Document:

Exhibit 4.1

 

	
  FEDERAL

  	
   

  	
  IDENTIFICATION

  
	
    NO. 04-2837126

  	
   

  	
   

  

 

The
Commonwealth of Massachusetts

William Francis Galvin

Secretary of the Commonwealth

One Ashburton Place, Boston, MA 02108-1512

 

CERTIFICATE OF VOTE OF DIRECTORS

ESTABLISHING A CLASS OR SERIES OF STOCK

(General Laws, Chapter 156B, Section 26)

 

We,    Anthony J. Armini, *President
and     Stephen N. Bunker, *Clerk

 

	
  of

  	
    Implant
  Sciences Corporation

  
	
   

  	
  (Exact
  name of corporation)

  

 

	
  located at:

  	
  107 Audubon
  Road, Wakefield, Massachusetts 01880

  
	
   

  	
  (Street
  Address of corporation in Massachusetts)

  

 

do hereby certify that at a meeting of directors of the Corporation on September 27,
2005, the following vote establishing and designating a class or series of
stock and determining the relative rights and preferences thereof was duly
adopted:

 

See Continuation Sheet 2A

 

*Delete the inapplicable words.

 

SERIES D
PREFERRED STOCK:     Votes for which the
space provided above is not sufficient should be provided on one side of
separate 81⁄2 x 11 sheets of white paper, numbered 2A, 2B, etc. with a left
margin of at least 1 inch.

 

 

CONTINUATION
SHEET 2A

 

IMPLANT
SCIENCES CORPORATION

 

VOTED:                 That,
pursuant to the authority expressly granted to and vested in the Board of
Directors of the Corporation by the provisions of Article IV of the
Amended and Restated Articles of Organization of the Corporation (the “Articles
of Organization”) and Section 26 of the Massachusetts Business
Corporation Law of the Commonwealth of Massachusetts, the Board of Directors
hereby creates, from the 5,000,000 shares of Preferred Stock, par value $.10
per share (the “Preferred Stock”), of the Corporation authorized to be
issued pursuant to the Amended and Restated Articles of Organization a series
of Preferred Stock, consisting of 500,000 shares of Series D Cumulative
Convertible Preferred Stock (the “Series D Preferred Stock”), and
hereby fixes the powers, designations, preferences and qualifications,
limitations or restrictions thereof, of the shares of such Series Ds set
forth in Exhibit A hereto (the “Certificate of Vote of Directors”).

 

 

SIGNED UNDER THE PENALTIES OF PERJURY, this 30th day of  September, 2005.

 

	
                    /s/
  Anthony Armini

  	
  , *President

  
	
   

  
	
                    /s/
  Stephen N. Bunker

  	
  , *Clerk

  
			

 

 

* Delete the inapplicable words.

 

 

EXHIBIT A

 

TERMS
OF SERIES D

CUMULATIVE CONVERTIBLE PREFERRED STOCK 

OF

IMPLANT SCIENCES CORPORATION

 

1.             Designation: Number of Shares.  The designation of said series of Preferred
Stock shall be Series D Cumulative Convertible Preferred Stock (the “Series D Preferred Stock”).  The number of shares of Series D
Preferred Stock shall be 500,000.  Each
share of Series D Preferred Stock shall have a stated value equal to $10
(as adjusted for any stock dividends, combinations or splits with respect to such
shares) (the “Stated Value”), and $.10 par
value.

 

2.             Ranking.  The Series D Preferred Stock shall rank (i) prior
to the Corporation’s common stock, par value $.10 per share (“Common Stock”); (ii) except as provided in clause (iii) below,
prior to any class or series of capital stock of the Corporation hereafter
created (unless, with the consent of the holder of Series D Preferred
Stock (the “Holder”) (which may be withheld in
such Holder’s sole and absolute discretion), such class or series of capital stock
specifically, by its terms, ranks senior to or Pari Passu with the Series D
Preferred Stock); (iii) Pari Passu with any class or series of capital
stock of the Corporation hereafter created specifically ranking, by its terms,
on parity with the Series D Preferred Stock and Pari Passu with the Series D
Preferred Stock of the Corporation (“Pari Passu Securities”);
and (iv) junior to any class or series of capital stock of the Corporation
hereafter created (with the consent of the Holder (which may be withheld in
Holder’s sole and absolute discretion) obtained in accordance with Section 6(g) hereof)
specifically ranking, by its terms, senior to the Series D Preferred
Stock  (“Senior
Securities”), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.

 

3.             Dividends.  The Holder shall be entitled to receive
preferential dividends in cash out of any funds of the Corporation legally
available at the time for declaration of dividends before any dividend or other
distribution will be paid or declared and set apart for payment on any shares
of any Common Stock, or other class of stock presently authorized but not yet
issued, or to be authorized (the Common Stock, and such other stock being
hereinafter collectively the “Junior Stock”),
(but after any dividend or other distribution will be paid or declared
and set apart for payment on any shares of any Senior Securities), shall accrue
at a rate per annum equal to the “prime rate” published in The Wall Street
Journal from time to time (the “Prime Rate”),
plus one percent (1.0%) (the “Contract Rate”)
per annum on the Stated Value per share payable monthly commencing one month
from the date hereof and on the first business day of each consecutive month
thereafter when as and if declared, at the Corporation’s option; provided,
however, that dividend payments may, in the sole discretion of the Corporation,
be made in fully paid and non-assessable shares of Common Stock which are
subject to an effective registration statement at the Fixed Conversion Price
(as defined herein) then in effect, and the issuance of such additional shares
shall constitute full payment of such dividend. 
The Contract Rate shall be increased or decreased as the case may be for
each increase or decrease in the Prime Rate in an amount equal to such increase
or decrease in the Prime Rate; each change to be effective as of the day of the
change in the Prime Rate.

 

 

(a)           The Contract Rate shall be calculated
on the last business day of each calendar month hereafter (other than for
increases or decreases in the Prime Rate which shall be calculated and become
effective in accordance with the terms of Section 1.1) until the Mandatory
Redemption Date (as defined herein) Date (each a “Determination
Date”) and shall be subject to adjustment as set forth herein.  If (i) the Company shall have registered
the shares of the Common Stock underlying the conversion of the Series D
Preferred Stock on a registration statement declared effective by the
Securities and Exchange Commission (the “SEC”), and (ii) the
market price (the “Market Price”)
of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for
the five (5) trading days immediately preceding a Determination Date
exceeds the then applicable Fixed Conversion Price (hereinafter defined) by at
least twenty-five percent (25%), the Contract Rate for the succeeding calendar
month shall automatically be reduced by 200 basis points (200 b.p.) (2%) for
each incremental twenty-five percent (25%) increase in the Market Price of the
Common Stock above the then applicable Fixed Conversion Price.    Notwithstanding the foregoing (and anything
to the contrary contained herein), in no event shall the Contract Rate be less
than zero percent (0%).

 

(b)           The dividends on the Series D
Preferred Stock at the rates provided above shall be cumulative whether or not
declared  so that, if at any time full
cumulative dividends at the rate aforesaid on all shares of the Series D
Preferred Stock then outstanding from the date from and after which dividends
thereon are cumulative to the end of the monthly  dividend period next preceding such time
shall not have been paid or declared and set apart for payment, or if the full
dividend on all such outstanding Series D Preferred Stock for the then
current dividend period shall not have been paid or declared and set apart for
payment, the amount of the deficiency shall be paid or declared and set apart
for payment (but without interest thereon) before any sum shall be set apart
for or applied by the Corporation or a subsidiary of the Corporation to the
purchase, redemption or other acquisition of the Series D Preferred Stock
or Pari Passu Securities and before any dividend or other distribution shall be
paid or declared and set apart for payment on any Junior Stock and before any
sum shall be set aside for or applied to the purchase, redemption or other
acquisition of Junior Stock.

 

(c)           Dividends on all shares of the Series D
Preferred Stock shall begin to accrue and be cumulative from and after the date
of issuance thereof.  A dividend period
shall be deemed to commence on the business day following a monthly dividend
payment date herein specified and to end on the next succeeding business
monthly dividend payment date herein specified.

 

4.             Redemption.

 

(a)           Monthly Redemption Payments.  Subject to the terms of this Section 4, beginning
on January 1, 2006, and on the first day of each month  thereafter until the Mandatory Redemption Date
(each, a “Repayment Date”), the Corporation shall
redeem the original Stated Value of the Series D Preferred Stock (to the
extent such amount has not been converted pursuant to Section 6 below) by
$151,515.20 (the “Monthly Redemption Amount”)
together with the dividend accrued to date on such portion of the original
Stated Value plus any and all  payments due
and owing but not previously paid under the Securities Purchase Agreement dated
September 30, 2005 between the Corporation and Laurus Master Fund, Ltd.
(the “Purchase 

 

2

 

Agreement”) and the Related
Agreements referred to therein, (collectively the “Monthly
Amount”), in accordance with Section 4(b) below.

 

(b)           Any
conversions will be applied to the closest upcoming amortization payment. For
example, if between January 1, 2006 and January 31, 2006, the Holder
converts $100,000 of Stated Value of the Series D Preferred Stock into
shares of Common Stock, then the Monthly Redemption Amount due on February 1,
2006   shall be $51,515.20; provided,
however, that as set forth in Section 6(a) herein, any
such conversion shall be limited to such number of shares which shall equal the
subsequent month’s Monthly Amount.

 

(c)           Payment in Cash or Common Stock.  If the Monthly Amount (or a portion of such
Monthly Amount if not all of the Monthly Amount may be converted into shares of
Common Stock pursuant to Section 4(d) is required to be paid in cash
pursuant to Section 4(f), then the Company shall pay the Holder an amount
in cash equal to 100% of the Monthly Amount (or such portion of such Monthly
Amount to be paid in cash) due and owing to the Holder on the Repayment
Date.  If the Monthly Amount (or a
portion of such Monthly Amount if not all of the Monthly Amount may be
converted into shares of Common Stock pursuant to Section 4(d)) is
required to be paid in shares of Common Stock pursuant to Section 4(f),
the number of such shares to be issued by the Company to the Holder on such Repayment
Date (in respect of such portion of the Monthly Amount converted into shares of
Common Stock pursuant to Section 4(f), shall be the number determined by
dividing (i) the portion of the Monthly Amount converted into shares of
Common Stock, by (ii) the then applicable Fixed Conversion Price.  For purposes hereof, subject to Section 3.6
hereof, the initial “Fixed Conversion Price”
means $6.80 which has been determined on the date of this Series D
Preferred Stock  as an amount equal to 105%
of the average closing price of the Common Stock for the [ten (10)] trading
days immediately prior to the date of this Series D Preferred Stock].

 

(d)           Monthly Amount Conversion
Conditions.  Subject to
Sections 4(c), 4(d) and 4(f) hereof, the Holder shall convert
into shares of Common Stock all or a portion of the Monthly Amount due on each Repayment
Date if the following conditions (the “Conversion Criteria”)
are satisfied: (i) the average closing price of the Common Stock as
reported by Bloomberg, L.P. on the Principal Market for the five (5) trading
days immediately preceding such Repayment Date shall be greater than or equal
to 110% of the Fixed Conversion Price and (ii) the amount of such
conversion does not exceed twenty five percent (25%) of the aggregate dollar
trading volume of the Common Stock for the period of twenty-two (22) trading
days immediately preceding such Repayment Date. 
If subsection (i) of the Conversion Criteria is met but subsection (ii) of
the Conversion Criteria is not met as to the entire Monthly Amount, the Holder
shall convert only such part of the Monthly Amount that meets subsection (ii) of
the Conversion Criteria.  Any portion of
the Monthly Amount due on an Repayment Date that the Holder has not been able
to convert into shares of Common Stock due to the failure to meet the
Conversion Criteria, shall be paid in cash by the Company at the rate of 100%
of the Monthly Amount otherwise due on such Repayment Date, within three (3) business
days of such Repayment Date.

 

3

 

(e)           No Effective Registration.  Notwithstanding anything to the contrary
herein, none of the Company’s obligations to the Holder may be converted into
Common Stock unless (a) either (i) an effective current Registration
Statement (as defined in the Registration Rights Agreement) covering the shares
of Common Stock to be issued in connection with satisfaction of such
obligations exists or (ii) an exemption from registration for resale of
all of the Common Stock issued and issuable is available pursuant to Rule 144
of the Securities Act and (b) no Event of Default (as hereinafter defined)
exists and is continuing, unless such Event of Default is cured within any
applicable cure period or otherwise waived in writing by the Holder..

 

(f)            Share Price/Issuance Limitations.  Notwithstanding anything to the contrary
herein, if the closing price of the Common Stock as reported by Bloomberg, L.P.
on the Principal Market for any of the 5 trading days preceding a Repayment
Date was less than the Fixed Conversion Price, the Corporation would be required
to pay such Monthly Amount in cash.

 

(g)           Deemed Conversions.  Any repayment of the Monthly Amount in shares
of Common Stock pursuant to the terms hereof shall constitute and be deemed a
conversion of such portion of the applicable Stated Value of the Series D
Preferred Stock for all purposes under this Certificate and the Purchase
Agreement (except as otherwise provided herein).

