**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM10-KSB/A**

 

**(AmendmentNo. 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, 2004.**                                                                                                                                             |
| ** **                                                                                                                                                                                 | ** **                                                                                     |
| **Or**                                                                                                                                                                                     |
| ** **                                                                                                                                                                                 | ** **                                                                                     |
| **o**                                                                                                                                                                                      | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.** |
| ** **                                                                                                                                                                                 | ** **                                                                                     |
| **For the  transition period from               to             .** |
| ** **                                                                                                                                                                                 | ** **                                                                                     |
| **Commission  file number 000-25839**                                                                                                                                                      |

 

**IMPLANTSCIENCES CORPORATION**

(Exact name ofregistrant as specified in its charter)

 
| **Massachusetts**                                                | ** ** | **04-2837126**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |       | (IRS Employer  Identification number) |
|                                                             |       |                                  |
| **107  Audubon Road, #5 Wakefield, MA**                          | ** ** | **01880**                             |
| (Address of  Principal Executive Offices)                        |       | (Zip Code)                            |

 

**781-246-0700**

(Registrant’s Telephone Number, Including Area Code)

 

Securities registeredpursuant to Section 12(b) of the Act:

 
| **Title of Each Class**       | ** ** | **Name of Each Exchange on Which Registered** |
|-------------------------------|------------|-----------------------------------------------|
| Common Stock, $.10 par  value |       | American  Stock Exchange                      |
| Warrants                      |       | American  Stock Exchange                      |

 

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

YES   ý   NO   o

 

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

NoDisclosure   ý

 

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

 

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

 

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

 

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

 

 

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**EXPLANATORY NOTE**

 

This Amendment No. 1 is being filed solely to correct an error whicharose in the process of converting the Company’s previously filed annual reporton Form 10-KSB to electronic form suitable for filing on the Securities andExchange Commission’s EDGAR system.  Inthe previous filing, the line identifying the accounts payable liability wasinadvertently deleted from the balance sheet. In accordance with the rules of the Commission, Item7. Financial Statements and Supplementary Data isbeing refiled in its entirety.

 

In order to preserve the nature and character of the disclosures setforth in the Original Report, except as expressly noted herein, this reportspeaks as of the date of the filing of the Original Report, October 12, 2004,and we have not updated the disclosures in this report to speak as of a laterdate.  All information contained in thisAmended Report is subject to updating and supplementing as provided in ourreports filed with the Securities and Exchange Commission subsequent to thedate of the Original Report.

 

2

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**ITEM 7.****                             FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

Our Financial Statementsand Related Report of Independent Registered Public Accounting Firm arepresented in the following pages.  TheFinancial Statements filed in this Item 7 are as follows:

 
| Report  of Independent Registered Public Accounting Firm                                                                        |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|
| Balance Sheet as of  June 30, 2004                                                                                              |   |
| Statements  of Operations for the years ended June 30, 2003 and 2004                                                            |   |
| Statements  of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for the  years ended June 30, 2003 and 2004 |   |
| Statements  of Cash Flows for the years ended June 30, 2003 and 2004                                                            |   |
| Notes  to Financial Statements                                                                                                  |   |

 

3

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**Report of Independent RegisteredPublic Accounting Firm**

** **

The Board of Directors and Stockholders

Implant Sciences Corporation:

 

We have audited the accompanying balance sheet of Implant SciencesCorporation as of June 30, 2004 and the related statements of operations,stockholders’ equity and comprehensive income (loss) and cash flows for each ofthe two years in the period ended June 30, 2004.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Implant SciencesCorporation at June 30, 2004, and the results of its operations and its cashflows for each of the two years in the period ended June 30, 2004, inconformity with accounting principles generally accepted in the United Statesof America.

 

 
|                  | /s/ BDO Seidman, LLP |   |
|-----------------------|----------------------|--------|
|                  |
| Boston, Massachusetts |
| September 21, 2004    |

 

4

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**IMPLANTSCIENCES CORPORATION**

**BALANCE SHEET**

 
| ** **                                                                                                                                         | ** ** | **June 30,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| **ASSETS**                                                                                                                                         |       |               |       |
| Current assets:                                                                                                                                    |       |               |       |
| Cash and cash  equivalents (Note 2)                                                                                                                |       | $                  | 6,906,000  |   |
| Accounts  receivable, less allowance of $89,000 (Note 2)                                                                                           |       | 709,000            |       |
| Accounts  receivable, unbilled (Notes 2 and 7)                                                                                                     |       | 1,434,000          |       |
| Inventories  (Notes 2 and 3)                                                                                                                       |       | 481,000            |       |
| Investments -  available for sale securities (Note 9)                                                                                              |       | 419,000            |       |
| Prepaid expenses  and other current assets (Note 16)                                                                                               |       | 140,000            |       |
| Total current  assets                                                                                                                              |       | 10,089,000         |       |
|                                                                                                                                               |       |               |       |
| Property and  equipment, net (Notes 2, 4 and 10)                                                                                                   |       | 4,308,000          |       |
| Amortizable  intangible assets. net (Note 15)                                                                                                      |       | 625,000            |       |
| Investment in  unconsolidated subsidiary (Note 6)                                                                                                  |       | 63,000             |       |
| Other  non-current assets                                                                                                                          |       | 139,000            |       |
|                                                                                                                                               |       |               |       |   |
| Total assets                                                                                                                                       |       | $                  | 15,224,000 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                     |       |               |       |
| Current  liabilities:                                                                                                                              |       |               |       |
| Current  maturities of long-term debt and obligations under capital lease (Notes 10 and  15)                                                       |       | $                  | 101,000    |   |
| Payable to  Med-Tec (Note 15)                                                                                                                      |       | 394,000            |       |
| Accrued expenses  (Note 5)                                                                                                                         |       | 740,000            |       |
| Accounts payable                                                                                                                                   |       | 578,000            |       |
| Deferred revenue                                                                                                                                   |       | 23,000             |       |
| Total current  liabilities                                                                                                                         |       | 1,836,000          |       |
|                                                                                                                                               |       |               |       |
| Long-term  liabilities:                                                                                                                            |       |               |       |
| Long-term debt  and obligations under capital lease, net of current maturities (Notes 10 and  15)                                                  |       | 6,000              |       |
| Payable to  Med-Tec, net of current amount (Note 15)                                                                                               |       | 212,000            |       |
| Total  liabilities                                                                                                                                 |       | 2,054,000          |       |
|                                                                                                                                               |       |               |       |
| Commitments and  Contingencies (Note 10)                                                                                                           |       |               |       |
|                                                                                                                                               |       |               |       |
| Convertible  preferred stock (Note 12): 5,000,000 shares authorized                                                                                |       |               |       |
| 7% Series A  Cumulative RedeemableConvertible Preferred Stock, $10 stated value; 250,000  shares designated; no shares issued and outstanding      |       | —             |       |
| 5% Series B  Cumulative Redeemable Convertible Preferred Stock, $10 stated value; 200,000  shares designated; no shares issued and outstanding     |       | —             |       |
| 5% Series C  Cumulative RedeemableConvertible Preferred Stock; $10 stated value; 250,000  shares designated; 131,875 shares issued and outstanding |       | 670,000            |       |
|                                                                                                                                               |       |               |       |
| Stockholders’  equity (Note 13):                                                                                                              |       |               |       |
| Common stock,  $0.10 par value; 20,000,000 shares authorized; 8,370,338 shares issued and  outstanding as of June 30, 2004                         |       | 837,000            |       |
| Additional  paid-in capital                                                                                                                        |       | 31,360,000         |       |
| Accumulated  deficit                                                                                                                               |       | (19,527,000        | )          |
| Deferred  compensation                                                                                                                             |       | (449,000           | )          |
| Accumualted  other comprehensive income                                                                                                            |       | 313,000            |       |
| Treasury stock,  3,103 common shares, at cost (Note 6)                                                                                             |       | (34,000            | )          |
| Total  stockholders’ equity                                                                                                                   |       | 12,500,000         |       |
|                                                                                                                                               |       |               |       |
| Total  liabilities and stockholders’ equity                                                                                                   |       | $                  | 15,224,000 |   |

 

The accompanying notesare an integral part of these financial statements.

 

5

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**IMPLANTSCIENCES CORPORATION**

**STATEMENTS OF OPERATIONS**

 
| ** **                                                                                                                                                             | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                             | ** ** | **2003**                 | ** ** | **2004** | ** ** |
| Revenues:                                                                                                                                                              |       |                     |       |   |   |
| Product  revenues:                                                                                                                                                     |       |                     |       |   |   |
| Medical                                                                                                                                                                |       | $                        | 4,474,000  |   | $ | 4,451,000 |   |
| Semiconductor                                                                                                                                                          |       | 876,000                  |       | 958,000 |   |
| Total product  revenues                                                                                                                                                |       | 5,350,000                |       | 5,409,000 |   |
| Government  contracts and other (Note 7)                                                                                                                               |       | 1,346,000                |       | 3,157,000 |   |
| Total revenues                                                                                                                                                         |       | 6,696,000                |       | 8,566,000 |   |
|                                                                                                                                                                   |       |                     |       |   |   |
| Cost of  revenues:                                                                                                                                                     |       |                     |       |   |   |
| Cost of product  revenues (includes $0 and $89,000 of non-cash stock-based compensation for  the years ended June 30, 2003 and 2004, respectively)                     |       | 4,147,000                |       | 3,976,000 |   |
| Cost of  government contracts and other                                                                                                                                |       | 1,216,000                |       | 2,210,000 |   |
| Total cost of revenues                                                                                                                                                 |       | 5,363,000                |       | 6,186,000 |   |
|                                                                                                                                                                   |       |                     |       |   |   |
| Gross margin                                                                                                                                                           |       | 1,333,000                |       | 2,380,000 |   |
|                                                                                                                                                                   |       |                     |       |   |   |
| Operating  expenses:                                                                                                                                                   |       |                     |       |   |   |
| Research and  development (includes $141,000 and $300,000 of non-cash stock-based  compensation for the years ended June 30, 2003 and 2004, respectively)              |       | 1,776,000                |       | 1,631,000 |   |
| Selling, general  and administrative (includes $167,000 and $1,279,000 of non-cash stock-based  compensation for the years ended June 30, 2003 and 2004, respectively) |       | 2,326,000                |       | 4,634,000 |   |
| Total operating  expenses                                                                                                                                              |       | 4,102,000                |       | 6,265,000 |   |
|                                                                                                                                                                   |       |                     |       |   |   |
| Loss from  operations                                                                                                                                                  |       | (2,769,000               | )          | (3,885,000 | ) |
|                                                                                                                                                                   |       |                     |       |   |   |
| Other income  (expenses):                                                                                                                                              |       |                     |       |   |   |
| Interest income                                                                                                                                                        |       | 27,000                   |       | 23,000 |   |
| Interest expense                                                                                                                                                       |       | (25,000                  | )          | (135,000 | ) |
| Gain on sale of  equipment                                                                                                                                             |       | —                   |       | 35,000 |   |
| Equity losses in  unconsolidated subsidiaries (Note 6)                                                                                                                 |       | (2,000                   | )          | (50,000 | ) |
| Total other  income (expense)                                                                                                                                          |       | —                   |       | (127,000 | ) |
|                                                                                                                                                                   |       |                     |       |   |   |
| Net loss                                                                                                                                                               |       | (2,769,000               | )          | (4,012,000 | ) |
| Preferred  distribution, dividends and accretion (Note 12)                                                                                                             |       | (891,000                 | )          | (2,527,000 | ) |
| Net loss per  share applicable to common shareholders                                                                                                                  |       | $                        | (3,660,000 | ) | $ | (6,539,000 | ) |
|                                                                                                                                                                   |       |                     |       |   |   |
| Net loss  applicable to common shareholders, basic and diluted                                                                                                         |       | $                        | (0.58      | ) | $ | (0.90 | ) |
|                                                                                                                                                                   |       |                     |       |   |   |
| Weighted average  common shares outstanding used in computing basic and diluted loss per share                                                                         |       | 6,310,748                |       | 7,317,677 |   |

 

The accompanying notesare an integral part of these financial statements.

