EXHIBIT 10.5


 


EXHIBIT A


 


REGISTRATION RIGHTS AGREEMENT


 


This Registration Rights Agreement (this “Agreement”)
is made and entered into as of March 3, 2005, by and among Implant
Sciences Corporation, a Massachusetts corporation (the “Company”), and
the purchasers signatory hereto (each such purchaser, a “Purchaser” and
collectively, the “Purchasers”).


 


This Agreement is made pursuant to the Securities
Purchase Agreement, dated as of the date hereof among the Company and the
Purchasers (the “Purchase Agreement”).


 


The Company and the Purchasers hereby agree as
follows:


 


1.                                       Definitions.  Capitalized terms used and not
otherwise defined herein that are defined in the Purchase Agreement shall have
the meanings given such terms in the Purchase Agreement.  As used in this Agreement, the following
terms shall have the following meanings:


 


“Advice” shall have the meaning set forth in Section 6(d).


 


“Effectiveness Date” means, with respect to the
Registration Statement required to be filed hereunder, the earlier of (a) the
90th calendar day following the date of the Purchase Agreement (or
the 120th calendar day in the event of a review by the Commission of
the Registration Statement) and (b) the fifth Trading Day following the date on
which the Company is notified by the Commission that the Registration Statement
will not be reviewed or is no longer subject to further review and comments.


 


“Effectiveness Period” shall have the meaning
set forth in Section 2(a).


 


“Event” shall have the meaning set forth in Section 2(b).


 


“Event Date” shall have the meaning set forth
in Section 2(b).


 


“Filing Date” means, with respect to the
Registration Statement required to be filed hereunder, the 40th
calendar day following the date of the Purchase Agreement.


 


“Holder” or “Holders” means the holder
or holders, as the case may be, from time to time of Registrable Securities.


 


“Indemnified Party” shall have the meaning set
forth in Section 5(c).


 


“Indemnifying Party” shall have the meaning set
forth in Section 5(c).


 


“Losses” shall have the meaning set forth in Section 5(a).


 


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“Plan of Distribution” shall have the meaning
set forth in Section 2(a).


 


“Proceeding” means an action, claim, suit,
investigation or proceeding (including, without limitation, an investigation or
partial proceeding, such as a deposition), whether commenced or threatened.


 


“Prospectus” means the prospectus included in
the Registration Statement (including, without limitation, a prospectus that
includes any information previously omitted from a prospectus filed as part of
an effective registration statement in reliance upon Rule 430A promulgated
under the Securities Act), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of the
Registrable Securities covered by the Registration Statement, and all other
amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.


 


“Registrable Securities” means all of the
Shares, the Warrant Shares and the Additional Investment Right Shares, together
with any shares of Common Stock issued or issuable upon any stock split,
dividend or other distribution, recapitalization or similar event with respect
to the foregoing.


 


“Registration Statement” means the registration
statements required to be filed hereunder, including (in each case) the
Prospectus, amendments and supplements to the registration statement or
Prospectus, including pre- and post-effective amendments, all exhibits thereto,
and all material incorporated by reference or deemed to be incorporated by
reference in the registration statement.


 


“Rule 415” means Rule 415 promulgated by the
Commission pursuant to the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such Rule.


 


“Rule 424” means Rule 424 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same purpose and effect as such Rule.


 


“Selling Shareholder Questionnaire” shall have
the meaning set forth in Section 3(a).


 


2.                                       Registration.


 


(a)                                  On
or prior to the Filing Date, the Company shall use its best efforts to prepare
and file with the Commission the Registration Statement covering the resale of
all of the Registrable Securities for an offering to be made on a continuous
basis pursuant to Rule 415.  The
Registration Statement required hereunder shall be on Form S-3 (except if the
Company is not then eligible to register for resale the Registrable Securities
on Form S-3, in which case the Registration shall be on another appropriate
form in accordance herewith).  The
Registration Statement required hereunder shall contain


 


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substantially
the “Plan of Distribution” attached hereto as Annex A.  Subject to the terms of this Agreement, the
Company shall use its best efforts to cause the Registration Statement to be
declared effective under the Securities Act as promptly as possible after the
filing thereof, but in any event not later than the Effectiveness Date, and
shall use its best efforts to keep the Registration Statement continuously
effective under the Securities Act until the date when all Registrable
Securities covered by the Registration Statement have been sold or may be sold
without volume restrictions pursuant to Rule 144(k) as determined by the
counsel to the Company pursuant to a written opinion letter to such effect,
addressed and acceptable to the Company’s transfer agent and the affected
Holders (the “Effectiveness Period”). 
The Company shall immediately notify the Holders via facsimile of the
effectiveness of the Registration Statement on the same day that the Company
receives notification of the effectiveness from the Commission.  Failure to so notify the Holder within 1
Trading Day of such notification shall be deemed an Event under Section 2(b).


