---

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KSB/A
(Amendment No. 1)

|ý                                                                                            | Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.    
|-------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------
|For the fiscal year ending June 30, 2003.                                                   
|Or                                                                                          
|o                                                                                            | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
|For the transition period
from                             to           
                  .

Commission file number 000-25839

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

|Massachusetts(State or other jurisdiction
of incorporation or organization) |  | 04-2837126(IRS Employer
Identification number)
|--------------------------------------------------------------------------- |  | ----------------------------------------------
|107 Audubon Road, #5 Wakefield, MA(Address of Principal Executive Offices)  |  | 01880(Zip Code)                               
|781-246-0700(Registrant's Telephone Number, Including Area Code)           

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

Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $.10 par value

American Stock ExchangeWarrants

American Stock Exchange


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

YES ý        NO o

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

No
Disclosure ý

State
issuer's revenues for its most recent fiscal year: $6,696,000

The
aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $30,174,000 as of August 29, 2003 (based on the closing price
for such stock as of August 29, 2003).

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

Class

Outstanding at August 29, 2003Common Stock, $.10 par value

6,757,696


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EXPLANATORY NOTE

This
Amendment No. 1 is being filed solely to correct an error which arose in the process of converting the Company's previously filed annual report on
Form 10-KSB to electronic form suitable for filing on the Securities and Exchange Commission's EDGAR system. In the previous filing, a number was inadvertently misstated in
financial statement footnote number 2 captioned "Concentration of Credit Risk." In accordance with the rules of the Commission, the financial statements and accompanying footnotes are being refiled in
their entirety.

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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:

PageReport of Independent AuditorsBDO Seidman, LLP

26Report of Independent AuditorsErnst & Young, LLP

27Balance Sheet as of June 30, 2003

28Statements of Operations for the years ended June 30, 2002 and 2003

29Statements of Changes in Stockholders' Equity for the years ended June 30, 2002 and 2003

30Statements of Cash Flows for the years ended June 30, 2002 and 2003

31Notes to Financial Statements

32 - 48


25

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Report of Independent Auditors

The
Board of Directors and Stockholders
Implant Sciences Corporation

We
have audited the accompanying balance sheet of Implant Sciences Corporation as of June 30, 2003 and the related statements of operations, stockholders' equity and cash flows
for the year then ended. 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 audit.

We
conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides 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, 2003, and
the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.



Boston,
Massachusetts
August 19, 2003, (except with respect for the matter discussed in Note 1 and 17
as to which the date is August 28, 2003)

26

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Report of Independent Auditors

The
Board of Directors and Stockholders
Implant Sciences Corporation

We
have audited the statements of operations, stockholders' equity, and cash flows of Implant Sciences Corporation (the Company) for the year ended June 30, 2002. 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 audit.

We
conducted our audit 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 results of operations and cash flows of Implant Sciences Corporation for the year
ended June 30, 2002, in conformity with accounting principles generally accepted in the United States.



Boston,
Massachusetts
August 23, 2002, except for Note 13
as to which the date is October 7, 2002

27

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IMPLANT SCIENCES CORPORATION        BALANCE SHEET

|                                                                                                                                                                                          |                                                                                                      | June 30,
2003                              |          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------
|ASSETS (Note 13)                                                                                                                                                                          |                                                                                                      |                                            |          
|Current assets:                                                                                                                                                                           |                                                                                                      |                                            |          
|                                                                                                                                                                                          | Cash and cash equivalents (Note 2)                                                                   |                                            | $        
|                                                                                                                                                                                          | Accounts receivable, less allowance of $50,000 (Notes 2 and 7)                                       |                                            |          
|                                                                                                                                                                                          | Inventories (Note 3)                                                                                 |                                            |          
|                                                                                                                                                                                          | Investmentsavailable for sale securities (Note 10)                                                  |                                            |          
|                                                                                                                                                                                          | Prepaid expenses and other current assets                                                            |                                            |          
|                                                                                                                                                                                          |                                                                                                      |                                            |          
|                                                                                                                                                                                          |                                                                                                      | Total current assets                       |          
|Property and equipment, net (Notes 4 and 11)                                                                                                                                              |                                                                                                      |                                            | 4,741,000
|Investment in Epsilon Medical, Inc. (Note 6)                                                                                                                                              |                                                                                                      |                                            | 35,000   
|Other assets                                                                                                                                                                              |                                                                                                      |                                            | 101,000  
|                                                                                                                                                                                          |                                                                                                      |                                            |          
|                                                                                                                                                                                          |                                                                                                      | Total assets                               |          
|                                                                                                                                                                                          |                                                                                                      |                                            |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                      |                                                                                                      |                                            |          
|Current liabilities:                                                                                                                                                                      |                                                                                                      |                                            |          
|                                                                                                                                                                                          | Accounts payable                                                                                     |                                            | $        
|                                                                                                                                                                                          | Accrued expenses (Note 5)                                                                            |                                            |          
|                                                                                                                                                                                          | Note payable (Note 11 (b))                                                                           |                                            |          
|                                                                                                                                                                                          | Current portion of obligations under capital lease (Note 11)                                         |                                            |          
|                                                                                                                                                                                          |                                                                                                      |                                            |          
|                                                                                                                                                                                          |                                                                                                      | Total current liabilities                  |          
|                                                                                                                                                                                          |                                                                                                      |                                            |          
|Long-term liabilities:                                                                                                                                                                    |                                                                                                      |                                            |          
|Noncurrent obligations under capital lease (Note 11)                                                                                                                                      |                                                                                                      |                                            | 11,000   
|                                                                                                                                                                                          |                                                                                                      |                                            |          
|                                                                                                                                                                                          |                                                                                                      | Total liabilities                          |          
|                                                                                                                                                                                          |                                                                                                      |                                            |          
|Commitments and Contingencies (Notes 10, 11, 13, 15, 16 and 17)                                                                                                                           |                                                                                                      |                                            |          
|7% Series A Cumulative Convertible Preferred Stock; $10 stated value; 5,000,000 Preferred shares authroized; 150,000 Series A shares issued and outstanding as of June 30, 2003 (Note 13) |                                                                                                      |                                            | 966,000  
|Stockholders' equity (Note 14):                                                                                                                                                           |                                                                                                      |                                            |          
|                                                                                                                                                                                          | Common stock, $0.10 par value; 20,000,000 shares authorized; 6,650,156 shares issued and outstanding |                                            |          
|                                                                                                                                                                                          | Additional paid-in capital                                                                           |                                            |          
|                                                                                                                                                                                          | Accumulated deficit                                                                                  |                                            |          
|                                                                                                                                                                                          | Deferred compensation                                                                                |                                            |          
|                                                                                                                                                                                          | Accumulated other comprehensive income                                                               |                                            |          
|                                                                                                                                                                                          | Notes receivable from employees (Note 10)                                                            |                                            |          
|                                                                                                                                                                                          |                                                                                                      |                                            |          
|                                                                                                                                                                                          |                                                                                                      | Total stockholders' equity                 |          
|                                                                                                                                                                                          |                                                                                                      |                                            |          
|                                                                                                                                                                                          |                                                                                                      | Total liabilities and stockholders' equity |          
|                                                                                                                                                                                          |                                                                                                      |                                            |          

