts
receivable relating to such arrangements was approximately $91,000 and $250,000
for the year ended June 30, 1999 and 2000, respectively.

     The Company also conducts research and development under cost-sharing
arrangements with its commercial customers. Revenues under such arrangements
were approximately $351,000 and $30,000 for the year ended June 30, 1999 and
2000, respectively.

6. BANK BORROWINGS

     Maturities of long-term debt are as follows:

<TABLE>
<S>                                                         <C>
Year ending June 30:
  2001....................................................  $176,471
  2002....................................................   176,471
  2003....................................................   176,471
  2004....................................................    58,823
                                                            --------
                                                             588,236
  Less current portion....................................   176,471
                                                            --------
                                                            $411,765
                                                            ========
</TABLE>

     The Company finances 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

                                       31
<PAGE>   33
                          IMPLANT SCIENCES CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

is unsecured and the Equipment Term Loan is cross-collateralized and
cross-defaulted and has a first lien on substantially all of the Company's
assets.

     The Credit Facility bears interest at prime, which was 9.5% at June 30,
2000. At June 30, 2000 the Company had the entire $750,000 balance available
under the Credit Facility. The Credit Facility expires on September 30, 2000.

     The Company has a term loan facilities of $1,500,000 at June 30, 2000, of
which it has utilized $750,000. Interest is payable monthly at 1% above the
banks base rate commencing February 1998.

     The Company's Loan Agreement requires compliance with two financial
covenants including minimum levels of net worth and net loss limits. At June 30,
2000, the Company's net loss covenant was greater than the required amount. The
Company's bank has waived its rights under the Loan Agreement with respect to
this financial covenant at June 30, 2000.

7. RELATED PARTY TRANSACTIONS

     Accounts receivable from related parties as of June 30, 2000 consisted of a
loan of $137,500 to a principle shareholder and loans to ten employees, totaling
$137,500 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. Michael Szycher, President and CEO of CardioTech International is a
director of the Company.

     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. The President and CEO of CardioTech
International is a director of the Company.

8. 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 years ended June 30, 1999 and
2000 was $209,000 and $280,800, respectively.

     Included in property and equipment at June 30, 2000 is equipment recorded
under a capital lease with a net book value of $16,200.

                                       32
<PAGE>   34
                          IMPLANT SCIENCES CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     Future minimum rental payments required under capital leases and operating
leases with noncancelable terms in excess of one year at June 30, 2000, together
with the present value of net minimum lease payments:

<TABLE>
<CAPTION>
                                                      CAPITAL    OPERATING
                                                       LEASE       LEASE       TOTAL
                                                      -------    ---------    --------
<S>                                                   <C>        <C>          <C>
Year ending June 30:
2001................................................  $ 7,176    $328,759     $335,935
2002................................................    7,176     316,590      323,766
2003................................................    6,356     103,800      110,156
                                                      -------    --------     --------
Net minimum lease payments..........................  $20,708    $749,149     $769,857
                                                      =======    ========     ========
Less finance charges................................    4,040
                                                      -------
Present value of net minimum lease payments.........  $16,668
                                                      =======
</TABLE>

9. INCOME TAXES

     The components of the income tax benefit are as follows:

<TABLE>
<CAPTION>
                                                         YEAR ENDED JUNE 30,
                                                         --------------------
                                                           1999        2000
                                                         --------    --------
<S>                                                      <C>         <C>
Current:
  Federal..............................................  $(14,000)   $     --
  State................................................     4,600          --
                                                         --------    --------
                                                           (9,400)         --
Deferred...............................................   (27,300)         --
                                                         --------    --------
                                                         $(36,700)   $     --
                                                         ========    ========
</TABLE>

     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:

<TABLE>
<CAPTION>
                                                         1999         2000
                                                       ---------    ---------
<S>                                                    <C>          <C>
Expected tax benefit at 34%..........................  $(104,500)   $(846,100)
State income taxes, net of federal benefit...........     (4,100)    (193,000)
Stock compensation expense...........................     10,300       20,600
Effect of valuation allowance........................     57,500      957,800
Nondeductible expenses and other.....................      4,100       60,700
                                                       ---------    ---------
Income tax provision.................................  $ (36,700)   $       0
                                                       =========    =========
</TABLE>