 

5.             Liquidation Rights.

 

(a)           Upon the dissolution, liquidation or
winding-up of the Corporation, whether voluntary or involuntary, the Holder
shall be entitled to receive, after any payment or distribution shall be made
on the Senior Securities, but before any payment or distribution shall be made
on the Junior Stock, out of the assets of the Corporation available for
distribution to stockholders, the greater of (i) the unpaid Stated Value
per share of Series D Preferred Stock and all accrued and unpaid dividends
to and including the date of payment thereof or (ii) the number of shares
that would be issuable upon conversion of the Stated Value and accrued
dividends multiplied by the highest closing price for the five trading days
immediately preceding such liquidation payment date.  Upon the payment in full of all amounts due
to Holder the holders of the Common Stock of the Corporation and any other
class of Junior Stock shall receive all remaining assets of the Corporation
legally available for distribution.  If
the assets of the Corporation available for distribution to the Holder shall be
insufficient to permit payment in full of the amounts payable as aforesaid to
the Holder upon such liquidation, dissolution or winding-up, whether voluntary
or involuntary, then all such assets of the Corporation shall be distributed to
the exclusion of the holders of shares of Junior Stock ratably among the
Holder.

 

(b)           Neither the purchase nor the
redemption by the Corporation of shares of any class of stock nor the merger or
consolidation of the Corporation with or into any other corporation or
corporations nor the sale or transfer by the Corporation of all or any part of
its assets shall be deemed to be a liquidation, dissolution or winding-up of
the Corporation for the purposes of this paragraph 5.

 

6.             Conversion into Common Stock.  Shares of Series D Preferred Stock shall
have the following conversion rights and obligations:

 

4

 

(a)           Subject to the further provisions of
this paragraph 6 each Holder shall have the right at any time commencing after
the issuance ot the Holder of  the Series D
Preferred Stock to convert such shares into fully paid and non-assessable
shares of Common Stock of the Corporation (as defined in paragraph 6(i) below)
determined in accordance with the Fixed Conversion Price provided in paragraph
6(b) below.  All issued or accrued
but unpaid dividends may be converted at the election of the Holder
simultaneously with the conversion of the Stated Value of Series D
Preferred Stock being converted.  In the
event of any conversions of outstanding Stated Value under the Series D Preferred
Stock in part pursuant to this Section 6, such conversions shall be deemed
to constitute conversions of outstanding Stated Value applying to Monthly
Amounts for the Repayment Dates in chronological order.

 

(b)           The number of shares of Common Stock
issuable upon conversion of each share of Series D Preferred Stock shall
equal (i) the sum of (A) the Stated Value per share and (B) at
the Holder’s election accrued and unpaid dividends on such share, divided by (ii) $6.80
(the “Fixed Conversion Price”).

 

(c)           The Holder of any certificate for
shares of Series D Preferred Stock desiring to convert any of such shares
may give notice of its decision to convert the shares into Common Stock by
delivering or telecopying an executed and completed notice of conversion to the
Corporation (the “Conversion Date”).
Each date on which a notice of conversion is delivered or telecopied to the
Corporation in accordance with the provisions hereof shall be deemed a
Conversion Date.  A form of Notice of
Conversion that may be employed by a Holder is annexed hereto as Exhibit A.  The Corporation will cause the transfer agent
to transmit the shares of the Common Stock issuable upon conversion of the Series D
Preferred Stock (and a certificate representing the balance of the Series D
Preferred Stock not so converted, if requested by Purchaser) to the Holder by
crediting the account of the Holder’s prime broker with the Depository Trust
Company (“DTC”) through its Deposit Withdrawal
Agent Commission (“DWAC”) system
within three (3) business days after receipt by the Corporation of the
Notice of Conversion (the “Delivery Date”).  The Corporation is obligated to deliver to
the Holder simultaneously with the aforedescribed Common Stock, at the election
of the Holder, additional shares of Common Stock representing the conversion at
the Fixed Conversion Price, of dividends accrued on the Series D Preferred
Stock being converted.

 

In the
case of the exercise of the conversion rights set forth in paragraph 6(a) the
conversion privilege shall be deemed to have been exercised and the shares of
Common Stock issuable upon such conversion shall be deemed to have been issued
upon the date of receipt by the Corporation or Transfer Agent of the Notice of
Conversion.  The person or entity
entitled to receive Common Stock issuable upon such conversion shall, on the
date such conversion privilege is deemed to have been exercised and thereafter,
be treated for all purposes as the record Holder of such Common Stock and shall
on the same date cease to be treated for any purpose as the record Holder of
such shares of Series D Preferred Stock so converted.

 

Upon
the conversion of any shares of Series D Preferred Stock no adjustment or
payment shall be made with respect to such converted shares on account of any
dividend on the 

 

5

 

Common Stock, except that
the Holder of such converted shares shall be entitled to be paid any dividends
declared on shares of Common Stock after conversion thereof.

 

The
Corporation shall not be required, in connection with any conversion of Series D
Preferred Stock, and payment of dividends on Series D Preferred Stock to
issue a fraction of a share of its Series D Preferred Stock and shall
instead deliver a stock certificate representing the next whole number.

 

(d)           The Fixed Conversion Price determined
pursuant to 6(b) shall be subject to adjustment from time to time as
follows: if the Corporation shall at any time (A) declare any stock
dividend or distribution of stock on its Common Stock or other securities of
the Corporation other than the Series D Preferred Stock,  (B) split or subdivide the outstanding
Common Stock, (C) combine the outstanding Common Stock into a smaller
number of shares, or (D) issue by reclassification of its Common Stock any
shares or other securities of the Corporation, then in each such event the
Fixed Conversion Price shall be adjusted proportionately so that the Holder
shall be entitled to receive the kind and number of shares or other securities
of the Corporation which such Holder would have owned or have been entitled to
receive after the happening of any of the events described above had such
shares of Series D Preferred Stock been converted immediately prior to the
happening of such event (or any record date with respect thereto).  Such adjustment shall be made whenever any of
the events listed above shall occur. An adjustment made to the conversion
pursuant to this paragraph 6(d) shall become effective immediately after
the effective date of the event retroactive to the record date, if any, for the
event. Notwithstanding the foregoing, no adjustments will be made upon
issuances of any securities issued upon the exercise or conversion of currently
issued and outstanding options, warrants, or convertible securities.

 

(e)           (i)            In
case of any merger of the Corporation with or into any other corporation (other
than a merger in which the Corporation is the surviving or continuing
corporation and which does not result in any reclassification, conversion, or  change of the outstanding shares of Common
Stock) then unless the right to convert shares of Series D Preferred Stock
shall have terminated, as part of such merger, lawful provision shall be made
so that Holder shall thereafter have the right to convert each share of Series D
Preferred Stock into the kind and amount of shares of stock and/or other
securities or property receivable upon such merger by a Holder of the number of
shares of Common Stock into which such shares of Series D Preferred Stock
might have been converted immediately prior to such consolidation or
merger.  Such provision shall also
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in paragraph 6(d).  The foregoing provisions of this paragraph 6(e) shall
similarly apply to successive mergers.

 

(ii)           In case of any sale or conveyance to
another person or entity of the property of the Corporation as an entirety, or
substantially as an entirety, in connection with which shares or other securities
or cash or other property shall be issuable, distributable, payable, or
deliverable for outstanding shares of Common Stock, then, unless the right to
convert such shares shall have terminated, lawful provision shall be made so
that the Holder shall thereafter have the right to convert each share of the Series D
Preferred Stock into the kind and amount of shares of stock or other securities
or property that shall be issuable, distributable, payable, or 

 

6

 

deliverable upon such sale or conveyance with respect
to each share of Common Stock immediately prior to such conveyance.

 

(f)            Whenever the number of shares to be
issued upon conversion of the Series D Preferred Stock is required to be
adjusted as provided in this paragraph 6, the Corporation shall forthwith
compute the adjusted number of shares to be so issued and prepare a certificate
setting forth such adjusted conversion amount and the facts upon which such
adjustment is based, and such certificate shall forthwith be filed with the
Transfer Agent for the Series D Preferred Stock and the Common Stock; and
the Corporation shall mail to each Holder notice of such adjusted conversion
price.

 

(g)           In case at any time the Corporation
shall propose:

 

(i)            to pay any dividend or distribution
payable in shares upon its Common Stock or make any distribution (other than
cash dividends) to the holders of its Common Stock; or

 

(ii)           to offer for subscription any
additional shares of any class or any other rights (except offerings made in
connection with strategic business transactions or joint ventures with the
Company) at a price less than the then closing price of such shares as such
price is quoted on a Principal Market on the date of such issuance; or

 

(iii)          any capital reorganization or
reclassification of its shares or the merger of the Corporation with another
corporation (other than a merger in which the Corporation is the surviving or
continuing corporation and which does not result in any reclassification, conversion,
or change of the outstanding shares of Common Stock); or

 

(iv)          the voluntary dissolution, liquidation
or winding-up of the Corporation;

 

then,
and in any one or more of said cases, the Corporation shall cause at least
fifteen (15) days prior notice of the date on which (A) the books of the
Corporation shall close or a record be taken for such stock dividend,
distribution, or subscription rights, or (B) such capital reorganization,
reclassification, merger, dissolution, liquidation or winding-up shall take
place, as the case may be, to be mailed to the Transfer Agent for the Series D
Preferred Stock, if any, and for the Common Stock and to the Holder.

 

If the
Corporation issues any additional shares pursuant to Section 6(g)(ii) above
then, and thereafter successively upon each such issue, the Fixed Conversion
Price shall be  adjusted by
multiplying  the then applicable Fixed
Conversion Price by the following fraction:

 

	
    A + B

  	
   

  
	
    (A
  + B) + [((C – D) x B) / C]

  

 

A =
Actual shares outstanding prior to such offering

 

7

 

B
=  Actual shares sold in the offering

 

C = Closing market price of the Company’s common stock
on the date of such offering

 

D =
Offering price

 

(h)           So long as any shares of Series D
Preferred Stock shall remain outstanding and the Holder thereof shall have the
right to convert the same in accordance with provisions of this paragraph 6 the
Corporation shall at all times reserve from the authorized and unissued shares
of its Common Stock a sufficient number of shares to provide for such
conversions.

 

(i)            The term Common Stock as used in
this paragraph 6 shall mean the $.10 par value Common Stock of the Corporation
as such stock is constituted at the date of issuance thereof or as it may from
time to time be changed or shares of stock of any class of other securities
and/or property into which the shares of Series D Preferred Stock shall at
any time become convertible pursuant to the provisions of this paragraph 6.

 

(j)            The Corporation shall pay the amount
of any and all issue taxes (but not income taxes) which may be imposed in
respect of any issue or delivery of stock upon the conversion of any shares of Series D
Preferred Stock, but all transfer taxes and income taxes that may be payable in
respect of any change of ownership of Series D Preferred Stock or any
rights represented thereby or of stock receivable upon conversion thereof shall
be paid by the person or persons surrendering such stock for conversion.

 

(k)           Overall Limit on Common Stock
Issuable.  Notwithstanding anything
contained herein to the contrary, the Holder shall not be entitled to convert
pursuant to the terms of this Series D Preferred Stock an amount that
would be convertible into that number of Conversion Shares which would exceed
the difference between (i) 4.99% of the issued and outstanding shares of
Common Stock and (ii) the number of shares of Common Stock beneficially
owned by the Holder  For purposes of the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Exchange Act and Regulation 13d-3
thereunder.  The Conversion Share
limitation described in this Section 6(k) 
shall automatically become null and void following notice to the Company
upon the occurrence and during the continuance of an Event of Default, upon 75
days prior notice to the Company, or upon receipt by the Holder of a Notice of
Redemption, except that at no time shall the number of shares of Common Stock
beneficially owned by the Holder a exceed 19.99% of the outstanding shares of
Common Stock.  Notwithstanding anything
contained herein to the contrary, the number of shares of Common Stock issuable
by the Company and acquirable by the Holder at a price below $6.32 per share
pursuant to the terms of this Series D Preferred Stock, the Warrant, the
Purchase Agreement or any other Related Agreement, shall not exceed an
aggregate of 2,151,260 shares of Common Stock (subject to appropriate
adjustment for stock splits, stock dividends, or other similar recapitalizations
affecting the Common Stock) (the “Maximum Common Stock
Issuance”), unless the issuance of Common Stock hereunder in excess
of the Maximum Common Stock Issuance shall first be approved by the Company’s
shareholders.  If at 

 

8

 

any point in time and from time to time the number of
shares of Common Stock issued pursuant to the terms of this Series D
Preferred Stock, the Purchase Agreement or any other Related Agreement,
together with the number of shares of Common Stock that would then be issuable
by the Company to the Holder in the event of a conversion or exercise pursuant
to the terms of this Series D Preferred Stock, the Purchase Agreement or
any other Related Agreement, would exceed the Maximum Common Stock Issuance but
for this Section 6(k), the Company shall promptly call a shareholders
meeting to solicit shareholder approval for the issuance of the shares of
Common Stock hereunder in excess of the Maximum Common Stock Issuance.  Notwithstanding anything contained herein to
the contrary, the provisions of this Section 6(k) are irrevocable and may
not be waived by the Holder or the Company..

 

7.             Mandatory Conversion.  Except as set forth in Section 4 hereof,
the shares of Series D Preferred Stock and dividends may not be converted
without the consent of the Holder.

 

8.             Voting Rights.  The shares of Series D Preferred Stock
shall not have voting rights.

 

9.             Event of Default.  In the event that any of the following events
shall occur, and shall not be cured within 30 days of written notice from the
Holder to the Corporation (except with respect to Section 9.1, 9.2  and 9.8 below, for which the cure period shall
be as set forth therein) (each occurrence being a “Default
Notice Period”) or waived in writing by the Holder (such
circumstance being an “Event of Default”),
for so long as the Event of Default is continuing the dividend rate described
in Section 3 above  shall  become  fifteen percent (15.0%) and the Holder shall
have the right to elect to have the Corporation redeem the Series D
Preferred Stock.  Any such redemption
shall be effected by the prompt payment to the Holder by the Corporation of a
sum of money equal to 130% of the outstanding Stated Value of the shares of Series D
Preferred Stock, plus accrued and unpaid dividends.