The
accompanying notes are an integral part of these financial statements

28

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IMPLANT SCIENCES CORPORATION        STATEMENTS OF OPERATIONS

|                                                                                                  |                                                                                                                | Years Ended June 30,                                 |           
|------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | ----------
|
|Revenues (Note 2):                                                                                |                                                                                                                |                                                      |           
|                                                                                                  | Product revenues:                                                                                              |                                                      |           
|                                                                                                  |                                                                                                                | Medical                                              |           
|                                                                                                  |                                                                                                                | Semiconductor                                        |           
|                                                                                                  | Government contracts (Note 7)                                                                                  |                                                      |           
|                                                                                                  |                                                                                                                |                                                      |           
|                                                                                                  |                                                                                                                | Total revenues                                       |           
|                                                                                                  |                                                                                                                |                                                      |           
|Costs and expenses:                                                                               |                                                                                                                |                                                      |           
|                                                                                                  | Cost of product revenues                                                                                       |                                                      |           
|                                                                                                  | Cost of government contracts                                                                                   |                                                      |           
|                                                                                                  |                                                                                                                |                                                      |           
|                                                                                                  |                                                                                                                | Total costs and expenses                             |           
|                                                                                                  |                                                                                                                |                                                      |           
|Gross Margin                                                                                      |                                                                                                                |                                                      | 1,436,000 
|                                                                                                  |                                                                                                                |                                                      |           
|Operating Expenses:                                                                               |                                                                                                                |                                                      |           
|                                                                                                  | Research and development (includes $13,000 and $141,000 of stock-based compensation, respectively)             |                                                      |           
|                                                                                                  | Selling, general and administrative (includes $195,000 and $167,000 of stock-based compensation, respectively) |                                                      |           
|                                                                                                  |                                                                                                                |                                                      |           
|                                                                                                  |                                                                                                                | Total operating expenses                             |           
|                                                                                                  |                                                                                                                |                                                      |           
|Loss from operations                                                                              |                                                                                                                |                                                      | (2,180,000
|Other income (expense):                                                                           |                                                                                                                |                                                      |           
|                                                                                                  | Interest income                                                                                                |                                                      |           
|                                                                                                  | Interest expense                                                                                               |                                                      |           
|                                                                                                  | Other                                                                                                          |                                                      |           
|                                                                                                  | Equity in loss of Epsilon Medical, Inc. (Note 6)                                                               |                                                      |           
|                                                                                                  |                                                                                                                |                                                      |           
|                                                                                                  |                                                                                                                | Other expense                                        |           
|                                                                                                  |                                                                                                                |                                                      |           
|Net loss                                                                                          |                                                                                                                |                                                      | (2,194,000
|                                                                                                  | Preferred distribution, dividends and accretion                                                                |                                                      |           
|                                                                                                  |                                                                                                                |                                                      |           
|Net loss applicable to common shareholders                                                        |                                                                                                                | $                                                    | (2,724,000
|                                                                                                  |                                                                                                                |                                                      |           
|Net loss per share:                                                                               |                                                                                                                |                                                      |           
|                                                                                                  | Per sharebasic and diluted                                                                                    |                                                      |           
|                                                                                                  |                                                                                                                | Net loss                                             |           
|                                                                                                  |                                                                                                                | Preferred distribution                               |           
|                                                                                                  |                                                                                                                |                                                      |           
|                                                                                                  |                                                                                                                | Net loss per share applicable to common shareholders |           
|                                                                                                  |                                                                                                                |                                                      |           
|Weighted average common shares outstanding used in computing basic and diluted earnings per share |                                                                                                                |                                                      | 6,083,370 
|                                                                                                  |                                                                                                                |                                                      |           

The
accompanying notes are an integral part of these financial statements

29

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IMPLANT SCIENCES CORPORATION        STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY        FOR THE YEARS ENDED JUNE 30, 2002 AND 2003

|                                                                                                                                                                  |  | Common Stock |  |   |         |  |   |            |  |   |             |   |   |        |   |   |         |  |         |   |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | - | ------- |  | - | ---------- |  | - | ----------- | - | - | ------ | - | - | ------- |  | ------- | - | -
|
|
|
|Balance at June 30, 2001                                                                                                                                          |  | 5,912,770    |  | $ | 591,000 |  | $ | 10,930,000 |  | $ | (6,604,000  | ) | $ |       |   | $ |        |  | 23,000  |   | $
|                                                                                                                                                                  |  |              |  |   |         |  |   |            |  |   |             |   |   |        |   |   |         |  |         |   |  
|Issuance of common stock pursuant to exercise of stock options                                                                                                    |  | 68,758       |  |   | 7,000   |  |   | 178,000    |  |   |             |   |   |        |   |   |         |  |         |   |  
|Issuance of common stock pursuant to exercise of warrants                                                                                                         |  | 70,900       |  |   | 7,000   |  |   | 631,000    |  |   |             |   |   |        |   |   |         |  |         |   |  
|Issuance of common stock pursuant to employee stock purchase plan                                                                                                 |  | 3,124        |  |   |        |  |   | 22,000     |  |   |             |   |   |        |   |   |         |  |         |   |  
|Issuance of common stock pursuant to private financing agreement, net of issuance costs                                                                           |  | 145,349      |  |   | 15,000  |  |   | 1,076,000  |  |   |             |   |   |        |   |   |         |  |         |   |  
|Stock-based compensation                                                                                                                                          |  |              |  |   |         |  |   | 217,000    |  |   |             |   |   | (9,000 | ) |   |         |  |         |   |  
|Unrealized gain on available for sale securities                                                                                                                  |  |              |  |   |         |  |   |            |  |   |             |   |   |        |   |   | 45,000  |  |         |   |  
|Repayment of notes receivable from employees                                                                                                                      |  |              |  |   |         |  |   |            |  |   |             |   |   |        |   |   |         |  |         |   |  
|Sale of treasury stock                                                                                                                                            |  |              |  |   |         |  |   | 46,000     |  |   |             |   |   |        |   |   |         |  | (23,000 | ) |  
|Preferred distribution                                                                                                                                            |  |              |  |   |         |  |   | 530,000    |  |   | (530,000    | ) |   |        |   |   |         |  |        |   |  
|Net loss                                                                                                                                                          |  |              |  |   |         |  |   |            |  |   | (2,194,000  | ) |   |        |   |   |         |  |         |   |  
|                                                                                                                                                                  |  |              |  |   |         |  |   |            |  |   |             |   |   |        |   |   |         |  |         |   |  
|Balance at June 30, 2002                                                                                                                                          |  | 6,200,901    |  |   | 620,000 |  |   | 13,630,000 |  |   | (9,328,000  | ) |   | (9,000 | ) |   | 45,000  |  |        |   |  
|                                                                                                                                                                  |  |              |  |   |         |  |   |            |  |   |             |   |   |        |   |   |         |  |         |   |  
|Issuance of common stock pursuant to exercise of stock options                                                                                                    |  | 23,000       |  |   | 3,000   |  |   | 97,000     |  |   |             |   |   |        |   |   |         |  |         |   |  
|Issuance of common stock pursuant to exercise of warrants                                                                                                         |  | 2,000        |  |   |        |  |   | 18,000     |  |   |             |   |   |        |   |   |         |  |         |   |  
|Issuance of common stock pursuant to employee stock purchase plan                                                                                                 |  | 5,934        |  |   | 1,000   |  |   | 30,000     |  |   |             |   |   |        |   |   |         |  |         |   |  
|Issuance of common stock pursuant to private financing agreement, net of issuance costs                                                                           |  | 8,721        |  |   |        |  |   | 41,000     |  |   |             |   |   |        |   |   |         |  |         |   |  
|Value of Beneficial Conversion Feature and common stock warrants issued in connection with the issuance of the 7% Series A Cumulative Convertible Preferred Stock |  |              |  |   |         |  |   | 665,000    |  |   |             |   |   |        |   |   |         |  |         |   |  
|Accretion of the beneficial conversion feature and common stock warrants in connection with the Series A Preferred Stock                                          |  |              |  |   |         |  |   |            |  |   | (696,000    | ) |   |        |   |   |         |  |         |   |  
|Conversion of 7% Series A Cumulative Convertible Preferred Stock and related accrued dividends into common stock                                                  |  | 409,600      |  |   | 41,000  |  |   | 1,035,000  |  |   |             |   |   |        |   |   |         |  |         |   |  
|Accretion and Dividends Paid on Series A Preferred Stock                                                                                                          |  |              |  |   |         |  |   | 47,000     |  |   |             |   |   |        |   |   |         |  |         |   |  
|Stock-based compensation associated with warrants and nonqualified stock options issued to nonemployees                                                           |  |              |  |   |         |  |   | 306,000    |  |   |             |   |   | 2,000  |   |   |         |  |         |   |  
|Unrealized gain on available for sale securities                                                                                                                  |  |              |  |   |         |  |   |            |  |   |             |   |   |        |   |   | 72,000  |  |         |   |  
|Value of IPO warrant extension                                                                                                                                    |  |              |  |   |         |  |   | 195,000    |  |   | (195,000    | ) |   |        |   |   |         |  |         |   |  
|Net loss                                                                                                                                                          |  |              |  |   |         |  |   |            |  |   | (2,769,000  | ) |   |        |   |   |         |  |         |   |  
|                                                                                                                                                                  |  |              |  |   |         |  |   |            |  |   |             |   |   |        |   |   |         |  |         |   |  
|Balance at June 30, 2003                                                                                                                                          |  | 6,650,156    |  | $ | 665,000 |  | $ | 16,064,000 |  | $ | (12,988,000 | ) | $ | (7,000 | ) | $ | 117,000 |  |        |   | $
|                                                                                                                                                                  |  |              |  |   |         |  |   |            |  |   |             |   |   |        |   |   |         |  |         |   |  

