Document:

Exhibit 10.1

 

 

SECURITIES PURCHASE AGREEMENT

 

LAURUS MASTER FUND, LTD.

 

and

 

IMPLANT SCIENCES CORPORATION

 

 

Dated: July 6, 2005

 

 

LIST OF EXHIBITS

 

	
  Form of Warrant

  	
  Exhibit A

  
	
  Form of Opinion

  	
  Exhibit B

  
	
  Form of Escrow Agreement

  	
  Exhibit C

  

 

ii

 

SECURITIES PURCHASE AGREEMENT

 

THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”)
is made and entered into as of July 6, 2005, by and between IMPLANT SCIENCES
CORPORATION, a Massachusetts (the “Company”), and LAURUS MASTER FUND, LTD., a
Cayman Islands company (the “Purchaser”).

 

RECITALS

 

WHEREAS, the Company has authorized the sale to the
Purchaser of a Secured Convertible Term Note in the aggregate principal amount
of Three Million Dollars ($3,000,000) in the form of Exhibit A hereto (as
amended, modified and/or supplemented from time to time, the “Note”);

 

WHEREAS, the Company wishes to issue to the Purchaser
a warrant, on September 30, 2005, in the form of Exhibit B hereto (as amended,
modified and/or supplemented from time to time, the “Warrant”) to purchase up
to 250,000 shares of the Company’s Common Stock (subject to adjustment as set
forth therein) in connection with the Purchaser’s purchase of the Note;

 

WHEREAS, the Purchaser desires to purchase the Note
and the Warrant on the terms and conditions set forth herein; and

 

WHEREAS, the Company desires to issue and sell the
Note 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 shall sell to the Purchaser, and the
Purchaser shall purchase from the Company, the Note.  The sale of the Note on the Closing Date
shall be known as the “Offering.”  The
Note will mature on the Maturity Date (as defined in the Note).  Collectively, the Note and Warrant and Common
Stock issuable upon exercise of the Warrant are referred to as the “Securities.”

 

2.             Fees
and Warrant.  On the Closing Date:

 

(a)           The
Company will issue and deliver to the Purchaser the Warrant, on September 30,
2005,to purchase up to 250,000 shares of Common Stock (subject to adjustment as
set forth therein) in connection with the Offering, pursuant to Section 1
hereof.  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 for the benefit of the holder of the Warrant and shares

 

 

of
the Company’s Common Stock issuable upon exercise of the Warrant (the “Warrant
Shares”).

 

(b)           Subject
to the terms of Section 2(d) below, the Company shall pay to Laurus Capital
Management, LLC, the manager of the Purchaser, a closing payment in an amount
equal to four and one-half percent (4.50%) of the aggregate principal amount of
the Note.  The foregoing fee is referred
to herein as the “Closing Payment.”

 

(c)           The
Company shall reimburse the Purchaser for its reasonable expenses (including
legal fees and expenses) incurred in connection with the preparation and
negotiation of this Agreement and the Related Agreements (as hereinafter
defined), and expenses incurred in connection with the Purchaser’s due diligence
review of the Company and its Subsidiaries (as defined in Section 4.2) and all
related matters.  Amounts required to be
paid under this Section 2(c) will be paid on the Closing Date and shall be
$10,000 for such expenses referred to in this Section 2(c).

 

(d)           The
Closing Payment and the expenses referred to in the preceding clause (c) (net
of deposits previously paid by the Company) shall be paid at closing out of
funds held pursuant to the Escrow Agreement (as defined below) and a
disbursement letter (the “Disbursement Letter”).

 

3.             Closing,
Delivery and Payment.

 

3.1           Closing.  Subject to the terms and conditions herein,
the closing of the transactions contemplated hereby (the “Closing”), shall take
place on the date hereof, at such time or place as the Company and the
Purchaser may mutually agree (such date is hereinafter referred to as the “Closing
Date”).

 

3.2           Delivery.  Pursuant to the Escrow Agreement, at the
Closing on the Closing Date, the Company will deliver to the Purchaser, among
other things, the Note and the Warrant and the Purchaser will deliver to the
Company, among other things, the amounts set forth in the Disbursement Letter
by certified funds or wire transfer.

 

4.             Representations
and Warranties of the Company.  The Company
hereby represents and warrants to the Purchaser as follows

 

4.1           Organization,
Good Standing and Qualification.  Each of the
Company and each of its Subsidiaries is a corporation, partnership or limited
liability company, as the case may be, duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization.  Each of the Company and each of its
Subsidiaries has the corporate, limited liability company or partnership, as
the case may be, power and authority to own and operate its properties and
assets and, insofar as it is or shall be a party thereto, to (1) execute and
deliver (i) this Agreement, (ii) the Note and the Warrant to be issued in
connection with this Agreement, (iii) 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”), (iv) 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

 

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time to
time, the “Escrow Agreement”) and (viii) all other documents, instruments and
agreements entered into in connection with the transactions contemplated hereby
and thereby (the preceding clauses (ii) through (iv), collectively, the “Related
Agreements”); (2) issue and sell the Note; (3) issue and sell the Warrant
and the Warrant Shares; and (4) carry out the provisions of this Agreement and
the Related Agreements and to carry on its business as presently
conducted.  Each of the Company and its
Subsidiaries is duly qualified and is authorized to do business and is in good
standing as a foreign corporation, partnership or limited liability company, as
the case may be, in all jurisdictions in which the nature or location 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 has not, or
could not reasonably be expected to have, individually or in the aggregate, a
material adverse effect on the business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects of the Company
and its Subsidiaries, taken individually and as a whole (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
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, 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, 10,713,645 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. The authorized, issued
and outstanding capital stock of each Subsidiary of each of the Company and its
Subsidiaries is set forth on Schedule 4.3.

 

(b)           Except
as disclosed on Schedule 4.3 or in the Company’s Exchange Act Filings, other
than:  (i) the shares reserved for
issuance under the Company’s stock option plans; 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 disclosed on Schedule 4.3, neither the offer, issuance or sale of any of the
Note or the Warrant, or the issuance of the 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.

 

3

 

(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 Company’s Certificate of Incorporation (the “Charter”).  The 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.

 

4.4           Authorization;
Binding Obligations.  All
corporate, partnership or limited liability company, as the case may be, action
on the part of the Company and each of its Subsidiaries (including their
respective officers and directors) necessary for the authorization of this
Agreement and the Related Agreements, the performance of all obligations of the
Company and its Subsidiaries hereunder and under the other Related Agreements
at the Closing and, the authorization, sale, issuance and delivery of the Note
and Warrant has been taken or will be taken prior to the Closing.  This Agreement and the Related Agreements,
when executed and delivered and to the extent it is a party thereto, will be
valid and binding obligations of each 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 or legal remedies.

 

The sale of the Note is 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 issuance of the
Warrant and the subsequent exercise of the Warrant for Warrant Shares 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.

 

4.5           Liabilities.  Neither the Company nor any of its
Subsidiaries has any liabilities, except current liabilities incurred in the
ordinary course of business and liabilities disclosed in any of the Company’s
filings under the Securities Exchange Act of 1934 (“Exchange Act”) made prior
to the date of this Agreement (collectively, the “Exchange Act Filings”),
copies of which have been provided to the Purchaser.

 

4.6           Agreements;
Action.  Except as set forth on Schedule 4.6 or as
disclosed in any Exchange Act Filings:

 

(a)           there
are no agreements, understandings, instruments, contracts, proposed
transactions, judgments, orders, writs or decrees to which Each of the Company
and its Subsidiaries is a party or by which it is bound which may involve: (i)
obligations

 

4

 

(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)           Since
March 31, 2005  (the “Balance Sheet Date”),
neither the Company nor 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 (other than ordinary course obligations) 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 or entity not in excess, individually
or in the aggregate, of $100,000, other than ordinary course advances for
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;

 

5

 

(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.