 

9.1.          Failure to Make Payment.  The Corporation fails to pay any payment
required to be paid pursuant to the terms of hereof or the failure to timely
pay any other sum of money due to the Holder from the Corporation and such
failure continues for a period of five (5) business days after such
payment is due .

 

9.2.          Breach of Covenant.  The Corporation breaches any of the covenants
in Sections 6.2, 6.5, 6.12, 6.13, 9 or 10 of the Purchase Agreement in any
material respect and such breach, if subject to cure, continues for a period of
fifteen (15) days after the occurrence thereof.

 

9.3.          Breach of Representations and
Warranties.  Any representation or
warranty of the Corporation made in Section 4 of the Purchase Agreement
shall be false or misleading except for any such breach which does not have a
material adverse effect on the business or financial condition of the
Corporation, taken as a whole.

 

9.4.          Receiver or Trustee.  The Corporation shall make an assignment for
the benefit of creditors, or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business; or such a receiver or trustee shall otherwise be appointed.

 

9

 

9.5.          Bankruptcy.  Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings or relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Corporation.

 

9.6.          Delisting.  Delisting of the Common Stock from the every
Principal Market or such other principal exchange on which the Common Stock is
listed for trading.

 

9.7.          Stop Trade.  An SEC stop trade order or Principal Market
trading suspension of more than three consecutive trading days.

 

9.8.        Failure to Deliver Common Stock.  The Corporation’s failure to timely deliver
Common Stock to the Holder pursuant to and in the form required hereof and Section 8
of the Purchase Agreement and continues for three (3) business days after
receipt of notice of conversion.

 

10.           Mandatory Redemption.  The Corporation shall redeem the shares of Series D
Preferred Stock, including accrued but unpaid dividends thereon, no later than 36
months from the date of issuance thereof (the “Mandatory Redemption Date”).

 

11.           Status of Converted or Redeemed
Stock.  In case any shares of Series D
Preferred Stock shall be redeemed or otherwise repurchased or reacquired, the
shares so redeemed, converted, or reacquired shall resume the status of
authorized but unissued shares of Preferred Stock and shall no longer be
designated as Series D Preferred Stock.

 

10

 

EXHIBIT A

 

NOTICE
OF CONVERSION

 

(To Be
Executed By the Registered Holder in Order to Convert the Series D
Convertible Preferred Stock of Implant Sciences Corporation)

 

The undersigned hereby
irrevocably elects to convert $                            
of the Stated Value of the above Series D Convertible Preferred Stock and
$                          
of the dividend due, into shares of Common Stock of Implant Sciences
Corporation (the “Corporation”) according to the conditions hereof, as of the
date written below.

 

	
  Conversion Date:

  	
   

  
	
   

  
	
  Fixed Conversion Price per share:

  	
   

  
	
   

  	
   

  
	
   

  
	
  Number of Common Stock issuable upon this
  conversion:

  	
   

  
	
   

  	
   

  
	
   

  
	
  Signature:

  	
   

  
	
   

  	
   

  
	
  Print Name:

  	
   

  
	
   

  	
   

  
	
  Address:

  	
   

  
	
   

  	
   

  
	
   

  
	
   

  
	
  Deliveries pursuant to this notice of conversion
  should be made to:

  
	
   

  
	
   

  
	
   

  
	
   

  
	
   

  
	
   

  
	
   

  
							

 

 

SIGNED
UNDER THE PENALTIES OF PERJURY, this 30th day of September in the year 2005.

 

	
  /s/ Anthony Armini

  	
  , President

  
	
   

  
	
  /s/ Stephen Bunker

  	
  , Clerk

  

 

2

 

THE
COMMONWEALTH OF MASSACHUSETTS

 

Certificate of Vote of Directors Establishing

A Series of a Class of Stock

(General Laws, Chapter 156B, Section 26)

 

I hereby approve the
within certificate and, the filing fee in the

amount of $                   
having been paid, said certificate is hereby filed this

 

day of
September, 2005.

 

Effective Date:                                  

 

WILLIAM
FRANCIS GALVIN

Secretary of State

 

TO BE
FILLED IN BY CORPORATION

PHOTO COPY OF CERTIFICATE TO BE SENT

 

	
   

  	
           TO:

  
	
   

  	
     Ellenoff Grossman &
  Schole LLP

  
	
   

  	
         370
  Lexington Ave.

  
	
   

  	
    New York, New York 10017

  
	
   

  	
         Fax: (212)
  370 – 7889

  
	
   

  	
  Attention: Barry Grossman, Esq.Exhibit 10.1

 

 

IMPLANT
SCIENCES CORPORATION

 

SECURITIES
PURCHASE AGREEMENT

 

September 30,
2005

 

 

IMPLANT
SCIENCES CORPORATION

SECURITIES PURCHASE AGREEMENT

 

THIS SECURITIES PURCHASE AGREEMENT (the “Agreement”) is made and entered into as of
September 30, 2005, by and between Implant
Sciences Corporation, a Massachusetts corporation (the “Company”), and Laurus Master Fund, Ltd. a
Cayman Islands company (the “Purchaser”).

 

RECITALS

 

WHEREAS, the Company has authorized the sale of
Series D Convertible Preferred Stock, $0.10 par value, (the “Preferred Stock”), for the aggregate
purchase price of FIVE MILLION DOLLARS ($5,000,000), convertible into shares of
the Company’s common stock, $0.10 par value per share (the “Common Stock”);

 

WHEREAS, the Company wishes to issues a warrant (the
“Warrant”) to the Purchaser to
purchase shares of the Company’s Common Stock in connection with Purchaser’s
purchase of the Preferred Stock; WHEREAS,
Purchaser desires to purchase the Preferred Stock and Warrant on the terms and
conditions set forth herein; and

 

WHEREAS, the Company desires to issue and sell the
Preferred Stock and Warrant to the Purchaser on the terms and conditions set
forth herein.

 

AGREEMENT

 

NOW, THEREFORE,
in consideration of the foregoing recitals and the mutual promises,
representations, warranties and covenants hereinafter set forth and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

 

1.             AGREEMENT TO SELL AND PURCHASE. 
Pursuant to the terms and conditions set forth in this Agreement, on the
Closing Date (as defined in Section 3), the Company agrees to sell to the
Purchaser, and the Purchaser hereby agrees to purchase from the Company,
Preferred Stock in the stated amount of FIVE MILLION DOLLARS ($5,000,000),
convertible in accordance with the terms thereof into shares of the Company’s
Common Stock.  The Preferred Stock
purchased on the Closing Date shall be known as the “Offering.”  The Certificate of Vote of Directors
Establishing a Class or Series of Stock for the Preferred Stock (the
“Certificate of Vote of Directors”)
is annexed hereto as Exhibit A.  The
Preferred Stock will have a Mandatory Redemption Date (as defined in the
Preferred Stock) three years from the date of issuance.  Collectively, the Preferred Stock and Warrant
(as defined in Section 2) and Common Stock issuable upon conversion of the
Preferred Stock and exercise of the Warrant are referred to as the “Securities.”

 

2.             FEES AND WARRANT.

 

(a)           The Company will issue and deliver to the
Purchaser a Warrant to purchase 50,000 shares of Common Stock at a purchase
price of $10.20 per share of Common 

 

 

Stock in
connection with the Offering (the “Warrant”)
pursuant to Section 1 hereof.  The
Company shall reimburse the Purchaser for its reasonable expenses, including
legal fees for services rendered to the Purchaser in preparation of this
Agreement and the Related Agreements, and expenses in connection with the
Purchaser’s due diligence review of the Company and its Subsidiaries (as
defined in Section 4.2) and relevant matters.  Amounts required to be paid hereunder will be
paid at the Closing and shall not exceed $5,000.

 

(b)           The Warrant must be delivered on the
Closing Date.  A form of Warrant is
attached hereto as Exhibit B.  All
the representations, covenants, warranties, undertakings, and indemnification,
and other rights made or granted to or for the benefit of the Purchaser by the
Company are hereby also made and granted in respect of the Warrant and shares
of the Company’s Common Stock issuable upon exercise of the warrant (the
“Warrant Shares”).  A form of Closing
Payment and the expenses referred to in the preceding clause (a) (net of
deposits previously paid by the Company) shall be paid at closing out of funds
held pursuant to the Escrow Agreement (defined below) and a disbursement letter
(the “Disbursement Letter”).

 

(c)           The Company shall reimburse the Purchaser
for its reasonable legal fees for services rendered to the Purchaser in
preparation of this Agreement and the Related Agreements, and expenses in
connection with the Purchaser’s due diligence review of the Company and
relevant matters.  Amounts required to be
paid hereunder will be paid at the Closing and shall be [$5,000.]

 

(d)           The Company will pay a cash fee in the
amount of $90,000 (the “Fund Management Fee”)
to Laurus Capital Management, L.L.C., a Delaware limited liability
company.  The Fund Management Fee must be
paid on the Closing Date.  The
aforementioned Fund Management Fee and legal fees will be payable at the
Closing out of funds held pursuant to a Funds Escrow Agreement to be entered
into by the Company, Purchaser and an Escrow Agent.

 

3.             CLOSING, DELIVERY AND PAYMENT.

 

3.1          Closing.  Subject to
the terms and conditions herein, the closing of the transactions contemplated
hereby (the “Closing”), which
closing is comprised of Purchaser’s purchase of the Preferred Stock in the
aggregate principal amount of $5,000,000, shall take place on the date hereof,
at such other time or place as the Company and Purchaser may mutually agree
(such date is hereinafter referred to as the “Closing
Date”).

 

3.2          Delivery.  At the
Closing, subject to the terms and conditions hereof, the Company will deliver
to the Purchaser the Certificate of Vote of Directors in the form attached as
Exhibit A representing the stated amount of $5,000,000 of Preferred Stock
and a Common Stock Purchase Warrant in the form attached as Exhibit B in
the Purchaser’s name representing the right to purchase up to 50,000 Warrant
Shares and the Purchaser will deliver to the Company (i) that certain
Secured Convertible Term Note in the principal amount of $3,000,000 dated
July 6, 2005 (the “$3,000,000 Note”),
and $2,000,000, less fees and expenses set forth in Section 2 hereof, by
certified funds or wire transfer made payable to the order of the Company.

 

2

 

4.             REPRESENTATIONS AND WARRANTIES OF THE
COMPANY.

 

The Company hereby represents and warrants to the
Purchaser as of the date of this Agreement as set forth below.  As used herein, the term SEC Reports shall mean the Company’s Annual
Report on Form 10-KSB for the fiscal year ended June 30, 2004 and the
Company’s Quarterly Report on Form 10-QSB/A for the quarter ended
March 31, 2005.

 

4.1          Organization, Good Standing and Qualification. 
Each of the Company and each of its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Massachusetts, Delaware and California as applicable.  Each of the Company and each of its
Subsidiaries has all requisite corporate power and authority to own and operate
its properties and assets, to execute and deliver (i) this Agreement,
(ii) the Preferred Stock to be issued in connection with this Agreement,
(iii) the Warrant, (iv) the Master Security Agreement dated as of the
date hereof between the Company, certain Subsidiaries of the Company and the
Purchaser (as amended, modified and/or supplemented from time to time, the
“Master Security Agreement”), (v) the Registration Rights Agreement
relating to the Securities dated as of the date hereof between the Company and
the Purchaser (as amended, modified and/or supplemented from time to time, the
“Registration Rights Agreement”), (vi) the Subsidiary Guaranty dated as of
the date hereof made by certain Subsidiaries of the Company (as amended,
modified and/or supplemented from time to time, the “Subsidiary Guaranty”),
(vii) the Stock Pledge Agreement dated as of the date hereof among the
Company, certain Subsidiaries of the Company and the Purchaser (as amended,
modified and/or or supplemented from time to time, the “Stock Pledge
Agreement”), (viii) the Funds Escrow Agreement dated as of the date hereof
among the Company, the Purchaser and the escrow agent referred to therein,
substantially in the form of Exhibit D hereto (as amended, modified and/or
supplemented from time to time, the “Escrow Agreement”) and (ix) all other
documents, instruments and agreements entered into in connection with the transactions
contemplated hereby and thereby (the preceding clauses (ii) through (ix),
collectively, the “Related Agreements”) to issue and sell the Preferred Stock
and the shares of Common Stock issuable upon conversion of the Preferred Stock
(the “Conversion Shares”), to
issue and sell the Warrant and the shares of Common Stock issuable upon
exercise of the Warrant, and to carry out the provisions of this Agreement and
the Related Agreements and to carry on its business as presently conducted and
as presently proposed to be conducted. 
Each of the Company and each of its Subsidiaries is duly qualified and
is authorized to do business and is in good standing as a foreign corporation
in all jurisdictions in which the nature of its activities and of its
properties (both owned and leased) makes such qualification necessary, except
for those jurisdictions in which failure to do so would not have a material
adverse effect on the Company and its Subsidiaries, taken individually and as a
whole or their respective businesses a (“Material Adverse Effect”).