 


(b)                                 If:
(i) a Registration Statement is not filed on or prior to the Filing Date, or
(ii) the Company fails to file with the Commission a request for acceleration
in accordance with Rule 461 promulgated under the Securities Act, within five
Trading Days of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement will not
be “reviewed,” or is not subject to further review, or (iii) [INTENTIONALLY
DELETED], or (iv) a Registration Statement filed or required to be filed
hereunder is not declared effective by the Commission on or before the
Effectiveness Date, or (v) after a Registration Statement is first declared
effective by the Commission, it ceases for any reason to remain continuously
effective as to all Registrable Securities for which it is required to be
effective, or the Holders are not permitted to utilize the Prospectus therein
to resell such Registrable Securities, for in any such case 25 calendar
consecutive days but no more than an aggregate of 40 calendar days during any
12 month period (which need not be consecutive Trading Days) (subject to
tolling extension as provided by Section 3(k))(any such failure or breach
being referred to as an “Event,” and for purposes of clause (i) or (iv)
the date on which such Event occurs, or for purposes of clause (ii) the date on
which such five Trading Day period is exceeded, or for purposes of clause (v)
the date on which such 25 or 40 calendar day period, as applicable, is exceeded
being referred to as “Event Date”), then in addition to any other rights
the Holders may have hereunder or under applicable law, on each such Event Date
and, on each monthly anniversary of each such Event Date (if the applicable
Event shall not have been cured by such date) until the applicable Event is
cured, the Company shall pay to each Holder an amount in cash, as partial
liquidated damages and not as a penalty, equal to 2.0% of the aggregate
purchase price paid by such Holder pursuant to the Purchase Agreement for any
Registrable Securities then held by such Holder.  If the Company fails to pay any partial
liquidated damages pursuant to this Section in full within seven days
after the date payable, the Company will pay interest thereon at a rate of 18%
per annum (or such lesser maximum amount that is permitted to be paid by
applicable law) to the Holder, accruing daily from the date such partial
liquidated damages are due until such amounts, plus all such interest thereon,
are paid in full.  The partial liquidated
damages pursuant to the terms hereof shall apply on a daily pro-rata basis for
any portion of a month prior to the cure of an Event.


 


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3.                                       Registration Procedures


 


In connection with the Company’s registration
obligations hereunder, the Company shall:


 


(a)                                  Not
less than five Trading Days prior to the filing of the Registration Statement
or any related Prospectus or any amendment or supplement thereto, the Company
shall, (i) furnish to the Holders copies of all such documents proposed to be
filed (including documents incorporated or deemed incorporated by reference to
the extent requested by such Person) which documents will be subject to the
review of such Holders, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the reasonable opinion of respective counsel to conduct a
reasonable investigation within the meaning of the Securities Act.  The Company shall not file the Registration
Statement or any such Prospectus or any amendments or supplements thereto to
which the Holders of a majority of the Registrable Securities shall reasonably
object in good faith, provided that the Company is notified of such objection
in writing no later than 2 Trading Days after the Holders have been so
furnished copies of such documents.  Each
Holder agrees to furnish to the Company a completed Questionnaire in the form
attached to this Agreement as Annex B (a “Selling
Shareholder Questionnaire”) not less
than five Trading Days prior to the Filing Date or by the end of the fifth
Trading Day following the date on which such Holder receives draft materials in
accordance with this Section.  In the
event a Holder does not deliver the Selling Holder Questionnaire within such
time period, any liquidated damages that otherwise accrue as to such Holder
shall be tolled until such Selling Holder Questionnaire is received by the
Company.


 


(b)                                 (i)
Prepare and file with the Commission such amendments, including post-effective
amendments, to the Registration Statement and the Prospectus used in connection
therewith as may be necessary to keep the Registration Statement continuously
effective as to the applicable Registrable Securities for the Effectiveness
Period and prepare and file with the Commission such additional Registration
Statements in order to register for resale under the Securities Act all of the
Registrable Securities; (ii) cause the related Prospectus to be amended or
supplemented by any required Prospectus supplement, and as so supplemented or
amended to be filed pursuant to Rule 424; (iii) respond as promptly as
reasonably possible to any comments received from the Commission with respect
to the Registration Statement or any amendment thereto and, as promptly as
reasonably possible, upon request, provide the Holders true and complete copies
of all correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the applicable
period in accordance with the intended methods of disposition by the Holders
thereof set forth in the Registration Statement as so amended or in such
Prospectus as so supplemented.