The accompanying notes are an integral part of these financial statements

30

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IMPLANT SCIENCES CORPORATION        STATEMENTS OF CASH FLOWS

|                                                   |                                                                                                                       | Years Ended June 30,                         |                                          
|-------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | -----------------------------------------
|
|Cash flows from operating activities:              |                                                                                                                       |                                              |                                          
|                                                   | Net loss                                                                                                              |                                              | $                                        
|                                                   | Adjustments to reconcile net loss to net cash used in operating activities:                                           |                                              |                                          
|                                                   |                                                                                                                       | Depreciation and amortization                |                                          
|                                                   |                                                                                                                       | Stock-based compensation expense             |                                          
|                                                   |                                                                                                                       | Equity in loss of Epsilon Medical, Inc.      |                                          
|                                                   |                                                                                                                       | Changes in operating assets and liabilities: |                                          
|                                                   |                                                                                                                       |                                              | Accounts receivable                      
|                                                   |                                                                                                                       |                                              | Inventories                              
|                                                   |                                                                                                                       |                                              | Prepaid expenses and other current assets
|                                                   |                                                                                                                       |                                              | Accounts payable                         
|                                                   |                                                                                                                       |                                              | Accrued expenses                         
|                                                   |                                                                                                                       |                                              |                                          
|                                                   |                                                                                                                       |                                              |                                          
|                                                   |                                                                                                                       |                                              |                                          
|Cash flows from investing activities:              |                                                                                                                       |                                              |                                          
|                                                   | Investmentavailable for sale securities                                                                              |                                              |                                          
|                                                   | Purchase of property and equipment                                                                                    |                                              |                                          
|                                                   | Increase in other long-term assets                                                                                    |                                              |                                          
|                                                   | Decrease in notes receivable                                                                                          |                                              |                                          
|                                                   |                                                                                                                       |                                              |                                          
|                                                   |                                                                                                                       |                                              |                                          
|                                                   |                                                                                                                       |                                              |                                          
|Cash flows from financing activities:              |                                                                                                                       |                                              |                                          
|                                                   | Proceeds from common stock issuance, net of discount                                                                  |                                              |                                          
|                                                   | Proceeds from issuance of 7% Series A Cumulative Convertible Preferred Stock, net of issuance costs                   |                                              |                                          
|                                                   | Repayments of long-term debt and capital lease obligations                                                            |                                              |                                          
|                                                   | Repayments of note payable                                                                                            |                                              |                                          
|                                                   | Payments of preferred stock dividends                                                                                 |                                              |                                          
|                                                   |                                                                                                                       |                                              |                                          
|                                                   |                                                                                                                       |                                              |                                          
|                                                   |                                                                                                                       |                                              |                                          
|                                                   | Net decrease in cash and cash equivalents                                                                             |                                              |                                          
|                                                   | Cash and cash equivalents, beginning                                                                                  |                                              |                                          
|                                                   |                                                                                                                       |                                              |                                          
|                                                   | Cash and cash equivalents, ending                                                                                     |                                              | $                                        
|                                                   |                                                                                                                       |                                              |                                          
|Supplemental disclosures of cash flow information: |                                                                                                                       |                                              |                                          
|                                                   | Interest paid                                                                                                         |                                              | $                                        
|                                                   |                                                                                                                       |                                              |                                          
|Noncash Investing and Financing Activity:          |                                                                                                                       |                                              |                                          
|                                                   | Fixed assets acquired through capital leases                                                                          |                                              | $                                        
|                                                   |                                                                                                                       |                                              |                                          
|                                                   | Fixed asset acquired in exchange for equipment financing                                                              |                                              | $                                        
|                                                   |                                                                                                                       |                                              |                                          
|                                                   | Issuance of common stock in connection with Series A financing                                                        |                                              | $                                        
|                                                   |                                                                                                                       |                                              |                                          
|                                                   | Noncash beneficial conversion conversion feature                                                                      |                                              | $                                        
|                                                   |                                                                                                                       |                                              |                                          
|                                                   | Stock options exercised through note receivable from shareholder                                                      |                                              | $                                        
|                                                   |                                                                                                                       |                                              |                                          
|                                                   | Conversion of 7% Series A Cumulative Convertible Preferred Stock and accrued dividends into common stock              |                                              | $                                        
|                                                   |                                                                                                                       |                                              |                                          
|                                                   | Value of IPO warrants extension                                                                                       |                                              | $                                        
|                                                   |                                                                                                                       |                                              |                                          
|                                                   | Accretion of 7% Series A Cumulative Convertible Preferred Stock dividends, beneficial converison feature and warrants |                                              | $                                        
|                                                   |                                                                                                                       |                                              |                                          

The accompanying notes are an integral part of these financial statements

31

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IMPLANT SCIENCES CORPORATION        NOTES TO FINANCIAL STATEMENTS

1.     Description of Business

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

Currently,
the Company has viewed its operations and managed its business as principally one segment. However, upon the future development of the explosive detection products, the
Company will reevaluate its view of operations and consider reporting such information as a separate operating segment.

While
the Company strives to bring new products to market, it is subject to a number of risks similar to other technology based companies, including risks related to: its dependence on
key individuals and collaborative research partners, competition from substitute products and larger companies, its ability to develop and market commercially usable produces and obtain regulatory
approval for its products under development, and its ability to obtain the substantial additional financing necessary to adequately fund the development, commercialization and marketing of its
products. For the year ended June 30, 2003, the Company reported a loss from operations of $2,769,000 and used $1,437,000 in cash from operations. As of June 30, 2003, the Company had an
accumulated deficit of approximately $12,988,000. Management has initiated plans to reduce its operating expenses and increase its cash flow from operations. In addition, the Company has obtained
$1,800,000 of financing in 2004. Failure of the
Company to achieve its projections may require the Company to seek additional financing. There can be no guarantee that financing, if required, will be available at commercially favorable terms.

2.     Summary of Significant Accounting Policies



The Company considers any security with a maturity of 90 days or less at the time of investment to be cash equivalents.

The
Company accounts for investments in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under SFAS No. 115, securities
purchased in order to be held for indefinite periods of time and not intended at the time of purchase to be held until maturity are classified as available-for-sale securities.
At June 30, 2003, these securities consisted of an investment in CardioTech, a related party (See Nnote 10), which was recorded at fair market value, with any unrealized gains and losses
reported as a separate component of other accumulated comprehensive income (loss).

32

---



The estimated fair value of the Company's financial instruments, which include cash equivalents, investments in available for sale securities, accounts
receivable, accounts payable, note payable, and 7% Series A Cumulative Convertible Preferred Stock, approximates their carrying value due to their short-term nature.



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



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



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



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



The costs to obtain patents are capitalized. The Company amortizes the costs of patents ratably over the shorter of their useful or legal life ranging from 3 to
17 years. As of June 30, 2003, there were 22 patents issued. Accumulated amortization was approximately $160,000 and all patents were fully
amortized as of June 30, 2003. The Company recorded amortization expense of approximately $53,000 and $55,000 for fiscal 2002 and 2003, respectively.



In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", the Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amounts of the
assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair value less costs to sell. The Company believes that the
carrying value of its long-lived assets is fully realizable at June 30, 2003.

33

---



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

The
Company has three (3) major customers that accounted for the following annual revenue:

Year Ended June 30,2002

2003Company A

$
2,850,000

$
2,631,000Company B


1,650,000


1,628,000Company C


770,000


1,346,000


At
June 30, 2003, these customers accounted for the following amounts of accounts receivable:

Year Ended June 30, 2003Company A

$
301,000Company B


207,000Company C


58,000




The Company accounts for its employee stock based compensation arrangements under the provisions of Accounting Principal Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", rather than the alternative fair value accounting method provided for under SFAS 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.