 

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**IMPLANT SCIENCES CORPORATION**

**STATEMENTSOF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENVIS INCOME (LOSS)**

**FOR THE YEARS ENDED JUNE 30, 2003 AND 2004**

 
| ** **                                                                                                                                                          | ** ** | ** **        | ** ** | ** **     | ** ** | ** **  | ** ** | ** **               | ** ** | ** **       | ** ** | **Accumulated**   | ** ** | ** **          | ** ** | ** **     | ** ** | **Notes**              | ** ** | ** **        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|-------------|------------|--------------------------|------------|------------------|------------|-------------------|------------|---------------------|------------|----------------|------------|------------------------|------------|-------------------|------------|------------|------------|
| ** **                                                                                                                                                          | ** ** | **Common  Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | ** **               | ** ** | **Other**        | ** ** | ** **        | ** ** | ** **          | ** ** | **Receivable** | ** ** | **Total**              | ** ** | ** **        | ** ** |
| ** **                                                                                                                                                          | ** ** | **Number  of**    | ** ** | ** **     | ** ** | **Paid-in** | ** ** | ** **               | ** ** | **Deferred**     | ** ** | **Comprehensive** | ** ** | **Treasury  Stock** | ** ** | **from**       | ** ** | **Stockholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                                                                                                          | ** ** | **shares**        | ** ** | **Amount**     | ** ** | **Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Compensation** | ** ** | **Income**        | ** ** | **Shares**          | ** ** | **Amount**     | ** ** | **Employees**          | ** ** | **Equity**        | ** ** | **(Loss)** | ** ** |
| Balance at June  30, 2002                                                                                                                                           |       | 6,200,901         |       | $              | 620,000    |        | $          | 13,630,000               |       | $                | (9,328,000 | )                 | $          | (9,000              | )          | $              | 45,000     |                   | —     |              | $          | —     |       | $ | (138,000 | ) | $ | 4,820,000 |   | $ | (2,149,000 | ) |
|                                                                                                                                                                |       |              |       |           |       |        |       |                     |       |             |       |              |       |                |       |           |       |                   |       |              |       |       |       |
| Issuance of  common stock pursuant to exercise of stock options                                                                                                     |       | 23,000            |       | 3,000          |       | 97,000      |       |                     |       |             |       |              |       |                |       |           |       | (85,000                | )          | 15,000            |       |       |       |
| Issuance of  common stock pursuant to exercise of warrants                                                                                                          |       | 2,000             |       | —         |       | 18,000      |       |                     |       |             |       |              |       |                |       |           |       |                   |       | 18,000            |       |       |       |
| Issuance of  common stock pursuant to employee stock purchase plan                                                                                                  |       | 5,934             |       | 1,000          |       | 30,000      |       |                     |       |             |       |              |       |                |       |           |       |                   |       | 31,000            |       |       |       |
| Issuance of  common stock pursuant to private financing agreement, net of issuance costs                                                                            |       | 8,721             |       | —         |       | 41,000      |       |                     |       |             |       |              |       |                |       |           |       |                   |       | 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     |       |                     |       |             |       |              |       |                |       |           |       |                   |       | 665,000           |       |       |       |
| Accretion of the  beneficial conversion feature and common stock warrants in connection with  the 7% Series A Cumulative Convertible Preferred Stock                |       |              |       |           |       |        |       | (533,000                 | )          |             |       |              |       |                |       |           |       |                   |       | (533,000          | )          |       |       |
| Conversion of 7%  Series A Cumulative Convertible Preferred Stock and related accrued dividends  into common stock                                                  |       | 409,600           |       | 41,000         |       | 1,035,000   |       | (116,000                 | )          |             |       |              |       |                |       |           |       |                   |       | 960,000           |       |       |       |
| Accretion and  dividends paid on Series A Preferred Stock                                                                                                           |       |              |       |           |       | 47,000      |       | (47,000                  | )          |             |       |              |       |                |       |           |       |                   |       | —            |       |       |       |
| Stock-based  compensation associated with warrants and nonqualified stock options issued  to nonemployees                                                           |       |              |       |           |       | 306,000     |       |                     |       | 2,000            |       |              |       |                |       |           |       |                   |       | 308,000           |       |       |       |
| Unrealized gain  on available for sale securities                                                                                                                   |       |              |       |           |       |        |       |                     |       |             |       | 72,000            |       |                |       |           |       |                   |       | 72,000            |       | 72,000     |       |
| Value of IPO  warrant extension (Note 13)                                                                                                                           |       |              |       |           |       | 195,000     |       | (195,000                 | )          |             |       |              |       |                |       |           |       |                   |       | —            |       |       |       |
| Net loss                                                                                                                                                            |       |              |       |           |       |        |       | (2,769,000               | )          |             |       |              |       |                |       |           |       | —                 |       | (2,769,000        | )          | (2,769,000 | )          |
| Balance at June  30, 2003                                                                                                                                           |       | 6,650,156         |       | 665,000        |       | 16,064,000  |       | (12,988,000              | )          | (7,000           | )          | 117,000           |       | —              |       | —         |       | (223,000               | )          | 3,628,000         |       | (2,697,000 | )          |
|                                                                                                                                                                     |            |                   |            |                |            |             |            |                          |            |                  |            |                   |            |                     |            |                |            |                        |            |                   |            |            |            |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of thesefinancial statements.

 

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**IMPLANT SCIENCES CORPORATION**

**STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME (LOSS)**

**FOR THE YEARS ENDED JUNE 30, 2003 AND 2004**

 
|                                                                                                                                                 |   |              |   |           |    |        |   |            |   |             |        | **Accumulated**   |   |                |       |           |    | **Notes**              |   |              |   |       |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|----------------|---------|-------------|--------|-----------------|--------|------------------|-------------|-------------------|--------|---------------------|------------|----------------|---------|------------------------|--------|-------------------|--------|------------|--------|
|                                                                                                                                                 |   | **Common  Stock** |   | **Additional** |    |        |   |            |   | **Other**        |        |              |   |                |       | **Receivable** |    | **Total**              |   |              |   |
|                                                                                                                                                 |   | **Number  of**    |   |           |    | **Paid-in** |   | **Accumulated** |   | **Deferred**     |        | **Comprehensive** |   | **Treasury  Stock** |       | **from**       |    | **Stockholders’** |   | **Comprehensive** |   |
|                                                                                                                                                 |   | **shares**        |   | **Amount**     |    | **Capital** |   | **Deficit**     |   | **Compensation** |        | **Income**        |   | **Shares**          | ** ** | **Amount**     |    | **Employees**          |   | **Equity**        |   | **(Loss)** |   |
| Balance at June  30, 2003                                                                                                                            |   | 6,650,156         |   | $              | 665,000 |        | $      | 16,064,000      |   | $                | (12,988,000 | )                 | $      | (7,000              | )          | $              | 117,000 |                   | — |              | $      | —     |   | $ | (223,000 | ) | $ | 3,628,000 |   | $ | (2,697,000 | ) |
| Issuance of  common stock pursuant to exercise of stock options                                                                                      |   | 138,635           |   | 14,000         |    | 516,000     |   |            |   |             |        |              |   |                |       |           |    |                   |   | 530,000           |   |       |   |
| Issuance of  common stock pursuant to exercise of warrants                                                                                           |   | 186,120           |   | 19,000         |    | 1,083,000   |   |            |   |             |        |              |   |                |       |           |    |                   |   | 1,102,000         |   |       |   |
| Issuance of  common stock pursuant to employee stock purchase plan                                                                                   |   | 7,135             |   | 1,000          |    | 28,000      |   |            |   |             |        |              |   |                |       |           |    |                   |   | 29,000            |   |       |   |
| Issuance of  common stock pursuant to private financing agreement, net of issuance costs  of $310,000                                                |   | 468,604           |   | 47,000         |    | 4,642,000   |   |            |   |             |        |              |   |                |       |           |    |                   |   | 4,689,000         |   |       |   |
| Conversion of 7%  Series A Cumulative Convertible Preferred Stock and related accrued dividends  into common stock                                   |   | 301,143           |   | 30,000         |    | 1,501,000   |   | (32,000         | )      |             |        |              |   |                |       |           |    |                   |   | 1,499,000         |   |       |   |
| Conversion of 5%  Series B Cumulative Convertible Preferred Stock and related accrued dividends  into common stock                                   |   | 371,336           |   | 37,000         |    | 2,057,000   |   | (63,000         | )      |             |        |              |   |                |       |           |    |                   |   | 2,031,000         |   |       |   |
| Issuance of  common stock to consultants in exchange for services                                                                                    |   | 11,205            |   | 1,000          |    | 109,000     |   |            |   |             |        |              |   |                |       |           |    |                   |   | 110,000           |   |       |   |
| Accretion and  dividends on 7% Series A Cumulative Convertible Preferred Stock                                                                       |   |              |   |           |    |        |   | (532,000        | )      |             |        |              |   |                |       |           |    |                   |   | (532,000          | )      |       |   |
| Accretion of the  beneficial conversion feature and common stock warrants in connection with  the 5% Series B Cumulative Convertible Preferred Stock |   |              |   |           |    | 1,009,000   |   | (1,224,000      | )      |             |        |              |   |                |       |           |    |                   |   | (215,000          | )      |       |   |
| Accretion of the  beneficial conversion feature and common stock warrants in connection with  the 5% Series C Cumulative Convertible Preferred Stock |   |              |   |           |    | 1,005,000   |   | (638,000        | )      |             |        |              |   |                |       |           |    |                   |   | 367,000           |   |       |   |
| Conversion of 5%  Series C Cumulative Convertible Preferred Stock and related accrued dividends  into common stock                                   |   | 175,000           |   | 17,000         |    | 1,164,000   |   |            |   |             |        |              |   |                |       |           |    |                   |   | 1,181,000         |   |       |   |
| Repayment of  notes receivable from employees                                                                                                        |   |              |   |           |    |        |   |            |   |             |        |              |   |                |       |           |    | 223,000                |   | 223,000           |   |       |   |
| Investment in  unconsolidated subsidiaries (Note 6)                                                                                                  |   | 10,344            |   | 1,000          |    | 112,000     |   |            |   |             |        | (6,000            | )      | 3,103               |       | (34,000        | )       |                   |   | 73,000            |   | (6,000     | )      |
| Fair value  associated with warrants and nonqualified stock options issued to  nonemployees                                                          |   | —            |   | —         |    | 992,000     |   |            |   | 2,000            |        |              |   |                |       |           |    |                   |   | 994,000           |   |       |   |
| Stock-based  compensation associated with warrants and nonqualified stock options issued  to employees below fair market value                       |   | 50,660            |   | 5,000          |    | 1,040,000   |   |            |   | (444,000         | )           |              |   |                |       |           |    |                   |   | 601,000           |   |       |   |
| Unrealized gain  on available for sale securities                                                                                                    |   |              |   |           |    |        |   |            |   |             |        | 202,000           |   |                |       |           |    |                   |   | 202,000           |   | 202,000    |   |
| Value of  underwriter IPO unit warrant extension (Note 13)                                                                                           |   |              |   |           |    | 38,000      |   | (38,000         | )      |             |        |              |   |                |       |           |    |                   |   | —            |   |       |   |
| Net loss                                                                                                                                             |   |              |   |           |    |        |   | (4,012,000      | )      |             |        |              |   |                |       |           |    |                   |   | (4,012,000        | )      | (4,012,000 | )      |
| Balance at June  30, 2004                                                                                                                            |   | 8,370,338         |   | $              | 837,000 |        | $      | 31,360,000      |   | $                | (19,527,000 | )                 | $      | (449,000            | )          | $              | 313,000 |                   | 3,103  |              | $      | (34,000    | )      | $ | — |   | $ | 12,500,000 |   | $ | (3,816,000 | ) |
|                                                                                                                                                      |        |                   |        |                |         |             |        |                 |        |                  |             |                   |        |                     |            |                |         |                        |        |                   |        |            |        |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notesare an integral part of these financial statements.