 

4.7           Obligations
to Related Parties.  Except as set
forth on Schedule 4.7, 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 and for bonus payments;

 

(b)           reimbursement for reasonable expenses incurred on behalf of
the Company and its Subsidiaries;

 

(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 or any of its Subsidiaries);
and

 

(d)           obligations listed in the Company’s and each of its
Subsidiaries financial statements or disclosed in any of the Company’s Exchange
Act Filings.

 

Except as described above or set forth on Schedule 4.7, none of the
officers, directors or, to the best of the Company’s knowledge, key employees
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, individually or in the aggregate, in excess of $50,000 or have
any direct or indirect ownership interest in any firm or corporation with which
Each of the Company and 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
one percent (1%) of such company) which may compete with the Company or any of
its Subsidiaries.  Except as described
above, no officer, director or stockholder of the Company or any of its
Subsidiaries, 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

 

6

 

agreements, understandings or
proposed transactions are contemplated between the Company or any of its
Subsidiaries and any such person.  Except
as set forth on Schedule 4.7, Each of the Company and
its Subsidiaries is not a guarantor or indemnitor of any indebtedness of any
other person or entity.

 

4.8           Changes.  Since the Balance Sheet Date, except as
disclosed in any Exchange Act Filing or in any Schedule to this Agreement or to
any of the Related Agreements, there has not been:

 

(a)           any
change in the business, assets, liabilities, condition (financial or
otherwise), properties, operations or prospects of the Company or any of its
Subsidiaries, which individually or in the aggregate has had, or could
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect;

 

(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;

 

(d)           any damage, destruction or loss, whether or not covered by
insurance, which has had, or could reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect;

 

(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 of the Company or
any of its Subsidiaries;

 

(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 owned by the Company or any of its
Subsidiaries;

 

7

 

(l)            any
change in any material agreement to which the Company or any of its
Subsidiaries is a party or by which either the Company or any of its Subsidiaries
is bound which either individually or in the aggregate has had, or could
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect;

 

(m)          any
other event or condition of any character that, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect; 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 on Schedule 4.9, each of the Company and each of
its Subsidiaries has good and marketable title to its properties and
assets, and good title to its leasehold interests, 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, so long as in each such case, such liens and
encumbrances have no effect on the lien priority of the Purchaser in such
property; and

 

(c)           those that have otherwise arisen in the ordinary course of
business, so long as they have no effect on the lien priority of the Purchaser
therein.

 

All facilities, machinery, equipment, fixtures, vehicles and other
properties owned, leased or used by the Company or any 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. 
Except as set forth on Schedule 4.9, 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.

 

(a)           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. 
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.

 

8

 

(b)           Neither
the Company nor or any of its Subsidiaries has received any communications
alleging that the Company 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.

 

(c)           The
Company does not believe 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, 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.  Each of the
Company and its Subsidiaries is not in violation or default of (x) any term of
its Charter or Bylaws, or (y) any provision of any indebtedness, mortgage,
indenture, contract, agreement or instrument to which it is party or by which
it is bound or of any judgment, decree, order or writ, which violation or
default, in the case of this clause (y), has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect.  The execution, delivery and
performance of and compliance with this Agreement and the Related Agreements to
which it is a party, and the issuance and sale of the Note by the Company and
the other Securities by the Company each pursuant hereto and thereto, 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 on Schedule 4.12 hereto,
there is no action, suit, proceeding or investigation pending or, to the
Company’s or any of its Subsidiaries’ knowledge,
currently threatened against the Company or any of its
Subsidiaries
that prevents the Company or any of its Subsidiaries from
entering into this Agreement or the other Related Agreements, or from
consummating the transactions contemplated hereby or thereby, or which has had,
or could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect or any change in the current equity
ownership of the Company or any of its Subsidiaries, nor is the
Company nor any of its Subsidiaries aware that there is any basis to
assert any of the foregoing.  Neither the
Company nor any of its Subsidiaries is a party to or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality. 
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 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.  Except as set forth on Schedule 4.13,
neither the Company nor any of its Subsidiaries has been
advised:

 

9

 

(a)           that any of its
returns, federal, state or other, have been or are being audited as of the date
hereof; or

 

(b)           of any adjustment, deficiency, assessment or court decision
in respect of its federal, state or other taxes.

 

The Company has no knowledge of any liability for 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.  Except as set forth on Schedule 4.14, neither
the Company nor any of its Subsidiaries has any
collective bargaining agreements with any of its 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
disclosed in the Exchange Act Filings or on Schedule 4.14, 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
present employees, and the performance of the Company’s 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.  The Company nor any of its Subsidiaries has received
any notice alleging that any such violation has occurred.  Except for employees who have a current
effective employment agreement with the Company, no employee of the Company has
been granted the right to continued employment by the Company or to any
material compensation following termination of employment with the Company.  Except as set forth on Schedule 4.14, None of the Company nor its Subsidiaries is aware that any
officer, key employee or group of employees intends to terminate his, her or
their employment with the Company, nor does the Company have a present
intention to terminate the employment of any officer, key employee or group of
employees.

 

4.15         Voting
Rights.  Except as set forth on Schedule 4.15 and
except as disclosed in Exchange Act Filings, 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.  Neither of
the Company nor its Subsidiaries is in violation of any provision of the
Sarbanes-Oxley Act of 2002 or any SEC related regulation or rule or any rule of
the Principal Market (as hereafter defined) promulgated thereunder or any other
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

 

10

 

business or the
ownership of its properties which has had, or could reasonably be expected to
have, either individually or in the aggregate, a Material Adverse Effect.  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 or any other Related Agreement and the
issuance of any of the Securities, except such as have 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. 
Each of the Company and its Subsidiaries has all material 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, either
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

 

4.17         Environmental
and Safety Laws.  Neither the Company or 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 on Schedule 4.17, 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 or any of
its Subsidiaries’ knowledge, by any other person or entity on any
property owned, leased or used by the Company. 
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 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.

 

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 Note and Warrant, including all information the Company and its
Subsidiaries believe is reasonably necessary to make such investment
decision.  Neither this Agreement, the
Related Agreements, the exhibits and schedules hereto and thereto 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 or any of its Subsidiaries were based
on the Company’s and its

 

11

 

Subsidiaries’
experience in the industry and on assumptions of fact and opinion as to future
events which the Company or any of its Subsidiaries, at the date
of the issuance of such projections or estimates, believed to be reasonable.

 

4.20         Insurance.  Each of the Company and each of its
Subsidiaries has general commercial, product liability, fire and casualty
insurance policies with coverages which the Company and of
its Subsidiaries believes are customary for companies similarly
situated to the Company and its Subsidiaries in the same or similar business.

 

4.21         SEC
Reports.  Except as set forth on Schedule 4.21, the
Company has filed all proxy statements, reports and other documents required to
be filed by it under the Securities Exchange Act 1934, as amended (the “Exchange
Act”).  The Company has furnished the
Purchaser copies of:  (i) its Annual
Reports on Form 10-KSB for its fiscal years ended June 30, 2004; and (ii) its
Quarterly Reports on Form 10-QSB for its fiscal quarter ended March 31, 2005,
and the Form 8-K filings which it has made during the fiscal year 2005 to date
(collectively, the “SEC Reports”). 
Except as set forth on Schedule 4.21, each SEC Report was, at the time
of its filing, 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 filing 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         Listing.  The Company’s Common Stock is listed or
quoted, as applicable, on a Principal Market (as hereafter defined) and
satisfies and at all times hereafter will satisfy, all requirements for the
continuation of such listing or quotation, as applicable.  The Company has not received any notice that
its Common Stock will be delisted from, or no longer quoted on, as applicable,
the Principal Market or that its Common Stock does not meet all requirements
for such listing or quotation, as applicable. 
For purposes hereof, the term “Principal Market” means the NASD Over The
Counter Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Markets System,
American Stock Exchange or New York Stock Exchange (whichever of the foregoing
is at the time the principal trading exchange or market for the Common Stock).