The
Company has elected to use the disclosure-only provisions of SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based CompensationTransition
and Disclosure." Had compensation expense for stock option grants to employees been determined based on the fair value method at the

34

---

grant
dates for awards under the stock option plans consistent with the method prescribed by SFAS No. 123, the Company's net loss would have increased to the pro forma amounts indicated as
follows:

Year Ended June 30,2002

2003Net loss applicable to common shareholders, asreported

$
(2,724,000
)
$
(3,660,000
)Add: Stock-based employee compensation expense included in reported net loss





16,000Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards


(343,000
)

(559,000
)Pro forma net loss

$
(3,067,000
)
$
(4,203,000
)Basic and Diluted Loss per share:As reported

$
(0.45
)
$
(0.58
)Pro forma

$
(0.51
)
$
(0.67
)


The
Company has computed the pro forma disclosures for stock options granted to employees using the Black-Scholes option pricing model prescribed by SFAS No. 123. The assumptions
used during each of the two years ended June 30, 2003 were as follows:

June 30,2002

2003Risk free interest rate

3.68% - 4.55
%
2.27% - 4.65
%Expected dividend yield

0
%
0
%Expected lives (years)

5 years

5 - 10 yearsExpected volatility

63
%
45% - 98
%




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



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

35

---

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.

The
Company utilized a distributor for the sale of its prostate seeds. Under the terms of the distributor arrangement, the distributor had the right to return product previously
purchased, subject to certain conditions, and was entitled to certain price protection. Due to the limited timeframe under which these rights may be exercised by the distributor, the Company was able
to estimate the actual financial impact of each of these provisions. The Company records a provision for this estimate of the actual sales returns and price discounts each period.

The
Company accounts for shipping and handling fees passed on to its customers as revenues. The corresponding costs are recorded as costs of revenues.

The
Company's revenues by major product or service categories are as follows:

Year Ended June 30,2002

2003Prostate seeds

$
2,850,000

$
2,631,000Medical coatings


2,094,000


1,831,000Radioactive products


20,000


12,000Semiconductor


886,000


876,000Government grants


771,000


1,346,000$
6,621,000

$
6,696,000


On
July 31, 2003, the Company entered into an agreement with its former exclusive distributor (MED-TEC) for the sale of prostate seeds, to release each other from
further obligations under the 2000 Agreement. The new agreement conveys to the Company direct marketing and sales capabilities to sell its I-Plant Seed brachytherapy seeds for use in the
treatment of prostate cancer. In connection with this agreement, MED-TEC will work cooperatively with us to transition its customers and marketing materials directly to the Company.
Additionally, MED-TEC has agreed not to compete with the Company for a period of three years. The Company will pay MED-TEC an average of approximately $39,000 per month over
the next 28 months, beginning September 1, 2003.



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 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 reimbursed research and development costs were as follows:

2002

2003Company funded

$
1,540,000

$
811,000Customer reimbursed


771,000


1,216,000Total research and development

$
2,311,000

$
2,027,000


36

---



Basic earnings (loss) 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 and warrants is computed using the average market price for
the period. Basic and diluted net loss per share available for common shareholders is the same for all periods presented as outstanding common stock options and warrants have been excluded because
they are antidilutive.



In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB SFAS Nos. 4,44 and 64, and Amendment of FASB
SFAS No. 13 and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishments of Debt and SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No. 44 Accounting for intangible Assets of Motor Carriers. In addition, SFAS 145 amends SFAS
No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transaction and the required accounting for certain lease
modifications that have economic effects that existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed
conditions. The provision of SFAS No. 145 related to the rescission of SFAS No. 4 is effective in fiscal years beginning after May 15, 2002. The provisions of SFAS No. 145
related to SFAS No. 13 are to be applied to transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did not have an impact on the Company's results of operations,
financial position or cash flows.

In
June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force
("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)".
Under this statement, a liability or a cost associated with a disposal or exit activity is recognized at fair value when the liability is incurred rather than at the date of the entity's commitment to
an exit plan as required under EITF 94-3. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002, with earlier application
permitted. The adoption of SFAS 146 did not have a significant effect on the Company's operations, financial position or cash flows.

In
November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." Among other
things, FIN 45 requires guarantors to recognize, at fair value, their obligations to stand ready to perform under certain guarantees. FIN 45 is effective for guarantees issued or modified on or after
January 1, 2003. The adoption of FIN 45 did not have a material effect on the Company's financial position or results of operations.

On
December 31, 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure." SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation in
the event companies adopt SFAS

37

---

No. 123
and account for stock options under the fair value method. SFAS No. 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial
Reporting (APB 28), to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on
reported net income and earnings per share in annual and interim financial statements. While the Statement does not amend SFAS No. 123 to require companies to account for employee stock options
using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25 Accounting for Stock Issued to Employees (APB 25). The Company has adopted
the disclosure requirements of SFAS No. 148.

In
January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46's consolidation criteria are based on analysis of risks and rewards, not control,
and represent a significant and complex modification of previous accounting principles. FIN 46 represents an accounting change, not a change in the underlying economics of asset sales. FIN 46 is
effective for consolidated financial statements issued after June 30, 2003. The Company does not believe that the adoption of FIN 46 will have any effect on its financial position or future
results of operations.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 is the
first phase of the FASB's project on liabilities and equity. SFAS No. 150 provides guidance on how an entity classifies and measures certain financial instruments with characteristics of both
liabilities and equity. For publicly-held companies, SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. SFAS No. 150
requires companies to record the cumulative effect of financial instruments existing at the adoption date. The adoption of SFAS 150 did not have a significant effect on the Company's
operations, financial position or cash flows.

In
November 2002, the EITF reached consensus on EITF No. 00-21, "Revenue Arrangements with Multiple Deliverables." Revenue arrangements with multiple
deliverables include arrangements that provide for the delivery or performance of multiple products, services and/or rights to use assets where performance may occur at different points in time or
over different periods of time. The adoption of EITF No. 00-21 did not have a significant effect on the Company's operations, financial position or cash flows.

3.     Inventory

Inventory at June 30, 2003 consists of the following:

Raw materials

$
168,000Work-in-process


183,000Finished goods


122,000$
473,000


38

---

4.     Property and Equipment

Property and equipment at June 30, 2003 consists of the following:

Machinery and equipment

$
6,962,000Computers and software


348,000Leasehold improvements


306,000Furniture and fixtures


155,000Motor vehicles


33,000Equipment under capital leases


32,0007,836,000Less: Accumualted depreciation and amortization


(3,095,000
)$
4,741,000


The
Company recorded depreciation expense of approximately $701,000 and $745,000 for the year ended June 30, 2002 and 2003, respectively.

5.     Accrued Expenses

Accrued expenses at June 30, 2003 consists of the following:

Accrued compensation and benefits

$
324,000Accrued trade payables


209,000Accrued legal, accounting and printing


55,000Subcontractor costs


38,000Accrued utilities


17,000Other


26,000$
669,000


39

---



6.     Investment in Affiliate

On October 6, 1999, the Company acquired 38% of the outstanding shares of Epsilon Medical, Inc. in exchange for $50,000 in cash. The Company
accounts for their investment in Epsilon Medical, Inc. under the equity method and the carrying amount of their investment is adjusted to reflect the Company's share of all gains and losses.
For the years ended June 30, 2002 and 2003, the Company recognized its share of equity losses in Epsilon Medical, Inc. of approximately $5,000 and $2,000, respectively. Summarized
financial information is not presented as it is not material to the Company.

7.     Research and Development Arrangements

The Company is the recipient of several grants under the U.S. Government's Small Business Innovative Research (SBIR) Program. These grants from the National
Institute of Health are firm-fixed priced contracts and generally range in length from six to twenty-four months. Contracts received from the Department of Defense are both
firm-fixed price and cost-plus type programs and also range from six to twenty-four months. Revenues under such arrangements were approximately $771,000 and
$1,346,000 for the years ended June 30, 2002 and 2003, respectively. Unbilled accounts receivable relating to such arrangements was approximately $74,000 at June 30, 2003 and is included
in accounts receivable.

