IMPLANT SCIENCES CORP, 424B3, 1999-06-25

IMPLANT SCIENCES CORP
424B3, 1999-06-25
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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<PAGE> 1

Filed pursuant to Rule 424(b)(3)
Registration No. 333-64499

PROSPECTUS

[IMPLANT SCIENCES LOGO]

1,000,000 UNITS
EACH CONSISTING OF
ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT

------------------------

All of the Units being sold are being offered by Implant. Prior to this
speculative offering, there has been no public market for the Units, the Common
Stock or the Warrants. The Common Stock and Warrants will not trade separately
until at least 30 days from the date of this Prospectus or such later time as
may be determined by Westport Resources Investment Services, Inc. The exercise
price of the Warrants will be $9.00. The Units have been approved for listing on
the Nasdaq SmallCap Market, Inc. under the symbol "IMPLU" and on the Boston
Stock Exchange under the symbol "IMXU."

INVESTING IN THE UNITS INVOLVES RISKS. SEE RISK FACTORS BEGINNING ON PAGE
8.

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS IMPLANT
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit............. $7.50 $.75 $6.75
- ---------------------------------------------------------------------------------------------------
Total................ $7,500,000 $750,000 $6,750,000
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>

Implant has granted the underwriters a 45-day option to purchase up to
150,000 Units to cover over-allotments. This is a firm commitment offering.

WESTPORT RESOURCES INVESTMENT SERVICES, INC.
SCHNEIDER SECURITIES, INC.
WEATHERLY SECURITIES CORPORATION

The date of this Prospectus is June 23, 1999.
<PAGE> 2

[INSIDE FRONT COVER

On this page appear drawings of medical devices manufactured or processed
by Implant Sciences Corporation on an anatomical drawing of the human body.
Included in these drawings are stents, radioactive seeds, and orthopedic
implants.]

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Use of Proceeds............................................. 13
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 26
Management.................................................. 40
Principal Stockholders...................................... 47
Certain Transactions........................................ 49
Legal Proceedings........................................... 50
Description of Securities................................... 51
Shares Eligible for Future Sale............................. 55
Underwriting................................................ 57
Legal Matters............................................... 59
Experts..................................................... 59
Where You Can Find More Information......................... 60
Glossary.................................................... 61
Index to Financial Statements............................... F-1
</TABLE>

-------------------------

In this Prospectus, the terms "the Company," "Implant," "we," "our" and
"us" refer to Implant Sciences Corporation (unless the context otherwise
requires).

3
<PAGE> 3

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully. All information in this
prospectus reflects a six-for-one split of the Common Stock resulting from a six
share Common Stock dividend on each outstanding share on September 9, 1998 and a
six-for-seven reverse stock split on June 8, 1999.

IMPLANT SCIENCES CORPORATION

Over the past fifteen years, we have developed core technologies using ion
implantation and thin film coatings for medical device applications and have
proprietary processes and equipment for the manufacture of radiation therapy
implants.

- On May 26, 1999 we received notification of pre-market clearance from the
Food and Drug Administration for our radioactive iodine-125 seed used for
the treatment of prostate cancer.

- Our technology permits us to manufacture radioactive prostate seeds
using a nonradioactive fabrication process which we believe will be more
cost effective and less hazardous than conventional processes which use
radioactive wet chemistry.

- Our iodine-125 prostate seeds will be assembled and sealed and then made
radioactive in a nuclear reactor prior to shipment to customers which is
expected to occur in the first quarter of 2000.

- We have a joint development agreement with a major stent manufacturer to
develop radioactive coronary stents for the prevention of restenosis
(reclosure of the artery) after balloon angioplasty.

- We currently use our technologies to modify surfaces to reduce
polyethylene wear generation in artificial knees and hips.

- We supply ion implantation services to numerous semiconductor
manufacturers, research laboratories and universities.

PROPOSED PRODUCTS

PROSTATE SEEDS. Radioactive seeds are used primarily in the treatment of
prostate cancer. This treatment, known as brachytherapy, involves implanting
approximately 100 radioactive seeds (encapsulated radioactive material,
approximately half the size of a grain of rice) directly into the prostate. This
procedure is usually performed on an outpatient basis and permits a rapid
recovery. A published ten-year study conducted by the Northwest Hospital,
Seattle, Washington shows that this treatment has a ten-year disease-free
survival rate equal to surgical removal of the prostate and may be superior to
other early stage treatments, with a substantial reduction of the negative side
effects -- impotence and incontinence -- frequently associated with surgery and
external beam radiation treatment.

The American Cancer Society estimates that in 1998 about 184,500 new cases
of prostate cancer were diagnosed and 39,200 men died of the disease in the
United States. According to the American Cancer Society, 58% of diagnosed cases
the cancers are localized in the prostate. These cases are potential candidates
for brachytherapy.

RADIOACTIVE STENTS. According to the American Heart Association,
restenosis (narrowing of the artery) occurs following 30% - 40% of balloon
angioplasty procedures. Researchers in a number of studies at the Washington
Hospital Center, the Emory University School of Medicine and the Scripps Clinic
have found that the frequency of restenosis has been reduced when the artery is
treated with therapeutic radiation. By implanting therapeutic radioactivity onto
a stent, the patient can receive the appropriate
4
<PAGE> 4

dose of radiation within the coronary artery without significantly affecting the
surrounding tissue.

We have developed an ion implantation device which can accelerate and embed
radioactive atoms onto the surface of a metal stent. We intend to implant
therapeutic radioactivity into stents manufactured by our customers.

CURRENT PRODUCTS AND SERVICES

ORTHOPEDIC IMPLANTS. We implant nitrogen ions in the metal surfaces of
knee and hip total joint replacements manufactured by our customers to reduce
wear and thereby increase the life of the implant. The generation of wear debris
is one of the leading causes of deterioration of the bone surrounding the
implant, which causes implant loosening and ultimately the need for revision
surgery. In fiscal 1998, we ion implanted approximately 50,000 metal components
used in knee and hip total joint replacements for the Howmedica/Osteonics
Division of Stryker Corporation and Biomet Incorporated. See "Risk Factors -- We
depend on a small number of major customers."

SEMICONDUCTOR ION IMPLANTATION. We supply ion implantation services to
numerous semiconductor manufacturers, research laboratories, and universities.
Many of our customers provide semiconductor circuits and wafers to the
communications satellite and cellular telephone markets.

SALES

In fiscal 1998, we had revenue of approximately $2,904,000. All of our
revenue was derived from nitrogen ion implantation of total hip and knee joint
replacements, ion implantation of semiconductors, government research grants,
and contract research. We have not sold any radioactive prostate seeds or
radioactive coronary stents for commercial use.

Implant's offices and facilities are located at 107 Audubon Road, #5,
Wakefield, Massachusetts 01880, telephone (781) 246-0700. Implant's home page
can be found at www.implantsciences.com. Information contained in the Company's
website shall not be deemed part of this Prospectus. For a copy of this
Prospectus, please contact Westport Resources Investment Services, Inc. at
1-800-935-0222.
5
<PAGE> 5

THE OFFERING

Securities Offered by the Company..... 1,000,000 Units, each consisting of
one share of Common Stock, and one
Redeemable Common Stock Purchase
Warrant to purchase one share of
Common Stock at $9.00. The Warrants
are subject to redemption by the
Company at $0.20 per Warrant if the
closing bid price of the Common Stock
as reported on the Nasdaq SmallCap
Market, Inc. averages in excess of
$10.50 for a period of 20 consecutive
trading days. See "Description of
Securities."

Common Stock to be outstanding after
the offering.......................... 5,069,320 shares

Nasdaq SmallCap Market Symbols

Units............................... IMPLU

Common Stock........................ IMPL

Warrants............................ IMPLW

Boston Stock Exchange Symbols

Units............................... IMXU

Common Stock........................ IMX

Warrants............................ IMXW

The Units have been approved for listing on the Nasdaq SmallCap Market and the
Units, Common Stock and Warrants have been approved for listing on the Boston
Stock Exchange. The Company will apply for listing of the Common Stock and
Warrants on the Nasdaq SmallCap Market upon separation of the Units.
6
<PAGE> 6

SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, -----------------------
------------------------ MARCH 31, MARCH 31,
1997 1998 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product and contract research
revenues................... $2,678,918 $2,904,429 $2,128,209 $2,026,651
Equipment revenues(1)........ 350,754 -- -- --
---------- ---------- ---------- ----------
Total revenues............... 3,029,672 2,904,429 2,128,209 2,026,651
Total costs and expenses..... 2,628,899 3,014,599 2,145,238 2,242,031
---------- ---------- ---------- ----------
Operating income (loss)...... 400,773 (110,170) (17,029) (215,380)
Other income (expenses),
net........................ (21,043) 13,285 11,463 (35,856)
---------- ---------- ---------- ----------
Income (loss) before
provision (benefit) for
income taxes............... 379,730 (96,885) (5,566) (251,236)
Provision (benefit) for
income taxes............... 161,400 (38,900) 1,687 (36,700)
---------- ---------- ---------- ----------
Net income (loss)............ $ 218,330 $ (57,985) $ (7,253) $ (214,536)
========== ========== ========== ==========
Net income (loss) per share
Basic...................... $ 0.07 $ (0.02) $ 0.00 $ (0.06)
Diluted.................... 0.06 (0.02) 0.00 (0.06)
Weighted average number of
common and common
equivalent shares
outstanding
Basic...................... 2,929,806 3,523,368 3,452,598 3,854,892
Diluted.................... 3,485,892 3,523,368 3,452,598 3,854,892
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------
AS
ACTUAL ADJUSTED(2)
---------- -----------
<S> <C> <C>
BALANCE SHEET DATA
Cash................................................... $ 100,037 $5,722,037
Current assets......................................... 801,537 6,423,537
Working capital........................................ (561,854) 5,445,370
Total assets........................................... 3,001,819 8,623,819
Current portion of long term debt, including capital
lease................................................ 179,283 179,283
Long term debt, including capital lease, net of current
portion.............................................. 651,536 651,536
Stockholders' equity................................... 974,592 6,596,592
</TABLE>

- ---------------

(1) Represents non-recurring revenue from a contract to build one piece of
customized manufacturing equipment. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview" and
Footnote 5 of the audited financial statements.

(2) Adjusted to reflect the sale of 1,000,000 Units offered by the Company
hereby at an initial public offering price of $7.50 per Unit, after
deducting estimated underwriting discounts and commissions and offering
expenses, and the application of the net proceeds thereof.
7
<PAGE> 7

RISK FACTORS

An investment in our company involves a high degree of risk and units
should not be purchased by anyone who cannot afford the loss of their entire
investment. You should carefully consider all of the risk factors discussed
below as well as all other information in this Prospectus, before purchasing
units. The risks described below are not all the risks facing Implant.
Additional risks, including those not currently known to us or that we currently
deem immaterial, may also impair our business operations.

WE EXPECT TO HAVE CONTINUING LOSSES

During the nine months ended March 31, 1999, we had a net loss of
approximately $215,000 and negative working capital and accumulated deficit of
$561,854 and $479,896, respectively. We plan to further increase expenditures to
complete development and commercialize our new products, to increase our
manufacturing capacity and equipment, to ensure compliance with the U.S. Food
and Drug Administration's Quality System Regulations and broaden our sales and
marketing capabilities. As a result, we believe that we will incur losses over
the next several quarters.

WE HAVE SIGNIFICANT COMPETITION IN AN ENVIRONMENT OF RAPID TECHNOLOGICAL CHANGE

North American Scientific, Inc., Theragenics, Inc. and Nycomed Amershan plc
currently produce radioactive seeds. In addition, there are technologies that
compete with our proposed radioactive stents. Among the most closely competing
products in intracoronary radiation therapy are radioactive tipped guidewires
and radioactive fluid-filled balloons. For more information, see
"Business -- Competition."

THE MEDICAL COMMUNITY MAY NOT ACCEPT OUR PRODUCTS

Market acceptance for our products and services will depend upon a number
of factors, including:

- The receipt and timing of Food and Drug Administration regulatory
approvals for our radioactive stents.

- The establishment and demonstration in the medical community and among
health care payers of the clinical safety, efficacy and cost
effectiveness.

- Acceptance by the medical community of our radioactive seeds and
radioactive coronary stents.

- Our ability to enter into favorable agreements to distribute our
products.

WE MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE DEVELOPMENT OF OUR PRODUCTS

Our product development efforts are subject to the risks inherent in the
development of medical devices. These risks include the possibility that:

- Our products will be found to be ineffective or unsafe.

- Our products will fail to receive necessary regulatory clearances or
approvals.

- Our products will be difficult to manufacture on a large scale or be
uneconomical to market.

- The proprietary rights of third parties will interfere with our product
development.

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<PAGE> 8

- Third parties will market superior or equivalent products which achieve
greater market acceptance.

We do not know if we will be able to conduct our product development
efforts within the time frames currently anticipated or that such efforts will
be completed successfully.

WE COULD INCUR MATERIAL COSTS IF OUR PRODUCTS INFRINGE, OR ARE ACCUSED OF
INFRINGING, THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS

We are aware of a U.S. patent of a third party having broad claims covering
radioactive stents and methods of using radioactive stents for the treatment of
restenosis. We have not sought a formal opinion of counsel regarding the
validity of this patent or whether our processes may infringe this patent. We
plan to implant radioactivity into coronary stents manufactured by the patent
holder, its licensees or others. If we implant radioactivity onto stents that
are not manufactured by the patent holder or its licensees this patent holder
may seek to enforce the patent against us.

If the patent holder seeks to enforce the patent against us, we may be
required to engage in costly and protracted litigation; discontinue the
manufacture or activation of radioactive stents; develop non-infringing
technology; or enter into a license arrangement with respect to the patent. We
may not be able to develop non-infringing technology. We cannot be sure that any
necessary licenses would be available, or that, if available, such licenses
could be obtained on commercially reasonable terms. Litigation might result in
the patent holder obtaining an injunction which would prevent us from implanting
radioactivity into stents. In addition, the costs associated with defending a
patent infringement claim are significant, and even if we ultimately win such a
claim could have a material adverse effect on our business.

WE DEPEND ON PATENTS AND PROPRIETARY TECHNOLOGY

Although we have nine United States patents issued and fifteen United
States and two international patent applications pending for our technology and
processes, our success will depend, in part, on our ability to obtain the
patents applied for and maintain trade secret protection for our technology. The
validity and breadth of claims in medical technology patents involve complex
legal and factual questions and, therefore are highly uncertain. We do not know
if any pending patent applications or any future patent application will issue
as patents, that the scope of any patent protection, obtained will be enough to
exclude competitors, that any of our patents will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held by us. We do not know if others have or will
develop similar products, duplicate any of our products or design around any of
our patents issued or that may be issued in the future. In addition, whether or
not patents are issued to us, others may hold or receive patents which contain
claims having a scope that covers aspects of our products or processes.

We do not know if any of the patents issued to us will be challenged,
invalidated or circumvented. Patents and patent applications in the United
States may be subject to interference proceeding brought by the U.S. Patent and
Trademark Office, or to opposition proceedings initiated in a foreign patent
office by third parties. We might incur significant costs defending such
proceedings and we might not be successful.

We also rely on unpatented proprietary technology, trade secrets and
know-how and we do not know if others will independently develop substantially
equivalent proprietary information, techniques or processes, that such
technology or know-how will not be disclosed or that we can meaningfully protect
our rights to such unpatented proprietary technology, trade secrets, or
know-how. Although we have entered into non-disclosure

9
<PAGE> 9

agreements with our employees and consultants, we cannot be sure such
non-disclosure agreements will provide adequate protection for our trade secrets
or other proprietary know-how.

WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE GROWTH

We have very limited experience in the commercial production of radioactive
seeds or the commercial implantation of therapeutic radiation onto coronary
stents. Our future success will depend upon, among other factors, our ability
to:

- Recruit, hire, train and retain highly educated, skilled and experienced
management and technical personnel.

- Generate capital from operations.

- Scale-up our manufacturing process and expand our facilities.

- Manage the effects of growth on all aspects of our business, including
research, development, manufacturing, distribution, sales and marketing,
administration and finance.

Any failure on our part to manage any aspect of the growth, including the
ones listed above, of our business could have a material adverse effect on our
business.

WE DEPEND ON A SMALL NUMBER OF MAJOR CUSTOMERS

Approximately 48% of our sales in fiscal 1998 were made to the Howmedica/
Osteonics Division of Stryker Corporation and Biomet Incorporated. All of these
sales were of nitrogen ion implantation of orthopedic joint implants. We do not
have any significant purchase commitments from these customers extending beyond
one year. We do not know if these customers will continue to purchase our
products and services at the same levels as in previous years or that such
relationships will continue in the future. The loss of a significant amount of
business from any of these customers would have a material adverse effect on our
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION

Our business is subject to extensive regulation principally by the Food and
Drug Administration in the United States and corresponding foreign regulatory
agencies in each country in which we will sell our products. These regulations
affect:

- Product marketing clearances or approvals.

- Product standards.

- Packaging requirements.

- Design requirements.

- Manufacturing and quality assurance.

- Labeling.

- Import and export restrictions.

- Tariffs and other tax requirements.