 


(c)                                  Notify
the Holders of Registrable Securities to be sold as promptly as reasonably
possible and (if requested by any such Person) confirm such notice in writing
promptly following the day (i)(A) when a Prospectus or any Prospectus
supplement or


 


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post-effective amendment
to the Registration Statement is proposed to be filed; (B) when the Commission
notifies the Company whether there will be a “review” of the Registration
Statement and whenever the Commission comments in writing on the Registration
Statement (the Company shall upon request provide true and complete copies
thereof and all written responses thereto to each of the Holders); and (C) with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective; (ii) of any request by the Commission or any other
Federal or state governmental authority during the period of effectiveness of
the Registration Statement for amendments or supplements to the Registration
Statement or Prospectus or for additional information; (iii) of the issuance by
the Commission or any other federal or state governmental authority of any stop
order suspending the effectiveness of the Registration Statement covering any
or all of the Registrable Securities or the initiation of any Proceedings for
that purpose; (iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Registrable Securities for sale in any jurisdiction, or the
initiation or threatening of any Proceeding for such purpose; and (v) of the
occurrence of any event or passage of time that makes the financial statements
included in the Registration Statement ineligible for inclusion therein or any
statement made in the Registration Statement or Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in any
material respect or that requires any revisions to the Registration Statement,
Prospectus or other documents so that, in the case of the Registration Statement
or the Prospectus, as the case may be, it will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.


 


(d)                                 Use
commercially reasonable efforts to avoid the issuance of, or, if issued, obtain
the withdrawal of (i) any order suspending the effectiveness of the
Registration Statement, or (ii) any suspension of the qualification (or exemption
from qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.


 


(e)                                  Furnish
to each Holder, without charge, at least one conformed copy of the Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference to the extent requested by such Person, and all exhibits to the
extent requested by such Person (including those previously furnished or
incorporated by reference) promptly after the filing of such documents with the
Commission.


 


(f)                                    Promptly
deliver to each Holder, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request in connection with
resales by the Holder of Registrable Securities.  Subject to the terms of this Agreement, the
Company hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders in connection with the offering and sale
of the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto, except after the giving on any notice pursuant to Section 3(c).


 


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(g)                                 Prior
to any resale of Registrable Securities by a Holder, use its commercially
reasonable efforts to register or qualify or cooperate with the selling Holders
in connection with the registration or qualification (or exemption from the
Registration or qualification) of such Registrable Securities for the resale by
the Holder under the securities or Blue Sky laws of such jurisdictions within
the United States as any Holder reasonably requests in writing, to keep the
Registration or qualification (or exemption therefrom) effective during the
Effectiveness Period and to do any and all other acts or things reasonably
necessary to enable the disposition in such jurisdictions of the Registrable
Securities covered by the Registration Statement; provided, that the
Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified, subject the Company to any
material tax in any such jurisdiction where it is not then so subject or file a
general consent to service of process in any such jurisdiction.


 


(h)                                 If
NASDR Rule 2710 requires any broker-dealer to make a filing prior to executing
a sale by a Holder, make an Issuer Filing with the NASDR, Inc. Corporate
Financing Department pursuant to NASDR Rule 2710(b)(10)(A)(i)
and respond within five Trading Days to any comments received from NASDR in
connection therewith, and pay the filing fee required in connection therewith.


 


(i)                                     If
requested by the Holders, cooperate with the Holders to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be delivered to a transferee pursuant to the Registration Statement, which
certificates shall be free, to the extent permitted by the Purchase Agreement,
of all restrictive legends, and to enable such Registrable Securities to be in
such denominations and registered in such names as any such Holders may
request.


 


(j)                                     Upon
the occurrence of any event contemplated by Section 3(c)(v), as promptly
as reasonably possible, prepare a supplement or amendment, including a post-effective
amendment, to the Registration Statement or a supplement to the related
Prospectus or any document incorporated or deemed to be incorporated therein by
reference, and file any other required document so that, as thereafter
delivered, neither the Registration Statement nor such Prospectus will contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. If the
Company notifies the Holders in accordance with clauses (ii) through (v) of Section 3(c)
above to suspend the use of any Prospectus until the requisite changes to such
Prospectus have been made, then the Holders shall suspend use of such
Prospectus.  The Company will use its
best efforts to ensure that the use of the Prospectus may be resumed as
promptly as is practicable.  The Company
shall be entitled to exercise its right under this Section 3(i) to suspend
the availability of a Registration Statement and Prospectus, subject to the
payment of liquidated damages pursuant to Section 2(b), for a period not
to exceed 90 days (which need not be consecutive days) in any 12 month period.


 


(k)                                  Comply
with all applicable rules and regulations of the Commission.