 

4.2          Subsidiaries.  Each direct
and indirect Subsidiary of the Company, the direct owner of such Subsidiary and
its percentage ownership thereof, is set forth on Schedule 4.2.  For the purpose of this Agreement, a “Subsidiary”
of any person or entity means (i) a corporation or other entity whose
shares of stock or other ownership interests having ordinary voting power
(other than stock or other ownership interests having such power only by reason
of the happening of a contingency) to elect a majority of the directors of such
corporation, or other 

 

3

 

persons
or entities performing similar functions for such person or entity, are owned,
directly or indirectly, by such person or entity or (ii) a corporation or
other entity in which such person or entity owns, directly or indirectly, more
than 50% of the equity interests at such time.

 

4.3          Capitalization; Voting Rights.

 

(a)           The authorized capital stock of the
Company, immediately prior to the Closing, consists of (i) 20,000,000
shares of Common Stock, par value $0.10 per share, 10,756,842 shares of which
are issued and outstanding as of June 30, 2005, and (ii) 5,000,000
shares of Preferred Stock, par value $0.10 per share, none of which are issued
and outstanding on the date hereof.  The
authorized, issued and outstanding capital stock of each Subsidiary is set
forth on Schedule 4.3 hereto.

 

(b)           Other than (i) the shares reserved
for issuance under the Company’s stock option plans, stock grant agreements and
outstanding warrants; and (ii) shares which may be granted pursuant to
this Agreement and the Related Agreements, there are no outstanding options,
warrants, rights (including conversion or preemptive rights and rights of first
refusal), proxy or stockholder agreements, or arrangements or agreements of any
kind for the purchase or acquisition from the Company of any of its securities,
except as set forth in the SEC Reports or as listed in Schedule 4.3 (a).  Neither the offer, issuance or sale of any of
the Preferred Stock or Warrant, or the issuance of any of the Conversion Shares
or Warrant Shares, nor the consummation of any transaction contemplated hereby
will result in a change in the price or number of any securities of the Company
outstanding, under anti-dilution or other similar provisions contained in or
affecting any such securities other than as listed in Schedule 4.3 (a).

 

(c)           All issued and outstanding shares of the
Company’s Common Stock (i) have been duly authorized and validly issued
and are fully paid and nonassessable and (ii) were issued in compliance
with all applicable state and federal laws concerning the issuance of
securities.

 

(d)           The rights, preferences, privileges and
restrictions of the shares of the Common Stock are as stated in the Amended and
Restated Articles of Organization (the “Charter”).  The Conversion Shares and Warrant Shares have
been duly and validly reserved for issuance. 
When issued in compliance with the provisions of this Agreement and the
Company’s Charter, the Securities will be validly issued, fully paid and
nonassessable, and will be free of any liens or encumbrances; provided, however,
that the Securities may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein or as otherwise required by
such laws at the time a transfer is proposed.

 

(e)           Except as set forth in the SEC Reports,
no stock plan, stock purchase, stock option or other agreement or understanding
between the Company and any holder of any equity securities or rights to
purchase equity securities provides for acceleration or other changes in the
vesting provisions or other terms of such agreement or understanding as the
result of any merger, consolidated sale of stock or assets, change in control
or any other transaction(s) by the Company, including the transactions
contemplated hereunder.

 

4

 

4.4          Authorization; Binding Obligations. 
All corporate action on the part of the Company and each of its
Subsidiaries, including their respective officers, directors and stockholders
necessary for the authorization of this Agreement and the Related Agreements,
the performance of all obligations of the Company and its Subsidiaries
hereunder at each Closing and the authorization, sale, issuance and delivery of
the Securities pursuant hereto and the Related Agreements has been taken or
will be taken prior to the Closing.  The
Agreement and the Related Agreements, when executed and delivered, will be
valid and binding obligations of the Company and each of its Subsidiaries
enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors’ rights, and
(b) general principles of equity that restrict the availability of
equitable remedies.  The sale of the
Preferred Stock and the subsequent conversion of the Preferred Stock into
Common Stock are not and will not be subject to any preemptive rights or rights
of first refusal that have not been properly waived or complied with. The sale
of the Warrants and the subsequent exercise of the Warrants for Common Stock
are not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with.  The Certificate of Vote of Directors and the
Warrants , when executed and delivered in accordance with the terms of this
Agreement, will be valid and binding obligations of the Company and each of its
Subsidiaries, enforceable in accordance with their respective terms.

 

4.5          Liabilities.  Except as set
forth in the SEC Reports and Schedule 4.5 hereto, neither the Company nor
any of its Subsidiaries has any material liabilities and, to the best of its
knowledge, knows of no material contingent liabilities, except current
liabilities incurred in the ordinary course of business which have not been,
either in any individual case or in the aggregate, materially adverse.

 

4.6          Agreements; Action.

 

(a)           Except as set forth in the SEC Reports
and Schedule 4.6 hereto, there are no agreements, understandings,
instruments, contracts, proposed transactions, judgments, orders, writs or
decrees to which either the Company or any of its Subsidiaries is a party or to
its knowledge by which it is bound which may involve (i) obligations
(contingent or otherwise) of, or payments to, the Company or any of its
Subsidiaries in excess of $50,000 (other than obligations of, or payments to,
the Company or any of its Subsidiaries arising from purchase or sale agreements
entered into in the ordinary course of business), or (ii) the transfer or
license of any patent, copyright, trade secret or other proprietary right to or
from the Company or any of its Subsidiaries (other than licenses arising from
the purchase of “off the shelf” or other standard products), or
(iii) provisions restricting the development, manufacture or distribution
of the Company’s or any of its Subsidiaries’ products or services, or (iv) indemnification
by the Company or any of its Subsidiaries with respect to infringements of
proprietary rights.

 

(b)           Except as set forth in the SEC Reports,
neither the Company nor or any of its Subsidiaries has (i) declared or
paid any dividends, or authorized or made any distribution upon or with respect
to any class or series of its capital stock, (ii) incurred any
indebtedness for money borrowed or any other liabilities individually in excess
of $50,000 or, in the case of indebtedness and/or liabilities individually less
than $50,000, in excess of $100,000 in the aggregate, (iii) made any loans
or advances to any person, other than ordinary advances for 

 

5

 

travel
expenses, or (iv) sold, exchanged or otherwise disposed of any of its
assets or rights, other than the sale of its inventory in the ordinary course
of business.

 

(c)           For the purposes of subsections
(a) and (b) above, all indebtedness, liabilities, agreements,
understandings, instruments, contracts and proposed transactions involving the
same person or entity (including persons or entities the Company or any of its
Subsidiaries has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.

 

(d)           The Company maintains disclosure controls
and procedures (“Disclosure Controls”) designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized, and reported, within
the time periods specified in the rules and forms of the Securities and
Exchange Commission (“SEC”).

 

(e)           The Company makes and keep books,
records, and accounts, that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the Company’s assets.  The Company maintains internal control over
financial reporting (“Financial Reporting Controls”) designed by, or under the
supervision of, the Company’s principal executive and principal financial
officers, and effected by the Company’s board of directors, management, and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles (“GAAP”),
including that:

 

(i)            transactions are executed in accordance
with management’s general or specific authorization;

 

(ii)           unauthorized acquisition, use, or
disposition of the Company’s assets that could have a material effect on the
financial statements are prevented or timely detected;

 

(iii)          transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and that
the Company’s receipts and expenditures are being made only in accordance with
authorizations of the Company’s management and board of directors;

 

(iv)          transactions are recorded as necessary to
maintain accountability for assets; and

 

(v)           the recorded accountability for assets is
compared with the existing assets at reasonable intervals, and appropriate
action is taken with respect to any differences.

 

(f)          There is no weakness in any of the Company’s
Disclosure Controls or Financial Reporting Controls that is required to be
disclosed in any of the Exchange Act Filings, except as so disclosed.

 

(g)         The Company has not engaged in the past two years in
any discussion (i) with any representative of any corporation or
corporations regarding the consolidation or merger of the Company with or into any
such corporation or corporations, (ii)

 

6

 

with any corporation, partnership, association or
other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company, or a
transaction or series of related transactions in which more than 50% of the
voting power of the Company is disposed of or (iii) regarding any other
form of acquisition, liquidation, dissolution or winding up of the Company.

 

4.7.           Obligations to Related Parties.  Except as set forth in the SEC Reports, there are no
obligations of the Company or any of its Subsidiaries to officers, directors,
stockholders or employees of the Company or any of its Subsidiaries other than
(a) for payment of salary for services rendered, (b) reimbursement
for reasonable expenses incurred on behalf of the Company or any of its
Subsidiaries and (c) for other standard employee benefits made generally
available to all employees (including stock option agreements outstanding under
any stock option plan approved by the Board of Directors of the Company).  Except as set forth in the SEC Reports, none
of the officers, directors or stockholders of the Company or any of its
Subsidiaries, or any members of their immediate families, are indebted to the
Company or any of its Subsidiaries. 
Except as set forth in the SEC Reports, none of the officers, directors
or, to the best of the Company’s and its Subsidiaries knowledge, key employees
or stockholders of the Company or any members of their immediate families, are
indebted to the Company or any of its Subsidiaries or have any direct or
indirect ownership interest in any firm or corporation with which the Company
or any of its Subsidiaries is affiliated or with which the Company or any of
its Subsidiaries has a business relationship, or any firm or corporation which
competes with the Company or any of its Subsidiaries, other than passive
investments in publicly traded companies (representing less than 1% of such
company) which may compete with the Company or any of its Subsidiaries.  Except as set forth in the SEC Reports, no
officer, director or stockholder, or any member of their immediate families,
is, directly or indirectly, interested in any material contract with the
Company or any of its Subsidiaries and no agreements, understandings or
proposed transactions are contemplated between the Company or any of its
Subsidiaries and any such person.  Except
as set forth in the SEC Reports, neither the Company nor any of its
Subsidiaries is a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation.

 

4.8            Changes. 
Except as set forth in the SEC Reports, since March 31, 2005 there
has not been:

 

(a)           Any change in the assets, liabilities,
financial condition, prospects or operations of the Company or any of its
Subsidiaries, other than changes in the ordinary course of business, none of
which individually or in the aggregate has had or is reasonably expected to
have a material adverse effect on such assets, liabilities, financial
condition, prospects or operations of the Company or any of its Subsidiaries;

 

(b)           Any resignation or termination of any
officer, key employee or group of employees of the Company or any of its
Subsidiaries;

 

(c)           Any material change, except in the
ordinary course of business, in the contingent obligations of the Company or
any of its Subsidiaries by way of guaranty, endorsement, indemnity, warranty or
otherwise;

 

7

 

(d)           Any damage, destruction or loss, whether
or not covered by insurance, materially and adversely affecting the properties,
business or prospects or financial condition of the Company or any of its
Subsidiaries;

 

(e)           Any waiver by the Company or any of its Subsidiaries
of a valuable right or of a material debt owed to it;

 

(f)            Any direct or indirect loans made by the
Company or any of its Subsidiaries to any stockholder, employee, officer or
director of the Company or any of its Subsidiaries, other than advances made in
the ordinary course of business;

 

(g)           Any material change in any compensation
arrangement or agreement with any employee, officer, director or stockholder;

 

(h)           Any declaration or payment of any
dividend or other distribution of the assets of the Company or any of its
Subsidiaries;

 

(i)            Any labor organization activity related
to the Company or any of its Subsidiaries;

 

(j)            Any debt, obligation or liability
incurred, assumed or guaranteed by the Company or any of its Subsidiaries,
except those for immaterial amounts and for current liabilities incurred in the
ordinary course of business;

 

(k)           Any sale, assignment or transfer of any
patents, trademarks, copyrights, trade secrets or other intangible assets;

 

(l)            Any change in any material agreement to
which the Company or any of its Subsidiaries is a party or by which it is bound
which may materially and adversely affect the business, assets, liabilities,
financial condition, operations or prospects of the Company or any of its
Subsidiaries ;

 

(m)          Any other event or condition of any
character that, either individually or cumulatively, has or may materially and
adversely affect the business, assets, liabilities, financial condition,
prospects or operations of the Company or any of its Subsidiaries; or

 

(n)           Any arrangement or commitment by the
Company or any of its Subsidiaries to do any of the acts described in
subsection (a) through (m) above.

 

4.9.         Title to Properties and Assets; Liens, Etc. Except as set forth in the SEC Reports,
liens granted in favor of Purchaser and the liens set forth on
Schedule 4.9 hereto, the Company and each of its Subsidiaries has good and
marketable title to its properties and assets, and good title to its leasehold
estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance
or charge, other than (a) those resulting from taxes which have not yet
become delinquent, (b) minor liens and encumbrances which do not
materially detract from the value of the property subject thereto or materially
impair the operations of the Company or any of its Subsidiaries and
(c) those that have otherwise arisen in the ordinary course of
business.  All 

 

8

 

facilities,
machinery, equipment, fixtures, vehicles and other properties owned, leased or
used by the Company and each of its Subsidiaries are in good operating
condition and repair and are reasonably fit and usable for the purposes for
which they are being used.  The Company
and each of its Subsidiaries is in compliance with all material terms of each
lease to which it is a party or is otherwise bound.

 

4.10.       Intellectual Property.

 

(o)           The Company and each of its Subsidiaries
owns or possesses sufficient legal rights to all patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information and other
proprietary rights and processes necessary for its business as now conducted
and to the Company’s knowledge as presently proposed to be conducted (the “Intellectual Property”), without any known
infringement of the rights of others. 
Except as set forth in the SEC Reports, there are no outstanding
options, licenses or agreements of any kind relating to the foregoing
proprietary rights, nor is the Company or any of its Subsidiaries bound by or a
party to any options, licenses or agreements of any kind with respect to the
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information and other proprietary rights and processes of any other
person or entity other than such licenses or agreements arising from the
purchase of “off the shelf” or standard products.