RISKS ASSOCIATED WITH HANDLING HAZARDOUS MATERIALS

Our research activities sometimes involve the use of various hazardous
materials. Although we believe that our safety procedures for handling,
manufacturing, distributing,

10
<PAGE> 10

transporting and disposing of such materials comply with the standards for
protection of human health, safety, and the environment, prescribed by local,
state, federal and international regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. We
cannot eliminate the risk that one or more of our hazardous material or
hazardous waste handlers may cause contamination for which, under laws imposing
strict liability, we could be held liable. While we currently maintain our
insurance in amounts which we believe are appropriate in light of the risk of
accident, we could be held liable for any damages that might result from any
such event. Any such liability could exceed our insurance and available sources
and could have a material adverse effect on our business. See
"Business -- Government Regulation."

RISKS ASSOCIATED WITH THIRD PARTY REIMBURSEMENT AND POSSIBLE HEALTH CARE REFORMS

Medicare, Medicaid and other government insurance programs, as well as
private insurance reimbursement programs, greatly affect suppliers of health
care products. Several of our products and services, including our orthopedic
implants, radioactive seeds, radioactive coronary stents, and interventional
cardiology instruments and devices, are currently being reimbursed by third
party payers. Our customers rely on third-party reimbursements to cover all or
part of the costs of most of the procedures in which our products are used.
Third party payers may affect the pricing or relative attractiveness of our
products by regulating the maximum amount of reimbursement provided by such
payers to the physicians, hospitals and clinics using our devices, or by taking
the position that such reimbursement is not available at all. See
"Business -- Government Regulation."

RISKS OF PRODUCT LIABILITY

Certain of our devices are designed to be used in treatments of diseases
where there is a high risk of serious medical complications or death. Although
we intend to obtain product liability insurance coverage when we commence sales
of our radioactive seeds and radioactive coronary stents, there can be no
assurance that in the future we will be able to obtain such coverage on
acceptable terms or that insurance will provide adequate coverage against any or
all potential claims. Furthermore there can be no assurance that we will avoid
significant product liability claims and the attendant adverse publicity. Any
product liability claim or other claim with respect to uninsured or underinsured
liabilities could have a material adverse effect on our business. See
"Business -- Product Liability and Insurance."

RISKS OF DEPENDENCE ON FEW SUPPLIERS

We rely on a limited number of suppliers to provide materials used to
manufacture our products. If we cannot obtain adequate quantities of necessary
materials and services from our suppliers, there can be no assurance that we
will be able to access alternative sources of supply within a reasonable period
of time or at commercially reasonable rates. Limited sources, unavailability of
adequate quantities, the inability to develop alternative sources, a reduction
or interruption in supply or a significant increase in the price of raw
materials or services could have a material adverse effect on our business.

RISK OF DEPENDENCE ON KEY EXECUTIVES

We are substantially dependent, for the foreseeable future, upon our
Chairman of the Board, President and Chief Executive Officer, Dr. Anthony J.
Armini and our Vice President and Chief Scientist, Dr. Stephen N. Bunker, both
of whom currently devote their full time and efforts to the management of the
company business. We have entered

11
<PAGE> 11

into an employment agreement with each of these officers. If we were to lose the
services of Dr. Armini or Dr. Bunker for any significant period of time, our
business would be materially adversely affected. We maintain key man life
insurance policies of $1,000,000 and $500,000 insuring the lives of Messrs.
Armini and Bunker, respectively. See "Management."

RISKS OF CONTROL BY EXISTING STOCKHOLDERS

Upon completion of this Offering, current principal stockholders and
management will own approximately 70.5% of the outstanding Common Stock,
assuming no exercise of options or warrants. Our principal stockholders and
current management will, as a practical matter, be able to direct the affairs of
business. In addition, the Chairman of the Board, President and Chief Executive
Officer, Anthony J. Armini, who currently owns 30.3% of the outstanding Common
Stock and currently controls 53.2% of the voting shares of the business will
after the Offering, own and control 24.3% of the voting shares. See "Principal
Stockholders."

ABSENCE OF PUBLIC MARKET

Prior to this Offering, there has been no public market for the Units,
Common Stock or Warrants. After the Offering, an active trading market might not
develop or continue.

IMMEDIATE AND SUBSTANTIAL DILUTION

If you buy the Units you will incur immediate and substantial dilution of
approximately $6.23 per share, or 83% of your investment in the Units (at an
initial public offering price of $7.50 per Unit), in that the net tangible book
value of the Units after this offering will be approximately $1.27 per Unit. See
"Dilution."

LEGAL RESTRICTIONS ON SALES OF SHARES UNDERLYING THE WARRANTS

The Warrants are not exercisable unless, at the time of exercise, we have a
current prospectus covering the shares of Common Stock issuable upon exercise of
the Warrants, and such shares have been registered or deemed to be exempt under
the securities laws of the state of residence of the exercising holder of the
Warrants. Although we will use our best efforts to have all the shares of the
Common Stock issuable upon exercise of the Warrants registered or qualified on
or before the exercise date and to maintain effective a registration statement
relating thereto until the expiration of the Warrants, there can be no assurance
that it will be able to do so.

REDEMPTION OF WARRANTS

We may redeem the Warrants at $0.20 per Warrant if the closing bid price of
the Common Stock as reported on the Nasdaq SmallCap Market (or any other market
on which the stock is then traded) averages in excess of $10.50 over a period of
20 consecutive trading days. In the event we decide to redeem the Warrants, such
Warrants would be exercisable until the close of business on the date fixed for
redemption. If any Warrant called for redemption is not exercised by such date,
it will cease to be exercisable and you will be entitled only to the redemption
price. See "Description of Securities -- Warrants."

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<PAGE> 12

USE OF PROCEEDS

If all 1,000,000 Units offered by this Prospectus are sold at an initial
public offering price per Unit of $7.50, the Company will receive net proceeds
of approximately $5,622,000 ($6,600,750 if the over-allotment option is
exercised in full). Net proceeds are determined after estimated commissions,
discounts and offering expenses payable by the Company.

The Company intends to use the net proceeds of this offering for the
following purposes:

<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT NET PROCEEDS
---------- -------------
<S> <C> <C>
Production equipment......................... $2,000,000 35.6%
- Expenditures for additional equipment
and personnel to prepare for and to
increase production capacity
Research and development activities and
regulatory matters......................... $1,500,000 26.7%
- Expenditures to increase research
personnel, development expenses, and
regulatory matters
Marketing and sales.......................... $1,500,000 26.7%
- Expenditures for sales and marketing
personnel, introducing new products,
market research studies, marketing
collateral materials, trade show
participation, public relations,
advertising expenses
Working capital and general corporate
purposes................................... $ 622,000 11%
</TABLE>

The amount and timing of working capital expenditures may vary
significantly depending upon numerous factors, including the progress of the
Company's research and development programs, the timing and costs involved in
obtaining regulatory approvals, the costs involved in filing, prosecuting and
enforcing patent claims, competing technological and market developments,
payments received under collaborative agreements, changes in collaborative
research relationships, the costs associated with potential commercialization of
the Company's products, including the development of marketing and sales
capabilities, the cost and availability of third-party financing for capital
expenditures and administrative and legal expenses.

The Company believes that its available cash and existing sources of
funding, together with the proceeds of this offering and interest earned
thereon, will be adequate to maintain its current and planned operations for the
next 18 months.

Until used, the Company intends to invest the net proceeds of this offering
in interest-bearing, investment-grade securities. While the net proceeds are so
invested, the interest earned by the Company on such proceeds will be limited by
available market rates. The Company intends to invest and use such proceeds so
as not to be considered an "investment company" under the Investment Company Act
of 1940, as amended.

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<PAGE> 13

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for the expansion and operation of its business, and does not anticipate paying
cash dividends in the foreseeable future. The Company's revolving credit line,
term loan and equipment purchase facility with its principal lender prohibit the
payment of dividends other than common stock dividends.

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<PAGE> 14

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1999, on an actual basis and as adjusted to reflect the sale by the
Company of 1,000,000 Units offered hereby (at an initial public offering price
of $7.50 per Unit and after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company) and the application of
the estimated net proceeds therefrom. The capitalization information set forth
in the following table is qualified by the more detailed Financial Statements
and Notes thereto included elsewhere in this Prospectus and should be read in
conjunction with such Financial Statements and Notes thereto.

<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Current portion of long-term debt, including capital
lease............................................. $ 179,283 $ 179,283
Long-term debt, including capital lease, net of
current portion................................... 651,536 651,536
Stockholders' equity:
Preferred Stock, par value $0.10 per share;
5,000,000 shares authorized, and no shares
issued or outstanding.......................... -- --
Common Stock, par value $0.10 per share;
20,000,000 shares authorized and 4,069,320
shares issued and outstanding, actual;
5,069,320 shares issued and outstanding, as
adjusted(1).................................... 474,754 506,932
Additional paid-in capital.......................... 979,734 6,569,556
Retained earnings (accumulated deficit)............. (479,896) (479,896)
---------- ----------
Total stockholders' equity........................ 974,592 6,596,592
---------- ----------
Total capitalization...................... 1,805,411 7,427,411
========== ==========
</TABLE>

- -------------------------

(1) Does not give effect to an aggregate of up to 2,293,398 shares of Common
Stock issuable upon exercise of: (i) the Warrants; (ii) the Underwriters'
over-allotment option, including the shares underlying the Warrants included
in the Units subject to such option; (iii) the Representative's Warrant;
(iv) the Warrants included in the Representative's Warrant; or (v) the
issuance of any of the 556,758 shares reserved for issuance upon the
exercise of options outstanding under the Company's 1992 Stock Option Plan,
the Company's 1998 Stock Option Plan, the 141,000 shares of Common Stock
reserved for issuance under the Company's 1998 Employee Stock Purchase Plan
and the 95,640 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants. The Company's 1998 Stock Option Plan provides for the
issuance of options to purchase up to 240,000 shares of Common Stock;
however, the Company has agreed with the Representative that it will not
issue options to purchase more than 100,000 shares of Common Stock in the
next 18 months. See "Underwriting," "Certain Transactions" and
"Management -- Benefit Plans."

15
<PAGE> 15

DILUTION

The net tangible book value of the Company's Common Stock as of March 31,
1999 was approximately ($86,482), or ($0.02) per share. Net tangible book value
per share represents the amount of the Company's total tangible assets less
total liabilities, divided by the 4,069,320 shares of Common Stock outstanding
as of May 30, 1999 (after the six-for-one split of the Common Stock resulting
from a six share Common Stock dividend on each outstanding share on September 9,
1998 and a six-for-seven reverse stock split on June 8, 1999).

Net tangible book value dilution per share represents the difference
between the amount per share paid by new investors who purchase Units in this
Offering and the pro forma net tangible book value per share of Common Stock
immediately after completion of this Offering. After giving effect to the sale
of 1,000,000 Units in this Offering at an initial public offering price of $7.50
per Unit, after deduction of estimated underwriting discounts and commissions
and offering expenses, the pro forma net tangible book value of the Company at
March 31, 1999 would have been $6,461,652 or $1.27 per share.

This represents an immediate increase in net tangible book value of $1.29
per share to existing shareholders, and an immediate dilution in net tangible
book value of $6.23 per share to new investors in the Offering, as illustrated
in the following table:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per Unit(1)............. $7.50
Net tangible book value per share at March 31,
1999............................................. $(0.02)
Increase per share attributable to new investors.... 1.29
------
Pro forma net tangible book value per share after the
Offering(2)................................................. 1.27
-----
Net tangible book value dilution per share to new
investors(3)................................................ $6.23
=====
</TABLE>

- -------------------------

(1) Before deduction of estimated underwriting discounts and commissions and
offering expenses to be paid by the Company. The initial public offering
price includes $0.10 for a Warrant.

(2) Does not give effect to an aggregate of up to 2,293,398 shares of Common
Stock issuable upon exercise of: (i) the Warrants; (ii) the Underwriters'
over-allotment option, including the shares underlying the Warrants included
in the Units subject to such option; (iii) the Representative's Warrant;
(iv) the Warrants included in the Representative's Warrant; or (v) the
issuance of any of the 556,758 shares reserved for issuance upon the
exercise of options outstanding under the Company's 1992 Stock Option Plan,
the Company's 1998 Stock Option Plan, the 141,000 shares of Common Stock
reserved for issuance under the Company's 1998 Employee Stock Purchase Plan
and the 95,640 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants. The Company's 1998 Stock Option Plan provides for the
issuance of options to purchase up to 240,000 shares of Common Stock;
however, the Company has agreed with the Representative that it will not
issue options to purchase more than 100,000 shares of Common Stock in the
next 18 months. See "Underwriting," "Certain Transactions" and
"Management -- Benefit Plans."

(3) Represents dilution of approximately 83% to purchasers of the Units.

The following table summarizes as of June 8, 1999, on a pro forma basis to
reflect the same adjustments described above, the number of shares of Common
Stock purchased

16
<PAGE> 16

from the Company, the total consideration paid and the average price per share
paid by (i) the existing holders of Common Stock and (ii) the new investors in
the Offering, assuming the sale of 1,000,000 Units by the Company hereby at an
initial public offering price of $7.50 per Unit. The calculations are based upon
total consideration given by new and existing shareholders, before any deduction
of estimated underwriting discounts and commissions and offering expenses.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- -------------------- AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
--------- ------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 4,069,320 80.3% $1,396,340 15.7% $0.34
New Investors........... 1,000,000 19.7% $7,500,000 84.3% $7.50
--------- ----- ---------- -----
Total(1)...... 5,069,320 100.0% $8,896,340 100.0%
========= ===== ========== =====
</TABLE>

- -------------------------

(1) The foregoing table does not give effect to the items described in footnotes
(1) and (2) to the previous dilution table.

17
<PAGE> 17

SELECTED FINANCIAL DATA

The following selected financial data for the fiscal years ended June 30,
1997 and June 30, 1998 has been derived from the Company's audited historical
financial statements, which are included in this Prospectus. The financial data
for the nine month periods ended March 31, 1998 and 1999 are derived from
unaudited financial statements, which are included in this Prospectus. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the nine months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the entire year
ending June 30, 1999. This data should be read in conjunction with the Financial
Statements and Notes thereto and the other financial information included
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, ------------------------
------------------------ MARCH 31, MARCH 31,
1997 1998 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product and contract research
revenues.................... $2,678,918 $2,904,429 $2,128,209 $2,026,651
Equipment revenues(1)......... 350,754 -- -- --
---------- ---------- ---------- ----------
Total revenues................ 3,029,672 2,904,429 2,128,209 2,026,651
Cost of product and contract
research revenues........... 1,354,188 1,693,662 1,297,352 1,216,896
Cost of equipment revenues.... 347,414 -- -- --
Research and development...... 300,936 306,536 233,433 298,639
Selling, general and
administrative.............. 626,361 1,014,401 614,453 726,496
---------- ---------- ---------- ----------
Total costs and expenses...... 2,628,899 3,014,599 2,145,238 2,242,031
---------- ---------- ---------- ----------
Operating income (loss)....... 400,773 (110,170) (17,029) (215,380)
Other income (expense)........ (21,043) 13,285 11,463 (35,856)
---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income
taxes....................... 379,730 (96,885) (5,566) (251,236)
Provision (benefit) for income
taxes....................... 161,400 (38,900) 1,687 (36,700)
---------- ---------- ---------- ----------
Net income (loss)............. $ 218,330 $ (57,985) $ (7,253) $ (214,536)
========== ========== ========== ==========
Net income (loss) per share...
Basic....................... $ 0.07 $ (0.02) $ 0.00 $ (0.06)
Diluted..................... $ 0.06 $ (0.02) $ 0.00 $ (0.06)
Weighted average number of
common and common equivalent
shares outstanding..........
Basic....................... 2,929,806 3,523,368 3,452,598 3,854,892
Diluted..................... 3,485,892 3,523,368 3,452,598 3,854,892
</TABLE>

18
<PAGE> 18

<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------
ACTUAL AS ADJUSTED(2)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash................................................ $ 100,037 $5,722,037
Current assets...................................... 801,537 6,423,537
Working capital..................................... (561,854) 5,445,370
Total assets........................................ 3,001,819 8,623,819
Current portion of long term debt, including capital
lease............................................. 179,283 179,283
Long term debt, including capital lease, net of
current........................................... 651,536 651,536
Stockholders' equity................................ 974,592 6,596,592
</TABLE>

- -------------------------

19
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. The discussion in this Section
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that
involve risks and uncertainties. The safe harbor from private actions based on
untrue statements or omissions of material fact that is provided by the two
statutory provisions does not apply to statements made in connection with an
initial public offering. The Company's actual results and the timing of certain
events may differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in "Risk Factors" and "Business."

OVERVIEW

Implant Sciences Corporation (the "Company") was founded in 1984 by its
present CEO and initially provided ion implantation services to the aerospace
and machine tool industries. The Company had proprietary equipment and processes
which provided increased hardness, wear resistance, and corrosion resistance to
its customers' components. In 1986, the Company added its first semiconductor
ion implantation machine to compete in the semiconductor industry. The Company
now has three automated semiconductor implanters which produced annual revenues
of approximately $667,000 in fiscal 1998.

In 1990, the Company developed, manufactured and began to sell wear testing
equipment to complement its ion implantation business. In 1994, the Company's
ion implantation business expanded into medical implants including total joint
replacements which is now the Company's largest revenue producer. By 1995, the
Company divested the wear test equipment product line through an asset sale to
Falex Corporation for a total price of $200,000 and future aggregate minimum
royalty payments of $175,000. This divestiture was made to focus the Company's
development and engineering personnel on the expanding medical device market.