8.     Cooperative Research and Development Agreement

In August 2002, the Company executed a Cooperative Research and Development Agreement with an agency of the Department of Homeland Security (TSA) for its
trace explosives detection prototypes. Under the agreement, the Company will submit these prototypes for testing and evaluation. In addition, the TSA will supply the Company with test protocols and
current and anticipated performance criteria needed for commercial approval and as a mechanism for future funding. The Company's explosives trace detection systems ("ETD") utilizes its proprietary
Laser Ion Mobility Spectrometer (IMS) technology, a novel technology based on its expertise with ions, or charged particles.

9.     Bank Borrowings

The Company financed its operations utilizing an Equipment Term Loan ("Term Loan") under a Loan Agreement with its bank. The Loan Agreement had a first lien on
substantially all of the Company's assets. On October 7, 2002, the Company paid the remaining balance of principal and interest of approximately $192,000 in connection with the 7%
Series A Cumulative Convertible Preferred Stock financing (Note 13) and terminated the Term Loan.

10.   Related Party Transactions

SFAS No. 57, "Related Party Disclosures," specifies the nature of information that should be disclosed in financial statements regarding related party
transactions. CardioTech, a public company, is a related party with the Company by virtue of its significant business relationships.

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

40

---

Accounts
receivable from related parties as of June 30, 2002 and 2003 consisted of a loan of $138,000 to the Company's chief executive officer, which was used to exercise options
for 50,000 shares of the Company's common stock on December 9, 1997. The loan is due and payable December 9, 2003. This transaction is reported as a reduction of stockholders' equity.

In
March 2000, the Company entered into a joint research agreement with CardioTech to develop a proprietary porous polymer biocompatible coating technology as a platform for the
Company's proprietary radioactive brachytherapy technology. In consideration for this agreement, the Company agreed to pay $150,000 in cash and purchase 100,000 shares of CardioTech stock at a price
of $1.00 per share. The final payment of $35,000 has been accrued at June 30, 2003. Through June 30, 2003, the Company acquired 60,000 shares of common stock of CardioTech at a price of
$1.00 per share. As of June 30, 2003, the fair market value of the CardioTech shares held as investment is $177,000. At June 30, 2003, the Company is obligated to purchase 40,000 shares
of common stock at $1.00 per share. CardioTech is a publicly traded company whose common stock trades under the symbol CTE on the American Stock Exchange.

11.   Lease Obligations



The
Company has a five year operating lease for its manufacturing, research and office space which expires on December 31, 2008 with a provision to expand in June 2004. The
Company has an option to extend the lease for five additional years. Under the terms of the lease, the Company is responsible for its proportionate share of real estate taxes and operating expenses
relating to this facility. Total rental expense, including maintenance and real estate tax expenses, for the fiscal years ended June 30, 2002 and 2003 was $543,000 and $583,000, respectively.

Included
in property and equipment at June 30, 2003 is equipment recorded under a capital lease with a net book value of $2,000. Amortization of assets under capital lease
obligations is included in depreciation expense.

41

---

Future
minimum rental payments required under capital leases and operating leases with noncancelable terms in excess of one year at June 30, 2003, together with the present value
of net minimum lease payments are as follows:

Capital
Lease

Operating
LeaseYear ending June 30:2004

$
6,000


442,0002005


5,000


531,0002006


5,000


568,0002007


1,000


569,0002008





570,000Thereafter





285,000Net minimumlease payments


17,000

$
2,965,000Less: finance charges


1,000Present value of net minimumlease payments


16,000Less: current portion


5,000Long termportion

$
11,000




In
June, 2003, the Company purchased a MC3, mass-analyzed ion implanter and wafer handling end-station (the "system") from Axcelis Technologies, Inc.
("Axcelis") for a price of $1,300,000. The Company has financed the equipment with Axcelis via monthly installments of approximately $43,000 beginning July 2003 and continuing through
December 31, 2003. Interest is being calculated at prime plus 6.25%. The Company must make a lump sum payment for the unpaid balance of the purchase price of approximately $1,109,000 not later
than December 31, 2003. Title for the equipment shall remain with Axcelis until the system is paid in full. Should the Company fail to pay the balance in full, Axcelis has the right to recover
the system from the Company. The value of the equipment is included in property and equipment. The Company is attempting to refinance this note payable prior to December 31, 2003. In the event
that the Company is unable to refinance the equipment, it will be returned to Axcelis.

12.   Income Taxes

A reconciliation of the federal statutory rate to the Company's effective tax rate for the years ended June 30, 2002 and 2003 is as follows:

2002

2003Income tax provision at federal statutory rate

(34.0
)%
(34.0
)%Increase (decrease) in tax resulting fromState tax provision, net of federal benefit

(5.8
)%
(6.3
)%Non-deductible expenses

3.7
%
4.6
%Other, net

(0.5
)%
(3.1
)%Change in valuation allowance

36.6
%
38.8
%Effective income tax rate


%

%


42

---

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

Deferred tax assets:Net operating loss and tax credit carryforwards

$
4,700,000Accrued expenses


57,000Book over tax patent amortization


77,000Other


34,000Depreciation


(269,000
)Total deferred tax assets


4,599,000Valuation allowance


(4,599,000
)Net deferred tax asset

$



A
valuation allowance has been established for the Company's tax assets as their use is dependent on the generation of sufficient future taxable income, which cannot be predicted at this
time.

At
June 30, 2003, the Company has the following unused net operating loss and tax credit carryforwards available to offset federal and state taxable income, both of which expire
at various times through 2023.

Net Operating
Loss

R & D
CreditsFederal

$
10,783,000

$
240,000State

$
10,520,000

$
230,000


The
Company's Federal net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service and are subject to certain limitations in the event
of cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%.

13.   Series A 7% Cumulative Convertible Preferred Stock

On October 7, 2002, the Company issued 250,000 shares of Series A 7% Cumulative Convertible Preferred Stock ("Series A") having a stated value of
$10 per share, pursuant to a Securities Purchase Agreement executed on October 7, 2002 with the Laurus Master Fund, Ltd. The Company received $2,500,000 in gross proceeds, less a
management and placement agent fee of approximately $300,000, and related transaction costs of approximately $101,000. The terms of the Series A provide for repayment of outstanding principal
and accrued dividends in either cash or with shares of the Company's common stock, at the Company's option, over a 14 month period beginning February 1, 2003. If the Company elects to
convert into shares of the Company's common stock, the common stock will be valued at $5.19 per share. However, if the closing price of the Company's common stock for any of the 11 trading days prior
to a monthly repayment date is less than $5.70, the common stock will be valued at the greater of 83% of the average of the three lowest closing prices during the 30 trading days immediately preceding
the repayment date or $2.02 and Laurus Master Fund, Ltd. will be permitted to convert such part of the monthly payment, up to the amount the Company elected to repay, into shares of common
stock. Any part of the monthly amount not converted into common stock shall be paid in cash on the following monthly repayment date. The Company also granted the investor a security interest in
substantially all of the Company's assets. In connection with the issuance of the Series A, the investor received a warrant to purchase 55,000 shares of the Company's common stock.

43

---

The
common stock purchase warrant may be exercised at any time and is valid for five years from the date of issuance at an exercise price of $6.23 per share.

In
accordance with the provisions of Emerging Issues Task Force (EITF) Issue 00-27, "Application of EITF Issue No. 98-5 'Accounting for Convertible
Securities with Beneficial Conversion Features of Contingently Adjustable Conversion Ratios', to Certain Convertible Securities", which became effective in November 2000, the allocated value of
the Series A contained a beneficial conversion feature calculated based on the difference between the effective conversion price of the proceeds allocated to the Series A and the fair
market value of the common stock at the date of issuance. The discount arising from the beneficial conversion feature aggregated $537,000. The discount is being amortized and recorded as a preferred
dividend during the period from the issuance of the preferred stock to the mandatory redemption date of April 7, 2004.

The
Company valued the Series A at issuance at $1,434,000 based on the relative fair market values of the financial instruments issued in connection with this placement, net of
offering costs and the
beneficial conversion feature. The amounts recorded in the financial statements represent the amounts attributed to the sale of the preferred stock, net cash proceeds of $2,099,000 ($401,000 of
issuance costs incurred), amount allocated to warrants of $128,000, and the amount of the discount related to the value of beneficial conversion feature of $537,000. The Company is accreting these
discounts on the carrying value of the preferred stock to its redemption value of $2,500,000 at April 7, 2004. The accretion of these amounts is being recorded as a preferred dividend in the
period of accretion. During the year ended June 30, 2003, approximately $696,000 was amortized.