 

4.23         No
Integrated Offering.  Neither the
Company, nor 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 or any of the Related
Agreements 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.

 

4.24         Stop
Transfer.  The Securities are restricted securities as
of the date of this Agreement.  The
Company shall 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 state and federal securities laws.

 

12

 

4.25         Dilution.  The Company specifically acknowledges that
its obligation to issue the shares of Common Stock upon exercise of the Warrant
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.

 

4.26         Patriot
Act.  The Company certifies that, to the best of
Company’s knowledge, neither the Company nor any of its
Subsidiaries
has been designated, nor is or shall be owned or controlled, by a “suspected
terrorist” as defined in Executive Order 13224. 
The Company hereby acknowledges that the Purchaser seeks to comply with all
applicable laws concerning money laundering and related activities.  In furtherance of those efforts, the Company
hereby represents, warrants and covenants that: 
(i) none of the cash or property that the Company or
any of its Subsidiaries will pay or will contribute to the Purchaser has been
or shall be derived from, or related to, any activity that is deemed criminal
under United States law; and (ii) no contribution or payment by the Company or
any of its Subsidiaries to the Purchaser, to the extent that they are within
the Company’s and/or its Subsidiaries’ control shall cause the Purchaser or
any of its Subsidiaries to be in violation of the United States Bank Secrecy
Act, the United States International Money Laundering Control Act of 1986 or
the United States International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001.  The Company shall
promptly notify the Purchaser if any of these representations, warranties or
covenants ceases to be true and accurate regarding the Company
or any of its Subsidiaries.  The Company
shall provide the Purchaser all additional information regarding the Company or
any of its Subsidiaries that the Purchaser deems necessary or convenient to
ensure compliance with all applicable laws concerning money laundering and
similar activities.  The Company
understands and agrees that if at any time it is discovered that any of the
foregoing representations, warranties or covenants are incorrect, or if
otherwise required by applicable law or regulation related to money laundering
or similar activities, the Purchaser may undertake appropriate actions to
ensure compliance with applicable law or regulation, including but not limited
to segregation and/or redemption of the Purchaser’s investment in the
Company.  The Company and
its Subsidiaries further understand that the Purchaser may release
confidential information about the Company and its Subsidiaries and, if
applicable, any underlying beneficial owners, to proper authorities if the
Purchaser, in its sole discretion, determines that it is in the best interests
of the Purchaser in light of relevant rules and regulations under the laws set
forth in subsection (ii) above.

 

4.27         ERISA.  Based upon the Employee Retirement Income
Security Act of 1974 (“ERISA”), and the regulations and published
interpretations thereunder:  (i) neither
the Company nor any of its Subsidiaries has engaged
in any Prohibited Transactions (as defined in Section 406 of ERISA and Section
4975 of the  Internal Revenue Code of 1986, as amended (the “Code”));
(ii) each of the Company and each of its Subsidiaries has met all applicable
minimum funding requirements under Section 302 of ERISA in respect of its
plans; (iii) neither the Company nor any of its
Subsidiaries
has any knowledge of any event or occurrence which would cause the Pension
Benefit Guaranty Corporation to institute proceedings under Title IV of ERISA
to terminate any employee benefit plan(s); (iv) neither the Company nor
any of its Subsidiaries has any fiduciary responsibility for investments with
respect to any plan existing for the benefit of persons other than the Company’s
or such Subsidiary’s employees; and (v) neither the Company nor
any of its Subsidiaries has withdrawn, completely or partially, from any
multi-employer

 

13

 

pension plan so as
to incur liability under the Multiemployer Pension Plan Amendments Act of 1980.

 

5.             Representations
and Warranties of the Purchaser.  The Purchaser
hereby represents and warrants to the Company 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           No
Shorting.  The Purchaser or any of its affiliates and
investment partners has not, will not and will not cause any person or entity,
to directly engage in “short sales” of the Company’s Common Stock as long as
the Note shall be outstanding.

 

5.2           Requisite
Power and Authority.  The 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 corporate action
on the 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 the 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 and legal remedies.

 

5.3           Investment
Representations.  The 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
the Purchaser’s representations contained in this Agreement, including, without
limitation, that the Purchaser is an “accredited investor” within the meaning
of Regulation D under the Securities Act of 1933, as amended (the “Securities
Act”).  The Purchaser confirms that it
has received or has had full access to all the information it considers
necessary or appropriate to make an informed investment decision with respect
to the Note and the Warrant to be purchased by it under this Agreement and the
Warrant Shares acquired by it upon the exercise of the Warrant,
respectively.  The Purchaser further
confirms that it has had an opportunity to ask questions and receive answers
from the Company regarding the Company’s and its Subsidiaries’ business,
management and financial affairs and the terms and conditions of the Offering,
the Note, the Warrant and the Securities and to obtain additional information
(to the extent the Company possessed such information or could acquire it
without unreasonable effort or expense) necessary to verify any information furnished
to the Purchaser or to which the Purchaser had access.

 

5.4           The
Purchaser Bears Economic Risk.  The 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. 
The Purchaser must bear the economic risk of this investment until the
Securities are sold pursuant to: (i) an effective

 

14

 

registration statement
under the Securities Act; or (ii) an exemption from registration is available
with respect to such sale.

 

5.5           Acquisition
for Own Account.  The Purchaser
is acquiring the Note and Warrant and the Warrant Shares for the Purchaser’s
own account for investment only, and not as a nominee or agent and not with a
view towards or for resale in connection with their distribution.

 

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

 

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

 

5.8           Legends.

 

(a)           The
Note shall bear substantially the following legend:

 

“THIS NOTE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS.  THIS NOTE MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES 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
Warrant Shares shall bear a legend which shall be in substantially the
following form until such shares are covered by an effective registration
statement filed with the SEC:

 

“THE SHARES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY 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.”

 

15

 

(c)           The
Warrant shall bear substantially the following legend:

 

“THIS WARRANT AND THE
COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
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.”

 

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 will maintain the listing or
quotation, as applicable, of its Common Stock on the 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.

 

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 the Purchaser and promptly provide copies thereof
to the Purchaser.

 

6.4           Reporting
Requirements.  The Company
will deliver, or cause to be delivered to the Purchaser or make available to
the Purchaser through its timely Exchange Act Filings, each of the following,
which shall be in form and detail acceptable to the Purchaser:

 

(a)           As
soon as available, and in any event within ninety (90) days after the end of
each fiscal year of the Company, each of the Company’s and each of its
Subsidiaries’ audited financial statements with a report of independent
certified public accountants of recognized standing selected by the Company
(the “Accountants”), which annual financial statements shall be without
qualification and shall include each of the Company’s and each of its
Subsidiaries’ balance sheet as at the end of such fiscal year and the related
statements of each of the Company’s and each of its Subsidiaries’ income, 

 

16

 

retained earnings and
cash flows for the fiscal year then ended, prepared on a consolidating and
consolidated basis to include the Company, each Subsidiary of the Company and
each of their respective affiliates, all in reasonable detail and prepared in
accordance with GAAP, together with (i) if and when available, copies of any
management letters prepared by the Accountants; and (ii) a certificate of the
Company’s President, Chief Executive Officer or Chief Financial Officer stating
that such financial statements have been prepared in accordance with GAAP and
whether or not such officer has knowledge of the occurrence of any Event of
Default (as defined in the Note) and, if so, stating in reasonable detail the
facts with respect thereto;

 