In 1993 and in 1995, the Company accepted two significant government
contracts to design, construct and install two large ion implantation systems at
customer sites. The second system was completed in 1997 for a total contract
amount of approximately $1,933,000 of which $351,000 was recognized as revenue
in fiscal 1997. After meeting its present obligations, the Company plans to
cease producing this equipment line to devote its entire engineering staff to
the medical device business. The Company continues to build ion implantation
equipment for its own use. The Company believes that its proprietary equipment
expertise is best devoted to manufacturing its own products such as radioactive
prostate seeds, radioactive stents, and coatings for orthopedic implants and
other medical devices. In addition to its three semiconductor ion implanters,
the Company now operates four implanters dedicated to medical production
including one special purpose ion implanter for the production of radioactive
stents, two implanters dedicated to research and development, and has two under
construction. At present the Company's revenues are approximately 77% from the
medical products and services business and the remainder from the semiconductor
ion implantation business.

20
<PAGE> 20

RESULTS OF OPERATIONS

The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total revenues:

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
JUNE 30, ----------------------
-------------- MARCH 31, MARCH 31,
1997 1998 1998 1999
----- ----- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product and contract research
revenues:
Medical....................... 73.7% 77.0% 76.4% 82.2%
Semiconductor................. 14.8 23.0 23.6 17.8
Equipment........................ 11.5 -- -- --
----- ----- ----- -----
Total revenues........... 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of product and contract
research revenues............. 44.7 58.3 60.9 60.0
Cost of equipment revenues....... 11.5 -- -- --
Research and development......... 9.9 10.6 11.0 14.7
Selling, general and
administrative................ 20.7 34.9 28.9 35.9
----- ----- ----- -----
Total costs and
expenses............... 86.8 103.8 100.8 110.6
----- ----- ----- -----
Operating income (loss)............ 13.2 (3.8) (0.8) (10.6)
Other income (expense), net........ (0.7) 0.5 0.5 (1.8)
----- ----- ----- -----
Income before (benefit) provision
for income taxes................. 12.5 (3.3) (.3) (12.4)
(Benefit) provision for taxes...... 5.3 (1.3) 0.0 (1.8)
----- ----- ----- -----
Net income (loss).................. 7.2% (2.0)% (0.3)% (10.6)%
===== ===== ===== =====
</TABLE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

NINE MONTHS ENDED MARCH 31, 1999 AND 1998

REVENUES. Total revenues decreased to approximately $2,026,000 in the nine
months ended March 31, 1999 from approximately $2,128,000 in the nine months
ended March 31, 1998. The 4.8% decrease was primarily attributable to soft
semiconductor sales and a decrease in government contract and grant revenue as
three Phase I contracts reached completion during the nine months ended March
31, 1999. These decreases were offset by a 16% increase in orthopedic and
interventional cardiology medical revenues. Less than 5% of all revenues were
derived from foreign sources.

The Company's two major customers, the Howmedica/Osteonics Division of
Stryker Corporation and Biomet, Incorporated, accounted for 54.3% and 7.8%,
respectively, of revenue in the nine months ended March 31, 1999 and 43.9% and
6.4% respectively, in the nine months ended March 31, 1998. The Company's
government contract and grant revenue accounted for 10.8% and 18.5% of revenue
for the nine months ended March 31, 1999 and 1998, respectively.

COST OF PRODUCT AND CONTRACT RESEARCH REVENUES. Cost of product and
contract research revenues decreased to approximately $1,217,000 from
approximately $1,297,000 for the nine months ended March 31, 1999 and decreased
as a percentage of revenues to

21
<PAGE> 21

60% from 61% in the same periods. This decrease in cost is primarily
attributable to a reduction in costs of materials and government contract and
grant related costs.

RESEARCH AND DEVELOPMENT. Research and development expenses increased to
approximately $299,000 from approximately $233,000 in the nine months ended
March 31, 1999, a 28.3% increase, due to product development. The Company
anticipates in future periods its research and development expenses will
continue to increase in total dollars expended as a result of its new product
development plans.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increase to approximately $726,000 from approximately $614,000 in the
nine months ended March 31, 1999. The 18.2% increase in selling, general and
administrative expenses is primarily attributable to increased personnel,
particularly the development of a senior management team. The Company
anticipates that in future periods its selling, general and administrative
expenses will increase in total dollars expended as a result of its plans to
commercialize new products.

FISCAL 1998 COMPARED TO FISCAL 1997

REVENUES. Total revenues decreased to approximately $2,904,000, in fiscal
1998, from approximately $3,030,000, in fiscal 1997. The 4.2% decrease was
primarily attributable to the completion of a one-time contract, completed in
fiscal 1997, to build one piece of customized manufacturing equipment. The
Company's medical and semiconductor businesses both experienced revenue
increases in fiscal 1998. Less than 5% of all revenues were derived from foreign
sources.

The Company has three major customers, the Howmedica/Osteonics Division of
Stryker Corporation, Concurrent Technology Corporation and Biomet Incorporated.
Sales to Howmedica/Osteonics accounted for 48.9% of total revenues, in fiscal
1997, and 42.3% of total revenues, in fiscal 1998. Sales to Concurrent
Technology Corporation accounted for 11.6% of total revenues, in fiscal 1997,
and 0% of total revenues, in fiscal 1998. Sales to Biomet Incorporated accounted
for 4.9% of total revenues, in fiscal 1997, and 6.0% of total revenues, in
fiscal 1998.

The Company's government contract and grant revenue accounted for less than
1% and 11% of total revenues, in fiscal 1997 and 1998, respectively, with
approximately one-third of the fiscal 1998 revenue derived from a National
Institutes of Health grant to develop radioactive coronary stents. The Company
also conducts research and development under cost sharing arrangements with its
commercial customers. Revenues under such arrangements were approximately
$110,000 and $100,000 for the years ended June 30, 1997 and 1998, respectively.

Medical revenues increased to approximately $2,237,000, in fiscal 1998,
from approximately $2,232,000, in fiscal 1997. The increase in fiscal 1998
revenues is primarily attributable to increased contract revenue from government
contracts and grants, and increased medical coatings revenue, offset by a
decrease in orthopedic revenue primarily due to a price reduction associated
with a negotiated supply agreement.

Semiconductor revenues increased to approximately $667,000, in fiscal 1998,
from approximately $447,000, in fiscal 1997. The 49.2% increase in semiconductor
ion implantation revenue primarily reflects an increase in customer base as well
as volume increases from existing customers.

COST OF PRODUCT AND CONTRACT RESEARCH REVENUES. Cost of product and
contract research increased to approximately $1,694,000, in fiscal 1998, from
approximately
22
<PAGE> 22

$1,354,000, in fiscal 1997, and increased as a percentage of revenues from
44.7%, in fiscal 1997, to 58.3%, in fiscal 1998. The increase in cost is
primarily attributable to increased activity related to government contracts and
grants which generally have lower gross margins than product revenues, increased
production material costs and the absorption of fixed labor and overhead
expenses associated with the completion, in fiscal 1997, of a one-time equipment
production subcontract.

RESEARCH AND DEVELOPMENT. Research and development expenses increased to
approximately $307,000, in fiscal 1998, from approximately $301,000, in fiscal
1997, and increased as a percentage of revenues from 9.9%, in fiscal 1997, to
10.6%, in fiscal 1998. The increase primarily reflects an increased level of
research and development activity relating to the Company's new products, which
are radioactive prostate seeds for the treatment of prostate cancer and
radioactive and radiopaque stents for the treatment of coronary artery
reocclusion. The Company anticipates that its research and development expenses
will continue to increase in total dollars expended.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to approximately $1,014,000, in fiscal 1998,
from approximately $626,000, in fiscal 1997, and increased as a percentage of
revenues from 20.7%, in fiscal 1997, to 34.9%, in fiscal 1998. The increase
primarily reflects the cost associated with a terminating an agreement with the
acting Financial Officer; sales and marketing expenses, personnel, travel, and
legal expenses. The Company anticipates that its selling, general and
administrative expenses will increase in total dollars as a result of its plans
to commercialize its new products.

OTHER INCOME AND EXPENSES, NET. Other income and expenses, net consist
primarily of interest earned on the Company's short-term investments, interest
expense on loans and rental income for machine space. Other income and expense
increased to approximately $13,000, in fiscal 1998, from ($21,000), in fiscal
1997. This increase in income primarily reflects a reduction in interest expense
due to the repayment of loans provided by officers of the Company in fiscal
1996.

LIQUIDITY AND CAPITAL RESOURCES. As of March 31, 1999 the Company had
approximately $100,000 in cash in the form of checking and money market
accounts. The Company also had a $300,000 revolving line of credit from a
commercial bank at a rate of prime plus one percent, of which $195,000 was
available at March 31, 1999. This line of credit expires on September 30, 1999.
The Company also has a term loan and an equipment purchase facility with a
commercial bank, under which approximately $57,000 and $750,000, respectively,
were outstanding at March 31, 1999. Under the provisions of its Loan Agreement,
the Company is required to maintain compliance with certain financial covenants,
including debt service coverage, minimum levels of net worth and restrictions on
indebtedness. At June 30, 1998, the Company's debt service coverage and net
worth was less than the required amounts. The Company's bank waived its rights
under the Loan Agreement with respect to compliance with these financial
covenants at June 30, 1998. At September 30, 1998 the Company met all of its
financial covenants. In December 1998, the Company's bank changed its loan
compliance requirements from a quarterly basis to an annual basis. The bank now
measures compliance annually, consistent with the Company's fiscal year end.
Accordingly, amounts payable under the Loan Agreement are classified as
long-term in the accompanying balance sheet.

23
<PAGE> 23

During fiscal 1998, operating activities used $83,000 of cash. Net cash
used by operating activities in fiscal 1998 primarily reflects the net loss of
$58,000 and payment of offering costs.

During fiscal 1998, investing activities used $392,000 in cash. Net cash
used by investing activities included $559,000 of purchases of property and
equipment and $31,000 of patent fees. These uses of cash were partially offset
by the redemption of short-term investments of $198,000. The Company intends to
make significant investments over the next several years to support the
development and commercialization of its products and the expansion of its
manufacturing facility. See "Use of Proceeds."

During fiscal 1998, financing activities provided $103,000 in cash. Net
cash provided by financing activities primarily includes proceeds from an
equipment loan and the sale of the Company's Common Stock, as a result of option
exercises, offset by the repayment in full of the Company's line of credit.

During the nine months ending March 31, 1999, operating activities used
cash of approximately $425,000 due principally to the payment of operating
expenses and offering costs and an increase in accounts receivable.

During the nine months ending March 31, 1999, investing activities used
cash of approximately $432,000. Net cash used by investing activities included
$411,000 purchases of property and equipment and $21,000 of patent fees.
Although the Company does not have significant capital commitments, the Company
intends to make significant investments over the next several years to support
the development and commercialization of its new products and the expansion of
its manufacturing equipment.

During the nine months ended March 31, 1999, financing activities provided
approximately $646,000 in cash. Net cash provided by financing activities
primarily includes proceeds from an equipment loan and line of credit.

The Company plans to further increase its expenditures to complete
development and commercialize its new products, to increase its manufacturing
capacity, to ensure compliance with the FDA's Quality System Regulations and to
broaden its sales and marketing capabilities.

The Company anticipates that the proceeds of the Offering and interest
thereon, together with existing cash and cash equivalents, will be sufficient to
fund its operations and planned new product development, including increased
working capital expenditures, through at least the next 18 months.

During 1998 and 1999, the Company incurred operating losses and utilized
significant amounts of cash to fund operations. During this time the Company
increased its cash expenditures to develop its new products, increase capacity
and equipment and increase sales and marketing capabilities in anticipation of
FDA approval for its radioactive prostate seed (which was obtained on May 26,
1999) and radioactive stent products. The Company has been utilizing its credit
facilities and cash and cash equivalents to finance operations. In order to be
better positioned to achieve its strategic objectives, the Company is attempting
to obtain equity financing through an initial public offering of its common
stock.

24
<PAGE> 24

initial public offering. The Company believes that these programs will continue
until such time as additional sources of financing are obtained. Management of
the Company has outlined and implemented a plan of action to ensure that the
Company has adequate sources of cash to meet its working capital needs for at
least the next twelve months. The key elements of the plan are as follows:

- Further operating expense reductions to eliminate certain expenditures
which are not critically essential to achieving critical business
objectives at this time (e.g., temporary personnel, use of outside
consultants, discretionary spending).

- Timing of new product development expenditures has been closely tied to
timing of anticipated financing.

- Continued pursuit of government research grants.

- Pursuit of financing alternatives including bank financing, strategic
alliances, and capital contributions by management.

As a result of the above actions, management believes that its existing
cash resources and credit facilities should meet working capital requirements
over the next eighteen months. However, unanticipated decreases in revenues,
increases in expenses or further delays in the process of obtaining equity
financing, may adversely impact the Company's cash position and require further
cost reductions.

YEAR 2000 COMPLIANCE

As the year 2000 approaches, it is generally anticipated that certain
computers, software and other equipment utilizing microprocessors may be unable
to recognize or properly process dates after the year 1999 without software
modification. The Company has evaluated this potential issue with respect to its
software, equipment, financial systems and suppliers. Expenditures by the
Company to date in connection with year 2000 compliance have not been material,
and the Company does not believe the year 2000 problem will have any material
adverse effect on its business, operations or financial condition.

25
<PAGE> 25

BUSINESS

Certain terms are defined in a glossary beginning on page 61.

GENERAL

Implant Sciences Corporation (the "Company") has, over the past fifteen
years, developed core technologies using ion implantation and thin film coatings
for medical device applications and has proprietary processes and equipment for
the manufacture of radiation therapy implants. The Company plans to apply this
technology to manufacture radioactive prostate seeds using a non-radioactive
fabrication process which it believes will be more cost-effective and less
hazardous than conventional processes which use radioactive wet chemistry. The
seeds will be assembled, sealed and then made radioactive in a nuclear reactor
just prior to shipment to customers. The Company believes that the opportunities
for radioactive prostate seeds will continue to grow as an attractive
alternative to other methods of treatment. On May 26, 1999, the Company received
notification of pre-market clearance for its radioactive iodine-125 seed from
the Food and Drug Administration ("FDA").

In the interventional cardiology field, the Company has a joint development
agreement with a major stent manufacturer to develop radioactive coronary
stents. The Company believes these radioactive seeds used for the treatment of
prostate cancer and radioactive coronary stents for the prevention of restenosis
(reclosure of the artery) after balloon angioplasty, will have a significant
competitive advantage over currently existing devices.

The Company has developed its proprietary thin film coating technology in
order to apply it to radiopaque (visible by x-ray) coatings on stents,
guidewires, catheters and other devices used in interventional cardiology
procedures. In addition, the Company is applying its ion implantation
technologies to modify surfaces to reduce polyethylene wear generation in
orthopedic joint implants, manufactured by the Howmedica/Osteonics Division of
Stryker Corporation and Biomet Incorporated. Approximately 77% of the Company's
revenues in fiscal 1998 were derived from its ion implantation of medical
products business. The Company also supplies ion implantation services to
numerous semiconductor manufacturers, research laboratories and universities.
The Company has nine issued United States patents and fifteen United States
patents pending covering its technologies and processes. The Company also has
pending two international patent applications.

Although there are a wide range of commercial applications for the
Company's proprietary technologies, the Company has chosen to focus on the
medical device industry. Within the medical device industry, the Company is
concentrating on the prostate cancer, interventional cardiology and orthopedic
segments. The Company believes that each of these segments share similar growth
dynamics in that they represent diseases or chronic conditions that most
frequently occur in people over the age of 50. The Company expects that the
number of medical procedures performed annually in each of these segments will
continue to grow as the population in the United States over the age of 50
continues to grow. Similar trends appear in other highly developed countries.

TECHNOLOGIES

GENERAL. The Company uses two core technologies, ion implantation and thin
film coatings, to provide enhanced surfaces to various medical implants and
semiconductor products. With respect to each core technology, the Company has
developed proprietary

26
<PAGE> 26

processes and equipment for the purpose of improving or altering the surfaces of
medical implants and semiconductor wafers.

Ion implantation and thin film coatings are techniques first developed in
the 1970s to improve the functional surface properties of metals, ceramics and
polymers, such as friction, wear, wettability and hardness. Ion implantation was
initially developed as a means to dope semiconductors in the fabrication of
integrated circuits. The accuracy, cleanliness and controllability of this
process has made it the standard for semiconductor manufacturing. Ion
implantation is generally preferred over other surface modification methods
because it does not delaminate, does not require high temperatures and does not
deform or alter the dimensions of the treated surface.

Thin film coatings were initially developed to interconnect transistors on
semiconductor chips. Thin films modify surfaces by layering a desired metal or
ceramic coating on the substrate material. Common thin film coating techniques
include chemical vapor deposition and physical vapor deposition.

ION IMPLANTATION. Ion implantation is a process by which ions
(electrically charged atoms) are accelerated to high velocity in a vacuum and
directed toward a substrate or target material. The atoms become embedded just
below the surface of the material producing an alloy composed of the atoms and
the substrate material in the near-surface region of the target material. This
surface alloy may have new mechanical, electrical, chemical, optical and other
properties. The Company believes its proprietary technology, including high
current ion sources and specialized component holding fixtures, provides higher
ion implant doses and higher beam power and yields superior surface
characteristics at lower cost than commercially available equipment.
[GRAPHIC]
Ion implantation of a knee component

Ion implantation can be used to embed single isotopes of radioactive
elements into components. The Company plans to use its proprietary equipment to
manufacture radioactive seed implants for the treatment of prostate cancer and
other carcinomas. The Company is in the process of developing radioactive
prostate seeds containing iodine-125, which can be manufactured without
hazardous radioactive wet chemistry, the methods currently employed by existing
suppliers. The Company has three patents pending on its process. The Company
also believes it can cost-effectively implant ions of therapeutic radioisotopes
including phosphorous-32, palladium-103 or yttrium-90 into a device such as a
coronary stent used to reduce restenosis following balloon angioplasty.