 

8

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**IMPLANTSCIENCES CORPORATION**

**STATEMENTSOF CASH FLOWS**

 
| ** **                                                                                                               | ** ** | **Years Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                               | ** ** | **2003**                 | ** ** | **2004** | ** ** |
| **Cash  flows from operating activities:**                                                                               |       |                     |       |   |   |
| Net loss                                                                                                                 |       | $                        | (2,769,000 | ) | $ | (4,012,000 | ) |
|                                                                                                                     |       |                     |       |   |   |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                             |       |                     |       |   |   |
| Depreciation and  amortization                                                                                           |       | 800,000                  |       | 1,263,000 |   |
| Stock-based  compensation expense                                                                                        |       | 308,000                  |       | 1,668,000 |   |
| Equity loss in  unconsolidated subsidiaries                                                                              |       | 2,000                    |       | 50,000 |   |
| Changes in  operating assets and liabilities:                                                                            |       |                     |       |   |   |
| Accounts  receivable                                                                                                     |       | 138,000                  |       | (1,365,000 | ) |
| Inventories                                                                                                              |       | (21,000                  | )          | (8,000 | ) |
| Prepaid expenses  and other current assets                                                                               |       | 39,000                   |       | (102,000 | ) |
| Accounts payable                                                                                                         |       | 176,000                  |       | (171,000 | ) |
| Accrued expenses                                                                                                         |       | (110,000                 | )          | 30,000 |   |
| Net cash used in  operating activities                                                                                   |       | (1,437,000               | )          | (2,647,000 | ) |
|                                                                                                                     |       |                     |       |   |   |
| **Cash  flows from investing activities:**                                                                               |       |                     |       |   |   |
| Purchase of  property and equipment                                                                                      |       | (478,000                 | )          | (355,000 | ) |
| Investment -  available for sale securities                                                                              |       | —                   |       | (40,000 | ) |
| Increase in  other non-current assets                                                                                    |       | (26,000                  | )          | (105,000 | ) |
| Net cash used in  investing activities                                                                                   |       | (504,000                 | )          | (500,000 | ) |
|                                                                                                                     |       |                     |       |   |   |
| **Cash  flows from financing activities:**                                                                               |       |                     |       |   |   |
| ** **                                                                                                               |       |                     |       |   |   |
| Proceeds from  issuance of common stock in connection with the exercise of options and the  Employee Stock Purchase Plan |       | 46,000                   |       | 559,000 |   |
| Proceeds from  warrant exercise                                                                                          |       | 18,000                   |       | 1,102,000 |   |
| Proceeds from  issuance of 7% Series A Cumulative Convertible Preferred Stock, net of  issuance costs                    |       | 2,099,000                |       | — |   |
| Proceeds from  issuance of 5% Series B Cumulative Convertible Preferred Stock, net of  issuance costs                    |       | —                   |       | 1,818,000 |   |
| Proceeds from  issuance of 5% Series C Cumulative Convertible Preferred Stock, net of  issuance costs                    |       | —                   |       | 2,282,000 |   |
| Repayments of  long-term debt and capital lease obligations                                                              |       | (276,000                 | )          | (1,579,000 | ) |
| Payments of  preferred stock dividends                                                                                   |       | (42,000                  | )          | — |   |
| Repayments of  notes receivable from employees                                                                           |       | —                   |       | 223,000 |   |
| Proceeds from  issuance of common stock in connection with private placement, net of  issuance costs                     |       | 41,000                   |       | 4,689,000 |   |
| Net cash  provided by financing activities                                                                               |       | 1,886,000                |       | 9,094,000 |   |
|                                                                                                                     |       |                     |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                                                                    |       | (55,000                  | )          | 5,947,000 |   |
| Cash and cash  equivalents, beginning                                                                                    |       | 1,014,000                |       | 959,000 |   |
| Cash and cash  equivalents, ending                                                                                       |       | $                        | 959,000    |   | $ | 6,906,000 |   |
|                                                                                                                          |            |                          |            |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these financial statements.

 

9

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| ** **                                                                                                                | ** ** | **Years Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                | ** ** | **2003**                 | ** ** | **2004** | ** ** |
| **Supplemental  disclosures of cash flow information:**                                                                   | ** ** | ** **               | ** ** | ** ** | ** ** |
| Interest paid                                                                                                             |       | $                        | 10,000     |   | $ | 135,000 |   |
|                                                                                                                      |       |                     |       |   |   |
| **Noncash  Investing and Financing Activity:**                                                                            | ** ** | ** **               | ** ** | ** ** | ** ** |
| Fixed assets  acquired in exchange for equipment financing                                                                |       | $                        | 1,300,000  |   | $ | — |   |
| Issuance of  Series A warrants                                                                                            |       | $                        | 128,000    |   | $ | — |   |
| Noncash  beneficial conversion feature - Series A                                                                         |       | $                        | 537,000    |   | $ | — |   |
| Stock options  exercised for note receivable for shareholder                                                              |       | $                        | 85,000     |   | $ | — |   |
| Value of IPO  warrant extension (Note 13)                                                                                 |       | $                        | 195,000    |   | $ | 38,000 |   |
| Issuance of  Series B warrants                                                                                            |       | $                        | —     |   | $ | 184,000 |   |
| Noncash  beneficial conversion feature - Series B                                                                         |       | $                        | —     |   | $ | 826,000 |   |
| Issuance of  Series C warrants                                                                                            |       | $                        | —     |   | $ | 305,000 |   |
| Noncash  beneficial conversion feature - Series C                                                                         |       | $                        | —     |   | $ | 700,000 |   |
| Conversion of 7%  Series A Cumulative Convertible Preferred stock and accrued dividends into  common stock                |       | $                        | 1,076,000  |   | $ | 1,531,000 |   |
| Conversion of 5%  Series B Cumulative Convertible Preferred stock and accrued dividends into  common stock                |       | $                        | —     |   | $ | 2,064,000 |   |
| Conversion of 5%  Series C Cumulative Convertible Preferred stock and accrued dividends into  common stock                |       | $                        | —     |   | $ | 1,181,000 |   |
| Accretion of 7%  Series A Cumulative Convertible Preferresd Stock, dividends, beneficial  conversion feature and warrants |       | $                        | 696,000    |   | $ | 564,000 |   |
| Accretion of 5%  Series B Cumulative Convertible Preferred Stock, dividends, beneficial  conversion feature and warrants  |       | $                        | —     |   | $ | 1,287,000 |   |
| Accretion of 5%  Series C Cumulative Convertible Preferred Stock, dividends, beneficial  conversion feature and warrants  |       | $                        | —     |   | $ | 638,000 |   |
| Value of  intangible asset acquired in exchange for long-term note payable                                                |       | $                        | —     |   | $ | 1,007,000 |   |
|                                                                                                                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |

** **

The accompanying notes are an integral part of thesefinancial statements.

 

10

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**1.****              Description of Business**

 

ImplantSciences Corporation (the “Company”) develops products for the medical deviceand explosives detection industry using ion implantation and thin film coatingsof radioactive and non-radioactive materials. The Company has received Food and Drug Administration 510(k) clearanceto market its I-Plantä Iodine-125radioactive seed for the treatment of prostate cancer.  The Company also has under developmentinterventional cardiology devices and temporary coronary brachytherapy systemsfor the prevention of restenosis (reclosure of the artery after balloonangioplasty).  The Company also modifiesthe surface characteristics of orthopedic joint implants to reduce polyethylenewear and thereby increasing the life of the implant and provides ionimplantation of electronic dopants for the semiconductor industry.  Additionally, the Company continues todevelop explosives detection systems to be used in the detection of traceresidues of explosives.

 

Whilethe Company strives to bring new products to market, it is subject to a numberof risks similar to other technology-based companies, including risks relatedto: (a) its dependence on key individuals and collaborative research partners; (b)competition from substitute products and larger companies; (c) its ability todevelop and market commercially usable produces and obtain regulatory approval forits products under development; and (d) its ability to obtain the substantialadditional financing necessary to adequately fund the development,commercialization and marketing of its products.  For the year ended June 30, 2004, the Companyreported a net loss of $4,012,000 and used $2,647,000 in cash fromoperations.  As of June 30, 2004, theCompany had an accumulated deficit of approximately $19,527,000.  Management continually evaluates plans toreduce its operating expenses and increase its cash flow from operations.  Failure of the Company to achieve itsprojections may require the Company to seek additional financing.  There can be no guarantee that financing, ifrequired, will be available at commercially favorable terms.  Management believes that its working capitalat June 30, 2004 and cash flows generated during the year then ended will besufficient to finance its operations through at least the next twelve months.

 

**2.****              Summary of Significant AccountingPolicies**

 

*Cash, CashEquivalents, and Investments*

 

The Company considers anysecurities with maturities of 90 days or less at the time of investment to becash equivalents.

 

The Company accounts forinvestments in accordance with Statement of Financial Accounting Standards (“SFAS”)No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”  Under SFAS No. 115, securities purchased inorder to be held for indefinite periods of time and not intended at the time ofpurchase to be held until maturity are classified as available-for-salesecurities.  At June 30, 2004, thesesecurities consisted of common stock in CardioTech, a related party (See Note 9).  This common stock is recorded at fair marketvalue with any unrealized gains and losses reported as a separate component of equityin other accumulated comprehensive income (loss).

 

*ComprehensiveIncome (Loss)*

 

The Company hasaccumulated other comprehensive income resulting from the unrealized gain on aninvestment in marketable securities of CardioTech International Inc. (Note 9)and the recognition of the unrealized gain of the Company’s share of CardioTechand the Company’s stock owned by CorNova (Note6), which is recorded as aseparate component of equity in other accumulated comprehensive income (loss).

 

*Financial Instruments*

 

The estimated fair valuesof the Company’s financial instruments, which at June 30, 2004 include cashequivalents, investments in available for sale securities, accounts receivable,accounts payable, long-term debt, and 5% Series C Cumulative ConvertiblePreferred Stock, approximates their carrying values due to their short-termnature or market variable rates of interest.

 

*Inventories*

 

Inventories consist ofraw materials, work-in-process and finished goods.  Work-in-process and finished goods includeslabor and overhead, and are stated at the lower of cost (first in, first out)or market.

 

11

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*Property and Equipment and Capital Lease*

 

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

 
| ** **                                                 | ** ** | **Estimated Lives**                                                              | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| Machinery and  equipment                                   |       | 5 - 7 years                                                                      |       |
| Computers and  software                                    |       | 3 - 5 years                                                                      |       |
| Leasehold  improvements and equipment under capital leases |       | Lesser of the remaining life of the lease or the  useful life of the improvement |       |
| Furniture and  fixtures                                    |       | 7 years                                                                          |       |
| Motor vehicles                                             |       | 7 years                                                                          |       |

 

*WarrantyCosts*

 

The Company accrueswarranty costs in the period the related revenue is recognized.  Warranty costs and related accruals are notmaterial to operating results.

 

*Income Taxes*

 

The liability method isused to account for income taxes. Deferred tax assets and liabilities are determined based on differencesbetween the financial reporting and income tax bases of assets and liabilitiesas well as net operating loss and tax credit carry forwards and are measuredusing the enacted tax rates and laws that will be in effect when thedifferences reverse.  Deferred tax assetsmay be reduced by a valuation allowance to reflect the uncertainty associatedwith their ultimate realization.

 

*Patent Costs*

 

As of June 30, 2004,there were 23 patents issued.  TheCompany expenses patent costs as incurred.

 

*Impairmentof Long-Lived Assets*

 

In accordance with SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” theCompany reviews the carrying values of its long-lived assets for possible impairmentwhenever events or changes in circumstances indicate that the carrying amountsof the assets may not be recoverable.

 

The Company believes that the carrying value of its long-livedassets is fully realizable at June 30, 2004.

 

*Concentration of Credit Risk and Major Customers*

 

The Company grants creditto its customers, primarily large corporations in the medical device andsemiconductor industries and the U.S. government.  The Company performs periodic creditevaluations of customer financial conditions and generally does not requirecollateral.  Receivables are generallydue within thirty days.  Credit losseshave historically been minimal, which is consistent with management’sexpectations.  Reserves are provided forestimated amounts of accounts receivable which may not be collected.  Financial instruments that potentiallysubject the Company to concentration of credit risk consist of tradereceivables.