 

(p)           Neither the Company nor or any of its
Subsidiaries has received any communications alleging that the Company or any
of its Subsidiaries has violated any of the patents, trademarks, service marks,
trade names, copyrights or trade secrets or other proprietary rights of any
other person or entity, nor is the Company or any of its Subsidiaries aware of
any basis therefor.

 

(q)           Neither the Company nor or any of its
Subsidiaries believes that it is or will be necessary to utilize any
inventions, trade secrets or proprietary information of any of its employees
made prior to their employment by the Company or any of its Subsidiaries,
except for inventions, trade secrets or proprietary information that have been
rightfully assigned to the Company or any of its Subsidiaries.

 

4.11.       Compliance with Other Instruments. 
Except as set forth in the SEC Reports, neither the Company nor or any
of its Subsidiaries is in violation or default of any term of their respective
Charter or Bylaws, or of any provision of any mortgage, indenture, contract,
agreement, instrument or contract to which it is party or by which it is bound
or of any judgment, decree, order or writ. 
The execution, delivery and performance of and compliance with this
Agreement and the Related Agreements, and the issuance and sale of Securities
pursuant hereto, will not, with or without the passage of time or giving of
notice, result in any such material violation, or be in conflict with or
constitute a default under any such term or provision, or result in the
creation of any mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of the Company or any of its Subsidiaries or the
suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
license, authorization or approval applicable to the Company, its business or
operations or any of its assets or properties.

 

4.12.       Litigation.  Except as set
forth in the SEC Reports, there is no action, suit, proceeding or investigation
pending or, to the Company’s knowledge, currently threatened 

 

9

 

against
the Company or any of its Subsidiaries that questions the validity of this
Agreement or the Related Agreements or the right of the Company or any of its
Subsidiaries to enter into any of such agreements, or to consummate the
transactions contemplated hereby or thereby, or which might result, either
individually or in the aggregate, in any material adverse change in the assets,
condition, affairs or prospects of the Company or any of its Subsidiaries,
financially or otherwise, or any change in the current equity ownership of the
Company or any of its Subsidiaries, nor is the Company or any of its
Subsidiaries aware that there is any basis for any of the foregoing. Neither
the Company nor any of its Subsidiaries is a party or subject to the provisions
of any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality.  Except as set
forth in the SEC Reports, there is no action, suit, proceeding or investigation
by the Company or any of its Subsidiaries currently pending or which the
Company or any of its Subsidiaries intends to initiate.

 

4.13.       Tax Returns and Payments.  Each of the
Company and each of its Subsidiaries has timely filed all tax returns (federal,
state and local) required to be filed by it. 
All taxes shown to be due and payable on such returns, any assessments
imposed, and to the Company’s knowledge all other taxes due and payable by the
Company or any of its Subsidiaries on or before the Closing, have been paid or
will be paid prior to the time they become delinquent.  Neither the Company nor any of its Subsidiaries
has been advised (a) that any of their respective returns, federal, state
or other, have been or are being audited as of the date hereof, or (b) of
any deficiency in assessment or proposed judgment to its federal, state or
other taxes.  Except as set forth on
Schedule 4.13 hereto, neither the Company nor any of its Subsidiaries
has any knowledge of any liability of any tax to be imposed upon its properties
or assets as of the date of this Agreement that is not adequately provided for.

 

4.14.       Employees.  Neither the
Company nor any of its Subsidiaries has any collective bargaining agreements
with any of their respective employees. 
There is no labor union organizing activity pending or, to the Company’s
knowledge, threatened with respect to the Company or any of its
Subsidiaries.  Except as set forth in the
SEC Reports, neither the Company nor any of its Subsidiaries is a party to or
bound by any currently effective employment contract, deferred compensation
arrangement, bonus plan, incentive plan, profit sharing plan, retirement
agreement or other employee compensation plan or agreement.  To the Company’s knowledge, no employee of
the Company or any of its Subsidiaries, nor any consultant with whom the
Company or any of its Subsidiaries has contracted, is in violation of any term
of any employment contract, proprietary information agreement or any other
agreement relating to the right of any such individual to be employed by, or to
contract with, the Company or any of its Subsidiaries because of the nature of
the business to be conducted by the Company or any of its Subsidiaries; and to
the Company’s knowledge the continued employment by the Company or any of its
Subsidiaries of their respective present employees, and the performance of the
Company’s and each of its Subsidiaries contracts with its independent
contractors, will not result in any such violation.  Neither the Company nor any of its
Subsidiaries is aware that any of its employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with their duties to the Company or any of its
Subsidiaries.  Neither the Company nor
any of its Subsidiaries has received any notice alleging that any such
violation has occurred.  Except as set
forth in the SEC Reports, no employee of the Company or any of its Subsidiaries
has been granted the right to continued employment by the 

 

10

 

Company
or any of its Subsidiaries or to any material compensation following
termination of employment with the Company or any of its Subsidiaries.  Neither the Company nor any of its
Subsidiaries is aware that any officer, key employee or group of employees
intends to terminate his, her or their employment with the Company or any of
its Subsidiaries, nor does the Company or any of its Subsidiaries have a
present intention to terminate the employment of any officer, key employee or
group of employees.

 

4.15.       Registration Rights and Voting Rights. 
Except as set forth in the SEC Reports and on Schedule 4.15
attached hereto, neither the Company nor any of its Subsidiaries is presently
under any obligation, and has not granted any rights, to register any of the
Company’s presently outstanding securities or any of its securities that may
hereafter be issued.  To the Company’s
knowledge, no stockholder of the Company or any of its Subsidiaries has entered
into any agreement with respect to the voting of equity securities of the
Company or any of its Subsidiaries.

 

4.16.       Compliance with Laws; Permits.  To its
knowledge, neither the Company nor any of its Subsidiaries is in violation of
any applicable statute, rule, regulation, order or restriction of any domestic
or foreign government or any instrumentality or agency thereof in respect of
the conduct of its business or the ownership of its properties which violation
would materially and adversely affect the business, assets, liabilities,
financial condition, operations or prospects of the Company or any of its
Subsidiaries.  No governmental orders,
permissions, consents, approvals or authorizations are required to be obtained
and no registrations or declarations are required to be filed in connection
with the execution and delivery of this Agreement and the issuance of any of
the Securities, except such as has been duly and validly obtained or filed, or
with respect to any filings that must be made after the Closing, as will be
filed in a timely manner.  The Company
and each of its Subsidiaries has all franchises, permits, licenses and any
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects or financial condition of the Company and each
of its Subsidiaries.

 

4.17.       Environmental and Safety Laws.  Neither the
Company nor any of its Subsidiaries is in violation of any applicable statute,
law or regulation relating to the environment or occupational health and
safety, and to its knowledge, no material expenditures are or will be required
in order to comply with any such existing statute, law or regulation.  Except as set forth in the SEC Reports, no
Hazardous Materials (as defined below) are used or have been used, stored, or
disposed of by the Company or any of its Subsidiaries or, to the Company’s
knowledge, by any other person or entity on any property owned, leased or used
by the Company or any of its Subsidiaries. 
For the purposes of the preceding sentence, “Hazardous Materials” shall mean (a) materials which are
listed or otherwise defined as “hazardous”
or “toxic” under any applicable
local, state, federal and/or foreign laws and regulations that govern the
existence and/or remedy of contamination on property, the protection of the
environment from contamination, the control of hazardous wastes, or other
activities involving hazardous substances, including building materials, or
(b) any petroleum products or nuclear materials.

 

4.18.       Valid Offering.  Assuming the
accuracy of the representations and warranties of the Purchaser contained in
this Agreement, the offer, sale and issuance of the 

 

11

 

Securities
will be exempt from the registration requirements of the Securities Act of
1933, as amended (the “Securities Act”),
and will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws. 
Neither the Company, any of its Subsidiaries, nor any agent on their
respective behalf has solicited or will solicit any offers to sell or has
offered to sell or will offer to sell all or any part of the Securities to any
person or persons so as to bring the sale of such Securities by the Company or
any of its Subsidiaries within the registration provisions of the Securities
Act or any state securities laws.

 

4.19.       Full Disclosure.  Each of the
Company and each of its Subsidiaries has provided the Purchaser with all
information requested by the Purchaser in connection with its decision to
purchase the Preferred Stock, including all information the Company believes is
reasonably necessary to make such investment decision.  To the Company’s knowledge, neither this
Agreement, the exhibits and schedules hereto, the Related Agreements nor any
other document delivered by the Company or any of its Subsidiaries to Purchaser
or its attorneys or agents in connection herewith or therewith or with the
transactions contemplated hereby or thereby, contain any untrue statement of a
material fact nor omit to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances in which
they are made, not misleading.  Any
financial projections and other estimates provided to the Purchaser by the
Company and each of its Subsidiaries were based on the Company’s and each of
its Subsidiaries’ experience in the industry and assumptions of fact and
opinion as to future events which the Company and each of its Subsidiaries, at
the date of the issuance of such projections or estimates, believed to be
reasonable.  As of the date hereof no
facts have come to the attention of the Company or any of its Subsidiaries that
would, in its opinion, require the Company to revise or amplify in any material
respect the assumptions underlying such projections and other estimates or the
conclusions derived therefrom.  Any
financial projections are subject to future events and neither the Company nor
any of its Subsidiaries can give any assurance that it will meet its financial
projections.

 

4.20.       Insurance.  Each of the
Company and each of its Subsidiaries has general commercial, product liability,
fire and casualty insurance policies with coverage customary for companies
similarly situated to the Company and each of its Subsidiaries.

 

4.21.       SEC Reports.  The Company
has filed all proxy statements, reports and other documents required to be
filed by it under the Exchange Act of 1934, as amended (the “Exchange Act”).    Each SEC Report was in substantial
compliance with the requirements of its respective form and none of the SEC
Reports, nor the financial statements (and the notes thereto) included in the
SEC Reports, as of their respective dates, contained any untrue statement of a
material fact or omitted 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.

 

4.22.       No Market Manipulation.  The Company
has not taken, and will not take, directly or indirectly, any action designed
to, or that might reasonably be expected to, cause or result in stabilization
or manipulation of the price of the Common Stock of the Company to facilitate
the sale or resale of any of the Securities being offered hereby or affect the
price at which any of the Securities being offered hereby may be issued.

 

12

 

4.23.       Listing.  The Company’s Common Stock is
listed for trading on the American Stock Exchange and satisfies all
requirements for the continuation of such listing.  The Company has not received any notice that
its Common Stock will be delisted from the American Stock Exchange or that the
Common Stock does not meet all requirements for the continuation of such
listing.

 

4.24.       No Integrated Offering.  Except for
the Company’s private placement of Common Stock and Warrants in the aggregate
amount of $7,803,230 on or about March 8, 2005 and the $3,000,000 Note
issued to the Purchaser on or about July 6, 2005, neither the Company, nor
any of its affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales of any security or solicited
any offers to buy any security under circumstances that would cause the
offering of the Securities pursuant to this Agreement to be integrated with
prior offerings by the Company for purposes of the Securities Act which would
prevent the Company from selling the Securities pursuant to Rule 506 under
the Securities Act, or any applicable exchange-related stockholder approval
provisions.  Nor will the Company or any
of its affiliates or subsidiaries take any action or steps that would cause the
offering of the Securities to be integrated with other offerings.

 

4.25.       Stop Transfer.  The
Securities are restricted securities as of the date of this Agreement.  The Company will not issue any stop transfer
order or other order impeding the sale and delivery of any of the Securities at
such time as the Securities are registered for public sale or an exemption from
registration is available, except as required by federal securities laws.

 

4.26.       Dilution.  The Company
understands the nature of the Securities being sold hereby and recognizes that they
may have a potential dilutive effect. 
The Company specifically acknowledges that its obligation to issue the
Conversion Shares is binding upon the Company and enforceable regardless of the
dilution such issuance may have on the ownership interests of other
shareholders of the Company.

 

5.     REPRESENTATIONS,
WARRANTIES AND COVENANTS OF THE PURCHASER.

 

The Purchaser hereby represents and warrants to the
Company with respect to itself or himself as follows (such representations and
warranties do not lessen or obviate the representations and warranties of the
Company set forth in this Agreement):

 

5.1.         Requisite Power and Authority. 
Purchaser has all necessary power and authority under all applicable
provisions of law to execute and deliver this Agreement and the Related
Agreements and to carry out their provisions. 
All action on Purchaser’s part required for the lawful execution and
delivery of this Agreement and the Related Agreements have been or will be
effectively taken prior to the Closing. 
Upon their execution and delivery, this Agreement and the Related
Agreements will be valid and binding obligations of Purchaser, enforceable in
accordance with their terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors’ rights, and (b) as limited
by general principles of equity that restrict the availability of equitable
remedies.

 

13

 

5.1          Investment Representations.  Purchaser understands that the Securities are being
offered and sold pursuant to an exemption from registration contained in the
Securities Act based in part upon Purchaser’s representations contained in the
Agreement.

 

5.2          Purchaser Bears Economic Risk.  
Purchaser has substantial experience in evaluating and investing in
private placement transactions of securities in companies similar to the
Company so that it is capable of evaluating the merits and risks of its
investment in the Company and has the capacity to protect its own
interests.  Purchaser must bear the
economic risk of this investment until the Securities are registered pursuant
to the Securities Act, or an exemption from registration is available.