THIN FILM COATING. A thin film coating is grown upon a substrate in a
vacuum by the gradual deposition of atoms on the substrate. The Company's
proprietary unbalanced

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magnetron sputtering process results in coatings that are extremely dense and
free of voids, yielding good contrast and sharp edges under x-ray or
fluoroscopic examination. These coatings usually consist of gold or platinum for
radiopaque applications. The Company's proprietary manufacturing process allows
for efficient utilization of precious metals and for cost-effective recovery and
recycling of these precious metals. The Company is developing processes to coat
stents, guidewires and catheters used in interventional cardiology procedures
with substances, usually gold or platinum, that allow those stents, guidewires
and catheters to be visible under x-ray observation during a procedure. The
Company believes other techniques for applying thin film coatings are less
desirable for medical device applications because of their inability to apply a
dense coating, while continuing to be flexible and adhering to the substrate.

CURRENT AND FUTURE PRODUCTS

PROSTATE CANCER SEEDS

GENERAL. The alternatives generally presented to patients diagnosed with
prostate cancer are surgical removal of the prostate (radical prostatectomy) or
external beam radiation. Both techniques frequently have significant side
effects including impotence and incontinence. Brachytherapy is an increasingly
popular treatment technique whereby radioactive seeds (each of which is
approximately half the size of a grain of rice) are temporarily or permanently
implanted into the prostate. This technique allows the delivery of highly
concentrated yet confined doses of radiation directly to the prostate.
Surrounding healthy tissues and organs are spared significant radiation
exposure. Advances in transrectal ultrasound and catscan imaging equipment
provide detailed and precise measurements of prostate size and shape, for seed
distribution and placement. [GRAPHIC]
Radioactive prostate seed implant procedure
PROSTATE SEEDS. The Company has developed, and applied for two United
States patents covering radioactive seeds, implants and methods of manufacturing
radioactive seed implants by a proprietary process. On May 26, 1999, the Company
received notice of pre-market clearance from the FDA for its radioactive
iodine-125 seed and believes these seeds should be available for commercial sale
in the first quarter of 2000. These seeds are used primarily in the treatment of
prostate cancer. This treatment, known as

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brachytherapy, involves implanting approximately 100 radioactive seeds directly
into the prostate and is usually performed on an outpatient basis. A published
ten-year study conducted by the Northwest Hospital, Seattle, Washington (the
"Northwest Hospital Study") shows that this treatment has a ten-year
disease-free survival rate equal to surgical removal of the prostate and may be
superior to other early stage treatments, with a substantial reduction in the
negative side effects, impotence and incontinence, frequently associated with
surgery and external beam radiation treatment. The National Cancer Institute and
American Cancer Society have reported that sexual potency after implantation of
radioactive seeds has been 86% to 92%, which compares with rates of 10% to 40%
for radical prostectomies and 40% to 60% for external beam radiation therapy.
The Company's production method, involving a proprietary non-radioactive
fabrication procedure, does not use radioactive wet chemistry. Hospitals are
currently purchasing prostate seeds for approximately $45 to $55 each, for a
cost of $4,500 to $5,500 per procedure; however no assurance can be given that
these costs will remain the same. Initially the Company plans to introduce an
iodine-125 prostate seed.

COMPETITIVE ADVANTAGES. Management believes that the Company's
manufacturing process will result in lower capital equipment and manufacturing
assembly costs and will be less hazardous than the manufacturing processes used
by the Company's competitors. Other radioactive prostate seed manufacturers use
radioactive wet chemistry during seed assembly for iodine-125 products. These
technologies require much higher capital equipment costs than the Company's
technologies. The Company's dry process, for which it has patents pending, uses
no radioactive fabrication, and the Company believes it requires fewer personnel
and yields faster throughput. Following seed assembly the Company sends its
seeds to a nuclear reactor for activation. Using this non-radioactive
fabrication process, seeds can be fabricated and inventoried in large quantities
and activated only when ordered. Due to the short half life of iodine-125 (60
days), the competition must assemble and ship seeds on a tight schedule so they
can be implanted at the appropriate strength. For European and Asian markets,
the Company may ship and inventory "cold" seeds in overseas subsidiaries and
activate them in local nuclear reactors just prior to use. The Company currently
has no contracts with any foreign nuclear facility for activation of its
products overseas although such overseas facilities are readily available. The
Company believes these factors will result in lower manufacturing costs and,
therefore, will give the Company a cost advantage over its competitors.

SALES. The Company intends to manufacture and sell its own radioactive
prostate seeds to distributors of medical products and directly to major medical
centers, purchasing groups and hospitals. The Company has not yet sold any
prostate seeds for commercial use. On May 26, 1999, the Company received its
510(k) notice of pre-market clearance from the FDA for its iodine-125 seed, and
the Company believes these seeds should be available for commercial sale in the
first quarter of 2000.

MARKETS. Research done in 1998 by the American Cancer Society shows that
prostate cancer is the second most common cancer in American men, after skin
cancer. The American Cancer Society estimated that in 1998 about 184,500 new
cases of prostate cancer were diagnosed and 39,200 men will die of the disease
in the United States. According to the National Cancer Institute, over 80% of
prostate cancer is found in men over the age of 65. The National Cancer
Institute estimates that approximately 19 out of every 100 men born today will
be diagnosed with prostate cancer during their lifetimes. According to the
American Cancer Society, these numbers approximate the incidence and mortality
for breast cancer in women. According to the American Cancer Society, in 58% of
diagnosed cases, the cancers are localized in the prostate. These cases are
potential candidates for brachytherapy.

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Radical prostectomies and external beam radiation treatments are procedures
that are frequently used and have significant side effects including impotence
or incontinence. The Company believes brachytherapy is an attractive alternative
to surgery or external beam radiation for these cases because research to date
has shown that it has a lower incidence of these side effects.

The Company believes that there is currently a shortage of certain
radioactive seeds, although this situation may change as new competitors enter
this market and existing competitors increase production capacity.

INTERVENTIONAL CARDIOLOGY DEVICES

GENERAL. The American Heart Association estimates that in 1995, there were
approximately 434,000 balloon angioplasty procedures performed in the United
States. According to the American Heart Association, of these approximately 30%
to 40% result in restenosis after balloon angioplasty. Research by the
Washington Hospital Center, the Emory University School of Medicine and the
Scripps Clinic has shown that delivery of an appropriate dose of therapeutic
intravascular radioactivity can reduce the incidence of restenosis and therefore
the need for additional procedures. In cooperation with certain device
manufacturers, the Company is in the process of developing a number of devices
to be used in interventional cardiology procedures. Among these devices are
intravascular radioactive stents that are used to reduce restenosis following
balloon angioplasty and stents, guidewires and catheters containing radiopaque
markers. Coronary stents are made of metals which are not radiopaque and in many
cases must be coated with dense precious metals for increased visibility that is
critical to their guiding, positioning, manipulation and placement.
[GRAPHIC]
Expected therapeutic effect of a radioactive stent
compared to a conventional stent with restenosis

RADIOACTIVE STENTS. The Company has two patents issued and four United
States patents pending and has one pending international patent application for,
new methods of implanting radioactivity onto coronary stents that it believes
will reduce the incidence of restenosis. Ionizing radiation is recognized as a
promising approach to reducing restenosis at the site following balloon
angioplasty by inhibiting intimal hyperplasia. Radiosotopes, when implanted into
the stent itself, have shown marked inhibition of restenosis in animal studies.
Researchers at the Washington Hospital Center, the Emory University School of
Medicine and the Scripps Clinic researched a wide number of both external and
internal methods to deliver intravascular radiation to the coronary arteries,
some of which have problems associated with excessive whole-body radiation dose
exposure to the patient and

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cardiologist. The Company has developed a proprietary technique for the ion
implantation of both pure beta and pure x-ray emitters into stents, which
management believes has significant advantages over other methods. These
radioisotopes produce short-range radiation that only affect the targeted
tissues, rather than the entire body or region.

In fiscal 1998, the Company was awarded a grant from the National
Institutes of Health for the first phase of a possible two phase program to
further develop its radioactive stents on a commercial basis. The Company
currently has a joint development agreement with Guidant Corporation, a major
stent manufacturer, to develop a radioactive stent for animal studies which
could lead to clinical trials. Although the Company has developed and delivered
radioactive stents under this agreement, the Company believes that radioactive
stents will not be available for clinical use before 2001. See "Risk Factors --
We are subject to extensive governmental regulation."

RADIOPAQUE COATINGS. The Company has developed proprietary methods for
applying radiopaque coatings onto a variety of medical devices manufactured by
its customers in order to increase the visibility of such devices during
interventional cardiology and other catheter-based procedures. These
biocompatible coatings are deposited using a proprietary unbalanced magnetron
sputtered coating process. The resulting coating is extremely dense and free of
voids yielding good contrast and sharp edges under x-ray or fluoroscopic
examination. The Company uses this process to coat stents, guidewires and
catheters. For a fractional increase in the manufacturing cost of a stent, the
Company believes its coatings can provide significant added value and enhanced
performance. The Company's thin film coatings are being evaluated by certain
customers for stents, guidewires and catheters.

COMPETITIVE ADVANTAGES. For manufacture of radioactive stents, the Company
uses a proprietary ion implanter that has been optimized for this application.
The Company also has developed a proprietary ion source which uses a relatively
non-toxic form of phosphorous as the radioactive phosphorous-32 source material.
The Company believes its proprietary equipment can be used for commercial
production with the safety and quality control required by the FDA. For
manufacture of its radiopaque coatings, the Company has developed a proprietary
gold coating process and has built equipment that uses unbalanced magnetron
sputtering which provides adherent coatings on implants with complex shapes
(such as stents) and which allows for efficient recovery of precious metals not
consumed in the process.

SALES. The Company intends to implant therapeutic radioactivity into
stents manufactured by its customers. Although the Company developed and
delivered radioactive stents for evaluation and anticipated animal studies, the
Company has not implanted radioactivity into stents for commercial sale by its
customers and cannot make any such sales until it, or its customers, has
obtained appropriate approval from the FDA. The Company believes its radioactive
stents will not be available for commercial sale before 2001.

MARKETS. The American Heart Association estimates that in 1995 over 58
million Americans had one or more forms of cardiovascular disease and that there
were 434,000 balloon angioplasty procedures performed in the U.S. Restenosis
occurs in approximately 30% to 40% of all such procedures. The American Society
for Therapeutic Radiology and Oncology has reported, and numerous clinical
trials have found, that delivery of an appropriate dose of therapeutic
radioactivity can reduce the incidence of restenosis and therefore the need for
additional procedures. The Company believes that stents treated with therapeutic
radiation will be an attractive alternative to traditional stents because they

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can reduce restenosis by delivering an appropriate dose of radioactivity to the
affected site without adversely affecting the surrounding tissue.

ORTHOPEDIC TOTAL JOINT REPLACEMENTS

GENERAL. The Company provides surface engineering technology to
manufacturers of orthopedic hip and knee total joint replacements. The majority
of existing hip and knee joint replacements are made of a cobalt-chromium
("CoCr") femoral component that articulates against a polyethylene component.
While offering excellent biocompatibility and superior wear resistance over
prior alloys and designs and potentially longer average life than prior alloys,
CoCr devices still suffer from particle generation where the metal and
polyethylene components articulate against each other. This particle generation
has been identified as a primary cause of implant loosening due to osteolysis
requiring repeat surgery.
[GRAPHIC]
Total hip replacement Total knee replacement

ORTHOPEDICS. The Company implants CoCr components of total joint
replacements manufactured by its customers with nitrogen ions. Nitrogen ion
implantation of these components reduces polyethylene wear by modifying the
native oxide present in CoCr alloys. Laboratory tests and clinical studies have
shown that nitrogen ion-implanted CoCr components offer superior performance
over untreated components, significantly reducing wear and slowing the incidence
of osteolysis which ultimately leads to revision surgery.

The Company is currently developing zirconia and alumina ceramic ion
implantation techniques and believes they will emerge as the preferred next
generation surface treatment method for orthopedic total joint replacements.
Management believes the use of monolithic ceramic or ceramic coated femoral
components holds greater promise than other types of components in reducing
osteolysis because ceramics have wear characteristics superior to metal and are
biocompatible and inert. The Company believes monolithic ceramic hip heads are
currently employed in a limited number of hip procedures in the US. Because of

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their brittle nature, monolithic ceramics are not likely to be utilized for
femoral knee components. As an alternative to monolithic ceramic components, the
Company's ceramic coatings of CoCr devices using its "blended interface" process
can be applied to either hip or knee joint replacements. The Company believes
that ceramic coatings of CoCr devices would combine the bulk strength of a metal
alloy with the superior surface characteristics of a ceramic. Several orthopedic
companies are considering the Company's surface treatment methods to provide
ceramic coated metal implants.

COMPETITIVE ADVANTAGES. The Company believes it now operates one of the
highest beam-current ion implanters used in the medical field. This equipment
has higher through-put and lower cost than equipment with a lower beam-current.
For the Company's new second generation orthopedic coating this equipment can
provide a ceramic coating with superior adhesion due to its patented "blended
interface" process.

SALES. The Company currently implants CoCr components of total joint
replacements made by its customers with nitrogen ions and is developing ceramic
ion implantation techniques for total joint replacements. The Company receives
untreated CoCr total joint replacements from its customers and implants them at
its facility. The Company then invoices and ships the implanted total joint
replacements to its customers. Total joint replacements treated with ceramic ion
implantation may not be sold commercially until the Company, or its customer,
has obtained appropriate approval from the FDA. The Company believes these total
joint replacements will not be available for commercial sale until after 2001.

MARKETS. Osteoarthritis is a natural result of the aging process and is
the predominant cause of the need for joint replacement. The Company believes
that longer life expectancy as well as the growth in the number of people over
50 will cause the demand for total joint replacement to increase. According to
the American Academy of Orthopedic Surgeons, the hip and knee total joint
replacement market was estimated to be 500,000 units in 1995 in the United
States. The Company treats approximately 50,000 units each year using its ion
implantation process for the Howmedica/Osteonics Division of Stryker Corporation
and Biomet Incorporated. Research by the Company has shown that the Company's
ceramic coatings can decrease wear debris generation by two-thirds, which the
Company believes will reduce osteolysis and thereby reduce the need for revision
surgery.

SEMICONDUCTOR ION IMPLANTATION

The Company supplies ion implantation services to numerous semiconductor
manufacturers, research laboratories, and research universities. Ion
implantation of electronic dopants into silicon, the process by which silicon is
turned into a semiconductor, is an integral part of the integrated circuit
fabrication process. While many of the Company's customers have their own ion
implantation equipment, they often use the Company's services and specialized
expertise for research and new product development because they do not want to
interfere with production or because they are unable to perform the services
themselves.

To serve this market, the Company offers the ion implantation of over 60 of
the 92 natural elements for its customers' research programs. The Company offers
all of the necessary dopants for silicon as well as for new materials such as
gallium arsenide, silicon carbide, indium phosphide and other advanced compound
semiconductors. The Company also performs high dose ion-implantation of silicon
and germanium to improve the crystallinity and to modify the semiconductor
properties of these materials.

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PRINCIPAL SUPPLIERS

The Company uses several principal suppliers for the materials it uses to
prepare its products. PraxAir Distributors, Inc. provides the Company with
production gases. Newark Electronics Corp. and Eaton Corporation both provide
the Company with electronic components. The Company uses Glemco, Inc.,
McMaster-Carr Supply Co., Cambridge Valve and Fitting, Inc. and Copper and Brass
Sales for its machine shop supplies, including copper, aluminum, stainless
steel, graphite and hardware. The Company uses Refining Systems, Inc. for its
supply of gold. The Company believes that adequate supplies of its required
materials will continue to be available, however, no assurances can be given
that this will be the case. See "Risk Factors -- Dependence on few suppliers."

SALES AND MARKETING

The Company's marketing and sales methods vary according to the
characteristics of each of its main business areas. The Company's foreign sales
have comprised less than five percent of its total revenues. Sales and marketing
to the medical device and semiconductor markets are directed by the Company's
Vice President of Marketing and Sales who is assisted by the Company's Director
of Medical Devices and the Company's Director of Semiconductor Products. Sales
in the medical device and semiconductor arena are handled by three full time
salespeople, who handle both medical devices and semiconductor products. The
solicitation and proposal process for research and development contracts and
grants are conducted by the Company's President, its Chief Scientist, and its
scientific staff.

MEDICAL SALES AND MARKETING

The Company plans to market its radioactive prostate seeds to distributors
of medical products as well as major hospitals and key physicians who might
purchase radioactive prostate seeds. The Company plans to hire additional sales
personnel to make direct calls on these potential customers. The Company plans
to market its implantation of radioactivity onto coronary stents directly to
stent manufacturers who will in turn sell the stents to hospitals.