(b)           As
soon as available and in any event within forty five (45) days after the end of
each fiscal quarter of the Company, an unaudited/internal balance sheet and
statements of income, retained earnings and cash flows of the Company and each
of its Subsidiaries as at the end of and for such quarter and for the year to
date period then ended, prepared on a consolidating and consolidated basis to
include all the Company, each Subsidiary of the Company and each of their
respective affiliates, in reasonable detail and stating in comparative form the
figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end adjustments and
accompanied by a certificate of the Company’s President, Chief Executive
Officer or Chief Financial Officer, stating (i) that such financial statements
have been prepared in accordance with GAAP, subject to year-end audit
adjustments, and (ii) whether or not such officer has knowledge of the
occurrence of any Event of Default (as defined in the Note) not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto;

 

(c)           As
soon as available and in any event within twenty (20) days after the end of
each calendar month, an unaudited/internal balance sheet and statements of
income, retained earnings and cash flows of each of the Company and its
Subsidiaries as at the end of and for such month and for the year to date
period then ended, prepared on a consolidating and consolidated basis to
include the Company, each Subsidiary of the Company and each of their
respective affiliates, in reasonable detail and stating in comparative form the
figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end adjustments and
accompanied by a certificate of the Company’s President, Chief Executive
Officer or Chief Financial Officer, stating (i) that such financial statements
have been prepared in accordance with GAAP, subject to year-end audit
adjustments, and (ii) whether or not such officer has knowledge of the
occurrence of any Event of Default (as defined in the Note) not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto;

 

(d)           The Company
shall 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. ;
and

 

(e)           The
Company shall deliver, or cause the applicable Subsidiary of the Company to
deliver, such other information as the Purchaser shall reasonably request.

 

17

 

6.5           Use of
Funds.  The Company shall use the proceeds of the
sale of the Note and the Warrant for general working capital purposes and the
repayment of certain indebtedness due and owing by the Company to the Accurel
shareholders, on the date hereof, only.

 

6.6           Access
to Facilities.  Each of the
Company and each of its Subsidiaries will permit any representatives designated
by the Purchaser (or any successor of the Purchaser), upon reasonable notice
and during normal business hours, at such person’s expense and accompanied by a
representative of the Company or any Subsidiary (provided that no such prior
notice shall be required to be given and no such representative of the Company
or any Subsidiary shall be required to accompany the Purchaser in the event the
Purchaser believes such access is necessary to preserve or protect the
Collateral (as defined in the Master Security Agreement) or following the
occurrence and during the continuance of an Event of Default (as defined in the
Note)), to:

 

(a)           visit and inspect any of the properties of the Company or
any of its Subsidiaries;

 

(b)           examine the corporate
and financial records of the Company or any 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 the Company or
any of its Subsidiaries with the directors, officers and independent
accountants of the Company or any of its Subsidiaries.

 

Notwithstanding the foregoing, neither the Company nor any of its Subsidiaries
will provide any material, non-public information to the Purchaser unless the
Purchaser signs a confidentiality agreement and otherwise complies with
Regulation FD, under the federal securities laws.

 

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 taxes, assessments and governmental
charges or levies imposed upon the income, profits, property or business of the
Company and its Subsidiaries; provided, however, that any such tax, assessment,
charge or levy need not be paid currently if (i) the validity thereof shall
currently and diligently be contested in good faith by appropriate proceedings,
(ii) such tax, assessment, charge or levy shall have no effect on the lien
priority of the Purchaser in any property of the Company and (iii) if the
Company and/or such Subsidiary shall have set aside on its books adequate
reserves with respect thereto in accordance with GAAP; and provided, further,
that the Company and 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 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 similar business
similarly situated as the Company and its Subsidiaries; and the Company and its
Subsidiaries will maintain, with financially sound and reputable insurers,
insurance against other

 

18

 

hazards and risks
and liability to persons and property to the extent and in the manner which the
Company reasonably believes is customary for companies in similar business
similarly situated as the Company and its Subsidiaries and to the extent
available on commercially reasonable terms. 
The Company, and each of its Subsidiaries, will jointly and severally
bear the full risk of loss from any loss of any nature whatsoever with respect
to the assets pledged to the Purchaser as security for their respective
obligations hereunder and under the Related Agreements.  At the Company’s and each of its Subsidiaries’
joint and several cost and expense in amounts and with carriers reasonably
acceptable to the Purchaser, each of the Company and each of its Subsidiaries
shall (i) keep all its insurable properties and properties in which it has an
interest insured against the hazards of fire, flood, sprinkler leakage, those
hazards covered by extended coverage insurance and such other hazards, and for
such amounts, as is customary in the case of companies engaged in businesses
similar to the Company’s or the respective Subsidiary’s including business
interruption insurance; (ii) maintain a bond in such amounts as is customary in
the case of companies engaged in businesses similar to the Company’s or the
respective Subsidiary’s insuring against larceny, embezzlement or other
criminal misappropriation of insured’s officers and employees who may either
singly or jointly with others at any time have access to the assets or funds of
the Company either directly or through governmental authority to draw upon such
funds or to direct generally the disposition of such assets; (iii) maintain
public and product liability insurance against claims for personal injury,
death or property damage suffered by others; (iv) maintain all such worker’s
compensation or similar insurance as may be required under the laws of any
state or jurisdiction in which the Company or the respective Subsidiary is
engaged in business; and (v) furnish the Purchaser with (x) copies of all
policies and evidence of the maintenance of such policies at least thirty (30)
days before any expiration date, (y) excepting the Company’s workers’
compensation policy, endorsements to such policies naming the Purchaser as “co-insured”
or “additional insured” and appropriate loss payable endorsements in form and
substance satisfactory to the Purchaser, naming the Purchaser as loss payee,
and (z) evidence that as to the Purchaser the insurance coverage shall not be
impaired or invalidated by any act or neglect of the Company or any Subsidiary
and the insurer will provide the Purchaser with at least thirty (30) days
notice prior to cancellation.  The
Company and each Subsidiary shall instruct the insurance carriers that in the
event of any loss thereunder, the carriers shall make payment for such loss to
the Company and/or the Subsidiary and the Purchaser jointly.  In the event that as of the date of receipt
of each loss recovery upon any such insurance, the Purchaser has not declared
an event of default with respect to this Agreement or any of the Related
Agreements, then the Company and/or such Subsidiary shall be permitted to
direct the application of such loss recovery proceeds toward investment in
property, plant and equipment that would comprise “Collateral” secured by the
Purchaser’s security interest pursuant to the Master Security Agreement or such
other security agreement as shall be required by the Purchaser, with any
surplus funds to be applied toward payment of the obligations of the Company to
the Purchaser.  In the event that the
Purchaser has properly declared an event of default with respect to this
Agreement or any of the Related Agreements, then all loss recoveries received
by the Purchaser upon any such insurance thereafter may be applied to the
obligations of the Company hereunder and under the Related Agreements, in such
order as the Purchaser may determine. 
Any surplus (following satisfaction of all Company obligations to the
Purchaser) shall be paid by the Purchaser to the Company or applied as may be
otherwise required by law.  Any
deficiency thereon shall be paid by the Company or the Subsidiary, as
applicable, to the Purchaser, on demand.

 

19

 

6.9           Intellectual
Property.  Each of the Company and each of its Subsidiaries
shall maintain in full force and effect its 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 of its business.

 

6.10         Properties.  Each of the Company and each of its
Subsidiaries will keep its properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
needful and proper repairs, renewals, replacements, additions and improvements
thereto; and each of the Company and each of its Subsidiaries will at all times
comply with each provision of all leases to which it is a party or under which
it occupies property if the breach of such provision could, either individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.

 

6.11         Confidentiality.  The Company will not, and will not permit any
of its Subsidiaries to, 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.  Notwithstanding the foregoing, the Company
may disclose the Purchaser’s identity and the terms of this Agreement to its
current and prospective debt and equity financing sources.