 

5.3          Acquisition for Own Account. 
Purchaser is acquiring the Preferred Stock for Purchaser’s own account
for investment only, and not with a view towards their distribution.

 

5.4          Purchaser Can Protect Its Interest.  
Purchaser represents that by reason of its, or of its management’s,
business or financial experience, Purchaser has the capacity to protect its own
interests in connection with the transactions contemplated in this Agreement,
and the Related Agreements.  Further,
Purchaser is aware of no publication of any advertisement in connection with
the transactions contemplated in the Agreement.

 

5.5          Accredited Investor.   Purchaser
represents that it is an accredited investor within the meaning of Regulation D
under the Securities Act.

 

5.6          Legends.

 

(a)           The Preferred Stock shall bear the
following legend until the Preferred Stock and Conversion Shares are sold
pursuant to an effective registration statement filed with the Securities and
Exchange Commission (the “SEC”):

 

“THESE SHARES OF PREFERRED STOCK AND THE COMMON
STOCK ISSUABLE UPON CONVERSION OF THE PREFERRED STOCK HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR, IF APPLICABLE, STATE
SECURITIES LAWS.  THESE SHARES OF
PREFERRED STOCK AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE PREFERRED
STOCK MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE PREFERRED STOCK OR
COMMON STOCK ISSUABLE UPON CONVERSION OF PREFERRED STOCK UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IMPLANT SCIENCES CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.”

 

(b)           The Conversion Shares and the Warrant
Shares shall bear a legend which shall be in substantially the following form
until such shares are sold pursuant to an effective registration statement
filed with the SEC:

 

14

 

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR IF APPLICABLE,
STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO IMPLANT SCIENCES CORPORATION THAT SUCH REGISTRATION
IS NOT REQUIRED.”

 

(c) The
Warrants shall bear the following legend:

 

“THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE
COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON
STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO IMPLANT SCIENCES CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED.”

 

The Purchaser covenants and agrees with the Company
as follows:

 

5.7          Security Interest. 
Purchaser
agrees to terminate its security interest in the assets, as fully described in
the Security Agreement between the Company and Purchaser of even date herewith
(the “Security Agreement”), upon
the Company tendering the final payment in satisfaction of the obligations as
defined in the Security Agreement. 
Purchaser agrees to join with the Company in executing termination
statements and other instruments pursuant to the Uniform Commercial Code as
enacted and in effect from time to time in the Commonwealth of Massachusetts in
form satisfactory to the Company and in executing such other documents or
instruments as may be required or deemed necessary by the Company for purposes
of terminating the security interest in the collateral.

 

5.8          Prospectus.  Purchaser
shall furnish copies of the prospectus in connection with a public sale or
disposition of the Common Stock.

 

5.9          Preferred Stock Certificate. 
When Purchaser elects to convert shares of Preferred Stock in accordance
with Section 8 below, Purchaser shall surrender the Preferred Stock
Certificate upon receipt of a credit to the account of the Purchaser’s prime
broker through the DWAC system (as defined below), representing the Conversion
Shares or upon complete satisfaction of the Preferred Stock.

 

15

 

5.10        Certain Trading Restrictions.  Purchaser agrees that, as long as it holds any shares
of Preferred Stock, neither it nor any of its Affiliates shall enter into any
Short Sales (as defined herein).  For
purposes of this Section 5.11, a “Short
Sale” shall mean a sale of Common Stock by Purchaser that would be
required to be marked as a “short sale” by the broker executing the sale
pursuant to the provisions of Rules 10a-1(c) and
10a-1(d)(1) under the Exchange Act if such rules applied to the sale
(whether or not they in fact apply to the sale), and that is made at a time
when immediately after the sale, and giving effect to all other sales by the
Purchaser, there would be no equivalent offsetting long position in Common
Stock held by Purchaser.  For the purpose
of determining under this Section 5.11 whether there is an equivalent
offsetting long position in Common Stock held by Purchaser, only those
Conversion Shares that are (i) issuable upon conversion of the Preferred
Stock for which a conversion notice has been delivered by Purchaser on or prior
to a trading day or (ii) issuable as a result of the delivery by the
Company of a Repayment Election Notice, as defined in the Certificate of Vote
of Directors, shall be deemed to be held long by Purchaser on such trading day.

 

5.11        Reporting Requirements.  Purchaser will
timely file with the SEC all reports required to be filed pursuant to the
Exchange Act.  Purchaser will respond
timely, accurately and completely to any inquiry by the SEC, NASD, or any stock
exchange upon which the Company maintains a listing, relating to the offering.

 

5.12        Subordination Agreements Purchaser agrees that it will execute a
Subordination Agreement with each of Comerica Bank and Bridge Bank on the date
hereof.

 

6      COVENANTS OF THE COMPANY.  
The Company covenants and agrees with the Purchaser as follows:

 

6.1          Stop-Orders. The Company will advise the Purchaser, promptly
after it receives notice of issuance by the SEC, any state securities
commission or any other regulatory authority of any stop order or of any order
preventing or suspending any offering of any securities of the Company, or of
the suspension of the qualification of the Common Stock of the Company for
offering or sale in any jurisdiction, or the initiation of any proceeding for
any such purpose.

 

6.2          Listing.   The Company
shall promptly secure the listing of the shares of Common Stock issuable upon
conversion of the Preferred Stock and upon the exercise of the Warrant on the
Pink Sheets, the NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ
National Market, American Stock Exchange or New York Stock Exchange (the “Principal Market”) upon which shares of
Common Stock are then listed (subject to official notice of issuance) and shall
maintain such listing so long as any other shares of Common Stock shall be so
listed.  The Company will maintain the
listing of its Common Stock on a Principal Market, and will comply in all
material respects with the Company’s reporting, filing and other obligations
under the bylaws or rules of the National Association of Securities
Dealers (“NASD”) and such
exchanges, as applicable.  The Company
will provide the Purchaser copies of all notices it receives notifying the
Company of the threatened and actual delisting of the Common Stock from any
Principal Market.

 

16

 

6.3          Market Regulations.   The Company
shall notify the SEC, NASD and applicable state authorities, in accordance with
their requirements, of the transactions contemplated by this Agreement, and
shall take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid issuance
of the Securities to Purchaser and promptly provide copies thereof to
Purchaser.

 

6.4          Reporting Requirements.   The Company
will timely file with the SEC all reports required to be filed pursuant to the
Exchange Act and refrain from terminating its status as an issuer required by
the Exchange Act to file reports thereunder even if the Exchange Act or the
rules or regulations thereunder would permit such termination.  In addition, within 20 days after the end of
each calendar month, the Company will provide to the Purchaser a monthly cash
flow statement, balance sheet and income statement for the immediately
preceding month.  Purchaser understands
that the provision of the information described herein may constitute material
non-public information and such information will only be provided upon the
execution by Purchaser of a confidentiality agreement.

 

6.5          Use of Funds.   The Company shall use the proceeds of the
sale of the Preferred Stock and Warrant for to pay the $3,000,000 Note, payable
to the Purchaser.  The balance of the
funds will be used for working capital.

 

6.6          Access to Facilities.   The Company
and each of its Subsidiaries will permit any representatives designated by the
Purchaser (or any transferee of the Purchaser), so long as such person holds
any Securities upon reasonable notice and during normal business hours, at such
person’s expense and accompanied by a representative of the Company, to
(a) visit and inspect any of the properties of the Company and each of its
Subsidiaries, (b) examine the corporate and financial records of the
Company and each of its Subsidiaries (unless such examination is not permitted
by federal, state or local law or by contract) and make copies thereof or
extracts therefrom and (c) discuss the affairs, finances and accounts of
any such corporations with the directors, officers and independent accountants
of the Company and each of its Subsidiaries.

 

6.7          Taxes.   Each of the
Company and each of its Subsidiaries will promptly pay and discharge, or cause
to be paid and discharged, when due and payable, all lawful taxes, assessments
and governmental charges or levies imposed upon the income, profits, property
or business of the Company and each of its Subsidiaries; provided, however,
that any such tax, assessment, charge or levy need not be paid if the validity
thereof shall currently be contested in good faith by appropriate proceedings
and the Company and each of its Subsidiaries shall have set aside on its books
adequate reserves with respect thereto, and provided, further, that the Company
and each of its Subsidiaries will pay all such taxes, assessments, charges or
levies forthwith upon the commencement of proceedings to foreclose any lien
which may have attached as security therefor.

 

6.8          Insurance.   Each of the
Company and each of its Subsidiaries will keep its assets which are of an
insurable character insured by financially sound and reputable insurers against
loss or damage by fire, explosion and other risks customarily insured against
by companies in the Company’s and each of the its Subsidiaries’ line of
business, in amounts sufficient to prevent the Company and each of its
Subsidiaries from becoming a co-insurer and 

 

17

 

not in
any event less than 100% of the insurable value of the property insured; and
the Company and each of its Subsidiaries will maintain, with financially sound
and reputable insurers, insurance against other hazards and risks and liability
to persons and property to the extent and in the manner customary for companies
in similar businesses similarly situated and to the extent available on
commercially reasonable terms.

 

6.9          Books and Records.   Each of the
Company and each of its Subsidiaries will keep true records and books of
account in which full, true and correct entries will be made of all dealings or
transactions in relation to its business and affairs in accordance with
generally accepted accounting principles applied on a consistent basis.  Purchaser understands that the provision of
the information described herein may constitute material non-public information
and such information will only be provided upon the execution by Purchaser of a
confidentiality agreement, and in accordance with applicable securities law.

 

6.10        Intellectual Property.   Each of the
Company and each of its Subsidiaries shall maintain in full force and effect
its corporate existence, rights and franchises and all licenses and other
rights to use Intellectual Property owned or possessed by it and reasonably deemed
to be necessary to the conduct their respective businesses.

 

6.11        Confidentiality.  Each of the
Company and each of its Subsidiaries agrees that they will not disclose, and
will not include in any public announcement, the name of the Purchaser, unless
expressly agreed to by the Purchaser or unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of such
requirement.

 

6.12        Corporate Existence.  Each of the
Company and each of its Subsidiaries shall maintain their respective corporate
existence, and will not liquidate, dissolve or effect a recapitalization,
reclassification or reorganization in any form of transaction.  In addition, neither the Company nor any of
its Subsidiaries shall sell all or substantially all of the Company’s or any of
its Subsidiaries’ assets, except in the event of a merger or consolidation or
sale or transfer of all or substantially all of the Company’s or any of its
Subsidiaries’ assets, where the surviving or successor entity in such
transaction (i) assumes the Company’s and each of its Subsidiaries’
obligations hereunder and the Related Agreements and (ii) is a publicly
traded company whose common stock is quoted or listed on a Principal Market or  (iii) simultaneously with the consummation
of such transaction irrevocably pays in full all of the obligations due and
owing to Purchaser from the Company under this Agreement and/or the Securities.

 

6.13        Reissuance of Securities. 
The Company agrees to reissue certificates representing the Securities
without the legends set forth in Section 5.7 above at such time as
(a) the holder thereof has disposed of such Securities pursuant to an
exemption from registration under the Securities Act, or (b) upon resale
subject to an effective registration statement after such Securities are
registered under the Securities Act.  The
Company agrees to cooperate with the Purchaser in connection with all resales
pursuant to Rule 144(d) and Rule 144(k) and provide legal
opinions necessary to allow such resales provided the Company and its counsel
receive reasonably requested representations from the selling Purchaser and
broker, if any.  The Purchaser covenants
to comply with applicable prospectus delivery requirements.

 

18

 

6.14        Opinion. On the Closing Date, the Company will deliver to the
Purchaser an opinion acceptable to the Purchaser from the Company’s legal
counsel in the form annexed hereto as Exhibit C.  The Company will provide, at the Company’s
expense, such other legal opinions in the future as are reasonably necessary
for the conversion of the Preferred Stock.

 

6.15        Margin Stock.      The Company will not permit any of the
proceeds of the Note to be used directly or indirectly to “purchase” or “carry”
“margin stock” or to repay indebtedness incurred to “purchase” or “carry”
“margin stock” within the respective meanings of each of the quoted terms under
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect.

 

6.16.       Reserved.

 

6.17        Authorization and Reservation of Shares.  The
Company shall at all times have authorized and reserved a sufficient number of
shares of Common Stock to provide for the Conversion Shares.

 

6.18        Financing Right of First
Refusal.    The Company hereby grants the Purchaser a
right of first refusal for as long as Purchaser holds any shares of Preferred
Stock to enter into a financing arrangement with the Company. The Company shall
submit a fully executed term sheet setting out the terms, conditions and
pricing of any proposed financing (such financing to be negotiated on “arm’s
length” terms) to be entered into by the Company. Purchaser shall have the
right, but not the obligation, to offer financing, to the Company on terms no
less favorable than those outlined in the previously negotiated term sheet
(which such term sheet shall be negotiated in good faith) within five business
days of receipt of such proposed term sheet. If the provisions of the
Purchaser’s term sheet shall be at least as favorable to the Company, the
Company shall enter into the financing arrangement outlined in the Purchaser’s
term sheet.  If the Purchaser declines to
exercise it right of first refusal hereunder, it hereby agrees to enter into
such documentation as shall be reasonably requested by Company in order to
subordinate its rights hereunder or under the Preferred Stock to the subsequent
financier.