In the provision of ion implantation for total joint replacements, the
Company concentrates on identifying and serving leading manufacturers. Where
possible, the Company attempts to become the sole provider of devices or surface
engineering services to each such manufacturer. The Company's marketing and
sales efforts require considerable direct contact and typically involve a
process of customer education in the merits of the Company's technology. The
Company accomplishes this by first researching customer needs, delivering
scientific papers at orthopedic and biomaterial conferences, and through
presentations at customer sites. The Company's internal research and government
research grants are an integral part of the marketing process. The Company's
patent portfolio is also very important in this process. See "Risk
Factors -- The medical community may not accept our products."

In order to promote sales of its radiopaque coatings, the Company attends
trade shows and uses press releases. Once a customer's interest is established,
the sales process proceeds with an initial demonstration project funded by the
customer. A set of developmental runs are then performed to determine project
feasibility and to roughly optimize a parameter set for deposition. After
testing of samples generated and considering cost estimates for production
quantities, the customer may authorize the Company to proceed to pilot
production.

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<PAGE> 34

In pilot production, typically, several hundred units are produced in a
manner equivalent to the envisioned full production method. Pilot production may
be done on an existing piece of equipment with customer/device specific
fixturing, or a prototype machine depending on the complexity of the process and
device. Samples made in pilot production are fabricated into complete devices
and used by the customer for further testing, clinical studies, FDA submissions,
and marketing and sales efforts.

To date two types of implants have been coated for 6 companies in the
orthopedic market and 28 types of devices have been coated for 23 companies in
the interventional cardiology market. Although none have been shipped for
commercial sale, more than half of these are presently under evaluation by the
customers for commercial production.

The Company is a party to a research and development agreement with Guidant
Corporation to develop radioactive stents for testing and commercialization by
Guidant Corporation. Guidant Corporation is required to fund the research up to
an amount totaling $375,000 provided that certain conditions are satisfied. For
the initial term of the agreement, the Company is required to deal exclusively
with Guidant Corporation in developing radioactive coronary stents and is
prohibited from entering into any discussions or agreement regarding any sale,
assignment, licensing or other disposition of any of its intellectual property
relating to radioactive coronary stents. After the initial term and at the
option of Guidant Corporation, the parties have agreed to negotiate for an
exclusive supply agreement and/or license relating to any intellectual property
arising from the research.

SEMICONDUCTOR SALES AND MARKETING

Since semiconductor ion implantation is a standard process in all
integrated circuit fabrication, customers usually know what they want and little
education is necessary. The Company's services are promoted and sold through
trade shows, advertising in trade magazines, direct mailings and press releases.
Most sales are between $600 and $2,500 per order, take less than one day to
complete, and the entire sales effort is often conducted by telephone. Most of
the Company's sales in this area are for outsourced customer-specified ion
implantation services which the customer's own ion implantation department is
unable or unwilling to perform.

GOVERNMENT CONTRACTS

Research and development contracts from the U.S. government must be won
through a competitive proposal process which undergoes peer review. The Company
is in frequent contact with the Department of Defense, the Department of Energy
and other agencies at conferences to stay informed of the government's needs.
The Company believes its principals and senior scientific staff have earned a
strong reputation with these and other agencies. To date the Company has been
awarded research and development contracts by the National Institute of Health,
the Department of Defense, the National Science Foundation, and the National
Aeronautics and Space Administration ("NASA").

RESEARCH AND DEVELOPMENT

The technical staff of the Company consists of nine scientists, including
four with Ph.D. degrees, two with Masters Degrees, and three with Bachelor
Degrees and with expertise in physical sciences and engineering. All of the
Company's existing and planned products rely on proprietary technologies
developed in its research and development laboratories. The Company's research
and development efforts may be self-funded, funded by corporate partners or by
awards under the Small Business Innovative Research

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("SBIR") program. The Company has obtained over $4,000,000 in U.S. government
grants and contracts over the past 10 years. Of this amount approximately
$160,000 and $438,000 was obtained in 1997 and 1998, respectively. The Company
also conducts research and development under cost-sharing arrangements with its
commercial customers. Revenues under such arrangements were approximately
$110,000 and $100,000 for the year ended June 30, 1997 and 1998, respectively.

PATENTS AND PROPRIETARY TECHNOLOGY

The Company's policy is to protect its proprietary position by, among other
methods, filing United States and foreign patent applications. The Company
currently has nine issued United States patents and fifteen United States patent
applications pending. The Company has two international patent applications
pending.

The Company has exclusive rights under patents covering the following
technologies: (i) an ion source generator which can be used in making
semiconductor devices while minimizing the use of toxic gases, (ii) a method of
using ion implantation for epitaxially growing thin films, which can be used for
semiconductor materials, (iii) a method of ion beam coating orthopedic implant
components to form a zirconium oxide interface layer with improved wear
properties, and (iv) an improved ceramic coated orthopedic implant component in
which the implant is first coated with a platinum alloy.

The Company is aware of a U.S. patent of a third party having broad claims
covering radioactive stents and methods of using radioactive stents for the
treatment of restenosis. The Company has not sought a formal opinion of counsel
regarding the validity of this patent or whether the Company's processes
infringe this patent. The Company plans to implant radioactivity onto coronary
stents manufactured by the patent holder, its licensees or others. If the
Company's plans to implant radioactivity onto the patent holder's stents do not
succeed and/or if the Company implants radioactivity onto stents that are not
manufactured by the patent holder or its licensees there can be no assurance
that the holder of this patent will not seek to enforce the patent against the
Company or the manufacturer of the stents, or that the Company would prevail in
any such enforcement action. See "Risk Factors -- We could incur material costs
if our products infringe, or are accused of infringing, the intellectual
property rights of others."

The Company intends to seek further patents on its technologies, if
appropriate. However, there can be no assurance that patents will issue for any
of the Company's pending or future applications or that any claim allowed from
such applications will be of sufficient scope or strength, or be issued in all
countries where the Company sells its products and services, to provide
meaningful protection or any commercial advantage to the Company. See "Risk
Factors -- We depend on patents and proprietary technology."

GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS

Although the Company's present business itself is not directly regulated by
the FDA, the medical devices incorporating its technologies are subject to FDA
regulation. The burden of securing FDA clearance or approval for these medical
devices rests with the Company's medical device manufacturers or licensees.
However, the Company intends to prepare Device Master Files which may be
accessed by the FDA to assist it in its review of the applications filed by the
Company's medical device manufacturers. The Company's radioactive iodine-125
seed is subject to the FDA's 510(k) notification of pre-market clearance, which
was granted by the FDA on May 26, 1999.

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Supplemental or full pre-market approval ("PMA") reviews require a
significantly longer period. A PMA will be required for the Company's
radioactive coronary stents. Thus, significantly more time will be required to
commercialize applications subjected to PMA review. The Company believes its
radioactive coronary stents will not be available for commercial sale before
2001. Furthermore, sales of medical devices outside the U.S. are subject to
international regulatory requirements that vary from country to country. The
time required to obtain clearance or approval for sale internationally may be
longer or shorter than that required for FDA approval. See "Risk Factors -- we
are subject to extensive governmental regulation."

In addition to FDA regulation, certain of the Company's activities are
regulated by, and require approvals from, other federal and state agencies. For
example, aspects of the Company's operations require the approval of the
Massachusetts Department of Public Health and registration with the Department
of Labor and Industries. Furthermore, the Company's use, management,
transportation, and disposal of certain chemicals and wastes are subject to
regulation by several federal and state agencies depending on the nature of the
chemical or waste material. Certain toxic chemicals and products containing
toxic chemicals may require special reporting to the United States Environmental
Protection Agency and/or its state counterparts. The Company is not aware of any
specific environmental liabilities that it could incur. The Company's future
operations may require additional approvals from federal and/or state
environmental agencies.

FACILITIES AND EQUIPMENT

Pursuant to a lease, dated July 29, 1998, the Company operates from a
21,992 sq. ft. leased facility in Wakefield, Massachusetts. The Company
currently operates nine ion implantation machines, and has two more under
construction by its own technical staff. Four are dedicated to medical
production including one special purpose ion implanter dedicated to production
of radioactive coronary stents. Three machines are dedicated to semiconductor
ion implantation. Two are used for research and development. Five machines are
housed in class 100 clean rooms. The Company maintains a machine shop facility
on its premises and employs four machinists which allows the Company to
fabricate and customize is specialized manufacturing equipment. The Company
expects that its space will be sufficient for the next 12 months. The Company's
current lease expires in May, 2000.

COMPETITION

In radioactive products, such as prostate seed implants and radioactive
stents, the Company expects to compete with Nycomed Amersham plc, Theragenics
Corp., North American Scientific, Inc., International Isotopes Inc., UroCore,
Inc., Uromed Corporation, and International Brachytherapy, Inc. Of these,
Nycomed Amersham plc, Theragenics Corp. and North American Scientific, Inc.
serve substantially the entire radioactive prostate seed market and
International Isotopes Inc., UroCore, Inc., Uromed Corporation, and
International Brachytherapy, Inc. have announced that they plan to enter the
prostate seed market. In addition, the Company's proposed radioactive stents
will compete with alternative technologies such as Novoste Corporation's
Beta-Cath system, radioactive tipped guidewires and radioactive filled balloons.
The number and types of procedures being performed on the prostate are
increasingly drawing new entrants into the market. The Company believes that
competition, and, in turn, pricing pressures, may increase. Many of the
Company's competitors have substantially greater financial, technical and

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marketing resources than the Company. See "Risk Factors -- We have significant
competition in an environment of rapid technological change."

Many medical device manufacturers have developed or are engaged in efforts
to develop internal surface modification technologies for use on their own
products. Most companies that market surface modification to the outside
marketplace are divisions of organizations with businesses in addition to
surface modification. Overall, the Company believes the worldwide market for
surface modification technologies applicable to medical devices is very
fragmented with no competitor having more than a 10% market share. Many of the
Company's existing and potential competitors (including medical device
manufacturers pursuing coating solutions through their own research and
development efforts) have substantially greater financial, technical and
marketing resources than the Company. See "Risk Factors -- We have significant
competition in an environment of rapid technological change."

With respect to ion implantation of orthopedic implants, the Company
primarily competes with Spire Corporation. Competition within the orthopedic
implant industry is primarily conducted on the basis of service and product
design. Price competition has abated somewhat in the case of first time and more
youthful patients where higher-cost and more durable reconstructive devices are
preferred. The Company attempts to differentiate itself from its competition by
providing what it believes are high value-added solutions to surface
modification. Management believes that the primary factors customers consider in
choosing a particular surface modification technology are performance, ease of
manufacturing, ability to produce multiple properties from a single process,
compliance with manufacturing regulations, customer service, pricing, turn
around time, and the ability to work with a variety of materials. The Company
believes that its process competes favorably with respect to these factors. The
Company believes that the cost and time required to acquire equipment and
technical engineering talent, as well as to obtain the necessary regulatory
approvals, significantly reduces the likelihood of a manufacturer changing the
coating process it uses after a device has been approved for marketing. See
"Risk Factors -- We have significant competition in an environment of rapid
technological change."

The Company's primary competition in the semiconductor industry consists of
three companies: Ion Implant Services, The Implant Center, and Ion Implant
Corporation. These companies are all located in Silicon Valley, California and
primarily serve the silicon wafer production needs of semiconductor factories in
their local area, although Ion Implant Corporation does research and development
implants nationwide. The Company mostly serves east coast factories with silicon
production and research and development laboratories worldwide.

Many of the Company's competitors and potential competitors have
substantially greater capital resources than the Company does and also have
greater resources and expertise in the areas of research and development,
obtaining regulatory approvals, manufacturing and marketing. There can be no
assurance that the Company's competitors and potential competitors will not
succeed in developing, marketing and distributing technologies and products that
are more effective than those developed and marketed by the Company or that
would render the Company's technology and products obsolete or noncompetitive.
Additionally, there is no assurance that the Company will be able to compete
effectively against such competitors and potential competitors in terms of
manufacturing, marketing and sales. See "Risk Factors -- We have significant
competition in an environment of rapid technological change."

38
<PAGE> 38

PRODUCT LIABILITY AND INSURANCE

The Company's business entails the risk of product liability claims.
Although the Company has not experienced any product liability claims to date,
there can be no assurance that such claims will not be asserted or that it will
have sufficient resources to satisfy any liability resulting from such claims.
The Company intends to acquire product liability insurance when its radioactive
prostate seed products and interventional cardiology devices are in commercial
production. There can be no assurance that product liability claims will not
exceed such insurance coverage limits, that such insurance will continue to be
available on commercially reasonable terms or at all, or that a product
liability claim would not materially adversely affect the business, financial
condition or results of operations of the Company. See "Risk Factors -- Risks of
product liability."

EMPLOYEES

As of March 31, 1999, the Company employed 36 full-time individuals. The
Company believes it maintains good relations with its employees. None of the
Company's employees is represented by a union or covered by a collective
bargaining agreement. The Company's success will depend, in large part, upon its
ability to attract and retain qualified employees. The Company faces competition
in this regard from other companies, research and academic institutions and
other organizations.

REPORTS TO STOCKHOLDERS

Implant intends to distribute to its stockholders annual reports containing
audited financial statements.

39
<PAGE> 39

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company and their ages as of
March 31, 1999 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Anthony J. Armini.............. 61 President, Chief Executive
Officer and Chairman of the
Board of Directors
Stephen N. Bunker.............. 55 Vice President and Chief
Scientist, Director
Alan D. Lucas.................. 43 Vice President of Marketing,
Sales and Business Development
Darlene M. Deptula-Hicks....... 41 Vice President and Chief
Financial Officer
Robert E. Hoisington........... 62 Director
Shunkichi Shimizu.............. 52 Director
</TABLE>

The Company currently has four directors. All directors are elected to hold
office until the next annual meeting of shareholders of the Company and until
their successors have been duly elected and qualified. Officers are elected to
serve subject to the discretion of the Board of Directors and until their
successors are appointed. There are no family relationships among executive
officers and directors of the Company.

DR. ANTHONY J. ARMINI has been the President, Chief Executive Officer, and
Chairman of the Board of Directors since the Company's incorporation. From 1972
to 1984, prior to founding the Company, Dr. Armini was Executive Vice President
at Spire Corporation. From 1967 to 1972, Dr. Armini was a Senior Scientist at
McDonnell Douglas Corporation. Dr. Armini received a Ph.D. in nuclear physics
from the University of California, Los Angeles in 1967. Dr. Armini is the author
of eleven patents and fifteen patents pending in the field of implant technology
and of fourteen publications in this field. Dr. Armini has over thirty years of
experience working with cyclotrons and linear accelerators, the production and
characterization of radioisotopes, and fifteen years of experience with ion
implantation in the medical and semiconductor fields.

DR. STEPHEN N. BUNKER has served as the Vice President and Chief Scientist
of the Company since 1987 and a Director of the Company since 1988. Prior to
joining the Company, from 1972 to 1987, Dr. Bunker was a Chief Scientist at
Spire Corporation. From 1971 to 1972, Dr. Bunker was an Engineer at McDonnell
Douglas Corporation. Dr. Bunker received a Ph.D. in nuclear physics from the
University of California, Los Angeles in 1969. Dr. Bunker is the author of six
patents in the field of implant technology.

ALAN D. LUCAS joined the Company in March 1998 as Vice President of
Marketing, Sales and Business Development. Prior to joining the Company, Mr.
Lucas accumulated over 20 years of experience in various marketing and business
development positions for medical device companies. Most recently, from 1996 to
1998, Mr. Lucas was the Director of Corporate Development at ABIOMED, Inc. From
1994 to 1996, Mr. Lucas was a strategic marketing and sales consultant focused
on medical technology. From 1991 to 1994 Mr. Lucas was the Director of Marketing
at Vision Sciences, Inc. a development stage medical device company.

40
<PAGE> 40

DARLENE M. DEPTULA-HICKS joined the Company in July 1998 as Vice President
and Chief Financial Officer. Prior to joining the Company, from 1997 to 1998 Ms.
Deptula-Hicks was the Corporate Controller for ABIOMED, Inc., a medical device
manufacturer. From 1994 to 1997 Ms. Deptula-Hicks was an independent financial
consultant. From 1992 to 1994 Ms. Deptula-Hicks was the Vice President and Chief
Financial Officer of GCA, a division of General Signal Corporation, a
semiconductor equipment manufacturer. Ms. Deptula-Hicks holds a BS in Accounting
and an MBA.

ROBERT E. HOISINGTON has served on the Board of Directors of the Company
since August, 1992. He is the President and founder of Management Strategies, a
general line consulting firm providing strategic planning for businesses with
annual revenues ranging from $10 million to $1 billion. Prior to founding
Management Strategies, Mr. Hoisington was a professional management consultant
at Arthur Young & Company.

SHUNKICHI SHIMIZU joined the Company's Board of Directors in March, 1998.
He is the Director of North American Operations of Takata Corporation, domiciled
in Tokyo, Japan. Takata Corporation is a manufacturer of seat belts and air
bags. Mr. Shimizu also is the Executive Vice President of TK Holdings, Inc. of
Ohio. Prior to joining Takata Corporation, he served as the Head of
International Finance Corporate Division at the Bank of Tokyo, Ltd.,
Headquarters. NAR Holding Corporation is a wholly-owned subsidiary of TREC
(Holland) Amsterdam B.V. Pursuant to an agreement with the Company, for so long
as NAR Holding Corporation owns at least 10% of the Company's issued and
outstanding shares of Common Stock, it is entitled to nominate one person for
election to the Board of Directors of the Company. Mr. Shimizu is NAR Holding
Corporation's nominee.