 

The Company has threemajor customers with revenues in excess of 10% of the Company’s total revenuesfor the years ended June 30, 2003 and 2004, respectively that accounted for thefollowing annual revenue:

 

| ** ** | ** ** | **Years Ended June 30,** | ** ** |
|------------|------------|--------------------------|------------|
| ** ** | ** ** | **2003**                 | ** ** | **2004** | ** ** |
|       |       |                     |       |   |   |
| Company A  |       | $                        | 1,346,000  |   | $ | 2,969,000 |   |
| Company B  |       | 1,628,000                |       | 1,585,000 |   |
| Company C  |       | 2,631,000                |       | 883,000 |   |
|            |            |                          |            |  |  |  |  |

 

12

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At June 30, 2004, these customers accounted for thefollowing amounts of accounts receivable:

 

| ** **    | ** ** | **Year Ended June 30,  2004** | ** ** |
|---------------|------------|-------------------------------|------------|
| Company A     |       | $                             | —     |   |
| Company B     |       | 222,000                       |       |
| Company C (1) |       | 1,534,000                     |       |
|               |            |                               |            |  |

 

----

(1) Contains billed andunbilled revenue.

 

*Employee Stock-BasedCompensation*

 

The Company accounts forits employee stock based compensation arrangements under the provisions ofAccounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issuedto Employees,” rather than the alternative fair value accounting methodprovided for under SFAS No. 123, “Accounting for Stock-Based Compensation.”

 

The Company haselected 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 optiongrants to employees been determined based on the fair value method at the grantdates for awards under the stock option plans consistent with the methodprescribed by SFAS No. 123, the Company’s net loss would have increased to thepro forma amounts indicated as follows:

 
| ** **                                                                                                        | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                        | ** ** | **2003**                 | ** ** | **2004** | ** ** |
| Net loss  applicable to common shareholders, as reported                                                          |       | $                        | (3,660,000 | ) | $ | (6,539,000 | ) |
| Add: Stock-based  employee compensation expense included in reported net loss                                     |       | 16,000                   |       | 295,000 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based method  for all awards |       | (870,000                 | )          | (856,000 | ) |
|                                                                                                              |       |                     |       |   |   |
| Pro forma net  loss                                                                                               |       | $                        | (4,514,000 | ) | $ | (7,100,000 | ) |
|                                                                                                              |       |                     |       |   |   |
| Basic and  diluted Loss per share applicable to common shareholders:                                              |       |                     |       |   |   |
| As reported                                                                                                       |       | $                        | (0.58      | ) | $ | (0.90 | ) |
| Pro forma                                                                                                         |       | $                        | (0.71      | ) | $ | (0.97 | ) |

 

The Company has computedthe pro forma disclosures for stock options granted to employees using theBlack-Scholes option pricing model prescribed by SFAS No. 123.  In addition, deferred compensation has been recordedrelating to stock options issued below fair market value.  The assumptions used during each of the two yearsended June 30, 2004 were as follows:

 

| ** **                                    | ** ** | **June 30,**      | ** ** |
|-----------------------------------------------|------------|-------------------|------------|
| ** **                                    | ** ** | **2003**          | ** ** | **2004** | ** ** |
| Risk free  interest rate                      |       | 2.27% - 4.65%     |       | 2.87% - 6.69% |   |
| Expected  dividend yield                      |       | 0%                |       | 0% |   |
| Expected lives  (years)                       |       | 5 – 10 years |       | 5 – 10 years |   |
| Expected  volatility                          |       | 45% - 98%         |       | 47% - 68% |   |
| Weighted-average  fair value of option grants |       | $3.60             |       | $6.75 |   |

 

13

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*Revenue Recognition*

 

The Company recognizesrevenue when there is persuasive evidence of an arrangement with the customerwhich states a fixed or determinable price and terms, delivery of the producthas 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 atthe time of shipment based on historical data.

 

Contract revenue undercost-sharing research and development agreements is recognized as eligibleresearch and development expenses are incurred. The Company’s obligation with respect to these agreements is to performthe research on a best-efforts basis. For contracts with a deliverable, revenue is recognized on a percentageof completion basis.

 

The Company utilized adistributor for the sale of its prostate seeds for a portion of the year,before transitioning to a direct sales force. Under the terms of the sale of prostate seeds, the customer had theright 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 were exercisableby the customer, the Company was able to estimate the financial impact of eachof these provisions upon shipment.   Additionally the Company recorded a provisionfor an estimate of the actual sales returns and price discounts each period.

 

*Accounts Receivable*

 

Contract revenue undercost sharing research and development agreements is recognized as eligibleexpenses are incurred.  Invoicing ofresearch and development contracts occurs in accordance with the terms of thecontract.  Revenue recognized butunbilled is recorded as unbilled accounts receivable.  At June 30, 2004 unbilled accounts receivablerepresented approximately 67% of total accounts receivable.  Generally, there are no prerequisitesnecessary to bill.

 

*Research and Development Costs*

 

All costs of research anddevelopment activities are expensed as incurred.  The Company performs research and developmentfor itself and under contracts with others, primarily the U.S. government.  In addition, periodically, the Company maycontinue its research on such projects at its own expense.  These costs are considered Company fundedresearch and development.

 

The Company funded andcustomer reimbursed research and development costs were as follows:

 
| ** **                      | ** ** | **June 30,** | ** ** |
|---------------------------------|------------|--------------|------------|
| ** **                      | ** ** | **2003**     | ** ** | **2004** | ** ** |
|                            |       |         |       |   |   |
| Company funded                  |       | $            | 811,000    |   | $ | 1,631,000 |   |
| Customer funded                 |       | 1,216,000    |       | 2,210,000 |   |
|                            |       |         |       |   |   |
| Total research  and development |       | $            | 2,027,000  |   | $ | 3,841,000 |   |
|                                 |            |              |            |  |  |  |  |  |  |

 

*Earnings (Loss) per Share*

 

Basicearnings (loss) per share is computed based only on theweighted average number of common shares outstanding during the period. Dilutedearnings per share is computed by using the weighted average number of commonshares outstanding during the period, plus the dilutive effects of sharesissuable 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 stockoptions and warrants is computed using the average market price for theperiod.  Basic and diluted net loss pershare available for common shareholders is the same for all periods presentedas outstanding common stock options and warrants have

 

14

----

 

beenexcluded because they are antidilutive.

 

The Company had thefollowing potential dilutive securities outstanding on June 30, 2003: (i)options and warrants to purchase 953,500 and 1, 551,775 shares, respectively,of the Company’s common stock at weighted average prices of $4.87 and $8.44 pershare, respectively, and (ii) Series A Preferred Stock convertible into anaggregate of 551,471 shares of the Company’s common stock.  Such potential dilutive securities were notincluded in the calculation of diluted loss per share in the 2003 because theinclusion thereof would be antidilutive.

 

The Company had thefollowing potential dilutive securities outstanding on June 30, 2004: (i)options and warrants to purchase 1,162,065 and 1,876,803 shares, respectively,of the Company’s common stock at weighted average exercise prices of $5.55 and$9.72 per share, respectively, and (ii) Series C Preferred Stock convertibleinto an aggregate of 195,370 shares of the Company’s common stock.  Such potential dilutive securities were notincluded in the calculation of diluted loss per share in 2004 because theinclusion thereof would be antidilutive.

 

*Recent Accounting Pronouncements*

 

In December 2003, theSecurities and Exchange Commission (“SEC”) published Staff Accounting Bulletin(“SAB”) No. 104, “Revenue Recognition.” SAB No. 104 was effective upon issuance. The adoption of SAB No. 104 did not have a material effect on theCompany’s financial position, results of operations, or cash flows.

 

*Use of Estimates*

 

The preparation of thesefinancial statements in conformity with accounting principles generallyaccepted in the United States of America, requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting periods.  Some of the moresignificant estimates include allowance for doubtful accounts, allowance forsales returns, inventory valuation, and warranty reserves.  Management’s estimates are based on the factsand circumstances available at the time estimates are made, past historicalexperience, risk of loss, general economic conditions and trends and management’sassessments of the probable future outcome of these matters.  Consequently, actual results could differfrom such estimates.

 

The adoption of SFAS 150 did not have amaterial effect on the Company’s operations, financial position or cash flows.

 

**3.****              Inventories**

 

Inventories at June 30,2004 consist of the following:

 
| Raw materials    |   | $      | 308,000 |   |
|------------------|--------|--------|---------|--------|
| Work-in-progress |   | 97,000 |    |
| Finished goods   |   | 76,000 |    |
|             |   |   |    |
|             |   | $      | 481,000 |   |

 

Thereserve for excess and obsolete inventory was $81,000 as of June 30, 2004.

 

15

----

 

**4.****              Property and Equipment**

 

Propertyand equipment at June 30, 2004 consists of the following**:**

 
| Machinery and  equipment                         |   | $          | 7,269,000 |   |
|--------------------------------------------------|--------|------------|-----------|--------|
| Computers and  software                          |   | 452,000    |      |
| Leasehold  improvements                          |   | 322,000    |      |
| Furniture and  fixtures                          |   | 161,000    |      |
| Motor vehicles                                   |   | 33,000     |      |
| Equipment under  capital leases                  |   | 32,000     |      |
|                                             |   | 8,269,000  |      |
| Less:  Accumualted depreciation and amortization |   | (3,961,000 | )         |
|                                             |   |       |      |
|                                             |   | $          | 4,308,000 |   |
|                                                  |        |            |           |        |  |

 

The Company recorded depreciation expense ofapproximately $745,000 and $866,000 for the years ended June 30, 2003 and 2004,respectively.  Capitalized leases andleasehold improvements are amortized based upon the lesser of the term of thelease or the useful life of the asset and such expense is included indepreciation expense.

 

**5.     Accrued Expenses**

 

Accrued expenses at June30, 2004 consist of the following:

 
| Accrued  compensation and benefits      |   | $       | 397,000 |   |
|-----------------------------------------|--------|---------|---------|--------|
| Accrued legal,  accounting and printing |   | 80,000  |    |
| Subcontractor  costs                    |   | 118,000 |    |
| Accrued  utilities                      |   | 17,000  |    |
| Accrued  dividends                      |   | 63,000  |    |
| Other                                   |   | 65,000  |    |
|                                    |   |    |    |
|                                    |   | $       | 740,000 |   |

 

**6.****              Investment in Unconsolidated Subsidiaries**

 

On October 6, 1999, theCompany acquired 38% of the outstanding shares of Epsilon Medical, Inc. inexchange for $50,000 in cash.  TheCompany accounted for its investment in Epsilon Medical, Inc. under the equitymethod and the carrying amount of their investment is adjusted to reflect theCompany’s share of all gains and losses. For the year ended June 30, 2003, the Company recognized its share ofequity losses in Epsilon Medical, Inc. of approximately $2,000.  As of June 30, 2004, the Company determinedthis investment was permanently impaired. Accordingly, the Company recognized approximately $35,000, the net investmentat June 30, 2004, as a loss on this investment.

 

InMarch 2004, the Company entered into an Exchange & Venture Agreement withCardioTech International, Inc. (“CardioTech”), a public company and relatedparty of the Company (Note 9) and CorNova, Inc. (“CorNova”).  CorNova is a start-up company, incorporatedas a Delaware corporation on October 12, 2003. CorNova’s focus will be the development and marketing of innovativeinterventional cardiology products.  Inconnection with the agreement, in March 2004, the Company and CardioTech issued10,344 and 12,931 shares, respectively, of their respective common stock (the “ContributoryShares”) bearing an aggregate fair market value of $113,000 and $76,000,respectively, as of the date of issuance. In exchange, the Company and CardioTech each received 1,500,000 sharesof CorNova’s common stock, which represents a 30% ownership position for eachparty, and a position on the Board of Directors.