                                       33
<PAGE>   35
                          IMPLANT SCIENCES CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     Significant components of the Company's deferred tax assets as of June 30
are as follows:

<TABLE>
<CAPTION>
                                                        1999         2000
                                                      --------    -----------
<S>                                                   <C>         <C>
Deferred tax assets:
  Net operating loss and tax credit carryforwards...  $ 46,100    $   961,500
  Accrued expenses..................................    11,600         57,800
  Deferred revenue..................................    60,600         50,300
  Other.............................................     1,200          7,700
                                                      --------    -----------
Total deferred tax assets...........................   119,500      1,077,300
  Valuation allowance...............................   (57,500)    (1,015,300)
                                                      --------    -----------
Net deferred tax assets.............................    62,000         62,000
Deferred tax liabilities:
  Tax over book depreciation........................   (29,000)       (29,000)
                                                      --------    -----------
Total deferred tax liabilities......................   (29,000)       (29,000)
                                                      --------    -----------
Net deferred tax asset..............................  $ 33,000    $    33,000
                                                      ========    ===========
</TABLE>

     At June 30, 2000 the Company has unused net operating loss carryforwards of
$2,140,000 and tax credit carryforwards of $81,100 both of which expire through
2020. 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

10. STOCKHOLDERS' EQUITY

     In September 1998, 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.

     The following table presents the activity of the 1992 and 1998 Stock Option
Plans for the years ended June 30, 1999, and 2000:

<TABLE>
<CAPTION>
                                                             1999                   2000
                                                     --------------------    -------------------
                                                                 WEIGHTED               WEIGHTED
                                                                 AVERAGE                AVERAGE
                                                                 EXERCISE               EXERCISE
                                                     OPTIONS      PRICE      OPTIONS     PRICE
                                                     --------    --------    -------    --------
<S>                                                  <C>         <C>         <C>        <C>
Outstanding at beginning of period.................   718,200      1.14      320,190      1.85
Granted............................................    28,632      4.36      115,500      6.16
Exercised..........................................  (321,642)     0.43           --
Canceled...........................................  (105,000)     1.38           --
                                                     --------     -----      -------     -----
Outstanding at end of period.......................   320,190      1.85      435,690      2.99
                                                     ========     =====      =======     =====
Options exercisable at end of period...............   264,755      1.46      326,699      2.12
                                                     ========     =====      =======     =====
Weighted average fair value per share of options
  granted during the period........................               $2.28                  $3.95
                                                                  =====                  =====
</TABLE>

                                       34
<PAGE>   36
                          IMPLANT SCIENCES CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     The following table presents weighted average price and life information
about significant option groups outstanding at June 30, 2000:

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING              OPTIONS EXERCISABLE
                                  ----------------------------------      -------------------
                                              WEIGHTED
                                               AVERAGE      WEIGHTED                 WEIGHTED
RANGE OF                                      REMAINING     AVERAGE                  AVERAGE
EXERCISE                                     CONTRACTUAL    EXERCISE                 EXERCISE
 PRICES                           NUMBER     LIFE (YRS)      PRICE        NUMBER      PRICE
--------                          -------    -----------    --------      -------    --------
<C>      <S>                      <C>        <C>            <C>           <C>        <C>
 $1.37   .......................  266,358                   $   1.37      266,358     $1.38
  4.00   .......................   50,400                       4.00       25,197      4.00
  5.00   .......................   60,500                       5.00        2,000      5.00
  6.50   .......................   30,000                       6.50       30,000      6.50
  6.63   .......................    4,000                       6.63           --        --
  6.75   .......................    2,000                       6.75        2,000      6.75
  7.00   .......................    3,432                       7.00        1,144      7.00
  9.00   .......................    6,000                       9.00           --        --
  9.12   .......................    8,000                       9.12           --        --
  9.50   .......................    5,000                       9.50           --        --
                                  -------                                 -------
                                  435,690                                 326,699
                                  =======                                 =======
</TABLE>

     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 1999 and
2000, consistent with the provisions of FAS 123, the pro forma net income per
share-diluted for 1999 and 2000, would have decreased by $70,000 and $239,000
respectively, and $0.08 per share and $0.48 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:

<TABLE>
<CAPTION>
                                                       OPTIONS GRANTED
                                                  --------------------------
                                                     1999           2000
                                                  -----------    -----------
<S>                                               <C>            <C>
Volatility......................................      54%            72%
Expected life (years)...........................       5              5
Risk free interest rate.........................  4.73%-5.49%    6.10%-6.49%
Dividend yield..................................      0%             0%
</TABLE>

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

     The effects on 1999 and 2000 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.