 

6.12         Required
Approvals.  (I) For so long as
twenty-five percent (25%) of the principal amount of the Note is outstanding,
the Company, without the prior written consent of the Purchaser, shall not, and
shall not permit any of its Subsidiaries to:

 

(a)           (i)
directly or indirectly declare or pay any dividends, other than dividends paid
to the Company or any of its wholly-owned Subsidiaries, (ii) issue any
preferred stock that is manditorily redeemable prior to the one year
anniversary of Maturity Date (as defined in the Note or (iii) redeem any of its
preferred stock or other equity interests;

 

(b)           liquidate,
dissolve or effect a material reorganization (it being understood that in no
event shall the Company dissolve, liquidate or merge with any other person or
entity (unless, in the case of such a merger, the Company or, in the case of
merger not involving the Company, such Subsidiary, as applicable, is the surviving
entity);

 

(c)           become
subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under
any circumstances) restrict the Company’s, right to perform the provisions of
this Agreement, any Related Agreement or any of the agreements contemplated
hereby or thereby;

 

(d)           materially alter or
change the scope of the business of the Company and its Subsidiaries taken as a
whole; and

 

(e)           (i)
create, incur, assume or suffer to exist any indebtedness (exclusive of trade
debt and debt incurred to finance the purchase of equipment (not in excess of
five percent (5%) of the fair market value of the Company’s and its
Subsidiaries’ assets)) whether secured or unsecured other than (x) the Company’s
obligations owed to the Purchaser, (y) indebtedness set forth on Schedule
6.12(e) attached hereto and made a part hereof and any refinancings or
replacements thereof on terms no less favorable to the

 

20

 

Purchaser than the
indebtedness being refinanced or replaced, and (z) any indebtedness incurred in
connection with the purchase of assets (other than equipment) in the ordinary
course of business, or any refinancings or replacements thereof on terms no
less favorable to the Purchaser than the indebtedness being refinanced or
replaced, so long as any lien relating thereto shall only encumber the fixed
assets so purchased and no other assets of the Company ; (ii) cancel any
indebtedness owing to it in excess of $50,000 in the aggregate during any 12
month period; (iii) assume, guarantee, endorse or otherwise become directly or
contingently liable in connection with any obligations of any other person or
entity, except the endorsement of negotiable instruments by the Company or any
Subsidiary thereof for deposit or collection or similar transactions in the
ordinary course of business or guarantees of indebtedness otherwise permitted
to be outstanding pursuant to this clause (e); and

 

(f)            The
Company, without the prior written consent of the Purchaser, shall not, and
shall not permit any of its Subsidiaries to, create or acquire any Subsidiary
after the date hereof unless (i) such Subsidiary is a wholly-owned Subsidiary
of the Company and (ii) such Subsidiary becomes a party to the Master Security
Agreement, the Stock Pledge Agreement and the Subsidiary Guaranty (either by
executing a counterpart thereof or an assumption or joinder agreement in
respect thereof) and, to the extent required by the Purchaser, satisfies each
condition of this Agreement and the Related Agreements as if such Subsidiary
were a Subsidiary on the Closing Date, provided, however, unless Purchaser
consent is otherwise required under any Related Agreement, the Company or any
of its Subsidiaries may enter into joint venture or similar arrangements if the
Company or any of its Subsidiaries owns, directly or indirectly, less than
fifty percent (50%) of the securities entitled to vote or control such
resulting joint venture or similar entity.

 

6.13         Reissuance
of Securities.  The Company
agrees to reissue certificates representing the Securities without the legends
set forth in Section 5.8 above at such time as:

 

(a)           the holder thereof is
permitted to dispose of such Securities pursuant to Rule 144(k) under the
Securities Act; or

 

(b)           upon resale subject to an effective registration statement
if 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 Purchaser and broker, if any.

 

6.14         Opinion.  On the Closing Date, the Company will deliver
to the Purchaser an opinion acceptable to the Purchaser from the Company’s
external legal counsel.  The Company will
provide, at the Company’s expense, such other legal opinions in the future as
are deemed reasonably necessary by the Purchaser (and acceptable to the
Purchaser) in connection with the conversion of the Note and exercise of the
Warrant.

 

21

 

6.15         Margin
Stock.       The Company
will not permit any of the proceeds of the Note or the Warrant 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 exercise of the Warrants.

 

7.             Covenants
of the Purchaser.  The Purchaser
covenants and agrees with the Company as follows:

 

7.1           Confidentiality.  The Purchaser will not disclose, and will not
include in any public announcement, the name of the Company, unless expressly
agreed to by the Company or unless and until such disclosure is required by law
or applicable regulation, and then only to the extent of such requirement.

 

7.2           Non-Public
Information.  The Purchaser will not effect any sales in the shares of the Company’s Common Stock
while in possession of material, non-public information regarding the Company
if such sales would violate applicable securities law.

 

7.3           Limitation on
Acquisition of Common Stock of the Company. 
Notwithstanding anything to the contrary contained in this Agreement,
any Related Agreement or any document, instrument or agreement entered into in
connection with any other transactions between the Purchaser and the Company,
the Purchaser may not acquire stock in the Company (including, without
limitation, pursuant to a contract to purchase, by exercising an option or
warrant, by converting any other security or instrument, by acquiring or
exercising any other right to acquire, shares of stock or other security
convertible into shares of stock in the Company, or otherwise, and such
contracts, options, warrants, conversion or other rights shall not be
enforceable or exercisable) to the extent such stock acquisition would cause
any interest (including any original issue discount) payable by the Company to
the Purchaser not to qualify as “portfolio interest” within the meaning of
Section 881(c)(2) of the Code, by reason of Section 881(c)(3) of the Code,
taking into account the constructive ownership rules under Section 871(h)(3)(C)
of the Code (the “Stock Acquisition Limitation”).  The Stock Acquisition Limitation shall
automatically become null and void without any notice to the Company upon the
existence of an Event of Default (as defined in the Note) at a time when the
average closing price of the Company’s common stock as reported by Bloomberg,
L.P. on the Principal Market for the immediately preceding five trading days is
greater than or equal to 150% of the Fixed Conversion Price (as defined in the
any preferred stock issued by the Company to the Holder).

 

7.4           In the
event that the Purchaser, in the exercise of its sole discretion, determines
not to make an additional investment in the Company on or before the Maturity
Date (as defined in the Note), the Purchaser shall, absent an Event of Default
under the Note that has occurred and

 

22

 

is continuing, enter into an
amendment, in form and substance satisfactory to the Purchaser, to extend the
Maturity Date (as defined in the Note) to December 6, 2005.

 

8.             Covenants
of the Company and the Purchaser Regarding Indemnification.

 

8.1           Company
Indemnification.  The Company
agrees to indemnify, hold harmless, reimburse and defend the Purchaser, each of
the Purchaser’s officers, directors, agents, affiliates, control persons, and
principal shareholders, against all claims, costs, expenses, liabilities,
obligations, losses or damages (including reasonable legal fees) of any nature,
incurred by or imposed upon the Purchaser which result, arise out of or are
based upon: (i) any misrepresentation by the Company or
any of its Subsidiaries or breach of any warranty by the Company or
any of its Subsidiaries in this Agreement, any other Related Agreement or in
any exhibits or schedules attached hereto or thereto; or (ii) any breach or
default in performance by Company or any of its
Subsidiaries
of any covenant or undertaking to be performed by Company or
any of its Subsidiaries hereunder, under any other Related Agreement or any
other agreement entered into by the Company or any of its
Subsidiaries
and/ and the Purchaser relating hereto or thereto.