 

Uponthe event of CorNova securing additional financing in the minimum amount of$1,000,000 and up to a maximum amount of $3,000,000 (the “Series A Financing”),CardioTech and Implant will each issue additional shares of their common stock(the “Investment Shares”), where the number of Investment Shares to be issuedwill be equal to twenty-five percent (25%), of the gross proceeds of the SeriesA

 

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Financing divided by therespective five (5) day average of the closing prices of the common stock ofCardioTech and Implant as published in the Wall Street Journal on the datesimmediately preceding each relevant closing of the Series A Financing.  This additional financing did not take placeas of June 30, 2004.

 

Boththe Contributory Shares and the Investment Shares (collectively, the “Securities”)are restricted securities within the meaning of Rule 144 of the Securities andExchange Commission under the Securities Act of 1933, as amended (the “SecuritiesAct”) and none of the Securities may be sold except pursuant to an effectiveregistration statement under the Securities Act or under the securities laws ofany state, or in a transaction exempt from registration under the SecuritiesAct.

 

TheCompany is accounting for this investment under the equity method under APBOpinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”  As of June 30, 2004, 10,344 shares have beenissued to CorNova by the Company, 3,103 of which have been categorized astreasury stock in the accompanying balance sheet.  These shares represent 30% of the sharesissued.  For the year ended June 30, 2004,the Company recognized approximately $15,000 of other expense representing theCompany’s portion of CorNova’s net loss. The Company also recorded approximately $6,000 as an unrealized loss,which is included in accumulated other comprehensive income for the year endedJune 30, 2004.  This unrealized lossrelated to the Company’s portion of the decline in value of the ContributoryShares issued to CorNova.

 

**7.****              Research andDevelopment Arrangements**

 

The Company is therecipient of several grants under the U.S. Government’s Small BusinessInnovative Research (SBIR) Program. These grants from the National Institute of Health are firm-fixed pricedcontracts and generally range in length from six to twenty-four months.  Contracts received from the Department ofDefense are both firm-fixed price and cost-plus type programs and also rangefrom six to twenty-four months.  Revenuesunder such arrangements were approximately $1,346,000 and $2,969,000 for theyears ended June 30, 2003 and 2004, respectively.  Unbilled accounts receivable relating to sucharrangements was approximately $1,434,000 at June 30, 2004.

 

**8.****              Cooperative Research and DevelopmentAgreement**

 

In August 2002, theCompany executed a Cooperative Research and Development Agreement with anagency of the Department of Homeland Security (TSA) for its trace explosivesdetection prototypes.  Under theagreement, the Company will submit these prototypes for testing andevaluation.  In addition, the TSA willsupply the Company with test protocols and current and anticipated performancecriteria needed for commercial approval and as a mechanism for future fundingfrom the TSA.  The Company is accountingfor the revenues related to this agreement under the percentage of completionmethod of accounting and has recognized approximately $846,000 during the yearended June 30, 2004.

 

**9.****              Related Party Transactions**

 

SFAS No. 57, “RelatedParty Disclosures,” specifies the nature of information that should bedisclosed in financial statements regarding related party transactions.  CardioTech, a publicly traded company whosecommon stock trades under the symbol CTE on the American Stock Exchange, is arelated party with the Company by virtue of its significant business relationships.

 

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

 

InMarch 2000, the Company entered into a joint research agreement with CardioTechto develop a proprietary porous polymer biocompatible coating technology as aplatform for the Company’s proprietary radioactive brachytherapytechnology.  In consideration for thisagreement, the Company agreed to pay $150,000 in cash and purchase 100,000shares of CardioTech stock at a price of $1.00 per share.  As of June 30, 2004, the Company haspurchased these shares, the fair market value of which is $419,000 and isrecorded as investments in available for sale securities in the accompanyingbalance sheet.

 

InJanuary 2004, a director of the Company entered into a Sales RepresentativeAgreement with the

 

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Companyto sell radioactive prostate seeds.  In April 2004, this director resigned fromthe Company’s Board of Directors to pursue this opportunity and eliminate anypossible conflict.

 

In March 2004 the Companyentered into an Exchange & Venture Agreement with CardioTech and CorNova(Note 6).  The Company’s CEO and theChairman of the Audit Committee are also on the Board of Directors of CorNova.

 

**10.****       Commitments and Contingencies**

 

(a)  Capital and Operating Leases

 

TheCompany has an operating lease for its manufacturing, research and office spacewhich expires on December 31, 2008.  TheCompany has an option to extend the lease for five additional years.  Under the terms of the lease, the Company isresponsible for its proportionate share of real estate taxes and operatingexpenses relating to this facility. Total rental expense, including maintenance and real estate taxexpenses, for the fiscal years ended June 30, 2003 and 2004 was $583,000 and$644,000, respectively.

 

Includedin property and equipment at June 30, 2004 is equipment recorded under acapital lease with a net book value of $2,000. Amortization of assets under capital lease obligations is included indepreciation expense.

 

Futureminimum rental payments required under capital leases and operating leases withnoncancelable terms in excess of one year at June 30, 2004, together with thepresent value of net minimum lease payments are as follows:

 
| ** **                                   | ** ** | **Capital Lease** | ** ** | **Operating Lease** | ** ** |
|----------------------------------------------|------------|-------------------|------------|---------------------|------------|
|                                         |       |              |       |                |       |
| Year ending June  30:                        |       |              |       |                |       |
| 2005                                         |       | $                 | 4,000      |                | $          | 557,000 |   |
| 2006                                         |       | 5,000             |       | 609,000             |       |
| 2007                                         |       | 1,000             |       | 610,000             |       |
| 2008                                         |       | —            |       | 611,000             |       |
| 2009                                         |       | —            |       | 306,000             |       |
| Net minimum  lease payments                  |       | 10,000            |       | $                   | 2,693,000  |   |
|                                         |       |              |       |                |       |
| Less: Finance  charges                       |       | —            |       |                |       |
| Present value of  net minimum lease payments |       | 10,000            |       |                |       |
|                                         |       |              |       |                |       |
| Less: current  portion                       |       | 4,000             |       |                |       |
|                                         |       |              |       |                |       |
| Long term  portion                           |       | $                 | 6,000      |                |       |   |
|                                              |            |                   |            |                     |            |  |  |  |  |

 

(b)Employment Agreements

 

On June 30, 2004, we entered into an employment agreement with Dr.Anthony J. Armini, the Company’s President and CEO, with an initial term ofthree years and an automatic renewal for a successive period of three years,unless the we or Dr. Armini give the other party not less than three monthswritten notice of non-renewal.  Underthis employment agreement, Dr. Armini serves as our president and chiefexecutive officer at a base salary of up to $210,000.  In addition, Dr. Armini may participate inour employee fringe benefit plans or programs generally available to employeesof comparable status and position.  Weare entitled to terminate his employment for any material breach of his employmentagreement at any time upon at least 30 days’ written notice.  In the event we terminate Dr. Armini’semployment without cause, we will pay him 12 months salary.  Under his employment agreement, he is subjectto restrictive covenants, including confidentiality provisions.  Also, during his employment and for a periodof two years after the term of the employment agreement, Dr. Armini is subjectto a non-competition provision.

 

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On June 30, 2004, we entered into an employment agreement with Dr.Stephen Bunker, the Company’s Vice President and Chief Scientist, with aninitial term of three years and an automatic renewal for a successive period ofthree years, unless the we or Dr. Bunker give the other party not less thanthree months written notice of non-renewal. Under this employment agreement, Dr. Bunker serves as our vice presidentand chief executive scientist at a base salary of up to $150,000.  In addition, Dr. Bunker may participate inour employee fringe benefit plans or programs generally available to employeesof comparable status and position.  Weare entitled to terminate his employment for any material breach of hisemployment agreement at any time upon at least 30 days’ written notice.  In the event we terminate Dr. Bunker’semployment without cause, we will pay him 12 months salary.  Under his employment agreement, he is subjectto restrictive covenants, including confidentiality provisions.  Also, during his employment and for a periodof two years after the term of the employment agreement, Dr. Bunker is subjectto a non-competition provision.

 

(c)  Other

 

From time to time, theCompany is subject to various claims, legal proceedings and investigationscovering a wide range of matters that arise in the ordinary course of itsbusiness activities.  Each of thesematters is subject to various uncertainties. On the basis of information presently available, the Company is notcurrently aware of any legal proceedings or claims that the Company believesare likely to have a material effect on the Company’s financial position orresults of operations.

 

**11.  Income Taxes**

 

A reconciliation of the federal statutory rate to the Company’seffective tax rate for the years ended June 30, 2003 and 2004 is as follows:

 
| ** **                                                | ** ** | **2003** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Income tax  provision (benefit) at federal statutory rate |       | (34.0    | )%         | (34.0    | )%         |
| Increase  (decrease) in tax resulting from                |       |     |       |     |       |
| State tax  provision, net of federal benefit              |       | (6.3     | )%         | (8.0     | )%         |
| Non-deductible  expenses                                  |       | 4.6      | %          | .3       | %          |
| Credits and  other, net                                   |       | (3.1     | )%         | (0.3     | )%         |
| Change in  valuation allowance                            |       | 38.8     | %          | 45.9     | %          |
| Effective income  tax rate                                |       | —   | %          | —   | %          |

 

Significant components ofthe Company’s net deferred tax asset as of June 30, 2004, are as follows:

 

***Deferred Tax Components***

 
| Deferred tax  assets:                            |   |       |      |
|--------------------------------------------------|--------|------------|-----------|
| Net operating  loss and tax credit carryforwards |   | $          | 6,181,000 |   |
| Accrued expenses                                 |   | 134,000    |      |
| Book over tax  patent costs                      |   | 71,000     |      |
| Stock-based  compensation                        |   | 545,000    |      |
| Depreciation                                     |   | (590,000   | )         |
| Equity  investments                              |   | 18,000     |      |
| Total deferred  tax assets                       |   | 6,359,000  |      |
| Valuation  allowance                             |   | (6,359,000 | )         |
| Net deferred tax  asset                          |   | $          | —    |   |

 

Avaluation allowance has been established for the Company’s tax assets as theiruse is dependent on the generation of sufficient future taxable income, whichcannot be predicted at this time. Included in the valuation allowance is approximately $545,000 related tocertain operating loss carryforwards resulting from the exercise of employeestock options, the tax benefit of which, when recognized, will be accounted

 

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foras a credit to additional paid in capital rather than a reduction in incometax.

 

AtJune 30, 2004, the Company has the following unused net operating loss and taxcredit carryforwards available to offset federal and state taxable income, bothof which expire at various times through 2024.

 

| ** ** | ** ** | **Net Operating  Loss** | ** ** | **Research & Development  Credits** | ** ** |
|------------|------------|-------------------------|------------|-----------------------------------------|------------|
|       |       |                    |       |                                    |       |
| Federal    |       | $                       | 14,345,000 |                                    | $          | 219,000 |   |
|       |       |                    |       |                                    |       |
| State      |       | $                       | 13,995,000 |                                    | $          | 315,000 |   |

 

The Company’s federal netoperating loss carryforwards are subject to review and possible adjustment bythe Internal Revenue Service and are subject to certain limitations in theevent of cumulative changes in the ownership interest of significantstockholders over a three-year period in excess of 50%.

 

**12.Convertible Preferred Stock**

 

*7% SeriesA Cumulative Convertible Preferred Stock*

 

On October 7, 2002, theCompany issued 250,000 shares of Series A 7% Cumulative Convertible PreferredStock (“Series A”) having a stated value of $10 per share, pursuant to aSecurities Purchase Agreement executed on October 7, 2002 with the LaurusMaster Fund, Ltd. (Laurus).  The Companyreceived $2,500,000 in gross proceeds, less a management and placement agentfee of approximately $300,000, and related transaction costs of approximately$101,000.  The terms of the Series Aprovide for repayment of outstanding principal and accrued dividends in eithercash 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 sharesof the Company’s common stock, the common stock will be valued at $5.19 pershare.  However, if the closing price ofthe Company’s common stock for any of the 11 trading days prior to a monthlyrepayment date is less than $5.70, the common stock will be valued at thegreater of 83% of the average of the three lowest closing prices during the 30trading days immediately preceding the repayment date or $2.02 and Laurus MasterFund, Ltd. will be permitted to convert such part of the monthly payment, up tothe amount the Company elected to repay, into shares of common stock.  Any part of the monthly amount not convertedinto common stock shall be paid in cash on the following monthly repaymentdate.  The Company also granted theinvestor a security interest in substantially all of the Company’s assets.  In connection with the issuance of the SeriesA, the investor received a warrant to purchase 55,000 shares of the Company’scommon stock.  The common stock purchasewarrant may be exercised at any time and is valid for five years from the dateof issuance at an exercise price of $6.23 per share.