                                       35
<PAGE>   37
                          IMPLANT SCIENCES CORPORATION

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     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, 2000.

11. 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 1999 and 2000, the Company recognized approximately $25,000 of royalties
under this arrangement.

12. 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 $9,872 and $61,204 in
1999 and 2000, respectively.

                                       36
<PAGE>   38

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item 9 is hereby incorporated by reference
to the text appearing under Part 1, Item 1 -- Business under the caption
"Executive Officers and Significant Employees" of the Registrant in this Report,
and by reference to the Company's definitive proxy statement to be filed by the
Company within 120 days after the close of its fiscal year (October 28, 2000).

ITEM 10.  EXECUTIVE COMPENSATION

     The information required by this Item 10 is hereby incorporated by
reference to the information under the heading "Executive Compensation" in the
Company's definitive proxy statement to be filed by the Company within 120 days
after the close of its fiscal year (October 28, 2000).

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item 11 is hereby incorporated by
reference to the information under the heading "Securities Beneficially Owned by
Directors, Officers and Principal Stockholders" in the Company's definitive
proxy statement to be filed by the Company within 120 days after the close of
its fiscal year (October 28, 2000).

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item 12 is hereby incorporated by
reference to the information under the heading "Certain Transactions", if any,
in the Company's definitive proxy statement to be filed by the Company within
120 days after the close of its fiscal year (October 28, 2000).

                                    PART IV

ITEM 13.  EXHIBIT INDEX

     (A) The following are filed as part of this report.

        (1) FINANCIAL STATEMENTS

<TABLE>
<S>                                                           <C>
Report of Independent Auditors..............................   22
Balance Sheets for the Fiscal Years Ended June 30, 1999 and
  2000......................................................   23
Statements of Operations for the Fiscal Years Ended June 30,
  1999 and 2000.............................................   24
Statements of Changes in Stockholders' Equity for the Fiscal
  Years Ended June 30, 1999 and 2000........................   25
Statements of Cash Flows for the Fiscal Years Ended June 30,
  1999 and 2000.............................................   26
Notes to Financial Statements...............................   27
</TABLE>

        (2) FINANCIAL STATEMENT SCHEDULES

     Supplemental schedules are not provided because of the absence of
conditions under which they are required or because the required information is
given in the financial statements or notes thereto.

                                       37
<PAGE>   39

        (3) EXHIBITS

     The following exhibits are filed as part of this report:

<TABLE>
<CAPTION>
EXHIBIT                               DESCRIPTION
NO.----                               -----------
<C>           <S>
       *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
</TABLE>

                                       38
<PAGE>   40

<TABLE>
<CAPTION>
EXHIBIT                               DESCRIPTION
NO.----                               -----------
<C>           <S>
      *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 U.S. Army Tank-Automotive and Armaments
              Command Armamanet Research, Development and Engineering
              Center, dated September 30, 1997+
      *10.26  Vendor Agreement Memorandum between the Company and
              Osteonics, dated February 2, 1998+
      *10.27  Sample Purchase Order between the Company and MicroSpring
              Company, Inc., dated October 24, 1996+
      *10.28  Asset Purchase Agreement between the Company and Falex
              Corporation, dated November 17, 1995+
      *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 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+
    ***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
</TABLE>

                                       39
<PAGE>   41

<TABLE>
<CAPTION>
EXHIBIT                               DESCRIPTION
NO.----                               -----------
<C>           <S>
   ****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  Distributorship agreement, dated January 26, 2000, by and
              between Implant Sciences Corporation and Medtec Iowa, Inc.
              Portions of this exhibit have been omitted pursuant to a
              request for confidential treatment
 ******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
      *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
       27.1   Financial Data Schedule
</TABLE>

---------------
      * Previously filed in the Registration Statement on Form SB-2
        (Registration No. 333-64499) filed on September 29, 1998.