 

8.2           Purchaser’s
Indemnification.  The 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 claims, costs, expenses,
liabilities, obligations, losses or damages (including reasonable legal fees)
of any nature, incurred by or imposed upon the Company which result, arise out
of or are based upon:  (i) any
misrepresentation by the Purchaser or breach of any warranty by the 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 the
Purchaser of any covenant or undertaking to be performed by the Purchaser
hereunder, or any other agreement entered into by the Company and the Purchaser
relating hereto.

 

8.3           Offering
Restrictions.  Except as
previously disclosed in the SEC Reports or in the Exchange Act Filings, or
stock or stock options granted to employees or directors of the Company (these
exceptions hereinafter referred to as the “Excepted Issuances”), the Company nor
any of its Subsidiaries will not, prior to the full repayment of the Note
(together with all accrued and unpaid interest and fees related thereto), (x)
enter into any equity line of credit agreement or similar agreement or (y)
issue, or enter into any agreement to issue, any securities with a variable/floating
conversion and/or pricing feature which are or could be (by conversion or
registration) free-trading securities (i.e. 
common stock subject to a registration
statement).

 

9.             Miscellaneous.

 

9.1           Governing
Law, Jurisdiction and Waiver of Jury Trial.

 

(a)           THIS
AGREEMENT AND THE OTHER RELATED AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS.

 

23

 

(b)           THE
COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN
THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY, ON THE ONE HAND,
AND THE PURCHASER, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF
THE RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR ANY OF THE OTHER RELATED AGREEMENTS; PROVIDED, THAT THE
PURCHASER AND THE COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY
HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF
NEW YORK; AND FURTHER  PROVIDED, THAT NOTHING IN THIS AGREEMENT
SHALL BE DEEMED OR OPERATE TO PRECLUDE THE PURCHASER FROM BRINGING SUIT OR
TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS,
TO REALIZE ON THE COLLATERAL (AS DEFINED IN THE MASTER SECURITY AGREEMENT) OR
ANY OTHER SECURITY FOR THE OBLIGATIONS (AS DEFINED IN THE MASTER SECURITY
AGREEMENT), OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE
PURCHASER.  THE COMPANY EXPRESSLY SUBMITS
AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND THE COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS.  THE COMPANY HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE
COMPANY AT THE ADDRESS SET FORTH IN SECTION 11.9 AND THAT SERVICE SO MADE SHALL
BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S ACTUAL RECEIPT THEREOF OR
THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.

 

(c)           THE
PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS.  THEREFORE, TO ACHIEVE
THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION,
THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT,
OR OTHERWISE BETWEEN THE PURCHASER AND/OR THE COMPANY ARISING OUT OF, CONNECTED
WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS AGREEMENT, ANY OTHER RELATED AGREEMENT OR THE TRANSACTIONS
RELATED HERETO OR THERETO.

 

9.2           Severability.  Wherever possible each provision of this
Agreement and the Related Agreements shall be interpreted in such manner as to
be effective and valid under applicable law, but if any provision of this
Agreement or any Related Agreement shall be

 

24

 

prohibited
by or invalid or illegal under applicable law such provision shall be
ineffective to the extent of such prohibition or invalidity or illegality,
without invalidating the remainder of such provision or the remaining
provisions thereof which shall not in any way be affected or impaired thereby.

 

9.3           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 to the extent
provided therein.  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.  All indemnities set forth herein shall
survive the execution, delivery and termination of this Agreement and the Note
and the making and repayment of the obligations arising hereunder, under the
Note and under the other Related Agreements.

 

9.4           Successors.  Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, heirs, executors and administrators of the parties hereto
and shall inure to the benefit of and be enforceable by each person or entity
which shall be a holder of the Securities from time to time, other than the
holders of Common Stock which has been sold by the Purchaser pursuant to Rule
144 or an effective registration statement. 
The Purchaser shall not be permitted to assign its rights hereunder or
under any Related Agreement to a competitor of the Company unless an Event of
Default (as defined in the Note) has occurred and is continuing.

 

9.5           Entire
Agreement; Maximum Interest.  This
Agreement, the Related Agreements, the exhibits and schedules hereto and
thereto 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. 
Nothing contained in this Agreement, any Related Agreement 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 rate 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
rate permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Company to the Purchaser and thus refunded
to the Company.

 

9.6           Amendment
and Waiver.

 

(a)           This
Agreement may be amended or modified only upon the written consent of the
Company and the Purchaser.

 

(b)           The
obligations of the Company and the rights of the Purchaser under this Agreement
may be waived only with the written consent of the Purchaser.

 

(c)           The
obligations of the Purchaser and the rights of the Company under this Agreement
may be waived only with the written consent of the Company.

 

25

 

9.7           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. 
All remedies, either under this Agreement or the Related Agreements, by
law or otherwise afforded to any party, shall be cumulative and not
alternative.

 

9.8           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 facsimile if sent during normal
business hours of the recipient, if not, then on the next business day;

 

(c)           three
(3) business days after having been sent by registered or certified mail,
return receipt requested, postage prepaid; or

 

(d)           one
(1) day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt.

 

All communications shall be sent as follows:

 

	
   

  	
  If to the Company, to:

  	
  IMPLANT
  SCIENCES CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Attention:

  	
  Chief
  Financial Officer

  
	
   

  	
   

  	
  Facsimile:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Attention:
  

  
	
   

  	
   

  	
  Facsimile:

  
	
   

  	
   

  	
   

  
	
   

  	
  If to the Purchaser, to:

  	
  Laurus
  Master Fund, Ltd.

  c/o M&C Corporate Services Limited

  P.O. Box 309 GT

  Ugland House

  George Town

  South Church Street

  Grand Cayman, Cayman Islands

  Facsimile:  345-949-8080  

  

 

26

 

	
   

  	
   

  	
  with a copy to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  John
  E. Tucker, Esq.

  825 Third Avenue 14th Floor

  New York, NY 10022

  Facsimile:  212-541-4434

  

 

or at such other address as the
Company or the Purchaser may designate by written notice to the other parties
hereto given in accordance herewith.

 

9.9           Attorneys’
Fees.  In the event that any suit or action is instituted
to enforce any provision in this Agreement or any Related 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 and/or such Related 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.

 

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

 

9.11         Facsimile
Signatures; Counterparts.  This
Agreement may be executed by facsimile signatures and in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one agreement.

 

9.12         Broker’s
Fees.  Except as set forth on Schedule 11.12 hereof,
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.  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 11.13 being
untrue.

 

9.13         Construction.  Each party acknowledges that its legal
counsel participated in the preparation of this Agreement and the Related
Agreements 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 or any Related Agreement to favor any
party against the other.

 

[THE REMAINDER OF THIS PAGE IS
INTENTIONALLY LEFT BLANK

 

27

 

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:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  
										

 

28

 

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

 

(a)           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, 10,713,645 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 will be issued to the shareholders of Core Systems and Accurel as a
result of the “collar.”  These collar
shares total approximately 616,700 shares and have not been issued yet.

 

The
two financings with RAM capital have provisions for repricing of their warrants
under certain circumstances.  The warrants
issued in the RAM financing completed in July 2004 will be repriced to $
8.30.  The warrants issued in the RAM
financing completed in March 2005, may be repriced to $8.50 based upon this
financing.

 

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

 

	
  Name

  	
   

  	
  # Shares

  Authorized

  	
   

  	
  Par Value

  	
   

  	
  Issued and

  Outstanding

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C Acquisition
  Corp.