 


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(l)                                     The
Company may require each selling Holder to furnish to the Company a certified
statement as to the number of shares of Common Stock beneficially owned by such
Holder and, if required by the Commission, the person thereof that has voting
and dispositive control over the Shares. During any periods that the Company is
unable to meet its obligations hereunder with respect to the registration of
the Registrable Securities solely because a Holder fails to furnish such
information within five Trading Days of the Company’s request, any liquidated
damages that are accruing at such time as to all Holders shall be tolled and
any Event that may otherwise occur solely because of such delay shall be
suspended as to all Holders, until such information is delivered to the
Company.


 


4.                                       Registration Expenses.  All fees
and expenses incident to the performance of or compliance with this Agreement
by the Company shall be borne by the Company whether or not any Registrable
Securities are sold pursuant to the Registration Statement.  The fees and expenses referred to in the
foregoing sentence shall include, without limitation, (i) all registration and
filing fees (including, without limitation, fees and expenses (A) with respect
to filings required to be made with the Trading Market on which the Common
Stock is then listed for trading, and (B) in compliance with applicable state
securities or Blue Sky laws reasonably agreed to by the Company in writing
(including, without limitation, fees and disbursements of counsel for the
Company in connection with Blue Sky qualifications or exemptions of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as requested by
the Holders) and (C) if not previously paid by the Company in connection with
an Issuer Filing, with respect to any filing that may be required to be made by
any broker through which a Holder intends to make sales of Registrable
Securities with NASD Regulation, Inc. pursuant to NASD Rule 2710, so long as
the broker is receiving no more than a customary brokerage commission in connection
with such sale, (ii) printing expenses (including, without limitation, expenses
of printing certificates for Registrable Securities and of printing
prospectuses if the printing of prospectuses is reasonably requested by the
holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company, (v) Securities Act liability
insurance, if the Company so desires such insurance, and (vi) fees and expenses
of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement.  In addition, the Company shall be responsible
for all of its internal expenses incurred in connection with the consummation
of the transactions contemplated by this Agreement (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the expense of any annual audit and the fees and
expenses incurred in connection with the listing of the Registrable Securities
on any securities exchange as required hereunder. In no event shall the Company
be responsible for any broker or similar commissions or, except to the extent
provided for in the Transaction Documents, any legal fees or other costs of the
Holders.


 


5.                                       Indemnification


 


(a)                                  Indemnification
by the Company.  The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, brokers, investment advisors and
employees of each of them, each Person who controls any such Holder (within the
meaning of Section 15 of the


 


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Securities Act or Section 20
of the Exchange Act) and the officers, directors, agents and employees of each
such controlling Person, to the fullest extent permitted by applicable law,
from and against any and all losses, claims, damages, liabilities, costs
(including, without limitation, reasonable attorneys’ fees) and expenses
(collectively, “Losses”), as incurred, arising out of or relating to any
untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising
out of or relating to any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein (in
the case of any Prospectus or form of prospectus or supplement thereto, in
light of the circumstances under which they were made) not misleading, except
to the extent, but only to the extent, that (i) such untrue statements or
omissions are based solely upon information regarding such Holder furnished in
writing to the Company by such Holder expressly for use therein, or to the
extent that such information relates to such Holder or such Holder’s proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto (it being understood that the Holder has approved Annex A
hereto for this purpose) or (ii) in the case of an occurrence of an event of
the type specified in Section 3(c)(ii)-(v), the use by such Holder of an
outdated or defective Prospectus after the Company has notified such Holder in
writing that the Prospectus is outdated or defective and prior to the receipt
by such Holder of the Advice contemplated in Section 6(d).  The Company shall notify the Holders promptly
of the institution, threat or assertion of any Proceeding of which the Company
is aware in connection with the transactions contemplated by this Agreement.


 


(b)                                 Indemnification
by Holders. Each Holder shall, severally and not jointly, indemnify and
hold harmless the Company, its directors, officers, agents and employees, each
Person who controls the Company (within the meaning of Section 15 of the
Securities Act and Section 20 of the Exchange Act), and the directors,
officers, agents or employees of such controlling Persons, to the fullest
extent permitted by applicable law, from and against all Losses, as incurred,
to the extent arising out of or based solely upon: (x) such Holder’s failure to
comply with the prospectus delivery requirements of the Securities Act or (y)
any untrue or alleged untrue statement of a material fact contained in any
Registration Statement, any Prospectus, or any form of prospectus, or in any
amendment or supplement thereto or in any preliminary prospectus, or arising
out of or relating to any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading (i) to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing
by such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus or (ii) to the extent that (1) such untrue
statements or omissions are based solely upon information regarding such Holder
furnished in writing to the Company by such Holder expressly for use therein,
or to the extent that such information relates to such Holder or such Holder’s
proposed method of distribution of Registrable Securities and was reviewed and
expressly approved in writing by such Holder expressly for use in the
Registration Statement (it being understood that the Holder has approved Annex A
hereto for this purpose), such Prospectus or such form of Prospectus or in any
amendment or supplement thereto or (2) in the case of an


 


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occurrence of an event of
the type specified in Section 3(c)(ii)-(v), the use by such Holder of an
outdated or defective Prospectus after the Company has notified such Holder in
writing that the Prospectus is outdated or defective and prior to the receipt
by such Holder of the Advice contemplated in Section 6(d).  In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.