     ** Previously filed in Amendment No. 1 to the Registration Statement, filed
        on December 21, 1998.

   *** Previously filed in Amendment No. 2 to the Registration Statement, filed
       on February 11, 1999.

  **** Previously filed in Amendment No. 3 to the Registration Statement, filed
       on April 30, 1999.

 ***** Previously filed in Form 10QSB for quarter ending December 31, 1999,
       filed on February 14, 2000.

****** Previously filed in Form 10QSB for the quarter ending March 31, 2000
       filed on May 15, 2000.

      + Filed under application for confidential treatment.

                                       40
<PAGE>   42

                                   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.

<TABLE>
<S>                                           <C>
                                              Implant Sciences Corporation
Date: September 19, 2000                      /s/ ANTHONY J. ARMINI
                                              --------------------------------------------------------
                                              Anthony J. Armini
                                              President, Chief Executive Officer, Chairman of the
                                              Board of Directors (Principal Executive Officer)
</TABLE>

     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.

<TABLE>
<S>                                           <C>
Date: September 19, 2000                      /s/ ANTHONY J. ARMINI
                                              --------------------------------------------------------
                                              Anthony J. Armini
                                              President, Chief Executive Officer, Chairman of the
                                              Board of Directors (Principal Executive Officer)

Date: September 19, 2000                      /s/ DARLENE M. DEPTULA-HICKS
                                              --------------------------------------------------------
                                              Darlene M. Deptula-Hicks
                                              Vice President and Chief Financial Officer (Principal
                                              Financial and Accounting Officer)

Date: September 19, 2000                      /s/ STEPHEN N. BUNKER
                                              --------------------------------------------------------
                                              Stephen N. Bunker
                                              Vice President and Chief Scientist, Director

Date: September 19, 2000                      /s/ ROBERT E. HOISINGTON
                                              --------------------------------------------------------
                                              Robert E. Hoisington, Director

Date: September 19, 2000                      /s/ SHUNKICHI SHIMIZU
                                              --------------------------------------------------------
                                              Shunkichi Shimizu, Director

Date: September 19, 2000                      /s/ MICHAEL SZYCHER
                                              --------------------------------------------------------
                                              Michael Szycher, Director
</TABLE>

                                       41
<PAGE>   43
                                  EXHIBIT INDEX

      The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
Exhibit
   No.                              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 U.S. Army Tank-Automotive and Armaments
               Command Armamanet Research, Development and Engineering
               Center, dated September 30, 1997+
      *10.26   Vendor Agreement Memorandum between the Company and
               Osteonics, dated February 2, 1998+
      *10.27   Sample Purchase Order between the Company and MicroSpring
               Company, Inc., dated October 24, 1996+
      *10.28   Asset Purchase Agreement between the Company and Falex
               Corporation, dated November 17, 1995+
      *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 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+
    ***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   Distributorship agreement, dated January 26, 2000, by and between
               Implant Sciences Corporation and Medtec Iowa, Inc. Portions of this
               exhibit have been omitted pursuant to a request for confidential
               treatment
 ******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
      *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
       27.1    Financial Data Schedule

-------------------------
     * Previously filed in the Registration Statement on Form SB-2 (Registration
       No. 333-64499) filed on September 29, 1998.

    ** Previously filed in Amendment No. 1 to the Registration Statement, filed
       on December 21, 1998.

   *** Previously filed in Amendment No. 2 to the Registration Statement, filed
       on February 11, 1999.

  **** Previously filed in Amendment No. 3 to the Registration Statement, filed
       on April 30, 1999.

 ***** Previously filed in Form 10QSB for quarter ending December 31, 1999,
       filed on February 14, 2000.

****** Previously filed in Form 10QSB for the quarter ending March 31, 2000,
       filed on


     + Filed under application for confidential treatment.
</TABLE>