The Board of Directors has a Compensation Committee, which provides
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company. Messrs. Hoisington and Shimizu serve on this
committee. The Board of Directors also has an Audit Committee, which reviews the
scope and results of the audit and other services provided by the Company's
independent auditors. Messrs. Hoisington and Shimizu serve on this committee.

There are no family relationships among the directors and executive
officers of the Company.

COMPENSATION OF DIRECTORS

The Company's directors who are employees of the Company do not currently
receive any compensation for service on the Board of Directors. Directors who
are not employees of the Company, other than Mr. Shimizu, are paid a yearly
stipend of $2,500 and are reimbursed for reasonable expenses incurred in
connection with attendance at Board and committee meetings.

Under the 1998 Incentive and Nonqualified Stock Option Plan (the "Option
Plan"), each Director who is not an employee of the Company automatically
receives an annual grant of options to purchase 2,000 shares of Common Stock at
an exercise price equal to the closing price of the Common Stock on that date
for each year of service. Each such option will have a term of five years and
will vest in full on the date of grant.

MEDICAL ADVISORY BOARD

The Company has formed a Medical Advisory Board which will advise and
consult with the Company's Board of Directors and senior management at such
times as the Chief

41
<PAGE> 41

Executive Officer shall request. This advice and consultation will relate
generally to the Company's business and products. The Medical Advisory Board
advises on industry trends and new or experimental modalities of treatment in
the oncology, interventional cardiology and orthopedic specialties. The Medical
Advisory Board members may be employed on a full-time basis by employers other
than the Company, and these members may have commitments to, or consulting,
advisory or other contractual relationships with, other third parties. These
third party commitments and relationships may limit the availability of the
Medical Advisory Board members to the Company, and may potentially result in
conflicts of interest. Consultations with Medical Advisory Board members may be
either individually or as a group depending upon board member availability. To
date, the following individuals have agreed to serve as members of the Medical
Advisory Board.

<TABLE>
<CAPTION>
NAME CURRENT POSITION
- ---- ----------------
<S> <C>
William Capello, M.D. Professor, Orthopaedic Surgeon (Total
Joint Replacement)
Department of Orthopedic Surgery
Indiana University School of Medicine
Indianapolis, Indiana
Andrew J. Carter, D.O., FACC Interventional Cardiologist (Intra-
Vascular Radiation Therapy)
Stanford Medical Center
Stanford, California
Jay P. Ciezki, M.D. Radiation Oncologist
Department of Radiation Oncology
The Cleveland Clinic Foundation
Cleveland, Ohio
Adam Dicker, M.D., Ph.D. Assistant Professor
Department of Radiation Oncology
Bodine Center for Cancer Treatment
Philadelphia, Pennsylvania
Stuart Goodman, M.D., Ph.D. Professor and Chairman, Orthopaedic
Surgeon (Total Joint Replacement)
Department of Orthopaedic Surgery
UCSF/Stanford Medical Center
Stanford, California
Robert Poss, M.D. Orthopedic Surgeon (Total Joint
Replacement)
Department of Orthopedic Surgery
Brigham and Women's Hospital
Boston, Massachusetts
</TABLE>

The Company has agreed to grant each member of the Advisory Board an option
to purchase 1,000 shares of Common Stock for each full year that such member
serves. The exercise price per share for the options issued with respect to the
first year of service is $7.00 per share. Each member also receives a yearly
stipend of $1,000.

42
<PAGE> 42

EXECUTIVE COMPENSATION

The following table provides certain summary information concerning
compensation earned in the fiscal year ended June 30, 1998 by the Company's
Chief Executive Officer and Company's other executive officers (collectively,
the "Named Executive Officers").

SUMMARY COMPENSATION TABLE
(FISCAL YEAR 1998)

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) COMPENSATION
- --------------------------- --------- -------- --------------- ------------
<S> <C> <C> <C> <C>
Anthony J. Armini(2)........... $104,000 -- $4,044 --
President, Chief Executive
Officer and Chairman of the
Board
Stephen N. Bunker(3)........... $79,000 -- $2,605 --
Vice President, Chief
Scientist and Director
Darlene M. Deptula-Hicks(4).... -- -- -- --
Vice President and Chief
Financial Officer
Alan D. Lucas(5)............... $22,500 $10,000 -- (6)
Vice President of Marketing,
Sales and Business
Development
</TABLE>

- ---------------
(1) Other Annual Compensation consists of life and disability insurance premiums
and 401(k) plan benefits paid by the Company on behalf of the Named
Executive Officer. See "-- Benefit Plans."

(2) Dr. Armini entered into an Employment Agreement with the Company on
September 26, 1998. See "-- Employment Agreements."

(3) Dr. Bunker entered into an Employment Agreement with the Company on
September 26, 1998. See "-- Employment Agreements."

(4) Ms. Deptula-Hicks joined the Company in July of 1998 and receives an annual
salary of $100,000. In addition, in July of 1998, Ms. Deptula-Hicks received
a stock option grant to purchase 25,200 shares of Common Stock at an
exercise price of $4.00 per share.

(5) Mr. Lucas joined the Company in March of 1998 and receives an annual salary
of $120,000.

(6) See "Option Grants in Last Fiscal Year," below.

43
<PAGE> 43

The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted (as adjusted to give effect
to the six-for-one split of the Common Stock resulting from a six share Common
Stock dividend on each outstanding share on September 9, 1998 and a
six-for-seven reverse stock split on June 8, 1999) during the fiscal year ended
June 30, 1998.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SH) DATE
- ---- ---------- ------------- -------- ----------
<S> <C> <C> <C> <C>
Alan D. Lucas................... 25,200 45.7% $4.00 2008
</TABLE>

The following table sets forth certain information concerning the value of
unexercised stock options held by the Named Executive Officers.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT JUNE 30, 1998 OPTIONS AT JUNE 30, 1998
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Anthony J. Armini.......... -- -- -- --
Stephen N. Bunker.......... -- -- -- --
Alan D. Lucas.............. -- 25,200 -- $88,200
</TABLE>

EMPLOYMENT AGREEMENTS

On September 26, 1998, the Company entered into employment agreements with
each of Anthony J. Armini, the President, Chief Executive Officer and Chairman
of the Board, and Stephen N. Bunker, the Vice President and Chief Scientist of
the Company. Pursuant to their employment agreements, each of which has a term
of five years, Dr. Armini is entitled to an annual base salary of $125,000 and
Dr. Bunker is entitled to an annual base salary of $100,000. Each of them is
eligible to receive additional bonuses at the discretion of the Board of
Directors.

BENEFIT PLANS

1998 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN

The 1998 Incentive and Nonqualified Stock Option Plan (the "1998 Option
Plan") was adopted by the Board of Directors and the shareholders of the Company
in September, 1998. A total of 240,000 shares of Common Stock will be reserved
for issuance under the 1998 Incentive and Nonqualified Stock Option Plan.
However, the Company has entered into an agreement with the Representative
pursuant to which it has agreed not to issue options to purchase more than
100,000 shares of Common Stock in the next 18 months. The 1998 Option Plan will
authorize (i) the grant of options to purchase Common Stock intended to qualify
as incentive stock options ("Incentive Options"), as defined in Section 422 of
the Code and (ii) the grant of options that do not so qualify ("Nonqualified
Options"). The exercise price of Incentive Options granted under the 1998

44
<PAGE> 44

Option Plan must be at least equal to the fair market value of the Common Stock
of the Company on the date of grant. The exercise price of Incentive Options
granted to an optionee who owns stock possessing more than 10% of the voting
power of the Company's outstanding capital stock must be at least equal to 110%
of the fair market value of the Common Stock on the date of grant.

The 1998 Option Plan may be administered by the Board of Directors or the
Compensation Committee. Except in the case of certain formula grants to
nonemployee directors described above under "Director Compensation," the Board
or the Compensation Committee will select the individuals to whom options will
be granted and will determine the option exercise price and other terms of each
award, subject to the provisions of the 1998 Option Plan. Incentive Options may
be granted under the 1998 Option Plan to employees, including officers and
directors who are also employees. Nonqualified Options may be granted under the
1998 Option Plan to officers and other employees and to directors and other
individuals providing services to the Company, whether or not they are employees
of the Company.

1998 EMPLOYEE STOCK PURCHASE PLAN

The 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan") was
adopted by the Board of Directors and the shareholders of the Company in
September, 1998. The Stock Purchase Plan authorizes the issuance of up to an
aggregate of 141,000 shares of Common Stock to participating employees. The
Stock Purchase Plan may be administered by the Board of Directors or the
Compensation Committee.

Under the terms of the Stock Purchase Plan, all employees of the Company
(other than seasonal employees) who have completed one year of employment with
the Company and whose customary employment is more than part-time (i.e. more
than 20 hours per week and more than five months in the calendar year) are
eligible to participate in the Stock Purchase Plan. Employees who own five
percent or more of the outstanding Common Stock of the Company and directors who
are not employees are not eligible to participate in the Stock Purchase Plan.

The right to purchase Common Stock under the Stock Purchase Plan will be
made available through a series of one year offerings (each, an "Offering
Period"). On the first day of an Offering Period, the Company will grant to each
eligible employee who has elected in writing to participate in the Stock
Purchase Plan an option to purchase shares of Common Stock. The employee will be
required to authorize an amount (between one and ten percent of the employee's
compensation) to be deducted by the Company from the employee's pay during the
Offering Period. On the last day of the Offering Period, the employee will be
deemed to have exercised the option, at the option exercise price, to the extent
of accumulated payroll deductions. Under the terms of the Stock Purchase Plan,
the option exercise price is an amount equal to 85% of the fair market value of
one share of Common Stock on either the first or last day of the Offering
Period, whichever is lower.

No employee may be granted an option that would permit the employee's
rights to purchase Common Stock to accrue at a rate in excess of $25,000 of the
fair market value of the Common Stock, determined as of the date the option is
granted, in any calendar year.

The Company has made no determination as to when the first Offering Period
under the Stock Purchase Plan will commence.

45
<PAGE> 45

1992 STOCK OPTION PLAN

The 1992 Stock Option Plan (the "1992 Option Plan") was adopted by the
Board of Directors and the shareholders in 1992. Upon the adoption of the 1998
Option Plan, the 1992 Option Plan was terminated. The 1992 Option Plan governs
only stock options outstanding under such plan. No new stock options will be
granted under the 1992 Option Plan, which has been superseded by the 1998 Option
Plan.

The 1992 Option Plan authorized (i) the grant of options to purchase Common
Stock intended to qualify as incentive stock options ("Incentive Options"), as
defined in Section 422 of the Code, and (ii) the grant of options that did not
so qualify ("Nonqualified Options"). The exercise price of Incentive Options
granted under the 1992 Option Plan was required to be at least equal to the fair
market value of the Common Stock of the Company on the date of grant. The
exercise price of Incentive Options granted to an optionee who owned stock
possessing more than 10% of the voting power of the Company's outstanding
capital stock was required to be at least equal to 110% of the fair market value
of the Common Stock on the date of grant.

The 1992 Option Plan was required to be administered by the Board of
Directors or a committee designated by the Board. The Board or the designated
committee was empowered to select the individuals to whom options were granted
and to determine the option exercise price and other terms of each award,
subject to the provisions of the 1992 Option Plan. The Board or a designated
committee had authority to grant Incentive Options under the 1992 Option Plan to
employees, including directors who were also employees, and to grant
Nonqualified Options to employees and to directors and other individuals
providing services to the Company, whether or not they were employees of the
Company.

46
<PAGE> 46

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 30, 1999, by (i) each person
or entity known to the Company to own beneficially five percent or more of the
Company's Common Stock, (ii) each of the Company's directors, (iii) the Named
Executive Officers, and (iv) all directors and executive officers of the Company
as a group.

<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT BENEFICIALLY OWNED(3)
BENEFICIALLY ---------------------------------
NAME AND ADDRESSES(1) OWNED(2) BEFORE OFFERING AFTER OFFERING
- --------------------- ---------------- --------------- --------------
<S> <C> <C> <C>
Anthony J. Armini................ 1,231,122 30.3% 24.3%
Patricia A. Armini............... 931,122 22.9% 18.3%
NAR Holding Corporation(4)....... 776,418 19.1% 15.3%
555 Madison Avenue, 27th Floor
New York, New York
Stephen N. Bunker................ 636,348 15.6% 12.6%
Robert E. and Joan Hoisington.... 30,000 * *
Shunkichi Shimizu................ -- -- --
Darlene M. Deptula-Hicks......... -- -- --
Alan D. Lucas.................... -- -- --
All Directors and Officers as a
group
(5 persons).................... 1,897,470 46.6% 37.4%
</TABLE>

- -------------------------

* Less than 1%.

(1) The address of all persons who are executive officers or directors of the
Company is care of the Company, 107 Audubon Road, Wakefield, Massachusetts
01880.

(2) To the Company's knowledge and subject to the information contained in the
footnotes to this table, all of the persons named in the table except
Patricia A. Armini, the former spouse of Anthony J. Armini, have sole voting
power with respect to all shares of Common Stock shown as beneficially owned
by them. All of Ms. Armini's shares are voted by Dr. Armini. Shares not
outstanding but deemed beneficially owned by virtue of the right of a person
or group to acquire them within 60 days of June 8, 1999 are treated as
outstanding only for purposes of determining the amount and percent owned by
such person or group.

(3) Percentage ownership is based on (i) before the Offering, 4,069,320 shares
of Common Stock outstanding as of June 8, 1999 and (ii) after the Offering,
an additional 1,000,000 shares to be issued by the Company in this Offering.

(4) NAR Holding Corporation is a wholly-owned subsidiary of TREC (Holland)
Amsterdam B.V. The Company believes that the principal beneficial owner of
TREC (Holland) Amsterdam B.V. is Takata Corporation and that its principal
beneficial owner is Juichiro Takada.

47
<PAGE> 47

VOTING TRUST AGREEMENT

Two of the principal stockholders of the Company, Anthony J. Armini and
Patricia A. Armini, are parties to a Voting Trust Agreement, dated November 1,
1991. Under this agreement, so long as either party owns at least 25% of the
beneficial interest in the Common Stock of the Company and Dr. Armini continues
to serve as Trustee of the Voting Trust, all of Ms. Armini's shares are voted by
Dr. Armini. In addition, this agreement places certain restrictions on the
rights of either party to sell or encumber his or her shares. After the offering
neither party will own 25% of the Common Stock.

48
<PAGE> 48

CERTAIN TRANSACTIONS

Some of the transactions described below were entered into when there were
less than two disinterested independent directors.

Between 1983 and 1994, two officers and shareholders of the Company, Dr.
Anthony J. Armini, and Dr. Stephen N. Bunker, did not receive certain
compensation. These underpayments of $562,070 for Dr. Armini and $249,755 for
Dr. Bunker were accrued by the Company as liabilities as the services were
rendered. In each of fiscal 1996 and 1997, a deferred compensation payment of
$193,252 and $119,000, respectively, was paid to Dr. Armini and $20,000 and $0,
respectively, was paid to Dr. Bunker, which payments were partial payments of
the accrued compensation due to each of them. The remaining amounts were
reflected as deferred compensation on the June 30, 1997 balance sheet. During
fiscal 1998, these two principal officers discharged the Company from its
remaining obligation.

On December 9, 1997, the Company entered into a Loan Agreement with Anthony
J. Armini. Pursuant to the terms of this Agreement, the Company loaned $137,500
to Dr. Armini for the purpose of exercising 300,000 options granted in 1993 to
purchase Common Stock. The interest rate on the loan, which is unsecured, is six
percent per annum. The entire amount of the principal and accumulated interest
will be due on December 9, 2003. In addition, Mr. Armini's loan agreement with
the Company provides that the entire principal and accrued interest will be due
and payable with the proceeds from the sale of the first 50,000 shares. His new
certificate will bear a restrictive legend regarding the foregoing.

In December, 1997, three of the directors of the Company exercised options
issued in 1993 to purchase shares of Common Stock of the Company in the
following amounts and at the following prices (as adjusted to give effect to a
six-for-one split of the Common Stock resulting from a six share Common Stock
dividend on each outstanding share on September 9, 1998 and a six-for-seven
reverse stock split on June 8, 1999): Stephen N. Bunker purchased 300,000 shares
at a price of $.46 per share; Anthony J. Armini purchased 300,000 shares at a
price of $.46 per share; and Robert E. Hoisington purchased 30,000 shares at a
price of $.42 per share. In addition, in June, 1997, NAR Holding Corporation
exercised its preemptive rights pursuant to a 1987 agreement to purchase 301,668
shares of Common Stock of the Company at a price of $.49 per share.

In July, 1998, as consideration for terminating an agreement with Eric
Akhund, acting chief financial officer of the Company, and his resignation from
the Company's board of directors, the Company provided the following benefits:
(i) a $60,000 lump sum cash payment; (ii) 12 additional payments of $4,125 per
month; (iii) warrants, with a three-year term, to purchase 86,640 shares of the
Common Stock of the Company at a price of $17.31 per share; (iv) 12,000 shares
of the Common Stock of the Company; and (v) the forgiveness of an $18,750
employee advance. The total cost to the Company of terminating this agreement
was $144,050. As part of Mr. Akhund's original agreement he was also provided
warrants, with a three year term, to purchase 9,000 shares of Common Stock of
the Company at a price of $1.51 per share. The Company granted piggyback
registration rights to this individual in any public offering after the initial
public offering of the Common Stock. This individual has agreed to sign a
lock-up agreement for future sale of such warrants and shares equivalent to the
lock-up agreements signed by the Company's management.