 


(c)                                  Conduct
of Indemnification Proceedings. If any Proceeding shall be brought or
asserted against any Person entitled to indemnity hereunder (an “Indemnified
Party”), such Indemnified Party shall promptly notify the Person from whom
indemnity is sought (the “Indemnifying Party”) in writing, and the
Indemnifying Party shall have the right to assume the defense thereof,
including the employment of counsel reasonably satisfactory to the Indemnified
Party and the payment of all fees and expenses incurred in connection with defense
thereof; provided, that the failure of any Indemnified Party to give such
notice shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent that it
shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such failure
shall have prejudiced the Indemnifying Party.


 


An Indemnified Party shall have the right to employ
separate counsel in any such Proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party or Parties unless: 
(1) the Indemnifying Party has agreed in writing to pay such fees and
expenses; (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to
such Indemnified Party in any such Proceeding; or (3) the named parties to any
such Proceeding (including any impleaded parties) include both such Indemnified
Party and the Indemnifying Party, and such Indemnified Party shall reasonably
believe that a material conflict of interest is likely to exist if the same
counsel were to represent such Indemnified Party and the Indemnifying Party (in
which case, if such Indemnified Party notifies the Indemnifying Party in
writing that it elects to employ separate counsel at the expense of the
Indemnifying Party, the Indemnifying Party shall not have the right to assume
the defense thereof and the reasonable fees and expenses of one separate
counsel shall be at the expense of the Indemnifying Party).  The Indemnifying Party shall not be liable
for any settlement of any such Proceeding effected
without its written consent, which consent shall not be unreasonably
withheld.  No Indemnifying Party shall,
without the prior written consent of the Indemnified Party, effect any
settlement of any pending Proceeding in respect of which any Indemnified Party
is a party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject matter of
such Proceeding.


 


Subject to the terms of this Agreement, all reasonable
fees and expenses of the Indemnified Party (including reasonable fees and expenses
to the extent incurred in connection with investigating or preparing to defend
such Proceeding in a manner not inconsistent with this Section) shall be paid
to the Indemnified Party, as incurred, within ten Trading Days of written
notice thereof to the Indemnifying Party; provided, that the


 


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Indemnified Party shall promptly reimburse the
Indemnifying Party for that portion of such fees and expenses applicable to
such actions for which such Indemnified Party is not entitled to
indemnification hereunder, determined based upon the relative faults of the
parties.


 


(d)                                 Contribution.  If a claim for indemnification under Section 5(a)
or 5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable
considerations.  The relative fault of such
Indemnifying Party and Indemnified Party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission of
a material fact, has been taken or made by, or relates to information supplied
by, such Indemnifying Party or Indemnified Party, and the parties’ relative
intent, knowledge, access to information and opportunity to correct or prevent
such action, statement or omission.  The
amount paid or payable by a party as a result of any Losses shall be deemed to
include, subject to the limitations set forth in this Agreement, any reasonable
attorneys’ or other reasonable fees or expenses incurred by such party in
connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party in accordance with its terms.


 


The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5(d) were determined by
pro rata allocation or by any other method of allocation that does not take
into account the equitable considerations referred to in the immediately
preceding paragraph.  Notwithstanding the
provisions of this Section 5(d), no Holder shall be required to
contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that
such Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, except in the case of
fraud by such Holder.


 


The indemnity and contribution agreements contained in
this Section are in addition to any liability that the Indemnifying
Parties may have to the Indemnified Parties.


 


6.                                       Miscellaneous


 


(a)                                  Remedies.  In the event of a breach by the Company or by
a Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement.  The Company and each Holder agree that
monetary damages would not provide adequate compensation for any losses
incurred by reason of a


 


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breach
by it of any of the provisions of this Agreement and hereby further agrees
that, in the event of any action for specific performance in respect of such
breach, it shall waive the defense that a remedy at law would be adequate.


 


(b)                                 No
Piggyback on Registrations.  Except
as set forth on Schedule 6(b) attached hereto, neither the Company
nor any of its security holders (other than the Holders in such capacity
pursuant hereto) may include securities of the Company in a Registration
Statement other than the Registrable Securities.  No Person has any right to cause the Company
to effect the registration under the Securities Act of any securities of the
Company.  The Company shall not file any
other registration statement until after the Effective Date.