  	
   

  	
  1,000

  	
   

  	
  .001

  	
   

  	
  100

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accurel Systems

  	
   

  	
  15,000,000

  	
   

  	
  none

  	
   

  	
  2,000,000

  	
   

  

 

D-1

 

Other shares subject to
issue:

 

	
  2004
  Stock Option Plan

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Balance
  available to Grant

  	
   

  	
  235,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Granted but
  unexercised

  	
   

  	
  265,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2000
  Stock Option Plan

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Balance
  available to Grant

  	
   

  	
  53,700

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Granted but unexercised

  	
   

  	
  1,270,705

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  1998
  Stock Option Plan

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Balance
  available to Grant

  	
   

  	
  11,503

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Granted but
  unexercised

  	
   

  	
  125,500

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  1992
  Stock Option Plan

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Balance
  available to Grant

  	
   

  	
  579,600

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Granted but
  unexercised

  	
   

  	
  54,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Warrants

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Balance
  Outstanding

  	
   

  	
  2,316,389

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  AIR’s

  	
   

  	
  611,765

  	
   

  

 

2

 

4.5           Term Note
with Comerica Bank in the amount of approximately $1.3 million

Line of Credit with
Bridge Bank in the amount of $1.5 million

Term note with Accurel
Shareholders in the amount of $1.65 million to be paid with the proceeds of
this financing

 

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

See 4.5

 

b)    See 4.5

Sold FEI equipment to Novelus
in conjunction with Accurel acquisition

 

f)     10-KSB Amendment
No. 2 for 6/30/05, 10-QSB/A for 12/31/04 and 3/31/05 to be filed.  Amendments include updated disclosures

 

4.8           Changes

f)             Loan to
Richard Sahagian, employee and shareholder - $35,000

Loan to Donna Prunier,
employee - $3,000

Loan to Anatoly
Lazarevich, employee - $2,000

g)            Walter
Wriggins – General Manager, Core Systems

John Munro – VP
Brachytherapy Products

j)              See 4.5

k)             Rapiscan
Systems currently owes the Company approximately $700,000 for the next progress
payment.

 

4.9           Liens

See 4.5

Lease schedules as of
3/31/05

 

	
   

  	
   

  	
  Capital

  leases and short

  and long term

  debt (1)

  	
   

  	
  Operating

  lease (2)

  	
   

  	
  Total

  	
   

  
	
  Year ending June
  30:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2005

  	
   

  	
  $

  	
  1,765,000

  	
   

  	
  $

  	
  436,000

  	
   

  	
  $

  	
  2,201,000

  	
   

  
	
  2006

  	
   

  	
  401,000

  	
   

  	
  1,746,000

  	
   

  	
  2,147,000

  	
   

  
	
  2007

  	
   

  	
  386,000

  	
   

  	
  1,771,000

  	
   

  	
  2,157,000

  	
   

  
	
  2008

  	
   

  	
  379,000

  	
   

  	
  1,784,000

  	
   

  	
  2,163,000

  	
   

  
	
  2009

  	
   

  	
  129,000

  	
   

  	
  1,187,000

  	
   

  	
  1,316,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
  $

  	
  3,060,000

  	
   

  	
  $

  	
  6,924,000

  	
   

  	
  $

  	
  9,984,000

  	
   

  

 

(1)   Includes the $1,650,000 Accurel
shareholder note payable due July 9, 2005.

 

3

 

(2)   Includes the $795,000 long term
lease liability (deferred rent) for Accurel’s facility lease, which is being
amortized over the life of the lease in the approximate amounts reflected in
the following table:

 

	
  $ Amount

  	
   

  	
  Year

  	
   

  
	
  21,000

  	
   

  	
  2005

  	
   

  
	
  102,000

  	
   

  	
  2006

  	
   

  
	
  126,000

  	
   

  	
  2007

  	
   

  
	
  150,000

  	
   

  	
  2008

  	
   

  
	
  174,000

  	
   

  	
  2009

  	
   

  

 

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 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.

 

4.13         California
Sales Tax Audit being completed at Accurel Systems

 

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

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

 

4.21         See 4.6(f)

 

e)  See 4.5

 

4Exhibit 10.2

 

THIS NOTE
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS.  THIS NOTE MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IMPLANT SCIENCES CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.

 

SECURED TERM NOTE

 

FOR VALUE RECEIVED,
IMPLANT SCIENCES CORPORATION, a Massachusetts corporation (the “Company”), promises to pay to LAURUS MASTER FUND, LTD., c/o
M&C Corporate Services Limited, P.O. Box 309 GT, Ugland House, South Church
Street, George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the “Holder”) or its registered assigns or successors in
interest, the sum of Three Million Dollars ($3,000,000), together with any
accrued and unpaid interest hereon, on November6, 2005 (the “Maturity Date”) if not sooner paid.

 

Capitalized terms
used herein without definition shall have the meanings ascribed to such terms
in that certain Securities Purchase Agreement dated as of the date hereof by
and between the Company and the Holder (as amended, modified and/or
supplemented from time to time, the “Purchase Agreement”).

 

The following
terms shall apply to this Secured Term Note (this “Note”):

 

ARTICLE I

CONTRACT RATE AND AMORTIZATION

 

1.1           Contract
Rate.  Subject to Sections 4.2 and
5.10, interest payable on the outstanding principal amount of this Note (the “Principal Amount”) 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”).  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.  Interest shall be (i) calculated on the basis
of a 360 day year, and (ii) payable monthly in cash, in arrears, commencing on
July 1, 2005, on the first business day of each consecutive calendar month
thereafter through and including the Maturity Date, and on the Maturity Date,
whether by acceleration or otherwise.

 

1.2           Principal
Payments.  All outstanding principal
amounts together with any accrued and unpaid interest and any and all other
unpaid amounts which are then owing by the Company to the Holder under this
Note, the Purchase Agreement and/or any other Related Agreement shall be due
and payable on the Maturity Date.

 

 

ARTICLE II

NOTE ISSUANCE

 

2.1           Issuance
of New Note.  Upon any loss or
destruction of this Note, a new Note containing the same date and provisions of
this Note shall, at the request of the Holder, be issued by the Company to the
Holder for the principal balance of this Note and interest which shall not have
been paid.  The Company shall not pay any
costs, fees or any other consideration to the Holder for the production and
issuance of a new Note.

 

ARTICLE III

EVENTS OF DEFAULT

 

3.1           Events
of Default.  The occurrence of any of
the following events set forth in this Section 3.1 shall constitute an event of
default (“Event of Default”) hereunder:

 

(a)           Failure
to Pay.  The Company fails to pay
when due any installment of principal, interest or other fees hereon in
accordance herewith, or the Company fails to pay any of the other Obligations
(under and as defined in the Master Security Agreement) when due, and, in any
such case, such failure shall continue for a period of three (3) days following
the date upon which any such payment was due.

 

(b)           Breach
of Covenant.  The Company or any of
its Subsidiaries breaches any covenant contained in 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.

 

(c)           Breach
of Representations and Warranties. 
Any representation, warranty or statement made or furnished by the
Company under the Purchase Agreement or any other Related Agreement shall at
any time be false or misleading in any material respect on the date as of which
made or deemed made.