49
<PAGE> 49

In January, 1999, the Company entered into loan agreements aggregating
$137,500 with ten employees for the purpose of permitting these employees to
exercise options to purchase 321,642 shares of Common Stock, in the aggregate.
The interest rate of each loan, which is unsecured, is 6% per annum. The entire
principal amount and accumulated interest on each loan will be due on January 7,
2002.

Pursuant to an agreement with the Company, for so long as NAR Holding
Corporation owns at least 10% of the Company's issued and outstanding shares of
Common Stock, it is entitled to nominate one person for election to the Board of
Directors of the Company. Mr. Shimizu is NAR Holding Corporation's designated
director.

Any future transactions between the Company and its officers, directors,
principal stockholders or other affiliates will be on terms no less favorable
than could be obtained from independent third parties and will be subject to
approval by a majority of the independent and disinterested directors. No
further loan advances or forgiveness of loans will be made in the future to
officers, directors and post-5% stockholders or their affiliates except for bona
fide business purposes without the approval of a majority of the independent and
disinterested directors.

LEGAL PROCEEDINGS

The Company is not currently a party to any legal proceedings.

50
<PAGE> 50

DESCRIPTION OF SECURITIES

Following the closing of the sale of the Units offered hereby, the
authorized capital stock of the Company will consist of 20,000,000 shares of
Common Stock, $0.10 par value per share and 5,000,000 shares of Preferred Stock,
$0.10 par value per share.

UNITS

Each Unit being offered by the Company consists of one share of Common
Stock and a Warrant exercisable for one share of Common Stock. The Common Stock
and Warrants which comprise the Units will trade only as units until at least 30
days after the date of the Prospectus or such later time as may be determined by
the Representative.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share in all matters
to be voted on by the shareholders. Subject to the preferences that may be
applicable to any Preferred Stock then outstanding, holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of the Company's
liabilities and the liquidation preference, if any, of any then outstanding
shares of Preferred Stock. Holders of Common Stock have no preemptive rights and
no rights to convert their Common Stock into any other securities, and there are
no redemption or sinking fund provisions with respect to such shares. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be materially adversely affected by, the rights of the holders of shares
of any series of Preferred Stock which the Company may designate and issue in
the future. All outstanding shares of Common Stock are fully paid and
non-assessable. The shares of Common Stock to be issued by the Company in the
Offering will be fully paid and non-assessable.

WARRANTS

The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Unit and Warrant Agreement (the "Warrant
Agreement") between the Company and American Securities Transfer & Trust Inc.
(the "Transfer and Warrant Agent"). A copy of the Warrant Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.

Each Warrant entitles the registered holder thereof to purchase, at any
time no sooner than 30 days after the date of the Prospectus, one share of
Common Stock at a price equal to $9.00. The warrants expire three years from the
date of this Prospectus. The Warrant exercise price is subject to adjustment
under provisions referred to below. The holder of any Warrant may exercise such
Warrant by surrendering the certificate representing the Warrant to the Transfer
and Warrant Agent, with the subscription form on the reverse side of such
certificate properly completed and executed, together with payment of the
exercise price. The Warrants may be exercised at any time in whole or in part at
the applicable exercise price until expiration of the Warrants. No fractional
shares will be issued upon the exercise of the Warrants.

51
<PAGE> 51

The exercise price of the Warrants bears no relation to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.

The exercise price and number of shares of Common Stock purchasable upon
the exercise of the Warrants are subject to adjustment upon the occurrence of
certain events, including, without limitation, stock splits, stock dividends,
recapitalizations and reclassifications.

The Warrants are subject to redemption by the Company at $0.20 per Warrant
if the closing bid price of the Common Stock as reported on the Nasdaq SmallCap
Market averages in excess of $10.50 for a period of twenty consecutive trading
days. In the event the Company exercises the right to redeem the Warrants, such
Warrants will be exercisable until the close of business on the date of
redemption. If any Warrant called for redemption is not exercised by such time,
it will cease to be exercisable and the holder will be entitled only to the
redemption price.

Upon separation from the Units, the Warrants will be in registered form and
may be presented to the Transfer and Warrant Agent for transfer, exchange or
exercise at any time on or prior to their expiration at which time the Warrants
become wholly void and of no value. If a market for the Warrants develops,
holders may sell Warrants instead of exercising them. There can be no assurance,
however, that a market for the Warrants will develop or continue.

The Warrants do not confer upon holders any voting, dividend or other
rights as shareholders of the Company.

The Company and the Transfer and Warrant Agent may make such modifications
to the Warrants that they deem necessary and desirable that do not materially
adversely affect the interests of the Warrant holders. No other modifications
may be made to the Warrants without the consent of the majority of the Warrant
holders. Modification of the number of securities purchasable upon the exercise
of any Warrant, the exercise price and the expiration date with respect to any
Warrant requires the consent of the holder of such Warrant unless such
modification occurs in connection with a stock split, stock dividend,
recapitalization, reclassification or similar event.

No gain or loss will be recognized by a holder upon the exercise of a
Warrant. The sale of a Warrant by a holder or the redemption of a Warrant by the
Company will result in the recognition of gain or loss in an amount equal to the
difference between the amount realized by the holder and the Warrant's adjusted
basis in the hands of the holder. Provided that the holder is not a dealer in
the Warrants and that the Common Stock would have been a capital asset in the
hands of the holder had the Warrant been exercised, gain or loss from the sale
or redemption of Warrant will be long-term or short-term capital gain or loss to
the holder. Loss on the expiration of the Warrant, equal to the Warrant's
adjusted basis in the hands of the holder, will be long-term or short-term
capital loss, depending on whether the Warrant had been held for more than one
year.

THE ABOVE DISCUSSION DOES NOT ADDRESS ALL OF THE TAX CONSIDERATIONS THAT MAY BE
RELEVANT TO A PARTICULAR PURCHASER. ACCORDINGLY, ALL PROSPECTIVE PURCHASERS ARE
ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE PURCHASE OF THE UNITS AND THE OWNERSHIP AND
DISPOSITION OF THE WARRANTS AND THE COMMON STOCK.

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<PAGE> 52

PREFERRED STOCK

The Board of Directors is authorized, subject to limitations prescribed by
Massachusetts law, to provide for the issuance of Preferred Stock in one or more
series, to establish from time to time the number of shares to be included in
each such series, and to fix the designations, preferences, voting powers,
qualifications and special or relative rights or privileges thereof. The Board
of Directors is authorized to issue Preferred Stock with voting, conversion and
other rights and preferences that could adversely affect the voting power or
other rights of the holders of Common Stock. Although the Company has no current
plans to issue such shares, the issuance of Preferred Stock or of rights to
purchase Preferred Stock could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of the outstanding voting stock of the Company. As of the
date of this Prospectus, there were no shares of Preferred Stock outstanding.

The Company has agreed with the Representative that it will not issue any
shares of Preferred Stock for a period ending thirteen months after date of this
Prospectus, without the prior written consent of the Representative. See
"Underwriting." The Company will issue preferred stock only with the approval of
a majority of the independent directors who do not have an interest in the
transaction and who have access, at the Company's expense, to the Company's or
independent legal counsel.

REPRESENTATIVE'S WARRANT

At the closing of this Offering, the Company will issue to the
Representative Warrants (the "Representative's Warrants") to purchase 100,000
shares of Common Stock and 100,000 Redeemable Warrants. The Representative's
Warrants will be exercisable for a four-year period commencing one year from the
date of this Prospectus. The exercise price of the Representative's Warrants
will be $12.00. The Representative's Warrants will not be transferable prior to
their exercise date except to officers of the Representative and members of the
syndicate and officers and partners thereof. The Representative's Warrants will
contain provisions providing adjustment in the event of any recapitalization,
reclassification, stock dividend, stock split or similar transaction. The
Representative's Warrants and the securities issuable upon their exercise may
not be offered for sale except in compliance with the applicable provisions of
the Securities Act. The Company has agreed that, for a period of five years from
the date of this Prospectus, if the Company intends to file a registration
statement for the public sale of securities (other than a registration statement
on Form S-4, S-8 or a comparable registration statement), it will notify all of
the holders of the Representative's Warrants and securities issued upon exercise
thereof, and if so requested, it will include therein material to permit a
public offering of the securities underlying the Representative's Warrants
solely at the expense of the Company (excluding fees and expenses of the
Holder's counsel and any underwriting or selling commissions). See
"Underwriting."

REGISTRATION RIGHTS

The Company has granted registration rights to the holders of the
Representative's Warrants, which provides the holders with certain rights to
register the shares of Common Stock underlying the Representative's Warrants. In
addition, for a period of five years from the date of this Prospectus, upon
written demand of the holders of a majority of the Representative's Warrants,
the Company has agreed, on one occasion, to promptly register the underlying
securities solely at the expense of the Company (excluding fees and

53
<PAGE> 53

expenses of the holder's counsel and any underwriting or selling commissions).
Additionally, for a period of five years from the date of this Prospectus, upon
written demand of any holder, the Company has agreed, on one occasion, to
promptly register the underlying securities for purposes of a public offering,
solely at the expense of such holder. See "Underwriting."

The Company has also granted to a former consultant piggyback registration
rights in any public offering after the initial public offering of the Common
Stock.

MASSACHUSETTS LAW

Following the Offering, the Company expects that it will have more than 200
stockholders, as a result of which it will be subject to the provisions of
Chapter 110F of the Massachusetts General Laws, an anti-takeover law. In
general, this statute prohibits a publicly held Massachusetts corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless either (i) prior to that date, the
Board of Directors approved either the business combination or the transaction
in which the person became an interested stockholder, (ii) the interested
stockholder acquires 90% of the outstanding voting stock of the corporation
(excluding shares held by certain affiliates of the corporation) at the time it
becomes an interested stockholder or (iii) the business combination is approved
by the Board of Directors and by the holders of two-thirds of the outstanding
voting stock of the corporation (excluding shares held by the interested
stockholder) voting at a meeting. In general, an "interested stockholder" is a
person who owns 5% (15% in the case of a person eligible to file a Schedule 13G
under the Securities Act with respect to the Common Stock) or more of the
outstanding voting stock of the corporation or who is an affiliate or associate
of the corporation and was the owner of 5% (15% in the case of a person eligible
to file a Schedule 13G under the Securities Act with respect to the Common
Stock) or more of the outstanding voting stock within the prior three years. A
"business combination" includes mergers, consolidations, stock and asset sales,
and other transactions with the interested stockholder resulting in a financial
benefit (except proportionately as a stockholder of the corporation) to the
interested stockholder. The Company may at any time amend its Articles or
By-Laws to elect not to be governed by Chapter 110F by a vote of the holders of
a majority of its voting stock. Such an amendment would not be effective for
twelve months and would not apply to a business combination with any person who
became an interested stockholder prior to the date of the amendment.

The Company's By-Laws provide that any holder of 10% or more of the
outstanding shares of Common Stock may call a meeting of stockholders.

LIMITATION OF LIABILITY

The Company's Articles provide that no director of the Company shall be
personally liable to the Company or to its stockholders for monetary damages for
breach of fiduciary duty as a director, except that the limitation shall not
eliminate or limit liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 61 or 62 of Chapter 156B of the Massachusetts General
Laws, dealing with liability for unauthorized distributions and loans to
insiders, respectively, or (iv) for any transaction from which the director
derived an improper personal benefit.

54
<PAGE> 54

The Company's Articles and By-Laws further provide for the indemnification
of the Company's directors and officers to the fullest extent permitted by
Section 67 of Chapter 156B of the Massachusetts General Laws, including
circumstances in which indemnification is otherwise discretionary.

A principal effect of these provisions is to limit or eliminate the
potential liability of the Company's directors for monetary damages arising from
breaches of their duty of care, unless the breach involves one of the four
exceptions described in (i) through (iv) above. These provisions may also shield
directors from liability under federal and state securities laws.

TRANSFER AGENT AND WARRANT AGENT

The Transfer Agent and Registrar for the Units, the Common Stock and the
Warrants is American Securities Transfer and Trust Inc., Denver, Colorado.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this Offering, there has been no public market for the securities
of the Company. Future sales of substantial amounts of Units or Common Stock in
the public market could materially adversely affect the market price of such
securities. As described below, only a limited number of shares will be
available for sale shortly after this Offering, due to certain contractual and
legal restrictions on resale. Nevertheless, sales of substantial amounts of the
Company's Units or Common Stock in the public market or the perception that such
sales could occur after such restrictions lapse could materially adversely
affect the market price of the Units, Common Stock and Warrants and the ability
of the Company to raise equity capital in the future.

Upon completion of this Offering, the Company will have outstanding
5,069,320 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. The Units
consisting of 1,000,000 shares of Common Stock and the Warrants to purchase
1,000,000 shares of Common Stock that are to be sold by the Company to the
public in this Offering will be freely tradable without restriction under the
Securities Act, unless purchased by affiliates of the Company as that term is
defined in Rule 144 under the Securities Act.

The remaining 4,069,320 shares of Common Stock outstanding upon completion
of this Offering will be restricted securities as that term is defined in Rule
144 under the Securities Act ("Restricted Shares"). Restricted Shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144 or 701 promulgated under the Securities Act,
which are summarized below. Sales of the Restricted Shares in the public market,
or the availability of such shares for sale, could materially adversely affect
the market price of the Common Stock and Warrants. In general, under Rule 144 as
currently in effect, beginning 90 days after the date of this Prospectus, a
person (or persons whose shares are aggregated) who has beneficially owned
Restricted Shares for at least one year (including the holding period of any
owner other than an affiliate of the Company) would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of
(i) one percent of the number of shares of Common Stock then outstanding or (ii)
the average weekly trading volume of the Common Stock during the four calendar
weeks preceding the filing of notice of such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company.

55
<PAGE> 55

Under Rule 144(k), a person who is not deemed to have been an affiliate of the
Company at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any owner other than an affiliate of the
Company), is entitled to sell such shares without complying with the manner of
sale, public information volume limitations or notice provisions of Rule 144.

Any employee, officer or director of or consultant to the Company who
purchased shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates of the Company to sell their Rule 701 shares under Rule 701 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the public information, volume limitation or
notice requirements of Rule 144. In both cases, a holder of Rule 701 shares is
required to wait until 90 days after the date of this Prospectus before selling
such shares.

Holders of all 4,069,320 restricted shares of Common Stock, including
officers and directors and holders of five percent or more of the Common Stock,
have entered into contractual lock-up agreements providing that they will not
offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of the shares of stock owned by them or that could be purchased by them
through the exercise of options to purchase Common Stock of the Company, for
thirteen months after the date of this Prospectus.

In addition to the 13-month lock-up, all officers and directors holding
shares and all stockholders holding five (5%) percent or more of the outstanding
shares further agree not to publicly sell their shares until the sooner of: (1)
the public share price reaches $15.00 and maintains that level for 20
consecutive days or (2) four (4) years after the initial public offering, except
for one shareholder holding 15.3% of the issued and outstanding Common Stock
(post offering) who will be locked up for two (2) years.

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<PAGE> 56

UNDERWRITING

The Underwriters named below have agreed, subject to the terms and
conditions of the firm commitment Underwriting Agreement between the Company,
and the Underwriters, to purchase from the Company the number of Units set forth
opposite their names. The Representative of the Underwriters is Westport
Resources Investment Services, Inc. The underwriting discount set forth on the
cover page of this Prospectus will be allowed to the Underwriters at the time of
delivery to the Underwriters of the Units so purchased.

<TABLE>
<CAPTION>
NUMBER
NAMES OF UNDERWRITERS OF UNITS
- --------------------- ---------
<S> <C>
Westport Resources Investment Services, Inc. ....... 300,000
Schneider Securities, Inc. ......................... 330,000
Weatherly Securities Corporation ................... 330,000
Neidiger, Tucker, Bruner, Inc. ..................... 40,000
---------
Total..................................... 1,000,000
=========
</TABLE>

The Underwriters have advised the Company that they propose to offer the
Units to the public at an offering price $7.50 per Unit and that the
Underwriters may allow to certain dealers who are members of the National
Association of Securities Dealers, Inc. a concession not in excess of $0.375 per
Unit.

The following table summarizes the compensation to be paid to the
Underwriters by the Company.

<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts paid by the Company..... $.75 $750,000 $862,500
</TABLE>

The Company has granted to the Underwriters an over-allotment option
exercisable during the 45-day period following the date of this Prospectus to
purchase up to a maximum of 150,000 additional Units at the public offering
price, less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriters may exercise such option only to satisfy
over-allotments in the sale of the Units.

The Company has agreed to pay to the Representative a non-accountable
expense allowance equal to 3% of the total proceeds of this Offering, or
$225,000 ($258,750 if the Underwriters exercise the over-allotment option in
full), of which $62,500 has already been paid. The Underwriters do not intend to
offer or sell Units to accounts over which they exercise discretionary
authority.

At the closing of this Offering, the Company will issue to the
Representative, for nominal consideration the Representative's Warrants to
purchase 100,000 shares of Common Stock and 100,000 Warrants exercisable at 160%
of the initial public offering price for these Securities. See "Description of
Securities -- Representative's Warrants."