 

In accordance with theprovisions of Emerging Issues Task Force (EITF) Issue 00-27, “Application ofEITF Issue No. 98-5 ‘Accounting for Convertible Securities with BeneficialConversion Features of Contingently Adjustable Conversion Ratios’, to CertainConvertible Securities”, which became effective in November 2000, the allocatedvalue of the Series A contained a beneficial conversion feature calculatedbased on the difference between the effective conversion price of the proceedsallocated to the Series A and the fair market value of the common stock at thedate of issuance.  The discount arisingfrom the beneficial conversion feature aggregated $537,000.  The discount is being amortized and recordedas a preferred dividend during the period from the issuance of the preferredstock to the mandatory redemption date of April 7, 2004 or the actualconversion date, whichever is earlier.

 

The Company valued theSeries A at issuance at $1,434,000 based on the relative fair market values ofthe

 

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

 

As of June 30, 2004, allamounts were fully amortized and the principal balance of the Series A has beenpaid in full.  All Series A shares hadbeen converted into 672,458 shares of common stock.  During the years ended June 30, 2003 and 2004,approximately $696,000 and $564,000, respectively, was amortized.

 

*5%Series B Cumulative Convertible Preferred Stock*

 

OnAugust 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, pursuant to a Securities Purchase Agreement executed on August28, 2003 with the Laurus Master Fund, Ltd. The Company received $2,000,000 in gross proceeds, less a management andplacement agent fee of approximately $108,000, and related transaction costs ofapproximately $70,000.  The terms of theSeries B provide for repayment with shares of the Company’s common stock or incash, pursuant to an amortization schedule. Repayment of the Series B commenced on December 1, 2003.  The Company has the sole option to determinewhether to satisfy payment of the monthly amount in full on each repayment dateeither in cash or in shares of common stock, or a combination of both.  However, if the closing price for any of the11 trading days preceding a repayment date is less than $6.00, the Companywould be required to pay such monthly amount in cash at 105% of the monthlyobligation.  If the payment of themonthly amount is made in common stock, the fixed conversion price is$5.50.  The Company also issued to Laurusa warrant to purchase 25,000 shares of common stock at $6.88 per share and45,000 shares of common stock at $8.25 per share.  The Securities Purchase Agreement alsoprovides for a security interest in substantially all of the Company’s assetsand provides Laurus a right of first refusal on future financing arrangementsduring the Term of the agreement.  In theevent Laurus declines to exercise its right of first refusal, it hereby agreesto enter into such documentation as shall be reasonable requested by theCompany in order to subordinate its rights under the Series B to the subsequentfinancier.  The Company utilized theproceeds of this financing to commercialize its explosives detection system andfor general working capital purposes.

 

In accordance with theprovisions of EITF Issue 00-27, the allocated value of the Series B contained abeneficial conversion feature calculated based on the difference between theeffective conversion price of the proceeds allocated to the Series B and thefair market value of the common stock at the date of issuance.  The discount arising from the beneficialconversion feature aggregated $826,000. The discount is being amortized and recorded as a preferred dividendduring the period from the issuance of the preferred stock to the mandatoryredemption date of March 1, 2005, or the actual conversion date, whichever isearlier.

 

The Company valued theSeries B at issuance to be $812,000 based on the relative fair market values ofthe financial instruments issued in connection with this placement, net ofoffering costs and the beneficial conversion feature.  The amounts recorded in the financialstatements represent the amounts attributed to the sale of the preferred stock,net cash proceeds of $1,822,000 ($178,000 of issuance costs incurred), amountallocated to warrants of $184,000, and the amount of the discount related tothe value of beneficial conversion feature of $826,000.  The Company is accreting these discounts onthe carrying value of the preferred stock to its redemption value of $2,000,000at March 1, 2005, or the actual conversion date, whichever is earlier.  The accretion of these amounts is beingrecorded as a preferred dividend in the period of redemption.

 

As of June 30, 2004, allamounts were fully amortized and the principal balance of the Series B has beenpaid in full.  All Series B shares andaccrued dividends had been converted into 371,336 shares of common stock.During the year ended June 30, 2004, approximately $1,287,000 was amortized.

 

*5% Series C CumulativeConvertible Preferred Stock*

 

OnNovember 25, 2003, the Company issued 250,000 shares of Series C 5%Cumulative Convertible Preferred Stock (“Series C”) having a stated value of$10 per share, pursuant to a Securities Purchase Agreement executed on November25, 2003 with the Laurus Master Fund, Ltd.  The Company received $2,500,000 in grossproceeds, less a management and placement agent fee of approximately $125,000,and

 

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relatedtransaction costs of approximately $86,000. The terms of the Series C provide for repayment with shares of theCompany’s common stock or in cash, pursuant to an amortization schedule.  Repayment of the Series C commences on March31, 2004.  The Company has the soleoption to determine whether to satisfy payment of the monthly amount in full oneach repayment date either in cash or in shares of common stock, or acombination of both unless the closing price of the Company’s common stock, forany of the eleven trading days preceding a repayment date was less than $7.35,wherein the Company will be required to pay such monthly amount in cash.  If the payment of the monthly amount is madein common stock, the fixed conversion price is $6.75.  The Company also issued to Laurus a warrantto purchase 50,000 shares of common stock at $8.44 per share and 50,000 sharesof common stock at $10.13 per share.  TheSecurities Purchase Agreement also provides for a security interest insubstantially all of the Company’s assets and provides Laurus a right of firstrefusal on future financing arrangements during the Term of the agreement.  In the event Laurus declines to exercise itsright of first refusal, it hereby agrees to enter into such documentation asshall be reasonable requested by the Company in order to subordinate its rightsunder the Series C to the subsequent financier. The Company will utilize the proceeds of this financing to purchase anion implanter and for general working capital purposes.

 

In accordance with theprovisions of EITF Issue 00-27, the allocated value of the Series C contained abeneficial conversion feature calculated based on the difference between theeffective conversion price of the proceeds allocated to the Series C and thefair market value of the common stock at the date of issuance.  The discount arising from the beneficialconversion feature aggregated $700,000. The discount is being amortized and recorded as a preferred dividendduring the period from the issuance of the preferred stock to the mandatoryredemption date of June 1, 2005, or the actual conversion date, whichever isearlier using the effective interest method.

 

The Company valued theSeries C at issuance to be $1,284,000 based on the relative fair market valuesof the financial instruments issued in connection with this placement, net ofoffering costs and the beneficial conversion feature.  The amounts recorded in the financialstatements represent the amounts attributed to the sale of the preferred stock,net cash proceeds of $2,289,000 ($211,000 of issuance costs incurred), theamount allocated to warrants of $305,000, and the amount of the discountrelated to the value of beneficial conversion feature of $700,000.  The Company is accreting these discounts onthe carrying value of the preferred stock to its redemption value of $2,500,000at June 1, 2005, or the actual conversion date, whichever is earlier.  The accretion of these amounts is beingrecorded as a preferred dividend in the period of redemption.  During the year ended June 30, 2004,approximately $638,000 was amortized.

 

As of June 30, 2004,118,125 shares of Series C were converted into 175,000 shares of common stockat the price of $6.75 per share.  Theoutstanding principal at June 30, 2004, is $1,318,750.  For the year ended June 30, 2004, the Companyaccrued approximately $64,000 of dividends.

 

**13.  Stockholders’ Equity**

 

(a)  IPO Units

 

InJune 1999, the Company issued 1,138,000 Units, consisting of one share ofcommon stock, and one redeemable common stock purchase warrant (the “IPOWarrants”) in connection with its initial public offering.  Each Unit carries the right to purchase oneshare of common stock at $9.00, and is redeemable by the Company at $0.20 perwarrant if the closing bid price of the common stock averages in excess of $10.50for a period of 20 consecutive trading days. On March 28, 2002, the Company extended the expiration date of the IPOWarrants from June 23, 2002 to June 30, 2003. The Company did not receive any consideration from the holders of thewarrants accordingly, the Company recognized thistransaction as a preferred distribution based upon the estimated fair value ofthe extension of approximately $530,000. On April 15, 2003, the Company again extended the expiration date of theIPO Warrants from June 30, 2003 to June 30, 2005.  The Company did not receive any considerationfrom the holders of the warrants, accordingly, theCompany recognized the value of this transaction as a preferred distributionbased upon the estimated fair value of the extension of approximately $195,000for the year ended June 30, 2003.  TheCompany also issued to the Representative of the Underwriters, for nominalconsideration, the Representative’s Warrants to purchase 100,000 shares ofcommon stock and 100,000 redeemable warrants at an exercise price of$12.00.  The expiration date of theRepresentative’s warrants was extended from June 22, 2004 to December 22,2004.  The Company did not receive anyconsideration from the holders of the warrants, accordingly, the Companyrecognized the value of this transaction as a preferred distribution based uponthe

 

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estimatedfair value of the extension of approximately $38,000 for the year ended June30, 2004.  During the year ended June 30,2004, 400 of the IPO warrants and 69,030 of the Representative’s warrants wereexercised, and the balance expired.  Asof June 30, 2004, 1,064,700 IPO warrants remain outstanding, and 29,101 of theRepresentative’s warrants remain outstanding.

 

(b)  Option Activity

 

InSeptember 1998, the Company adopted the 1998 Stock Option Plan (the “1998 Plan”).  The 1998 Plan provides for the grant ofincentive stock options and nonqualified stock options to employees andaffiliates.  The exercise price of theoptions equals 100% of the fair market value on the date of the grant.  Options expire ten years from the date of theoption grant and vest ratably over a three-year period commencing with thesecond year.  A total of 280,000 optionswere reserved for issuance under the 1998 Plan. Upon adoption of the 1998 Plan, the 1992 Stock Option Plan wasterminated.  No new stock options will begranted under the 1992 Stock Option Plan, which has been superseded by the 1998Plan.  In December 2000, the Companyadopted the 2000 Incentive and Non Qualified Stock Option Plan (the “2000 Plan”).  The 2000 Plan provides for the grant ofincentive stock options and nonqualified stock options to employees andaffiliates.  The exercise price of theoptions equals 100% of the fair market value on the date of the grant or 110%of the fair market value for greater than 5% beneficial owners of the Companystock.  Options expire between five andten years from the date of the option grant and have variable vesting periods.  A total of 1,000,000 options are reserved forissuance under the 2000 Plan.  As of June30, 2004, a total of 8,503 and 0 stock options are available for issuance underthe 1998 and 2000 stock option Plans, respectively.  As of June 30, 2004, the Company’s Board ofDirectors approved the issuance of 500,000 options to employees under the 2000Plan.  During the year ended June 30,2004, 38,800 options were granted by the Company prior to shareholderapproval.  These grants are subject toshareholder approval.  Shareholderapproval fixes the measurement date at which time the Company may recorddeferred compensation related to the difference between the fair market valueof the options upon approval and the exercise price of options.  These amounts, if any, will be expensed overthe related vesting period.

 

InDecember 2003, the stockholders of the Company approved an increase in the 2000Incentive and Non-Qualified Stock Option Plan from 600,000 shares to 1,000,000shares.  Prior to the approval of thisincrease, the Company granted options to employees, subject to shareholderapproval.  The Company recordedapproximately $739,000 of deferred compensation expense relating to these stockoptions, which represents the difference between the exercise price of theoptions and the fair market value of the stock on the date of shareholderapproval. This deferred compensation will be recorded as compensation expenseover the related vesting period, $295,000 of which was recorded as non-cashcompensation during the year ended June 30, 2004.