As
of June 30, 2003, 100,000 shares of Series A were converted into 375,975 shares of common stock at prices ranging from $2.02 to $5.19 per share. The outstanding
principal at June 30, 2003, is $1,500,000. An additional 33,625 shares of common stock were issued at prices ranging from $2.02 to $2.66 per share to pay accumulated dividends of approximately
$76,000, through June 30, 2003. The Company also paid $42,000 in accrued dividends in cash.

14.   Stockholders' Equity



In
June 1999, the Company issued 1,000,000 Units, consisting of one share of common stock, and one redeemable common stock purchase warrant (the "IPO Warrants") 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. On March 28, 2002, the Company extended the expiration date of the IPO Warrants from June 23, 2002 to
June 30, 2003. The Company did not receive any consideration from the holders of the warrants, accordingly the Company recognized this transaction as a preferred distribution based upon the
estimated fair value of the extension of approximately $530,000. On April 15, 2003, the Company again extended the expiration date of the IPO Warrants from June 30, 2003 to
June 30, 2005. The Company did not receive any consideration from the holders of the warrants, accordingly, the Company recognized the value of this transaction as a preferred distribution
based upon the estimated fair value of the extension of approximately $195,000. 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. As of June 30,
2003, 927,100 IPO Warrants remain outstanding, and all of the Representative's Warrants remain outstanding.

44

---



In
September 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan"). The 1998 Plan provides for the grant of incentive stock options and nonqualified stock options
to employees and affiliates. The exercise price of the options equals 100% of the fair market value on the date of the grant. Options expire ten years from the date of the option grant and vest
ratably over a three-year period commencing with the second year. A total of 280,000 options were reserved for issuance under the 1998 Plan. Upon adoption of the 1998 Plan, the 1992 Stock
Option Plan was terminated. No new stock options will be granted under the 1992 Stock Option Plan, which has been superseded by the 1998 Plan. In December 2000, the Company adopted the 2000
Incentive and Non Qualified Stock Option Plan (the "2000 Plan"). The 2000 Plan provides for the grant of incentive stock options and nonqualified stock options to employees and affiliates. The
exercise price of the options equals 100% of the fair market value on the date of the grant. Options expire between five and ten years from the date of the option grant and have variable vesting
periods. A total of 1,000,000 options were reserved for issuance under the 2000 Plan, and are subject to stockholder approval. As of June 30, 2003, a total of 8,503 and 347,200 stock options
are available for issuance under the 1998 and 2000 stock option Plans, respectively.

In
September 1998, the Company adopted the 1998 Employee Stock Purchase Plan (the "Plan"). The Plan provides a method whereby employees of the Company will have an opportunity to
acquire an ownership interest in the Company through the purchase of shares of Common Stock of the Company through payroll deductions. After 12 months of employment, an employee is eligible to
participate and can defer up to 10% of their wages into this Plan, with a maximum of $25,000 in any calendar year. The purchase price of the Common Stock is calculated at the lower of 85% of the
closing price of the stock on the first day of the plan period or the last day of the plan period. The periods are January 1 to June 30 and July 1 to December 31.
Fractional shares are not issued. Participants may withdraw at any time by giving written notice to the Company and will be credited the amounts of deferrals in their account. The maximum number of
shares eligible to be issued under the Plan is 141,000. As of June 30, 2003, a total of 129,577 shares are available for issuance under the Plan.

The
following table presents the activity of the 1992, 1998 and 2000 Stock Option Plans for the years ended June 30, 2002, and 2003:

|                                                               |  | 2002    |   | 2003
|-------------------------------------------------------------- |  | ------- | - | ----
|
|Outstanding at beginning of period                             |  | 414,893 |   | $   
|Granted                                                        |  | 96,000  |   |     
|Exercised                                                      |  | (68,190 | ) |     
|Canceled                                                       |  | (8,003  | ) |     
|                                                               |  |         |   |     
|Outstanding at end of period                                   |  | 434,700 |   |     
|                                                               |  |         |   |     
|Options exercisable at end of period                           |  | 348,190 |   |     
|                                                               |  |         |   |     
|Weighted-average fair value of options granted during the year |  |         |   |     
|                                                               |  |         |   |     

45

---

The
following table presents weighted average price and life information about significant options groups outstanding at June 30, 2003:

Options OutstandingOptions ExercisableWtd Avg
Remaining
Contractual
LifeRange of Exercise Prices

Number
of
Shares

Wtd Avg
Exercise
Price

Number
of
Shares

Wtd Avg
Exercise
Price$  1.00 - $  1.37

80,000

2.84

$
1.37

80,000

$
1.37$  2.10 - $  2.31

135,900

9.68

$
2.13

135,900

$
2.13$  3.99 - $  5.26

447,600

9

$
4.14

215,100

$
4.44$  6.50 - $  9.50

282,000

5.86

$
8.15

229,860

$
8.05$10.90 - $14.00

8,000

8.7

$
11.91

4,700

$
12.61953,500

7.65

$
4.87

665,560

$
4.91




In
October 2002, in connection with the issuance of Series A, the Company issued to Laurus Master Fund, Ltd. a warrant to purchase 55,000 shares of common stock at
an exercise price of $6.23 per share. This warrant was fully vested upon issuance and expires 5 years from the date of grant. The warrant was recorded as a discount from the preferred stock at
its estimated fair value of $128,000. The Company has accreted approximately $64,000 of this discount as a preferred distribution for the year ended June 30, 2003.

In
March 2003, the Company issued a warrant to a public relations company to purchase 100,000 shares of common stock at an exercise price of $2.40, in exchange for services. This
warrant was fully vested upon issuance and expires 5 years from the date of grant. The fair value of this warrant was approximately $90,000 and was recorded as compensation expense in the
accompanying statement of operations for the year ended June 30, 2003.

In
June 2003, the Company issued warrants to a group of scientists in connection with a research and development agreement to purchase a total of 83,000 shares of common stock at
an exercise price of $3.31. These warrants were fully vested upon issuance and expire 5 years from the date of grant. The fair value of these warrants was approximately $105,000 and was
recorded as compensation expense in the accompanying statement of operations for the year ended June 30, 2003.

During
2003, the Company issued other warrants to various advisors and individuals in exchange for services to purchase a total of 54,000 shares of common stock at exercise prices
ranging from $3.16 to $12.45. The fair value of these warrants was approximately $48,000 and was recorded as compensation expense in the accompanying statement of operations for the year ended
June 30, 2003.

The
Company estimated the fair value of the warrants using the Black-Scholes option-pricing model. The Company estimated the fair value of the warrants using the following input
assumptions:

Volatility

63.0% - 67.1
%Dividend yield

0
%Risk-free interest rate

2.78% - 4.50
%Expected lives

5 years


46

---

The
following table presents the weighted average exercise price of warrants outstanding at June 30, 2003:

Warrants Outstanding and ExercisableRange of Exercise Prices

Number of
Warrant Shares

Wtd Avg
Exercise Price$  2.40 - $  3.31

222,000

$
2.89$  6.23 - $  9.00

982,100

$
8.84$12.00 - $12.45

253,000

$
12.031,457,100

$
8.49




In
November 2002, the Company issued a nonqualified stock option to an advisor in exchange for services to purchase 50,000 shares of common stock at exercise price of $4.23 per
share. This option vests over a period of 3 years with 50% of the options vesting immediately and the remaining unvested options to vest at a rate of 33% upon each subsequent year anniversary
of the date of grant. The Company recorded initial compensation expense related to this grant based on the fair value, as calculated using the Black-Scholes option-pricing model, of approximately
$37,000 and recorded deferred compensation of approximately $37,000 to be amortized as expense over the vesting period of the stock option.

In
June 2003, the employment status of this advisor to the Company changed to that of a part-time employee. Therefore, as of the start date of employment, all deferred
compensation relating to the unvested options was reversed and the Company recorded compensation expense related to this grant based on the fair value immediately prior to the start date. For the year
ended June 30, 2003, the Company recorded a total of approximately $45,000 as compensation expense relating to this option grant, which is included in the accompanying statement of operations.