 


(c)                                  Compliance.  Each Holder covenants and agrees that it will
comply with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities pursuant to
the Registration Statement.


 


(d)                                 Discontinued
Disposition.  Each Holder agrees by
its acquisition of such Registrable Securities that, upon receipt of a notice
from the Company of the occurrence of any event of the kind described in Section 3(c),
such Holder will forthwith discontinue disposition of such Registrable
Securities under the Registration Statement until such Holder’s receipt of the
copies of the supplemented Prospectus and/or amended Registration Statement or
until it is advised in writing (the “Advice”) by the Company that the
use of the applicable Prospectus may be resumed, and, in either case, has
received copies of any additional or supplemental filings that are incorporated
or deemed to be incorporated by reference in such Prospectus or Registration
Statement.  The Company will use its best
efforts to ensure that the use of the Prospectus may be resumed as promptly as
it practicable.  The Company agrees and
acknowledges that any periods during which the Holder is required to
discontinue the disposition of the Registrable Securities hereunder shall be
subject to the provisions of Section 2(b).


 


(e)                                  Piggy-Back
Registrations.  If at any time during
the Effectiveness Period there is not an effective Registration Statement
covering all of the Registrable Securities and the Company shall determine to
prepare and file with the Commission a registration statement relating to an
offering for its own account or the account of others under the Securities Act
of any of its equity securities, other than on Form S-4 or Form S-8 (each as
promulgated under the Securities Act) or their then equivalents relating to
equity securities to be issued solely in connection with any acquisition of any
entity or business or equity securities issuable in connection with the stock
option or other employee benefit plans, then the Company shall send to each
Holder a written notice of such determination and, if within fifteen days after
the date of such notice, any such Holder shall so request in writing, the
Company shall include in such registration statement all or any part of such
Registrable Securities such Holder requests to be registered, subject to customary
underwriter cutbacks applicable to all holders of registration rights.


 


(f)                                    Amendments
and Waivers.  The provisions of this
Agreement, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given, unless the


 


11





















 


same
shall be in writing and signed by the Company and each Holder of the then
outstanding Registrable Securities.


 


(g)                                 Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be made in
accordance with the provisions of the Purchase Agreement.


 


(h)                                 Successors
and Assigns.  This Agreement shall
inure to the benefit of and be binding upon the successors and permitted
assigns of each of the parties and shall inure to the benefit of each
Holder.  Each Holder may assign their
respective rights hereunder in the manner and to the Persons as permitted under
the Purchase Agreement.


 


(i)                                     Execution
and Counterparts.  This Agreement may
be executed in any number of counterparts, each of which when so executed shall
be deemed to be an original and, all of which taken together shall constitute
one and the same Agreement.  In the event
that any signature is delivered by facsimile transmission, such signature shall
create a valid binding obligation of the party executing (or on whose behalf
such signature is executed) the same with the same force and effect as if such
facsimile signature were the original thereof.


 


(j)                                     Governing
Law.  All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be determined with the provisions of the Purchase Agreement.


 


(k)                                  Cumulative
Remedies.  The remedies provided
herein are cumulative and not exclusive of any remedies provided by law.


 


(l)                                     Severability.
If any term, provision, covenant or restriction of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions set forth
herein shall remain in full force and effect and shall in no way be affected,
impaired or invalidated, and the parties hereto shall use their commercially
reasonable efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction.  It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.


 


(m)                               Headings.  The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.


 


(n)                                 Independent
Nature of Holders’ Obligations and Rights. 
The obligations of each Holder hereunder are several and not joint with
the obligations of any other Holder hereunder, and no Holder shall be
responsible in any way for the performance of the obligations of any other
Holder hereunder.  Nothing contained
herein or in any other agreement or document delivered at any closing, and no
action taken by any Holder pursuant hereto or thereto, shall be deemed to
constitute the Holders as a partnership, an association, a joint venture or any
other kind of entity, or create a presumption that the


 


12





















 


Holders are in any way
acting in concert with respect to such obligations or the transactions
contemplated by this Agreement.  Each
Holder shall be entitled to protect and enforce its rights, including without
limitation the rights arising out of this Agreement, and it shall not be
necessary for any other Holder to be joined as an additional party in any
proceeding for such purpose.


 


*************************


 


13





















 


IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first written above.