 

InSeptember 1998, the Company adopted the 1998 Employee Stock Purchase Plan (the “Plan”).  The Plan provides a method whereby employeesof the Company will have an opportunity to acquire an ownership interest in theCompany through the purchase of shares of Common Stock of the Company throughpayroll deductions.  After 12 months ofemployment, an employee is eligible to participate and can defer up to 10% oftheir wages into this Plan, with a maximum of $25,000 in any calendar year.  The purchase price of the Common Stock iscalculated at the lower of 85% of the closing price of the stock on the firstday of the plan period or the last day of the plan period.  The periods are January 1 to June 30 and July1 to December 31.  Fractional shares arenot issued.  Participants may withdraw atany time by giving written notice to the Company and will be credited theamounts of deferrals in their account. The maximum number of shares eligible to be issued under the Plan is141,000.  As of June 30, 2003, a total of122,442 shares are available for issuance under the Plan.

 

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Thefollowing table presents the activity of the 1992, 1998 and 2000 Stock OptionPlans for the years ended June 30, 2003, and 2004:

 
| ** **                                                      | ** ** | **2003**   | ** ** | **2004**                                | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-----------------------------------------|------------|
| ** **                                                      | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of period                             |       | 434,700    |       | $                                       | 6.23       |   | 953,500 |   | $ | 4.87 |   |
|                                                            |       |       |       |                                    |       |   |   |   |   |
| Granted                                                         |       | 545,800    |       | 3.60                                    |       | 352,200 |   | 6.75 |   |
| Exercised                                                       |       | (23,000    | )          | 4.33                                    |       | (138,635 | ) | 3.77 |   |
| Canceled                                                        |       | (4,000     | )          | 9.12                                    |       | (5,000 | ) | 7.74 |   |
|                                                            |       |       |       |                                    |       |   |   |   |   |
| Outstanding at  end of period                                   |       | 953,500    |       | $                                       | 4.87       |   | 1,162,065 |   | $ | 5.55 |   |
|                                                            |       |       |       |                                    |       |   |   |   |   |
| Options  exercisable at end of period                           |       | 665,560    |       | $                                       | 4.91       |   | 669,665 |   | $ | 4.90 |   |
|                                                            |       |       |       |                                    |       |   |   |   |   |
| Weighted-average  fair value of options granted during the year |       |       |       | $                                       | 3.60       |   |   |   | $ | 6.75 |   |

 

The following tablepresents weighted average price and life information about significant optionsgroups outstanding at June 30, 2004:

 
| ** **                    | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                       | ** ** |
|-------------------------------|------------|-------------------------|------------|---------------------------------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Remaining Contractual Life  (in years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $1.00 - $1.37                 |       | 61,800                  |       | 1.92                                                          |       | $ | 1.37 |   | 61,800 |   | $ | 1.37 |   |
| $2.10 - $2.31                 |       | 89,165                  |       | 7.58                                                          |       | 2.15 |   | 89,165 |   | 2.15 |   |
| $3.16 - $5.26                 |       | 427,900                 |       | 7.81                                                          |       | 4.20 |   | 249,450 |   | 4.30 |   |
| $6.33 - $9.50                 |       | 554,000                 |       | 3.51                                                          |       | 5.01 |   | 260,900 |   | 8.10 |   |
| $10.90 - $14.00               |       | 29,200                  |       | 7.70                                                          |       | 10.41 |   | 8,350 |   | 12.61 |   |
| ** **                    | ** ** | **1,162,065**           | ** ** | **5.35**                                                      | ** ** | **$** | **5.53** | ** ** | **669,665** | ** ** | **$** | **5.33** | ** ** |

 

(c)  Warrants

 

In August 2003, inconnection with the issuance of Series B, the Company issued to Laurus awarrant to purchase 25,000 shares of common stock at an exercise price of $6.88per share and an additional warrant to purchase 45,000 shares of common stockat an exercise price of $8.25.  Thesewarrants were fully vested upon issuance and expire 5 years from the date ofgrant.  The warrants were recorded as adiscount on the preferred stock at their estimated fair value of approximately$184,000.  The Company has accreted thediscount as a preferred distribution during the year ended June 30, 2004.

 

In August 2003, theCompany issued a warrant to a consultant to purchase 2,000 shares of commonstock at an exercise price of $5.24 and, in May 2004, an additional warrant topurchase 8,000 shares at the same exercise price, in exchange forservices.  This warrant was fully vestedupon issuance and expires 5 years from the date of grant.  The fair value of these warrants wasapproximately $63,000 and was recorded as compensation expense in theaccompanying statement of operations during the year ended June 30, 2004

 

In November 2003, inconnection with the issuance of Series C, the Company issued to Laurus awarrant to purchase 50,000 shares of common stock at an exercise price of $8.44per share and an

 

24

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additionalwarrant to purchase 50,000 shares of common stock at an exercise price of$10.13.  These warrants were fully vestedupon issuance and expire 5 years from the date of grant.  The warrants were recorded as a discount onthe preferred stock at their estimated fair value of approximately$305,000.  The Company has accretedapproximately $143,000 of the discount as a preferred distribution during theyear ended June 30, 2004.

 

In June 2004, inconnection with a private placement (Note 17), the Company issued to TrukOpportunity Fund LLC, Truk International Fund LP, Basso Multi-Strategy FundLTD, Basso Equity Opportunity Holding Fund LTD and Pacific Wave Partners LTDwarrants to purchase a total of 133,088 shares ofcommon stock at an exercise price of $14.43. These warrants were fully vested upon issuance and expire 5 years fromthe date of grant.

 

During 2004, the Company issued a warrant to an investor relationscompany to purchase 250,000 shares of common stock at an exercise price of$14.00, in exchange for services.  Thiswarrant was fully vested upon issuance and expired on June 30, 2004.  The fair value of this warrant wasapproximately $230,000 and was recorded as compensation expense in theaccompanying statement of operations for the year ended June 30, 2004.  In June 2004, the Company issued thisinvestor relations company another warrant to purchase 150,000 shares of commonstock at an exercise price of $14.00, in exchange for continued services.  These warrants were fully vested uponissuance and expire 3 years from the date of grant.  The fair value of these warrants wasapproximately $638,000 and was recorded as compensation expense in theaccompanying statement of operations during the year ended June 30, 2004.

 

During 2004, the Company issued other warrants to various advisors andindividuals in exchange for services to purchase a total of 10,000 shares ofcommon stock at exercise prices ranging from $9.95 to $10.25.  The fair value of these warrants wasapproximately $58,000 and was recorded as compensation expense in theaccompanying statement of operations during the year ended June 30, 2004.

 

The Company estimated the fair value of thewarrants issued during 2004 using the Black-Scholes option-pricing model. TheCompany estimated the fair value of the warrants using the following inputassumptions:

 

| Volatility               |   | 63.0% - 67.5%      |   |
|--------------------------|--------|--------------------|--------|
| Dividend yield           |   | 0%                 |   |
| Risk-free  interest rate |   | 0.94% - 4.50%      |   |
| Expected lives           |   | 3 months - 5 years |   |

 

25

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The following table presents the weighted average exercise price ofwarrants outstanding at June 30, 2004:

 

Warrants Outstanding and Exercisable

 

| **Range of Exercise  Prices** | ** ** | **Number  of  Warrant Shares** | ** ** | **Weighted  Average Exercise  Price** | ** ** |
|-------------------------------|------------|--------------------------------|------------|---------------------------------------|------------|
|                          |       |                           |       |                                  |       |
| $2.40 - $3.31                 |       | 105,310                        |       | $                                     | 3.28       |   |
|                          |       |                           |       |                                  |       |
| $5.24 - $6.88                 |       | 90,000                         |       | $                                     | 6.30       |   |
|                          |       |                           |       |                                  |       |
| $8.25 - $12.00                |       | 1,314,375                      |       | $                                     | 9.22       |   |
|                          |       |                           |       |                                  |       |
| $12.45 - $14.43               |       | 367,118                        |       | $                                     | 14.17      |   |
| Total                         |       | 1,876,803                      |       | $                                     | 9.72       |   |

 

(d)  Notes Receivable

 

During the year endedJune 30, 2004, loans previously made to the Company’s chief executive officerand to an employee for a total of approximately $223,000, relating to theexercise of stock options, which were recorded as a reduction of stockholders’equity, were paid in full.

 

**14.  401k Plan**

 

TheCompany has a defined contribution retirement plan which contains a 401(k)Plan.  All employees who are 21 years ofage and who have completed three months of service during which they worked atleast 1,000 hours are eligible for participation in the plan.  The Company makes discretionary contributionsto the 401(k) plan.  During the yearsended June 30, 2003 and 2004, the Company made no contributions to the plan.

 

**15.  Long-term Debt**

 

*MED-TECPayment Obligation*

 

On July 31, 2003, theCompany entered into an agreement with its former exclusive distributor ofprostate seeds, to release each other from further obligations under theoriginal Distributor Agreement.  The new agreement conveys to the Companydirect marketing and sales capabilities to sell its I-Plant Seed brachytherapyseeds for use in the treatment of prostate cancer.  In connection withthis, the Company’s former exclusive distributor will work cooperatively totransition customers and marketing materials directly to the Company.  Thedistributor also agreed not to compete with the Company for a period of threeyears.  The agreement requires the Company to pay the distributor anaverage of approximately $39,000 per month over the 28 months, beginningSeptember 1, 2003.  The present value of this payment obligation wasrecorded as approximately $1,007,000, using a rate of 10.24%.  This amount was recorded as an intangibleasset and is being amortized over its estimated useful life of 29 months. During the year ended June 30, 2004, approximately $383,000 of amortizationexpense was recognized, which is included in selling, general andadministrative expenses in the accompanying statement of operations.  As of June 30, 2004, the outstandingprincipal balance is approximately $606,000, of which $394,000 and $212,000becomes due during the year ended June 30, 2005 and 2006, respectively. For the year ended June 30, 2004, the Company recorded approximately $68,000 ofinterest expense relating to this transaction.

 

*Axcelis Lease Financing*

 

In June, 2003, theCompany purchased a MC3, mass-analyzed ion implanter and wafer handlingend-station (the “System”) from Axcelis Technologies, Inc. (“Axcelis”) for aprice of $1,300,000.  The Company hadfinanced the System with Axcelis via monthly installments of approximately$43,000 beginning July 2003 and continuing through December 31, 2003.  This agreement bore interest at prime plus6.25%.  In December, 2003, the Companyamended this agreement to extend the payment period

 

26

----

 

through June 30, 2004.  This refinancing provided for a lump sumpayment of approximately $571,000 in December 2003 and monthly installments ofapproximately $98,000 beginning January 2004 and continuing through June 30,2004.  Title for the equipment remainedwith Axcelis until the System was paid in full. The value of the equipment is included in property and equipment.  As of June 30, 2004, the unpaid principalbalance of this equipment is approximately $97,000, which becomes due duringthe year ended June 30, 2005 and is included in current maturities of long-termdebt in the accompanying balance sheet. During July 2004, this debt was paid in full.

 

**16.  Bay Area MRI**

 

In March 2004, theCompany entered into a consulting agreement with Christopher Lang and Bay AreaMRI to assist the Company in the sale of radioactive prostate seeds.  Ascompensation for consulting services, the Company may be required to pay commissionsof up to $600,000 ($300,000 in cash and $300,000 in shares of commonstock).  During the year ended June 30, 2004, the Company issued 3,205shares of restricted common stock, bearing an aggregate fair market value ofapproximately $37,500 and advanced $50,000 of cash commissions. As of June 30,2004, these amounts are classified as prepaid commissions, which will beamortized to expense when accrued.  For the year ended June 30, 2004,approximately $4,000 was amortized. Future commissions will be paid quarterly,up to a maximum of $300,000 in cash and $300,000 of common stock based onservices provided.

 

**17. ****Private Placement**

 

On June 17, 2004, theCompany issued 468,604 shares of common stock at $10.67 per share, in a privateplacement with the following four investors: Truk Opportunity Fund LLC; TrukInternational Fund LP; Basso Multi-Strategy Holding Fund Ltd; Basso EquityOpportunity Holding Fund Ltd.  TheCompany received $5,000,000 in gross proceeds, less placement agent fees andrelated transaction costs of approximately $310,000.