In
March 2003, the Company issued a nonqualified stock option to the same advisor in exchange for services to purchase 4,300 shares of common stock at exercise price of $2.10 per
share. This option vested immediately on the date of grant. The Company recorded compensation expense related to this grant based on the fair value, as calculated using the Black-Scholes
option-pricing model, of approximately $4,000 for the year ended June 30, 2003. The Company has recorded approximately $7,000 of deferred compensation expense relating to non-cash
compensation for a member of the Company's Medical Advisory Board.

During
2003, the Company issued options to an employee below fair market value on the date of grant. The Company recorded approximately $16,000 as stock based compensation related to
this transaction.



Notes
receivable from related parties as of June 30, 2003 consisted of a loan of approximately $138,000 to the Company's chief executive officer, which was used to exercise
options for 50,000 shares of the Company's common stock on December 9, 1997. The loan is due and payable December 9, 2003. During the year ended June 30, 2003, the Company granted
a loan to an employee for approximately $85,000 used to exercise options to purchase 20,000 shares of the company's common stock on November 15, 2003. The loan is due and payable on
November 15, 2005. These transactions are reported as a reduction of stockholders' equity.

47

---

15.   401k Plan

The Company has a defined contribution retirement plan which contains a 401(k) Plan. All employees who are 21 years of age and who have completed three
months 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 401(k) plan. The Company made
cash contributions to the plan of $60,000 and $0 during the years ended June 30, 2002 and 2003, respectively.

16.   Contingencies

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

17.   Subsequent Event

On July 31, 2003, the Company entered into an agreement with its former exclusive distributor for the sale of prostate seeds, to release each other from
further obligations under the 2000 Agreement. The new agreement conveys to the Company direct marketing and sales capabilities to sell its I-Plant Seed brachytherapy seeds for use in the
treatment of prostate cancer. In connection with this, the Company's former exclusive distributor will work cooperatively to transition customers and marketing materials directly to the Company. The
distributor also agreed not to compete with the Company for a period of three years. The Company will pay the distributor an average of approximately $39,000 per month over the next 28 months,
beginning September 1, 2003.

On
August 28, 2003, the Company issued 200,000 shares of Series B 5% Cumulative Convertible Preferred Stock ("Series B") having a stated value of $10 per share and a term
of eighteen (18) months ("Term"), pursuant to a Securities Purchase Agreement executed on August 28, 2003 with the Laurus Master Fund, Ltd. ("Laurus"). The Company received
$2,000,000 in gross proceeds, less a management fee and placement agent fee of approximately $100,000 and related transaction costs estimated to be an additional $73,000. The terms of the
Series B provide for repayment with shares of the Company's common stock or in cash, pursuant to an amortization schedule. Repayment of the Series B commences on December 1, 2003.
The Company has the sole option to determine whether to satisfy payment of the monthly amount in full on each repayment date either in cash or in shares of common stock, or a combination of both.
However, if the closing price for any of the 11 trading days preceding a repayment date is less than $6.00, the Company would be required to pay such monthly amount in cash at 105% of the monthly
obligation. If the payment of the monthly amount is made in common stock, the fixed conversion price is $5.50. The Company also issued to Laurus a warrant to purchase 25,000 shares of common stock at
$6.88 per share and 45,000 shares of common stock at $8.25 per share. The Securities Purchase Agreement also provides for a security interest in substantially all of the Company's assets and provides
Laurus a right of first refusal on future financing arrangements during the Term. In the event Laurus declines to exercise its right of first refusal, it hereby agrees to enter into such documentation
as shall be reasonable requested by the Company in order to subordinate its rights under the Series B to the subsequent financier. The Company will utilize the proceeds of this financing to
commercialize its explosives detection system and for general working capital purposes.

On
August 28, 2003, the Securities Purchase Agreement related to the Series A transaction was amended and all financial covenant requirements were eliminated.

48

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ITEM 13.    EXHIBIT INDEX

The following are filed as part of this report.

|Exhibit Number: |  |                                                                                                                                     
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|*3.2            |  | By-Laws of the Company                                                                                                              
|*3.3            |  | Articles of Amendment to the Articles of Organization of the Company, dated June 9, 1999                                            
|*3.4            |  | Restated Articles of Organization of the Company, dated June 9. 1999                                                                
|*********3.5    |  | Certificate of Vote of Directors establishing Series A 7% Cumulative Convertible Preferred Stock, dated October 7, 2002             
|**********3.6   |  | Certificate of Vote of Directors establishing Series B 5% Cumulative Convertible Preferred Stock, dated August 26, 2003.            
|**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                                                                                   
|*********4.4    |  | Specimen Certificate of the Series A 7% Cumulative Convertible Preferred Stock                                                      
|**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                                         
|                |  |                                                                                                                                     

57

---

|*10.19   |  | $750,000 Commercial Promissory Note signed by the Company in favor of US Trust, dated January 16, 1998                                                                                                                                                                                                                                                                                                                     
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.20   |  | Promissory Note signed by Anthony J. Armini in favor of the Company, dated September 26, 1998                                                                                                                                                                                                                                                                                                                              
|*10.21   |  | Shareholders Agreement between NAR Holding Corporation and Anthony J. Armini, dated July 15, 1987                                                                                                                                                                                                                                                                                                                          
|*10.22   |  | Lease between the Company and Teachers Insurance and Annuity Association of America, dated September 29, 1995                                                                                                                                                                                                                                                                                                              
|*10.23   |  | First Amendment to Lease and Expansion Agreement between the Company and Teachers Insurance and Annuity Association of America, dated July 29, 1998                                                                                                                                                                                                                                                                        
|*10.24   |  | Standard Cooperative Research and Development Agreement between the Company and the Naval Research Laboratory, dated January 21, 1997                                                                                                                                                                                                                                                                                      
|*10.25   |  | Cooperative Agreement between the Company and the United States of America US Army Tank-Automotive and Armaments Command Armament Research, Development and Engineering Center, dated September 30, 1997(1)                                                                                                                                                                                                                
|*10.26   |  | Vendor Agreement Memorandum between the Company and Osteonics, dated February 2, 1998(1)                                                                                                                                                                                                                                                                                                                                   
|*10.27   |  | Sample Purchase Order between the Company and MicroSpring Company, Inc., dated October 24, 1996(1)                                                                                                                                                                                                                                                                                                                         
|*10.28   |  | Asset Purchase Agreement between the Company and Falex Corporation, dated November 17, 1995(1)                                                                                                                                                                                                                                                                                                                             
|*10.29   |  | Settlement between the Company and Erik Akhund, dated July 1, 1998                                                                                                                                                                                                                                                                                                                                                         
|*10.30   |  | 1992 Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                     
|*10.31   |  | Form of Stock Option Agreement under the 1992 Stock Option Plan                                                                                                                                                                                                                                                                                                                                                            
|*10.32   |  | 1998 Incentive and Nonqualified Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                          
|**10.33  |  | Form of Incentive Stock Option under the 1998 Incentive and Nonqualified Stock Option Plan                                                                                                                                                                                                                                                                                                                                 
|**10.34  |  | Form of Nonqualified Stock Option under the 1998 Incentive and Nonqualified Stock Option Plan                                                                                                                                                                                                                                                                                                                              
|**10.35  |  | Form of Nonqualified Stock Option for Non-Employee Directors under the 1998 Incentive and Nonqualified Stock Option Plan                                                                                                                                                                                                                                                                                                   
|*10.36   |  | Form of Lock-Up Agreement                                                                                                                                                                                                                                                                                                                                                                                                  
|**10.37  |  | Agreement Appointing Transfer Agent and Registrar between the Company and American Securities and Transfer & Trust, Inc., dated October 19, 1998                                                                                                                                                                                                                                                                           
|**10.38  |  | Certification of Corporate Secretary dated October 19, 1998 concerning Agreement Appointing Transfer Agent and Registrar between the Company and American Securities Transfer & Trust, Inc.                                                                                                                                                                                                                                
|**10.39  |  | Research and Development Agreement between the Company and Guidant Corporation, dated May 20, 1998                                                                                                                                                                                                                                                                                                                         
|**10.40  |  | Letter Agreement between the Company and Guidant Corporation, dated September 29, 1998(1)                                                                                                                                                                                                                                                                                                                                  
|***10.41 |  | Form of Medical Advisory Board Agreement                                                                                                                                                                                                                                                                                                                                                                                   
|***10.42 |  | Form of Loan Agreement, dated January 7, 1999, between the Company and the following employees in the following amounts: Donald J. Dench ($12,500), Diane J. Ryan ($12,500), Mark and Kathleen Gadarowski ($12,500), Gregory
Huntington, Sr. ($12,500), Leonard DeMild ($25,000), Michael Nelson ($12,500), Richard Sahagian ($12,500), Darryl Huntington ($12,500), Dennis Gadarowski ($12,500) and David Santos ($12,500)
|***10.43 |  | Terms and Conditions from Sample Purchase Order between the Company and Biomet, Incorporated                                                                                                                                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                            