 

(d)           Default
Under Other Agreements.  The occurrence of any default (or similar
term) in the observance or performance of any other agreement or condition
relating to any now existing or future indebtedness, preferred equity, or
contingent obligation of the Company or any of its Subsidiaries to Holder or
otherwise beyond the relevant stated period of grace (if any), the effect of which
default is to cause, or permit the holder or holders of such indebtedness or
beneficiary or beneficiaries of such contingent obligation to cause, such
indebtedness to become due prior to its stated maturity or such contingent
obligation to become payable;

 

(e)           Bankruptcy.  The Company or any of its Subsidiaries shall
(i) apply for, consent to or suffer to exist the appointment of, or the
taking of possession by, a receiver, custodian, trustee or liquidator of itself
or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of creditors, (iii) commence a voluntary case under
the federal bankruptcy laws (as now or hereafter in effect), (iv) be
adjudicated a bankrupt or insolvent, (v) file a petition seeking to take advantage
of any other law providing for the relief of debtors, (vi) acquiesce to,
without challenge within ten (10) days of the filing thereof, or failure

 

2

 

to
have dismissed, within thirty (30) days, any petition filed against it in any
involuntary case under such bankruptcy laws, or (vii) take any action for the
purpose of effecting any of the foregoing;

 

(f)            Judgments.  Attachments or levies in excess of
$100,000  in the aggregate are made upon
the Company or any of its Subsidiary’s assets or a judgment is rendered against
the Company’s property involving a liability of more than $100,000  which shall not have been vacated,
discharged, stayed or bonded within thirty (30) days from the entry thereof;

 

(g)           Insolvency.  The Company or any of its Subsidiaries shall
admit in writing its inability, or be generally unable, to pay its debts as
they become due or cease operations of its present business;

 

(h)           Change
of Control.  A Change of Control (as
defined below) shall occur with respect to the Company, unless Holder shall
have expressly consented to such Change of Control in writing.  A “Change of Control” shall mean any event or
circumstance as a result of which (i) any “Person” or “group” (as such terms
are defined in Sections 13(d) and 14(d) of the Exchange Act, as in effect on
the date hereof), other than the Holder, is or becomes the “beneficial owner”
(as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or
indirectly, of 35% or more on a fully diluted basis of the then outstanding
voting equity interest of the Company, or (ii) the Company or any of its
Subsidiaries merges or consolidates with, or sells all or substantially all of
its assets to, any other person or entity;

 

(i)            Indictment;
Proceedings.  The indictment of the
Company or any of its Subsidiaries or any executive officer of the Company or
any of its Subsidiaries under any criminal statute, or commencement of criminal
or civil proceeding against the Company or any of its Subsidiaries or any
executive officer of the Company or any of its Subsidiaries that could
reasonably be expected to have a Material Adverse Effect, and pursuant to which
statute or proceeding penalties or remedies sought or available include
forfeiture of any of the property of the Company or any of its Subsidiaries;

 

(j)            The
Purchase Agreement and Related Agreements. 
(i) An Event of Default shall occur under and as defined in the Purchase
Agreement or any other Related Agreement, (ii) the Company or any of its
Subsidiaries shall breach any term or provision of the Purchase Agreement or
any other Related Agreement in any material respect and such breach, if capable
of cure, continues unremedied for a period of fifteen (15) days after the
occurrence thereof, (iii) the Company or any of its Subsidiaries attempts to
terminate, challenges the validity of, or its liability under, the Purchase
Agreement or any Related Agreement, (iv) any proceeding shall be brought to
challenge the validity, binding effect of the Purchase Agreement or any Related
Agreement or (v) the Purchase Agreement or any Related Agreement ceases to be a
valid, binding and enforceable obligation of the Company or any of its
Subsidiaries (to the extent such persons or entities are a party thereto);

 

(k)           Stop
Trade.  An SEC stop trade order or
Principal Market trading suspension of the Common Stock shall be in effect for
five (5) consecutive days or five (5) days during a period of ten (10)
consecutive days, excluding in all cases a suspension of all trading on a
Principal Market, provided that the Company shall not have been able to cure
such trading

 

3

 

suspension within thirty
(30) days of the notice thereof or list the Common Stock on another Principal
Market within sixty (60) days of such notice; or

 

(l)            Failure
to Deliver Replacement Note.  The
Company’s failure to deliver to issue and deliver a replacement Note as
required by Section 2.2 hereof to the Holder within seven (7) business days of
Holder’s written request therefor.

 

3.2           Default
Interest.  Following the occurrence
and during the continuance of an Event of Default, the Company shall pay
additional interest on this Note in an amount equal to two percent (2%) per
month, and all outstanding obligations under this Note, the Purchase Agreement
and each other Related Agreement, including unpaid interest, shall continue to
accrue interest at such additional interest rate from the date of such Event of
Default until the date such Event of Default is cured or waived.

 

ARTICLE IV

MISCELLANEOUS

 

4.1           Cumulative
Remedies.  The remedies under this
Note shall be cumulative.

 

4.2           Failure
or Indulgence Not Waiver.  No failure
or delay on the part of the Holder hereof in the exercise of any power, right
or privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.  All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.

 

4.3           Notices.  Any notice herein required or permitted to be
given shall be in writing and shall be deemed effectivfely given: (a) upon
personal delivery to the party 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 provided
in the Purchase Agreement executed in connection herewith, and to the Holder at
the address provided in the Purchase Agreement for such Holder, with a copy to
John E. Tucker, Esq., 825 Third Avfenue, 14th Floor, New York, New
York 10022, facsimile number (212) 541-4434, or at such other address as the
Company or the Holder may designate by ten days advance written notice to the
other parties hereto.  A Notice of
Conversion shall be deemed given when made to the Company pursuant to the
Purchase Agreement.

 

4.4           Amendment
Provision.  The term “Note” and all
references thereto, as used throughout this instrument, shall mean this
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented, and any successor instrument as such successor
instrument may be amended or supplemented.

 

4

 

4.5           Assignability.  This Note shall be binding upon the Company
and its successors and assigns, and shall inure to the benefit of the Holder
and its successors and assigns, and may be assigned by the Holder in accordance
with the requirements of the Purchase Agreement.  The Company may not assign any of its
obligations under this Note without the prior written consent of the Holder, any
such purported assignment without such consent being null and void.

 

4.6           Cost
of Collection.  In case of any Event
of Default under this Note, the Company shall pay the Holder reasonable costs
of collection, including reasonable attorneys’ fees.

 

4.7           Governing
Law, Jurisdiction and Waiver of Jury Trial.

 

(a)           THIS
NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW.

 

(b)           THE
COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN
THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY, ON THE ONE HAND,
AND THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS NOTE OR ANY OF THE OTHER
RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE OR
ANY OF THE RELATED AGREEMENTS; PROVIDED, THAT THE COMPANY ACKNOWLEDGES
THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED
OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER  PROVIDED,
THAT NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO PRECLUDE THE HOLDER
FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO
COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR
THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE
HOLDER.  THE COMPANY EXPRESSLY SUBMITS
AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND THE COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS.  THE COMPANY HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE
COMPANY AT THE ADDRESS SET FORTH IN THE PURCHASE AGREEMENT AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.

 

(c)           THE
COMPANY DESIRES THAT ITS DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS.  THEREFORE, TO

 

5

 

ACHIEVE THE BEST
COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE
COMPANY HERETO WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT,
OR OTHERWISE BETWEEN THE HOLDER AND THE COMPANY ARISING OUT OF, CONNECTED WITH,
RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN
CONNECTION WITH THIS NOTE, ANY OTHER RELATED AGREEMENT OR THE TRANSACTIONS
RELATED HERETO OR THERETO.

 

4.8           Severability.  In the event that any provision of this Note
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 this Note.

 

4.9           Maximum
Payments.  Nothing contained herein
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
required to be paid or other charges hereunder exceed the maximum rate permitted
by such law, any payments in excess of such maximum rate shall be credited
against amounts owed by the Company to the Holder and thus refunded to the
Company.

 

4.10         Security
Interest.  The Holder has been
granted a security interest in certain assets of the Company as more fully
described in the Master Security Agreement dated as of the date hereof.  The obligations of the Company under this
Note are guaranteed by certain Subsidiaries of the Company pursuant to the
Subsidiary Guaranty dated as of the date hereof.

 

4.11         Construction.  Each party acknowledges that its legal
counsel participated in the preparation of this Note 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 Note to favor
any party against the other.

 

[Balance of page intentionally left blank; signature
page follows]

 

6

 

IN WITNESS WHEREOF, the Company has caused
this Secured Convertible Term Note to be signed in its name effective as of
this        day of June, 2005.

 

 

	
   

  	
  IMPLANT SCIENCES
  CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
  WITNESS:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
					

 

7

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