 

In connection with thetransaction, we issued warrants to the investors to purchase 117,152 shares ofcommon stock at an exercise price of $14.43 per share, which are exercisableuntil June 16, 2009.  In addition, theinvestors have rights to purchase up to 215,330 shares of common stock at aprice of $11.61 per share, which are exercisable for a period commencing onJune 17, 2004 and ending on the earlier of (i) 100 days after July 26, 2004,the effective date of the registration statement filed on July 14, 2004 or (ii)February 16, 2005.  We also issuedwarrants to the placement agent to purchase 15,936 shares of our common stockat an exercise price of $14.43 per share, which are exercisable unit June 16,2009.  Should the investors exercisethese additional investment rights, the placement agent will receive anadditional warrant for 7,968 shares at an exercise price of $12.55 per share.

 

**18.  Financial Information by Segment**

 

Under SFAS No. 131, “Disclosures about Segments of an Enterpriseand Related Information,” operating segments are defined as componentsof an enterprise about which separate financial information is available thatis evaluated regularly by the chief operating decision maker, or decisionmaking group, in deciding how to allocate resources and in assessingperformance.  The Company’s chiefoperating decision making group is composed of the chief executive officer andmembers of senior management. The Company’s reportable segments are:  Medical, Semiconductor and Explosives.

 

Gross margin is themeasure that management uses when evaluating the Company’s segments,therefore, operating expenses are excluded from the financial informationbelow.

 

27

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The revenues and expenses related to these segments for theyears ended June 30, 2003 and 2004, respectively, are:  

 
| ** **   | ** ** | **Year Ended June 30, 2003** | ** ** |
|--------------|------------|------------------------------|------------|
| ** **   | ** ** | **Medical**                  | ** ** | **Semiconductor** | ** ** | **Explosives** | ** ** | **Total** | ** ** |
|         |       |                         |       |   |   |   |   |   |   |
| Revenue      |       | $                            | 4,594,000  |   | $ | 1,258,000 |   | $ | 844,000 |   | $ | 6,696,000 |   |
| COGS         |       | (3,884,000                   | )          | (992,000 | ) | (487,000 | ) | (5,363,000 | ) |
| Gross Margin |       | $                            | 710,000    |   | $ | 266,000 |   | $ | 357,000 |   | $ | 1,333,000 |   |

 
| ** **   | ** ** | **Year  Ended June 30, 2004** | ** ** |
|--------------|------------|-------------------------------|------------|
| ** **   | ** ** | **Medical**                   | ** ** | **Semiconductor** | ** ** | **Explosives** | ** ** | **Total** | ** ** |
| ** **   | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue      |       | $                             | 4,957,000  |   | $ | 1,022,000 |   | $ | 2,587,000 |   | $ | 8,566,000 |   |
| COGS         |       | (3,822,000                    | )          | (1,280,000 | ) | (1,084,000 | ) | (6,186,000 | ) |
| Gross Margin |       | $                             | 1,135,000  |   | $ | (258,000 | ) | $ | 1,503,000 |   | $ | 2,380,000 |   |

 

28

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**ITEM 13.****                      EXHIBITINDEX**

** **

The following are filedas part of this Form 10-KSB/A

** **
| **Exhibit  No.** | ** ** | **Ref.  No.** | ** ** | ** **                                                                                                                           |
|------------------|------------|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|
|             |       |          |       |                                                                                                                                 |
| 3.2              |       | 1             |       | By-Laws of the  Company                                                                                                              |
| 3.3              |       | 1             |       | Articles of  Amendment to the Articles of Organization of the Company, dated June 9, 1999                                            |
| 3.4              |       | 1             |       | Restated  Articles of Organization of the Company, dated June 9, 1999                                                                |
| 3.5              |       | 5             |       | Certificate of  Vote of Directors establishing Series A 7% Cumulative Convertible Preferred  Stock, dated October 7, 2002            |
| 3.6              |       | 10            |       | Certificate of  Vote of Directors establishing Series B 5% Cumulative Convertible Preferred  Stock, dated August 26, 2003            |
| 3.7              |       | 1             |       | Certificate of  Vote of Directors establishing Series C 5% Cumulative Convertible Preferred  Stock, dated November 25, 2003.         |
| 4.1              |       | 2             |       | Specimen  certificate for the Common Stock of the Company                                                                            |
| 4.2              |       | 2             |       | Specimen  certificate for the Redeemable Warrants of the Company                                                                     |
| 4.3              |       | 3             |       | Specimen  certificate for the Units of the Company                                                                                   |
| 4.4              |       | 5             |       | Specimen  Certificate of the Series A 7% Cumulative Convertible Preferred Stock                                                      |
| 10.3             |       | 1             |       | 1992 Stock  Option Plan                                                                                                              |
| 10.31            |       | 1             |       | Form of Stock  Option Agreement under the 1992 Stock Option Plan                                                                     |
| 10.32            |       | 1             |       | 1998 Incentive  and Nonqualified Stock Option Plan                                                                                   |
| 10.33            |       | 2             |       | Form of  Incentive Stock Option under the 1998 Incentive and Nonqualified Stock Option  Plan                                         |
| 10.34            |       | 2             |       | Form of  Nonqualified Stock Option under the 1998 Incentive and Nonqualified Stock  Option Plan                                      |
| 10.35            |       | 2             |       | Form of  Nonqualified Stock Option for Non-Employee Directors under the 1998 Incentive  and Nonqualified Stock Option Plan           |
| 10.54            |       | 4             |       | Research and  Development Agreement, dated March 13, 2000, by and between Implant Sciences  Corporation and Cardiotech International |
| 10.55            |       | 4             |       | Amendment to  Distributorship Agreement between Med-Tec Iowa, Inc., and Implant Sciences  Corporation dated 26 January 2000          |
| 10.69            |       | 5             |       | Securities  Purchase Agreement between Implant Sciences Corporation and Laurus Master  Fund, Ltd. Dated October 7, 2002              |
| 10.69.1          |       | 6             |       | Amendment #1 to  Item 10.69                                                                                                          |
| 10.70            |       | 5             |       | Security  Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd.  Dated October 7, 2002.                        |
| 10.71            |       | 5             |       | Common Stock  Purchase Warrant for 55,000 shares issued to Laurus Master Fund, Ltd. Dated  October 7, 2002.                          |
| 10.72            |       | 6             |       | Securities  Purchase Agreement between Implant Sciences Corporation and Laurus Master  Fund, Ltd. Dated August 28, 2003.             |
| 10.73            |       | 6             |       | Security  Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd.  Dated August 28, 2003.                        |

 

29

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| **Exhibit  No.** | ** ** | **Ref.  No.** | ** ** | ** **                                                                                                                                                                   |
|------------------|------------|---------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.74            |       | 6             |       | Common Stock  Purchase Warrant for 70,000 shares issued to Laurus Master Fund, Ltd. Dated  August 28, 2003.                                                                  |
| 10.75            |       | 7             |       | Securities  Purchase Agreement between Implant Sciences Corporation and Laurus Master  Fund, Ltd, Dated November 25, 2003.                                                   |
| 10.76            |       | 7             |       | Security  Agreement between Implant Sciences Corporation and Laurus Master Fund, Ltd.  Dated November 25, 2003.                                                              |
| 10.77            |       | 7             |       | Common Stock  Purchase Warrant for 100,000 shares issued to Laurus Master Fund, Ltd. Dated  November 25, 2003.                                                               |
| 10.78            |       | 8             |       | Exchange and  Venture agreement between Implant Sciences Corporation, CardioTech  International, and CorNova, Inc. dated March 5, 2004.                                      |
| 10.78            |       | 9             |       | Form of  Securities Purchase Agreement between Implant Sciences and certain investors                                                                                        |
| 10.79            |       | 9             |       | Form of Warrant  dated June, 17, 2004                                                                                                                                        |
| 10.80            |       | 9             |       | Form of  Additional Investors Rights Agreement dated June 17, 2004 between Implant  Sciences and certain investors                                                           |
| 10.81            |       | 9             |       | Form of  Registration Rights Agreement dated June 17, 2004 between Implant Sciences  and certain investors                                                                   |
| 10.82            |       |          |       | Employment  Agreement with Anthony J. Armini, dated June 30, 3004                                                                                                            |
| 21.1             |       |          |       | Subsidiaries of  the Company                                                                                                                                                 |
| 23.1             |       |          |       | Consent of BDO  Seidman, LLP, independent registered public accounting firm                                                                                                  |
|             |       |          |       |                                                                                                                                                                         |
| 31.1             |       |          |       | Certification of  Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                        |
| 31.2             |       |          |       | Certification of  the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                    |
| 32.1             |       |          |       | Certification of  the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.  1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|             |       |          |       |                                                                                                                                                                         |
|             |       | 1             |       | Previously filed  in the Registration Statement on Form SB-2 (Registration No. 333-64499) filed  on September 29, 1998, and is incorporated herein by reference.             |
|             |       | 2             |       | Previously filed  in Amendment No. 1 to the Registration Statement, filed on December 21, 1998,  and is incorporated herein by reference.                                    |
|             |       | 3             |       | Previously filed  in Amendment No. 2 to the Registration Statement, filed on February 11, 1999,  and is incorporated herein by reference.                                    |
|             |       | 4             |       | Previously filed  in Quarterly Report on Form 10-QSB for the quarter ended March 31, 2001,  filed on May 11, 2000, and is incorporated herein by reference.                  |
|             |       | 5             |       | Previously filed  in the Annual Report on Form 10 KSB for the fiscal year ended June 30, 2002  filed on October 15, 2002 and is incorporated herein by reference             |
|             |       | 6             |       | Previously filed  in the Annual Report on Form 10 KSB for the fiscal year ended June 30, 2003  filed on September 29, 2003 and is incorporated herein by reference           |
|             |       | 7             |       | Previously filed  on Form 8-K on December 12, 2003, and is incorporated herein by reference                                                                                  |
|             |       | 8             |       | Previously filed  on Form 8-K on March 18, 2004, and is incorporated herein by reference                                                                                     |
|             |       | 9             |       | Previously filed  on Form S-3 on July 14, 2004, and is incorporated herein by reference                                                                                      |

 

30

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**SIGNATURES**

 

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

 
|                    |   | Implant Sciences  Corporation                                            |
|-------------------------|--------|--------------------------------------------------------------------------|
|                    |   |                                                                     |
| Date: November 10, 2004 |   | /s/Anthony J. Armini                                                     |   |
|                    |   | Anthony J. Armini                                                        |
|                    |   | President, Chief  Executive Officer,  Chairman of the Board of Directors |
|                    |   | (Principal Executive  Officer)                                           |

 

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

 
| Date: November 10, 2004 |   | /s/ Anthony J. Armini                                                    |   |
|-------------------------|--------|--------------------------------------------------------------------------|--------|
|                    |   | Anthony J. Armini                                                        |
|                    |   | President, Chief  Executive Officer,  Chairman of the Board of Directors |
|                    |   | (Principal Executive  Officer)                                           |
|                    |   |                                                                     |
|                    |   |                                                                     |
| Date: November 10, 2004 |   | /s/ Diane J. Ryan                                                        |   |
|                    |   | Diane J. Ryan                                                            |
|                    |   | VP Finance and CFO                                                       |
|                    |   | (Principal Financial  and Accounting Officer)                            |
|                    |   |                                                                     |
|                    |   |                                                                     |
| Date: November 10, 2004 |   | /s/ Stephen N. Bunker                                                    |   |
|                    |   | Stephen N. Bunker                                                        |
|                    |   | Vice President and  Chief Scientist,  Director                           |
|                    |   |                                                                     |
|                    |   |                                                                     |
| Date: November 10, 2004 |   | /s/ Michael Szycher                                                      |   |
|                    |   | Michael Szycher,  Director                                               |
|                    |   |                                                                     |
|                    |   |                                                                     |
| Date: November 10, 2004 |   | /s/ David Eisenhaure                                                     |   |
|                    |   | David Eisenhaure,  Director                                              |
|                    |   |                                                                     |
|                    |   |                                                                     |
| Date: November 10, 2004 |   | /s/ Gerald Entine                                                        |   |
|                    |   | Gerald Entine, Director                                                  |

 

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