 

7      COVENANTS OF THE COMPANY
AND PURCHASER REGARDING INDEMNIFICATION.

 

7.1          Company Indemnification.  The Company agrees to indemnify, hold harmless,
reimburse and defend Purchaser, each of Purchaser’s officers, directors,
agents, affiliates, control persons, and principal shareholders, against any
claim, cost, expense, liability, obligation, loss or damage (including reasonable
legal fees) of any nature, incurred by or imposed upon the Purchaser which
results, arises out of or is based upon (i) any misrepresentation by
Company or breach of any warranty by Company in this Agreement or in any
exhibits or schedules attached hereto or any Related Agreement, or
(ii) any breach or default in performance by Company of any covenant or
undertaking to be performed by Company hereunder, or any other agreement
entered into by the Company and Purchaser relating hereto.

 

7.2          Purchaser’s Indemnification. 
Purchaser agrees to indemnify, hold harmless, reimburse and defend the
Company and each of the Company’s officers, directors, agents, affiliates,
control persons and principal shareholders, at all times against any claim,
cost, 

 

19

 

expense,
liability, obligation, loss or damage (including reasonable legal fees) of any
nature, incurred by or imposed upon the Company which results, arises out of or
is based upon (i) any misrepresentation by Purchaser or breach of any
warranty by Purchaser in this Agreement or in any exhibits or schedules
attached hereto or any Related Agreement; or (ii) any breach or default in
performance by Purchaser of any covenant or undertaking to be performed by Purchaser
hereunder, or any other agreement entered into by the Company and Purchaser
relating hereto.

 

7.3          Procedures.  The
procedures and limitations set forth in Section 9.6 shall apply to the
indemnifications set forth in Sections 7.1 and 7.2 above.

 

8      CONVERSION OF PREFERRED
STOCK.

 

8.1  Mechanics of Conversion.

 

(a)           Provided the Purchaser has notified the
Company of the Purchaser’s intention to sell the Conversion Shares and the
Conversion Shares are included in an effective registration statement or are
otherwise exempt from registration when sold: 
(i) Upon the conversion of the Preferred Stock or part thereof, the
Company shall, at its own cost and expense, take all necessary action
(including the issuance of an opinion of counsel) to assure that the Company’s
transfer agent shall issue the Conversion Shares in the name of the Purchaser
(or its nominee) or such other persons as designated by the Purchaser in
accordance with Section 8.1(b) hereof and in such denominations to be
specified representing the number of Conversion Shares issuable upon such
conversion; and (ii) the Company warrants that no instructions other than
these instructions have been or will be given to the transfer agent of the
Company’s Common Stock and that after the Effective Date (as hereinafter
defined) the Conversion Shares issued will be freely transferable subject to
the prospectus delivery requirements of the Securities Act and the provisions
of this Agreement, and will not contain a legend restricting the resale or
transferability of the Conversion Shares, other than as required by law.

 

(b)           Purchaser will give notice of its
decision to exercise its right to convert the Preferred Stock or part thereof
by telecopying or otherwise delivering an executed and completed notice of the
number of shares to be converted to the Company (the “Notice of Conversion”). The Purchaser will
not be required to surrender the Preferred Stock Certificate until the
Purchaser receives a credit to the account of the Purchaser’s prime broker
through the DWAC system (as defined below), representing the Conversion Shares
or until the Preferred Stock has been fully satisfied.  Each date on which a Notice of Conversion is
telecopied or delivered to the Company in accordance with the provisions hereof
shall be deemed a “Conversion Date.”  The Company will cause the transfer agent to
transmit the Conversion Shares (and a certificate representing the balance of
the Preferred Stock not so converted, if requested by Purchaser) to the
Purchaser by crediting the account of the Purchaser’s prime broker with the
Depository Trust Company (“DTC”)
through its Deposit Withdrawal Agent Commission (“DWAC”) system within three (3) business days after
receipt by the Company of the Notice of Conversion (the “Delivery Date”).

 

(c)           The Company understands that a delay in
the delivery of the Conversion Shares in the form required pursuant to
Section 8 hereof beyond the Delivery Date could result in economic loss to
the Purchaser.  In the event that the
Company fails to direct its 

 

20

 

transfer
agent to deliver the Conversion Shares to the Purchaser via the DWAC system
within the time frame set forth in Section 8.1(b) above and the
Conversion Shares are not delivered to the Purchaser by the Delivery Date
through any act or failure to act on the part of the Company, as compensation
to the Purchaser for such loss, the Company agrees to pay late payments to the
Purchaser for late issuance of the Conversion Shares in the form required
pursuant to Section 8 hereof upon conversion of the Preferred Stock in the
amount equal to the greater of (i) $500 per business day after the
Delivery Date or (ii) the Purchaser’s actual damages from such delayed
delivery. The Company shall pay any payments incurred under this
Section in immediately available funds upon demand and, in the case of
actual damages, accompanied by reasonable documentation of the amount of such
damages.  Such documentation shall show
the number of shares of Common Stock the Purchaser is forced to purchase (in an
open market transaction) which the Purchaser anticipated receiving upon such
conversion, and shall be calculated as the amount by which (A) the
Purchaser’s total purchase price (including customary brokerage commissions, if
any) for the shares of Common Stock so purchased exceeds (B) the aggregate
Stated Value (as defined in the Certificate of Vote of Directors) and/or
dividend amount of the Preferred Stock, for which such Conversion Notice was
not timely honored.

 

(d)           Nothing contained herein or in any
document referred to herein or delivered in connection herewith shall be deemed
to establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law.  In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
amount permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Company to a Purchaser and thus refunded
to the Company.

 

8.2          Maximum Conversion. 
Notwithstanding anything contained in the Certificate of Vote of
Directors to the contrary, the Holder shall not be entitled to convert pursuant
to the terms of this Series D Preferred Stock an amount that would be
convertible into that number of Conversion Shares which would exceed the
difference between (i) 4.99% of the issued and outstanding shares of
Common Stock and (ii) the number of shares of Common Stock beneficially
owned by the Holder For purposes of the immediately preceding sentence,
beneficial ownership shall be determined in accordance with
Section 13(d) of the Exchange Act and Regulation 13d-3
thereunder.  The Conversion Share
limitation described in this Section 8.2 
shall automatically become null and void following notice to the Company
upon the occurrence and during the continuance of an Event of Default, upon 75
days prior notice to the Company, or upon receipt by the Holder of a Notice of
Redemption, except that at no time shall the number of shares of Common Stock
beneficially owned by the Holder a exceed 19.99% of the outstanding shares of
Common Stock.  Notwithstanding anything
contained herein to the contrary, the number of shares of Common Stock issuable
by the Company and acquirable by the Holder at a price below $[6.32] per share
pursuant to the terms of this Series D Preferred Stock, the Warrant, the
Purchase Agreement or any other Related Agreement, shall not exceed an
aggregate of 2,151,260 shares of Common Stock (subject to appropriate adjustment
for stock splits, stock dividends, or other similar recapitalizations affecting
the Common Stock) (the “Maximum Common Stock
Issuance”), unless the issuance of Common Stock hereunder in excess
of the Maximum Common Stock Issuance shall first be approved by the Company’s
shareholders.  If at any point in time
and from time to time the number of shares of Common Stock issued pursuant to
the terms of this Series D Preferred Stock, the Purchase Agreement or any
other Related

 

21

 

Agreement,
together with the number of shares of Common Stock that would then be issuable
by the Company to the Holder in the event of a conversion or exercise pursuant
to the terms of this Series D Preferred Stock, the Purchase Agreement or
any other Related Agreement, would exceed the Maximum Common Stock Issuance but
for this Section 8.2, the Company shall promptly call a shareholders
meeting to solicit shareholder approval for the issuance of the shares of
Common Stock hereunder in excess of the Maximum Common Stock Issuance.  Notwithstanding anything contained herein to
the contrary, the provisions of this Section 8.2 are irrevocable and may
not be waived by the Holder or the Company..

 

8.3          Optional Redemption.  The Company
will have the option of redeeming any outstanding Stated Value of the Preferred
Stock (“Optional Redemption”) by
paying to the Purchaser 130% of such amount, together with accrued but unpaid
dividends thereon and any and all other sums due, accrued or payable to the Purchaser
arising under this Agreement, Certificate of Vote of Directors or any other
document delivered herewith (“Redemption
Amount”) outstanding on the day notice of redemption (“Notice of Redemption”) is delivered to a
Purchaser (“Redemption Date”).  A Notice of Redemption may not be given in
connection with any portion of Preferred Stock for which a Notice of Conversion
has been given by the Purchaser at any time before receipt of a Notice of
Redemption.  The Redemption Amount must
be paid in immediately available funds to the Purchaser no later than the
seventh (7th) business day after the Redemption Date (“Optional Redemption Payment Date”).  In the event the Company fails to pay the
Redemption Amount by the Optional Redemption Payment Date, then the Redemption
Notice will be null and void.  A Notice
of Redemption may be given by the Company, provided no Event of Default as
described in the Certificate of Vote of Directors shall have occurred or be
continuing.

 

9              OFFERING RESTRICTIONS.  
Except as previously disclosed in the SEC Reports or stock or stock
options granted to employees or directors of the Company or any of its
Subsidiaries; or equity or debt issued in connection with an acquisition of a
business or assets by the Company or any of its Subsidiaries; or the issuance
by the Company or any of its Subsidiaries of stock in connection with the
establishment of a joint venture partnership or licensing arrangement (these
exceptions hereinafter referred to as the “Excepted
Issuances”), neither the Company nor any of its Subsidiaries will
issue any securities with a floorless variable/floating conversion feature,
otherwise known as a “floorless convertible security” which are or could be (by
conversion or registration) free-trading securities prior to the repayment in
full or conversion in full of the Preferred Stock.

 

10           SECURITY INTEREST.  As a condition of Closing, the
Company and each of its Subsidiaries will grant to the Purchaser a security
interest in their respective assets pursuant to a Master Security Agreement and
Subsidiary Guarantee.  The Company and
each of its Subsidiaries will also execute all such documents reasonably
necessary to memorialize and further protect the security interest described
above.

 

11           MISCELLANEOUS.

 

11.1        Governing Law.
This Agreement shall be governed by and construed in accordance with the laws
of the State of New York, without regard to principles of conflicts of
laws.  Any action brought by either party
against the other concerning the transactions 

 

22

 

contemplated by this Agreement shall be
brought only in the state courts of New York or in the federal courts located
in the state of New York; provided, however that the Purchaser may choose to
waive this provision and bring an action outside the state of New York.  Both parties and the individuals executing
this Agreement and other agreements on behalf of the Company agree to submit to
the jurisdiction of such courts and waive trial by jury.  The prevailing party shall be entitled to
recover from the other party its reasonable attorney’s fees and costs.  In the event that any provision of this
Agreement or any other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or
rule of law.  Any such provision
which may prove invalid or unenforceable under any law shall not affect the
validity or enforceability of any other provision of any agreement.

 

11.2        Survival.  The representations, warranties, covenants
and agreements made herein shall survive any investigation made by the
Purchaser and the closing of the transactions contemplated hereby. All
statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder solely as of the date
of such certificate or instrument.

 

11.3        Successors and Assigns.  Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Securities from time to time.

 

11.4        Entire Agreement.  This Agreement, the exhibits
and schedules hereto, the Related Agreements and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and no party shall be
liable or bound to any other in any manner by any representations, warranties,
covenants and agreements except as specifically set forth herein and therein.

 

11.5        Severability.  In case any provision of the Agreement shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.

 

11.6        Amendment and Waiver. This Agreement may be amended or modified only upon the written
consent of the Company and the Purchaser. The obligations of the Company and
the rights of the holders of the Securities under the Agreement may be waived
only with the written consent of such holders of Securities.  The rights of the holder of Preferred Stock
may be waived only with the written consent of such holder.

 

11.7        Delays or Omissions.  It is agreed that no delay or
omission to exercise any right, power or remedy accruing to any party, upon any
breach, default or noncompliance by another party under this Agreement or the
Related Agreements, shall impair any such right, power or remedy, nor shall it
be construed to be a waiver of any such breach, default or noncompliance, or
any acquiescence therein, or of or in any similar breach, default or
noncompliance thereafter occurring.  It
is further agreed that any waiver, permit, consent or 

 

23

 

approval of any kind or character on the
Purchaser’s part of any breach, default or noncompliance under this Agreement,
the Preferred Stock or the Related Agreements or any waiver on such party’s
part of any provisions or conditions of the Agreement, the Certificate of Vote
of Directors or the Related Agreements must be in writing and shall be
effective only to the extent specifically set forth in such writing.  All remedies, either under this Agreement,
the Preferred Stock or the Related Agreements, by law or otherwise afforded to
any party, shall be cumulative and not alternative.

 

11.8        Notices.  All notices required or permitted hereunder
shall be in writing and shall be deemed effectively given: (a) upon
personal delivery to the party to be notified, (b) when sent by confirmed
telex or facsimile if sent during normal business hours of the recipient, if
not, then on the next business day, (c) five days after having been sent
by registered or certified mail, return receipt requested, postage prepaid, or
(d) one day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt.  All communications shall be sent to the
Company at the address as set forth on the signature page hereof, with a
copy to Ellenoff Grossman and Schole LLP, 370 Lexington Avenue New York, New
York 10017 Attention: David Selengut, Esq. Facsimile number (212) 370-7889
and to the Purchaser at the address set forth on the signature page hereto
for such Purchaser, with a copy in the case of the Purchaser to John
Tucker, Esq., 825 Third Avenue, 14th Floor, New York, NY 10022, facsimile
number (212) 541-4434, or at such other address as the Company or the Purchaser
may designate by ten days advance written notice to the other parties hereto.