 


	
   

  	
  IMPLANT SCIENCES CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
  A. J. Armini

  
	
   

  	
   

  	
  Title:

  	
  President and CEO

  



 


 


[SIGNATURE PAGE OF HOLDERS FOLLOWS]


 





















 


[HOLDER’S SIGNATURE PAGE TO IMX RRA]


 


	
  Name of Holder:

  	
   

  	
   

  
	
  Signature
  of Authorized Signatory of Holder:

  	
   

  	
   

  
	
  Name of
  Authorized Signatory:

  	
   

  	
   

  
	
  Title of
  Authorized Signatory: 

  	
   

  	
   

  
								



 


 


[SIGNATURE PAGES CONTINUE]


 


15





















 


ANNEX A


 


Plan of Distribution


 


The Selling Stockholders (the “Selling Stockholders”)
of the common stock (“Common Stock”) of Implant Sciences Corporation
(the “Company”) and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. 
These sales may be at fixed or negotiated prices.  The Selling Stockholders may use any one or
more of the following methods when selling shares:


 


•                  ordinary
brokerage transactions and transactions in which the broker-dealer solicits
purchasers;


 


•                  block trades
in which the broker-dealer will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction;


 


•                  purchases by
a broker-dealer as principal and resale by the broker-dealer for its account;


 


•                  an exchange
distribution in accordance with the rules of the applicable exchange;


 


•                  privately
negotiated transactions;


 


•                  settlement
of short sales entered into after the date of this prospectus;


 


•                  broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
shares at a stipulated price per share;


 


•                  a
combination of any such methods of sale;


 


•                  through the
writing or settlement of options or other hedging transactions, whether through
an options exchange or otherwise; or


 


•                  any other
method permitted pursuant to applicable law.


 


The Selling Stockholders may also sell shares under
Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”),
if available, rather than under this prospectus.


 


Broker dealers engaged by the Selling Stockholders may
arrange for other brokers dealers to participate in sales.  Broker dealers may receive commissions or
discounts from the Selling Stockholders (or, if any broker dealer acts as agent
for the purchaser of shares, from the purchaser) in amounts to be negotiated,
but, except as set forth in a supplement to this Prospectus, in the case of an
agency transaction not in excess of a customary brokerage commission in compliance
with NASDR Rule 2440; and in the case of a principal transaction a markup or
markdown in compliance with NASDR IM-2440.


 


16





















 


In connection with the sale of our common stock or
interests therein, the Selling Stockholders may enter into hedging transactions
with broker-dealers or other financial institutions, which may in turn engage
in short sales of the common stock in the course of hedging the positions they
assume.  The Selling Stockholders may
also sell shares of our common stock short and deliver these securities to
close out their short positions, or loan or pledge the common stock to
broker-dealers that in turn may sell these securities.  The Selling Stockholders may also enter into
option or other transactions with broker-dealers or other financial
institutions or the creation of one or more derivative securities which require
the delivery to such broker-dealer or other financial institution of shares
offered by this prospectus, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).


 


The Selling Stockholders and any brokerdealers or
agents that are involved in selling the shares may be deemed to be “underwriters”
within the meaning of the Securities Act in connection with such sales.  In such event, any commissions received by
such brokerdealers or agents and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.  Each Selling
Stockholder has informed the Company that it does not have any written or oral
agreement or understanding, directly or indirectly, with any person to
distribute the Common Stock. In no event shall any broker-dealer receive fees,
commissions and markups which, in the aggregate, would exceed eight percent
(8%).


 


The Company is required to pay certain fees and
expenses incurred by the Company incident to the registration of the shares.  The Company has agreed to indemnify the
Selling Stockholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.


 


Because Selling Stockholders may be deemed to be “underwriters”
within the meaning of the Securities Act, they will be subject to the
prospectus delivery requirements of the Securities Act.  In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus.  Each Selling Stockholder has advised us that
they have not entered into any written or oral agreements, understandings or
arrangements with any underwriter or broker-dealer regarding the sale of the
resale shares.  There is no underwriter
or coordinating broker acting in connection with the proposed sale of the
resale shares by the Selling Stockholders.


 


We agreed to keep this prospectus effective until the
earlier of (i) the date on which the shares may be resold by the Selling
Stockholders without registration and without regard to any volume limitations
by reason of Rule 144(k) under the Securities Act or any other rule of similar
effect or (ii) all of the shares have been sold pursuant to the prospectus or
Rule 144 under the Securities Act or any other rule of similar effect.  The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.


 


17





















 


Under applicable rules and regulations under the
Exchange Act, any person engaged in the distribution of the resale shares may
not simultaneously engage in market making activities with respect to our
common stock for a period of two business days prior to the commencement of the
distribution.  In addition, the Selling
Stockholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including Regulation M, which may limit
the timing of purchases and sales of shares of our common stock by the Selling
Stockholders or any other person.  We
will make copies of this prospectus available to the Selling Stockholders and
have informed them of the need to deliver a copy of this prospectus to each
purchaser at or prior to the time of the sale.