58

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|****10.44         |  | Unit and Warrant Agreement between the Company and American Securities Transfer & Trust, Inc., dated April 9, 1999                                                                                               
|----------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.45            |  | Agreement between the Company and U.S. Army Space and Missile Defense Command, dated May 27, 1999                                                                                                                
|*****10.46        |  | Second Amendment to Lease and Extension Agreement                                                                                                                                                                
|*****10.47        |  | Sublease Agreement                                                                                                                                                                                               
|*****10.48        |  | Consent to Sublease Agreement                                                                                                                                                                                    
|******10.52       |  | Distribution Agreement, dated January 26, 2000, by and between Implant Sciences Corporation and MedTec Iowa, Inc.(1)                                                                                             
|******10.53       |  | Stock Purchase Agreement, dated March 2, 2000, by and between Implant Sciences Corporation and MedTec Iowa, Inc.                                                                                                 
|******10.54       |  | Research and Development Agreement, dated March 13, 2000, by and between Implant Sciences Corporation and Cardiotech International, Inc.                                                                         
|******10.55       |  | Amendment to Distributorship Agreement between Med-Tec Iowa, Inc., and Implant Sciences Corporation dated 26 January 2000                                                                                        
|*******10.56      |  | Line of Credit Letter Agreement, dated October 10, 2001, by and between Implant Sciences Corporation and Cardiotech International Inc.                                                                           
|*******10.57      |  | $500,000 Line of Credit Term Grid Note, dated October 10, 2001, by and between Implant Sciences Corporation and Cardiotech International Inc.                                                                    
|*******10.58      |  | Security Agreement, dated October 10, 2001, by and between Implant Sciences Corporation and Cardiotech International Inc.                                                                                        
|*******10.59      |  | Guaranty of Line of Credit between Implant Sciences Corporation and Cardiotech International Inc. by Anthony J. Armini, dated October 10, 2001                                                                   
|*******10.60      |  | Subordination and Intercreditor Agreement by and between Cardiotech International Inc. and Anthony J. Armini,, Mark Gadarowski, Dennis Gadarowski, Richard Sahagian, and Daryl Huntington, dated October 10, 2001
|*******10.61      |  | Consent of Citizens Bank to Line of Credit Agreement by and between Implant Sciences Corporation and Cardiotech International, Inc., dated October 10, 2001                                                      
|*******10.62      |  | Modification Agreement by and between Implant Sciences Corporation and Citizens Bank of Massachusetts, dated October 11, 2001                                                                                    
|*******10.63      |  | Deposit Pledge Agreement by and between Implant Sciences Corporation and Citizens Bank of Massachusetts, dated October 11, 2001                                                                                  
|*******10.64      |  | Deposit Pledge Agreement by and between Stephen Bunker and Citizens Bank of Massachusetts, dated October 11, 2001                                                                                                
|*******10.65      |  | Limited Guaranty of Commercial Promissory Note between Implant Sciences Corporation and Citizens Bank of Massachusetts by Stephen Bunker, dated October 11, 2001                                                 
|*******10.66      |  | Deposit Account Control Agreement by and between Implant Sciences Corporation and Citizens Bank of Massachusetts, dated October 11, 2001                                                                         
|*******10.67      |  | Deposit Account Control Agreement by and between Stephen Bunker and Citizens Bank of Massachusetts, dated October 11, 2001                                                                                       
|********10.68     |  | Letter Agreement between Implant Sciences Corporation and Darlene Deptula-Hicks dated May 1, 2001                                                                                                                
|*********10.69    |  | Securities Purchase Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd. dated October 7, 2002                                                                                            
|**********10.69.1 |  | Amendment #1 to Item 10.69                                                                                                                                                                                       
|*********10.70    |  | Security Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd. dated October 7, 2002                                                                                                       
|*********10.71    |  | Common Stock Purchase Warrant for 55,000 shares issued to Laurus Master Fund, Ltd. dated October 7, 2002                                                                                                         
|                  |  |                                                                                                                                                                                                                  

59

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|**********10.72 |  | Securities Purchase Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd, dated August 28, 2003                                                                    
|--------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**********10.73 |  | Security Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd. dated August 28, 2003                                                                               
|**********10.74 |  | Common Stock Purchase Warrant for 70,000 shares issued to Laurus Master Fund, Ltd. dated August 28, 2003                                                                                 
|*21.1           |  | Subsidiaries of the Company                                                                                                                                                              
|23.1            |  | Consent of BDO Seidman, LLP Independent Certified Public Accountants, filed herewith                                                                                                     
|23.2            |  | Consent of Ernst & Young, LLP Independent Certified Public Accountants, filed herewith                                                                                                   
|**********24.1  |  | Power of Attorney                                                                                                                                                                        
|31.1            |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith                                                                       
|31.2            |  | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith                                                                   
|32.1            |  | Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith

---

|*          |  | Previously filed in the Registration Statement on Form SB-2 (Registration No. 333-64499) filed on September 29, 1998, and is incorporated herein by reference.                      
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**         |  | Previously filed in Amendment No. 1 to the Registration Statement, filed on December 21, 1998, and is incorporated herein by reference.                                             
|***        |  | Previously filed in Amendment No. 2 to the Registration Statement, filed on February 11, 1999, and is incorporated herein by reference.                                             
|****       |  | Previously filed in Amendment No. 3 to the Registration Statement, filed on April 30, 1999, and is incorporated herein by reference.                                                
|*****      |  | Previously filed in Quarterly Report on Form 10-QSB for the quarter ended December 31, 1999, filed on February 14, 2000, and is incorporated herein by reference.                   
|******     |  | Previously filed in Quarterly Report on Form 10-QSB for the quarter ended March 31, 2001, filed on May 11, 2000, and is incorporated herein by reference.                           
|*******    |  | Previously filed in Annual Report on Form 10-KSB for the fiscal year ended June 30, 2001, filed on October 15, 2001, and is incorporated herein by reference.                       
|********   |  | Previously filed in Amendment No. 1 to the Annual Report on Form 10-KSB for the fiscal year ended June 30, 2001, filed on February 8, 2002, and is incorporated herein by reference.
|*********  |  | Previously filed in the Annual Report on Form 10 KSB for the fiscal year ended June 30, 2002 filed on October 15, 2002 and is incorporated herein by reference                      
|********** |  | Previously filed in the Annual Report on Form 10 KSB for the fiscal year ended June 30, 2003 filed on September 29, 2003 and is incorporated herein by reference                    
|(1)        |  | Filed under application for confidential treatment.                                                                                                                                 



60

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SIGNATURES

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

|                      |  | IMPLANT SCIENCES CORPORATION                                                                                                              
|--------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|                      |  |                                                                                                                                           
|Date: October 1, 2003 |  | /s/ANTHONY J. ARMINIAnthony J. Armini
President, Chief Executive Officer,
Chairman of the Board of Directors
(Principal Executive Officer)

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

|Date: October 1, 2003 |  | /s/ANTHONY J. ARMINIAnthony J. Armini
President, Chief Executive Officer,
Chairman of the Board of Directors
(Principal Executive Officer)
|--------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|Date: October 1, 2003 |  | */s/DIANE J. RYANDiane J. Ryan
VP Finance and CFO
(Principal Financial and Accounting Officer)                                            
|Date: October 1, 2003 |  | */s/STEPHEN N. BUNKERStephen N. Bunker
Vice President and Chief Scientist,
Director                                                       
|Date: October 1, 2003 |  | */s/MICHAEL SZYCHERMichael Szycher, Director                                                                                              
|Date: October 1, 2003 |  | */s/SHAUN CAVEShaun Cave, Director                                                                                                        
|Date: October 1, 2003 |  | */s/DAVID EISENHAUREDavid Eisenhaure, Director                                                                                            

*
by Anthony J. Armini, Attorney In Fact

61

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