 

11.9        Attorneys’ Fees.  In the event that any suit or
action is instituted to enforce any provision in this Agreement, the prevailing
party in such dispute shall be entitled to recover from the losing party all
fees, costs and expenses of enforcing any right of such prevailing party under
or with respect to this Agreement, including, without limitation, such
reasonable fees and expenses of attorneys and accountants, which shall include,
without limitation, all fees, costs and expenses of appeals.

 

11.10      Titles and Subtitles.  The titles of the sections and
subsections of the Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.

 

11.11      Counterparts.  This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.

 

11.12      Broker’s Fees.  Each party hereto represents and warrants
that no agent, broker, investment banker, person or firm acting on behalf of or
under the authority of such party hereto is or will be entitled to any broker’s
or finder’s fee or any other commission directly or indirectly in connection
with the transactions contemplated herein, except as specified herein with
respect to the Purchaser.  Each party
hereto further agrees to indemnify each other party for any claims, losses or
expenses incurred by such other party as a result of the representation in this
Section 12.12 being untrue.

 

24

 

11.13      Construction.  Each party acknowledges that its legal
counsel participated in the preparation of this Agreement and, therefore,
stipulates that the rule of construction that ambiguities are to be
resolved against the drafting party shall not be applied in the interpretation
of this Agreement to favor any party against the other.

 

[Remainder of page intentionally left
blank.]

 

25

 

IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE AGREEMENT as of the
date set forth in the first paragraph hereof.

 

 

	
  COMPANY:

  	
   

  	
  PURCHASER:

  
	
   

  	
   

  	
   

  
	
  IMPLANT SCIENCES CORPORATION

  	
   

  	
  LAURUS MASTER FUND, LTD.

  
	
   

  	
   

  	
   

  
	
  By: /s/ Anthony J. Armini

  	
   

  	
   

  	
  By: /s/ Laurus Master Fund

  	
   

  
	
  Name: Anthony J. Armini

  Title: President

  Address:

  107 Audobon Road #5

  Wakefield, Massachusetts 01880

  	
   

  	
  Name:

  Address:LAURUS MASTER FUND, LTD.

  c/o Ironshore Corporate Services Ltd.

  P.O. Box 1234 G.T., Queensgate House,

  South Church Street

  Grand Cayman, Cayman Islands

  
					

 

26

 

LIST OF
EXHIBITS

 

	
  Form of Offering Certificate of Vote of Directors

  	
  Exhibit A

  
	
   

  	
   

  
	
  Form of Opinion

  	
  Exhibit B

  

 

 

EXHIBIT A

 

CERTIFICATE
OF VOTE OF DIRECTORS

 

 

EXHIBIT B

 

FORM OF
OPINION

 

 

TABLE OF
CONTENTS

 

	
  1.

  	
  AGREEMENT TO SELL AND PURCHASE

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  FEES.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  CLOSING, DELIVERY AND PAYMENT.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  3.1

  	
  Closing

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  3.2

  	
  Delivery.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
  REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.1

  	
  Organization, Good Standing and Qualification

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.2

  	
  Subsidiaries.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.3

  	
  Capitalization; Voting Rights.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.4

  	
  Authorization; Binding Obligations.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.5

  	
  Liabilities.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.6

  	
  Agreements; Action.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.7

  	
  Obligations to Related Parties.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.8

  	
  Changes.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.9

  	
  Title to Properties and Assets; Liens, Etc.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.10

  	
  Intellectual Property.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.11

  	
  Compliance with Other Instruments.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.12

  	
  Litigation.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.13

  	
  Tax Returns and Payments.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.14

  	
  Employees.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.15

  	
  Registration Rights and Voting Rights.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.16

  	
  Compliance with Laws; Permits.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.17

  	
  Environmental and Safety Laws

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.18

  	
  Valid Offering

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.19

  	
  Full Disclosure.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.20

  	
  Insurance.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.21

  	
  SEC Reports

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.22

  	
  No Market Manipulation.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.23

  	
  Listing.

  	
   

  

 

i

 

	
   

  	
  4.24

  	
  No Integrated Offering.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.25

  	
  Stop Transfer.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.26

  	
  Dilution.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  5.

  	
  REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.1

  	
  Requisite Power and Authority.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.2

  	
  Investment Representations.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.3

  	
  Purchaser Bears Economic Risk.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.4

  	
  Acquisition for Own Account.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.5

  	
  Purchaser Can Protect Its Interest.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.6

  	
  Accredited Investor.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.7

  	
  Legends.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.8

  	
  Security Interest

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.9

  	
  Prospectus.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.10

  	
  Preferred Stock Certificate.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.11

  	
  Certain Trading Restrictions

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  5.12

  	
  Reporting Requirements.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
  COVENANTS OF THE COMPANY.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.1

  	
  Stop-Orders.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.2

  	
  Listing

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.3

  	
  Market Regulations.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.4

  	
  Reporting Requirements.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.5

  	
  Use of Funds

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.6

  	
  Access to Facilities.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.7

  	
  Taxes.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.8

  	
  Insurance.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.9

  	
  Books and Records.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.10

  	
  Intellectual Property.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.11

  	
  Confidentiality.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.12

  	
  Corporate Existence.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.13

  	
  Reissuance of Securities.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.14

  	
  Opinion.

  	
   

  

 

ii

 

	
   

  	
  6.15

  	
  Financial Covenants.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
  COVENANTS OF THE COMPANY AND PURCHASER REGARDING
  INDEMNIFICATION.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  7.1

  	
  Company Indemnification.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  7.2

  	
  Purchaser’s Indemnification.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  7.3

  	
  Procedures.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
  CONVERSION OF PREFERRED STOCK.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  8.1

  	
  Mechanics of Conversion.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  8.2

  	
  Maximum Conversion.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  8.3

  	
  Optional Redemption

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
  REGISTRATION RIGHTS.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  9.1

  	
  Registration Rights Granted.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  9.2

  	
  Registration Procedures.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  9.3

  	
  Provision of Documents.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  9.4

  	
  Non-Registration Events

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  9.5

  	
  Expenses

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  9.6

  	
  Indemnification and Contribution.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  10.

  	
  OFFERING RESTRICTIONS

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  11.

  	
  SECURITY INTEREST.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  12.

  	
  MISCELLANEOUS.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.1

  	
  Governing Law.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.2

  	
  Survival.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.3

  	
  Successors and Assigns.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.4

  	
  Entire Agreement.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.5

  	
  Severability.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.6

  	
  Amendment and Waiver.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.7

  	
  Delays or Omissions.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.8

  	
  Notices.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.9

  	
  Attorneys’ Fees.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.10

  	
  Titles and Subtitles.

  	
   

  

 

iii

 

	
   

  	
  12.11

  	
  Counterparts.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.12

  	
  Broker’s Fees.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  12.13

  	
  Construction.

  	
   

  

 

iv

 

Schedules 

 

4.2           Subsidiaries:

 

	
  Name/Address

  	
   

  	
  Percent of Ownership

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  C
  Acquisition Corp

  	
   

  	
  100

  	
  %

  
	
  dba Core
  Systems

  	
   

  	
   

  	
   

  
	
  1050 Kifer
  Road

  	
   

  	
   

  	
   

  
	
  Sunnyvale,
  CA 94086

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Accurel
  Systems International Corp.

  	
   

  	
  100

  	
  %

  
	
  485 Lucerne
  Drive

  	
   

  	
   

  	
   

  
	
  Sunnyvale,
  CA 94085

  	
   

  	
   

  	
   

  

 

4.3           Capitalization:  Voting Rights

 

The
authorized capital stock of the Company, as of the date hereof consists of
25,000,000 shares, of which 20,000,000 are shares of Common Stock, par value
$0.10 per share, 10,784,834 shares of which are issued and outstanding,  and 5,000,000 are shares of preferred stock,
par value $0.10 per share of which     -0-  shares of preferred stock are issued and
outstanding.

 

Additional shares may be
issued to the shareholders of Core Systems based on an earn out, however, their
issuance is unlikely.

 

Subject
to certain exceptions, investors in a March 2005 private placement have
the right of first refusal, subject to Laurus Master Fund, Ltd.’s prior right
of first refusal.

 

The
authorized, issued and outstanding capital stock of each Subsidiary of the
Company is:

 

	
   

  	
   

  	
  # Shares

  	
   

  	
   

  	
   

  	
  Issued and

  	
   

  
	
  Name

  	
   

  	
  Authorized

  	
   

  	
  Par Value

  	
   

  	
  Outstanding

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C
  Acquisition Corp.

  	
   

  	
  1,000

  	
   

  	
  .001

  	
   

  	
  100

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accurel
  Systems

  	
   

  	
  15,000,000

  	
   

  	
  none

  	
   

  	
  2,000,000

  	
   

  

 

v

 

Other shares subject to issue:

 

 

	
  2004 Stock Option Plan

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Balance
  available to Grant

  	
   

  	
  28,574

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Granted but
  unexercised

  	
   

  	
  471,426

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2000
  Stock Option Plan

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Balance
  available to Grant

  	
   

  	
  59,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Granted but
  unexercised

  	
   

  	
  1,171,105

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  1998
  Stock Option Plan

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Balance
  available to Grant

  	
   

  	
  11,503

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Granted but
  unexercised

  	
   

  	
  125,500

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  1992
  Stock Option Plan

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Balance
  available to Grant

  	
   

  	
  0

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Granted but
  unexercised

  	
   

  	
  54,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Warrants

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Balance
  Outstanding

  	
   

  	
  2,574,389

  	
  * 

  

 

	
  *Includes
  250,000 warrants from $3.0M Laurus note

  	
   

  	
   

  	
   

  

 

	
  AIR’s

  	
   

  	
  611,765

  	
   

  

 

vi

 

4.5           Term Note with Comerica Bank

Line of Credit with Bridge Bank

Laurus Master Fund – short term note

 

4.6           a)    Holdback payments
to be disbursed per Stock Purchase Agreements with Accurel Shareholders

 

b)    See 4.5

$3.0M short term note with Laurus Master Fund

New capital equipment lease  ~ $50,000

Refinance of a short term loan to employee with
maturity date of 12/31/05

 

4.8           Changes

 

	
  a)

  	
   

  	
  Loan to Accurel Shareholders paid in full

  
	
   

  	
   

  	
  Rapiscan agreement in dispute

  
	
  f)

  	
   

  	
  Refinance of loan to Richard Sahagian, employee and shareholder -
  $35,000

  
	
   

  	
   

  	
  Loan to Donna Prunier, employee – balance due ~ $675

  
	
  g)

  	
   

  	
  Walter Wriggins – General Manager, Core Systems

  
	
   

  	
   

  	
  John Munro – VP Brachytherapy Products

  
	
  j)

  	
   

  	
  See 4.5

  
	
  k)

  	
   

  	
  Rapiscan Systems has manufacturing and distribution rights.

  
	
  l)

  	
   

  	
  Rapiscan agreement is in dispute

  

 

4.9           Liens

See 4.5

Lease schedules as of 6/30/05

 

	
   

  	
   

  	
  Debt and

  Capital

  Leases (1)

  	
   

  	
  Operating

  Lease

  	
   

  	
  Total

  	
   

  
	
  Year ending
  June 30:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2006

  	
   

  	
  $

  	
  2,052,000

  	
   

  	
  $

  	
  1,620,000

  	
   

  	
  $

  	
  3,672,000

  	
   

  
	
  2007

  	
   

  	
  386,000

  	
   

  	
  1,673,000

  	
   

  	
  2,059,000

  	
   

  
	
  2008

  	
   

  	
  377,000

  	
   

  	
  1,713,000

  	
   

  	
  2,090,000

  	
   

  
	
  2009

  	
   

  	
  131,000

  	
   

  	
  1,454,000

  	
   

  	
  1,585,000

  	
   

  
	
  2010

  	
   

  	
  3,000

  	
   

  	
  838,000

  	
   

  	
  841,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
  $

  	
  2,949,000

  	
   

  	
  $

  	
  7,298,000

  	
   

  	
  $

  	
  10,247,000

  	
   

  

 

Includes the $795,000 long term lease liability for
Accurel’s facility lease, which is being amortized over the life of the lease

 

4.12         Claim by the Company against Accurel
Shareholders ~ This claim relates to the Accurel selling shareholders’
misrepresentation of certain items which the company believes 

 

vii

 

would adjust the purchase price and also identifies
certain other undisclosed liabilities. 
This claim is being pursued in order to preserve our interests,
specifically in respect to the escrow payment being withheld from the payoff of
the loan from the shareholders, due this week. 
This is not a claim against the company. 
It is a claim against the Accurel selling shareholders.

 

The Company received a letter from an entity making
a frivolous claim that they have the right of first refusal with respect to a
previous Laurus financing.  The company
believes tha such claim is frivolous in nature as the relevant agreement
clearly states that such rights are subject to Laurus’ rights of first refusal.  The Company is in discussions which involve
offering the claimant an insignificant amount of warrants to purchase shares of
the Company’s common stock to drop the frivolous claim.

 

Claim by the Company against Rapiscan Systems
relating to Rapiscan being in default of the Distribution and Manufacturing
Agreement.

 

Claim by the Company against former employee
relating to the misappropriation of company property.

 

4.13         California Sales Tax Audit being completed at
Accurel Systems

 

4.14         The following investors have registration
rights:

 

	
  RAM Capital

  	
   

  	
  AIR’s

  	
   

  	
  611,765 shares

  

 

4.17          a)  
All locations use approved toxic chemicals in semiconductor services

b)   Wakefield
has radioactive materials, regulated by Commonwealth of MA

 

4.21         To file 12b-25 September 29, 2005

 

viii

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