 


18





















 


Annex B


 


Implant Sciences Corporation


 


Selling Securityholder Notice and Questionnaire


 


The
undersigned beneficial owner of common stock, par value $0.10 per share (the “Common
Stock”), of Implant Sciences Corporation, a Massachusetts corporation (the “Company”),
(the “Registrable Securities”) understands that the Company has filed or
intends to file with the Securities and Exchange Commission (the “Commission”)
a registration statement on Form S-3 (the “Registration Statement”) for
the registration and resale under Rule 415 of the Securities Act of 1933, as
amended (the “Securities Act”), of the Registrable Securities, in
accordance with the terms of the Registration Rights Agreement, dated as of March ___,
2005 (the “Registration Rights Agreement”), among the Company and the
Purchasers named therein.  A copy of the
Registration Rights Agreement is available from the Company upon request at the
address set forth below.  All capitalized
terms not otherwise defined herein shall have the meanings ascribed thereto in
the Registration Rights Agreement.


 


Certain
legal consequences arise from being named as a selling securityholder in the
Registration Statement and the related prospectus.  Accordingly, holders and beneficial owners of
Registrable Securities are advised to consult their own securities law counsel
regarding the consequences of being named or not being named as a selling
securityholder in the Registration Statement and the related prospectus.


 


NOTICE


 


The
undersigned beneficial owner (the “Selling Securityholder”) of
Registrable Securities hereby elects to include the Registrable Securities
owned by it and listed below in Item 3 (unless otherwise specified under such
Item 3) in the Registration Statement.


 


19





















 


The undersigned hereby
provides the following information to the Company and represents and warrants
that such information is accurate:  


 


QUESTIONNAIRE


 


1.                                      Name.


 


(a)                                  Full
Legal Name of Selling Securityholder


 


 


 


(b)                                 Full
Legal Name of Registered Holder (if not the same as (a) above) through which
Registrable Securities Listed in Item 3 below are held:


 


 


 


(c)                                  Full
Legal Name of Natural Control Person (which means a natural person who directly
you indirectly alone or with others has power to vote
or dispose of the securities covered by the questionnaire):


 


 


 


2.              Address for Notices to Selling
Securityholder:


 


 


 


 


Telephone:


Fax:


Contact
Person:


 


3.              Beneficial
Ownership of Registrable Securities:  


 


(a)                                  Type
and Principal Amount of Registrable Securities beneficially owned:


 


 


 


 


 


20





















 


4.              Broker-Dealer Status:  


 


(a)                                  Are you a broker-dealer?  


 


Yes   o           No  o


 


Note:                   If yes, the Commission’s staff has indicated that you
should be identified as an underwriter in the Registration Statement.  


 


(b)                                 Are you an affiliate of a broker-dealer?  


 


Yes   o           No  o


 


(c)                                  If you are an affiliate of a
broker-dealer, do you certify that you bought the Registrable Securities in the
ordinary course of business, and at the time of the purchase of the Registrable
Securities to be resold, you had no agreements or understandings, directly or
indirectly, with any person to distribute the Registrable Securities?  


 


Yes   o           No  o


 


Note:                   If no, the Commission’s staff has indicated that you
should be identified as an underwriter in the Registration Statement.  


 


5.              Beneficial Ownership of Other
Securities of the Company Owned by the Selling Securityholder.  


 


Except as set forth below in this
Item 5, the undersigned is not the beneficial or registered owner of any
securities of the Company other than the Registrable Securities listed above in
Item 3.  


 


(a)                                  Type and Amount of Other Securities
beneficially owned by the Selling Securityholder:


 


 


 


 


21





















 


6.              Relationships with the Company:  


 


Except as
set forth below, neither the undersigned nor any of its affiliates, officers,
directors or principal equity holders (owners of 5% of more of the
equity securities of the undersigned) has held any position or office or has
had any other material relationship with the Company (or its predecessors or
affiliates) during the past three years.  


 


State any exceptions here:


 


 


 


 


The
undersigned agrees to promptly notify the Company of any inaccuracies or
changes in the information provided herein that may occur subsequent to the
date hereof at any time while the Registration Statement remains effective.  


 


By
signing below, the undersigned consents to the disclosure of the information
contained herein in its answers to Items 1 through 6 and the inclusion of such
information in the Registration Statement and the related prospectus.  The undersigned understands that such
information will be relied upon by the Company in connection with the
preparation or amendment of the Registration Statement and the related
prospectus.  


 


IN
WITNESS WHEREOF the undersigned, by authority duly given, has caused this
Notice and Questionnaire to be executed and delivered either in person or by
its duly authorized agent.  


 


	
  Dated:

  	
   

  	
   

  	
  Beneficial
  Owner:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
  Title:

  
						



 


PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE
AND QUESTIONNAIRE, AND RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:   


 


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