For the period during which the Representative's Warrants are exercisable,
the holder(s) will have the opportunity to profit from a rise in the market
value of the Company's Common Stock, with a resulting dilution in the interests
of the other stockholders of the Company. The holder(s) of the Representative's
Warrants can be expected to exercise them at a time which the Company would, in
all likelihood, be able

57
<PAGE> 57

to obtain any needed capital from an offering of unissued Common Stock on terms
more favorable to the Company than those provided for in the Representative's
Warrants. Such facts may adversely affect the terms on which the Company can
obtain additional financing. To the extent that the Representative realizes any
gain from the resale of the Representative's Warrants or the securities issuable
thereunder, such gain may be deemed additional underwriting compensation under
the Securities Act of 1933, as amended.

The Company has agreed to enter into a two-year non-exclusive consulting
agreement with the Representative, pursuant to which the Representative will act
as a financial consultant to the Company, commencing on the closing date of this
Offering. The total consulting fee of $72,000 will be payable, in full, on the
closing date of this Offering.

The Company has agreed that for a period of thirteen months from the date
of this Prospectus it will not sell or otherwise dispose of any securities
without the prior written consent of the Representative, with the exception of
the grant of options and the issuance of shares issued upon the exercise of
options granted or to be granted under the Company's option plans and
outstanding warrants.

The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.

The Company has agreed with the Representative that for a period of 24
months from the closing date of this Offering, the Representative may designate
an observer to the Board of Directors who will be entitled to attend and receive
notice of all meetings of the Board. The observer, who has not been determined,
will be reimbursed for out-of-pocket travel expenses incurred in attending such
meetings but will otherwise not be compensated by the Company.

Upon the exercise of the Redeemable Warrants more than one year after the
Offering and to the extent not inconsistent with the guidelines of the National
Association of Securities Dealers Regulation, Inc., and the rules and
regulations of the Securities and Exchange Commission, the Company has agreed to
pay the Representative a commission equal to five percent of the exercise price
of the Redeemable Warrants. However, no compensation will be paid to the
Representative in connection with the exercise of the Redeemable Warrants if (a)
the market price of the underlying shares of Common Stock is lower than the
exercise price, (b) the Redeemable Warrants are exercised in an unsolicited
transaction, or (c) the Redeemable Warrants are held in any discretionary
accounts. In addition, unless granted an exemption by the Commission from
Regulation M promulgated under the Exchange Act, the Representative will be
prohibited from engaging in any market making activities or solicited brokerage
activities with regard to the Company's securities for a period of one or five
days before the solicitation of the exercise of any Redeemable Warrant or before
the exercise of any Redeemable Warrant based upon a prior solicitation, until
the later of the termination of such solicitation activity or the termination by
waiver or otherwise of any right the Representative or any other soliciting
broker-dealers may have to receive a fee for the exercise of the Redeemable
Warrants following such solicitation.

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<PAGE> 58

The Representative has advised the Company that, pursuant to Regulation M
under the Securities Act, some persons participating in this offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the Common Stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of Common Stock on behalf of the underwriters for the purpose of
fixing or maintaining the price of the Common Stock. A "syndicate covering
transaction" is a bid for or the purchase of Common Stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with this offering. A "penalty bid" is an arrangement permitting the
Representative to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with this offering if the Common
Stock originally sold by such underwriter or syndicate member is purchased by
the Representative in a syndicate covering transaction and has therefore not
been effectively placed by such underwriter or syndicate member. The
Representative has advised the Company that such transactions may be effected on
the Nasdaq SmallCap Market or otherwise and, if commenced, may be discontinued
at any time.

DETERMINATION OF OFFERING PRICE

Prior to this Offering, there has been no public market for the Common
Stock. The offering price of the securities and the exercise price of the
Warrants being offered hereby was determined by negotiation between the Company
and the Representative. Factors considered in determining such prices include
the history and the prospects for the industry in which the Company competes,
the past and present operations of the Company, the future prospects of the
Company, the abilities of the Company's management, the earnings, net worth and
financial condition of the Company, the general condition of the securities
markets at the time of this Offering, and the prices of similar securities of
comparable companies.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Foley, Hoag & Eliot LLP, Boston, Massachusetts. Certain legal matters
in connection with this Offering will be passed upon for the Underwriters by
William M. Prifti, Esq., Amesbury, Massachusetts.

EXPERTS

The financial statements of Implant Sciences Corporation at June 30, 1998
and 1997, and for each of the two years in the period ended June 30, 1998,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

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<PAGE> 59

WHERE YOU CAN FIND MORE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement") under the Securities Act with respect to the Units offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Units offered hereby, reference
is made to the Registration Statement and the exhibits and schedules filed as a
part thereof. Statements contained in this Prospectus concerning the contents of
any contract or any other document referred to are not necessarily complete and,
in each instance, if the contract or document is filed as an exhibit, reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement. Each such statement is qualified in all respects by
reference to such exhibit. The Registration Statement, including exhibits and
schedules thereto, may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Regional Offices of the
Commission at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and 7
World Trade Center, Thirteenth Floor, New York, New York 10048. Copies also may
be obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed
rates, or by calling the Commission at 1-800-SEC-0330. The Commission also
maintains a Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants, such as the
Company, that make electronic filings with the Commission.

60
<PAGE> 60

GLOSSARY

Alloy A mixture or solution of two or more metals.

Angioplasty A medical procedure used to repair a damaged or
diseased artery.

Balloon Catheter A tube with a balloon at its tip for dilating
arteries, used in angioplasty.

Beta Rays Radioactive emissions consisting of energetic
electrons.

Blended Interface The merging or blending of a coating into the
substrate material.

Brachytherapy Placement of a radioactive source in or near tissue
to deliver radiation therapy.

Cardiovascular System The heart with a network of blood vessels that
circulates blood around the body.

Catheter A flexible tubular device for insertion into a
narrow opening used to deliver a balloon and/or a
stent during angioplasty.

Chemical Vapor Deposition Depositing a coating by decomposition of a compound
gas on a surface.

Coronary Artery A vessel which delivers oxygenated blood to the
heart muscle.

Cyclotron A circular ion accelerator used in medicine to
produce radioisotopes.

Dopant An impurity element used to add positive or
negative charge to a semiconductor.

External Beam Radiation
Treatment A beam of x-rays or electrons usually generated by
a linear accelerator for radiation therapy.

Femoral Relating to the human femur or thigh bone.

Gamma Rays Electromagnetic radiation emitted by a nucleus.

Guidewire Wire used to guide a catheter through a narrow
opening.

Hyperplasia Excessive proliferation of smooth muscle cells
within the coronary artery.

Intima The inner layer of cells of an artery.

Iodine-125 A radioisotope emitting x-rays with a 60-day
half-life.

Ion Implantation The acceleration of ions to high velocity to embed
them into a surface.

Ion Charged atom, usually positive.

Linear Accelerator A straight ion accelerator used for external
radiation therapy or radioisotope production.

61
<PAGE> 61

Magnetron Sputtering A process used to intensify the emission of
material from the surface of a target by magnetic
means in order to form a coating on a substrate.

Native Oxide The natural oxide which exists on most active
metals such as stainless steel, cobalt chrome or
titanium.

Osteoarthritis A disease of the joint cartilage and underlying
bone, which may cause pain and impair joint
function.

Osteolysis A dissolution of the organic matrix of bone
resulting in destruction.

Phosphorus-32 A radioisotope emitting only beta rays with a 14
day half-life.

Physical Vapor Deposition Depositing a coating by condensing it from the
vapor onto a substrate.

Radioactive Seed A small permanently implanted pellet containing
therapeutic radioactivity.

Radioactive Stent A stent which contains a radioactive isotope
embedded within its metal surface.

Radioactive Wet Chemistry A chemical process using radioactive liquid
solutions.

Radiopaque Opaque to x-ray radiation and thus visible on x-ray
film.

Restenosis The reocclusion or closure of an artery after a new
channel has been formed using a balloon catheter or
stent.

Stent A metal mesh tube implanted into an artery to hold
it open.

Thin Film Coatings Coatings of an element or compound usually less
than 10 microns thick.

X-Rays Electromagnetic radiation emitted by atomic
electrons.

Yttrium-90 A radioisotope emitting only beta rays with a 3 day
half-life.

62
<PAGE> 62

IMPLANT SCIENCES CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets as of June 30, 1997 and 1998 and March 31,
1999 (Unaudited).......................................... F-3
Statements of Operations for the Years Ended June 30, 1997
and 1998 and for the Nine Months Ended March 31, 1998 and
1999 (Unaudited).......................................... F-4
Statements of Changes in Stockholders' Equity for the Years
Ended June 30, 1997 and 1998 and for the Nine Months Ended
March 31, 1999 (Unaudited)................................ F-5
Statements of Cash Flows for the Years Ended June 30, 1997
and 1998 and for the Nine Months Ended March 31, 1999
(Unaudited)............................................... F-6
Notes to Financial Statements (Including Data Applicable to
Unaudited Periods)........................................ F-8
</TABLE>

F-1
<PAGE> 63

IMPLANT SCIENCES CORPORATION

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Implant Sciences Corporation

We have audited the accompanying balance sheets of Implant Sciences
Corporation as of June 30, 1997 and 1998, and the related statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated July 31, 1998, the
Company, as discussed in Note 1, has experienced an increase in costs and
decrease in its working capital as a result of delays in its planned equity
offering that adversely affect the Company's current results of operations and
liquidity. Note 1 describes management's plans to address these issues.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Implant Sciences Corporation
at June 30, 1997 and 1998, and the results of its operations and its cash flows
for each of the two years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles.

ERNST & YOUNG LLP

Boston, Massachusetts
July 31, 1998 except as to
Note 1 and Note 13 as to which
the date is June 8, 1999

F-2
<PAGE> 64

IMPLANT SCIENCES CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30, JUNE 30, MARCH 31,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 683,076 $ 311,189 $ 100,037
Short-term investment..................................... 197,729 -- --
Accounts receivable, less allowances of $2,000............ 389,409 388,235 512,846
Inventories............................................... 24,785 31,338 121,080
Deferred income taxes..................................... 13,000 18,000 18,000
Refundable income taxes................................... -- 118,781 48,285
Prepaid expenses.......................................... 10,351 3,746 1,289
---------- ---------- ----------
1,318,350 871,289 801,537
Property and Equipment, at cost:
Machinery and equipment................................... 770,113 1,314,850 1,699,003
Leasehold improvements.................................... 60,141 62,553 69,346
Computers and software.................................... 36,335 36,335 46,022
Furniture and fixtures.................................... 38,096 49,833 59,895
Motor vehicles............................................ 14,822 14,822 14,822
Leased property under capital lease....................... -- 28,360 28,360
---------- ---------- ----------
919,507 1,506,753 1,917,448
Less accumulated depreciation............................. (602,842) (692,808) (778,240)
---------- ---------- ----------
316,665 813,945 1,139,208
Other Assets:
Patent costs, net of accumulated amortization of $10,627
and $15,699, at June 30, 1997 and 1998, respectively,
and of $19,629 at March 31, 1999........................ 91,871 117,738 134,940
Other noncurrent assets, primarily offering costs......... 18,402 363,511 926,134
Deferred income taxes..................................... 176,000 -- --
---------- ---------- ----------
286,273 481,249 1,061,074
---------- ---------- ----------
Total Assets....................................... $1,921,288 $2,166,483 $3,001,819
========== ========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolving line of credit.................................. $ 210,000 $ -- $ 105,000
Accounts payable.......................................... 95,173 107,359 176,812
Accrued expenses.......................................... 694,572 567,435 902,296
Current portion of long-term debt......................... 66,667 50,278 173,611
Obligations under capital lease........................... -- 5,074 5,672
---------- ---------- ----------
1,066,412 730,146 1,363,391
Long Term Liabilities:
Long term debt, net of current portion.................... 38,889 224,491 633,450
Obligations under capital lease........................... -- 22,090 18,086
Deferred income taxes..................................... -- 12,300 12,300
---------- ---------- ----------
38,889 258,881 663,836
Stockholders' Equity:
Common stock, $0.10 par value; 1,000,000 and 6,500,000
shares authorized; 517,613 and 622,613 shares issued and
outstanding at June 30, 1997 and 1998, respectively and
20,000,000 shares authorized; 4,747,540 shares issued
and outstanding at March 1999........................... 51,761 62,261 474,754
Additional paid-in capital................................ 971,601 1,380,555 979,734
Retained earnings (accumulated deficit)................... (207,375) (265,360) (479,896)
---------- ---------- ----------
Total Stockholders' Equity......................... 815,987 1,177,456 974,592
---------- ---------- ----------
Total Liabilities and Stockholders' Equity......... $1,921,288 $2,166,483 $3,001,819
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE> 65

IMPLANT SCIENCES CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------ ------------------------
1997 1998 1998 1999
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product and contract research revenues:
Medical................................... $2,231,918 $2,237,417 $1,626,225 $1,665,067
Semiconductor............................. 447,000 667,012 501,984 361,584
Equipment.................................... 350,754 -- -- --
---------- ---------- ---------- ----------
Total Revenues....................... 3,029,672 2,904,429 2,128,209 2,026,651
Costs and Expenses:
Cost of product and contract research
revenues.................................. 1,354,188 1,693,662 1,297,352 1,216,896
Cost of equipment revenues................... 347,414 -- -- --
Research and development..................... 300,936 306,536 233,433 298,639
Selling, general and administrative.......... 626,361 1,014,401 614,453 726,496
---------- ---------- ---------- ----------
Total Costs and Expenses............. 2,628,899 3,014,599 2,145,238 2,242,031
---------- ---------- ---------- ----------
Operating income (loss)........................ 400,773 (110,170) (17,029) (215,380)
Other income (expense):
Interest income.............................. 20,717 18,872 14,988 9,474
Interest expense............................. (41,760) (11,563) (8,007) (45,330)
Other........................................ -- 5,976 4,482 --
---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for
income taxes................................. 379,730 (96,885) (5,566) (251,236)
Provision (benefit) for income taxes........... 161,400 (38,900) 1,687 (36,700)
---------- ---------- ---------- ----------
Net income (loss)............................ $ 218,330 $ (57,985) $ (7,253) $ (214,536)
========== ========== ========== ==========
Net income (loss) per share -- basic......... $ 0.07 $ (0.02) $ 0.00 $ (0.06)
========== ========== ========== ==========
Net income (loss) per share -- diluted....... $ 0.06 $ (0.02) $ 0.00 $ (0.06)
========== ========== ========== ==========
Weighted average number of common shares
outstanding used for basic earnings per
share..................................... 2,929,806 3,523,368 3,452,598 3,854,892
========== ========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding used for
diluted earnings per share................ 3,485,892 3,523,368 3,452,598 3,854,892
========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE> 66

IMPLANT SCIENCES CORPORATION

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------------- ADDITIONAL EARNINGS TOTAL
NUMBER OF PAR PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT) EQUITY
--------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996.......... 467,335 $ 46,734 $ 828,398 $(425,705) $ 449,427
Net income...................... 218,330 218,330
Issuance of common stock........ 50,278 5,027 143,203 -- 148,230
--------- -------- ---------- --------- ----------
Balance at June 30, 1997.......... 517,613 51,761 971,601 (207,375) 815,987
Net loss........................ (57,985) (57,985)
Issuance of common stock........ 105,000 10,500 134,881 -- 145,381
Forgiveness of obligation to
stockholders, net of related
tax effect................... -- -- 274,073 -- 274,073
--------- -------- ---------- --------- ----------
Balance at June 30, 1998.......... 622,613 $ 62,261 $1,380,555 $(265,360) $1,177,456
Net loss (unaudited)............ -- -- -- (54,522) (54,522)
Issuance of common stock
(unaudited).................. 2,000 200 11,472 -- 11,672
Adjustment to reflect 7-for-1
stock split (unaudited)...... 3,747,678 374,768 (374,768) -- --
--------- -------- ---------- --------- ----------
Balance at December 31, 1998
(unaudited)..................... 4,372,291 $437,229 $1,017,259 $(319,882) $1,134,606
Net loss (unaudited)............ -- -- -- (160,014) (160,014)
Exercise of stock options for
notes receivable
(unaudited).................. 375,249 37,525 (37,525) -- --
========= ======== ========== ========= ==========
Balance at March 31, 1999
(unaudited)..................... 4,747,540 474,754 979,734 (479,896) 974,592
========= ======== ========== ========= ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE> 67

IMPLANT SCIENCES CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
--------------------- ---------------------
1997 1998 1998 1999
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss)................ $ 218,330 $ (57,985) $ (7,253) $(214,536)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and
amortization................ 65,052 101,075 74,122 89,058
Deferred income taxes provision
(benefit)................... 91,000 (3,200) (10,500) --
Changes in operating assets and
liabilities:
(Increase) decrease in
accounts
receivable................ 216,330 1,174 (69,633) (124,611)
(Increase) decrease in
inventories............... (24,785) (6,553) (4,006) (89,742)
(Increase) decrease in
prepaid income taxes...... -- (118,781) -- 70,496
(Increase) decrease in
prepaid expenses.......... (7,512) 6,605 (13,915) 2,457
(Increase) decrease in other
noncurrent assets......... (15,853) (351,146) (270,277) (562,319)
Increase (decrease) in
accounts payable.......... 32,002 12,186 (10,396) 69,453
Increase (decrease) in
accrued expenses.......... (125,963) 333,436 78,968 334,861
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities........... 448,601 (83,189) (232,890) (424,883)
CASH FLOWS USED IN INVESTING
ACTIVITIES
Redemption (purchase) of
short-term investments......... (197,729) 197,729 197,729 --
Purchase of property and
equipment...................... (51,708) (558,886) (315,699) (410,695)
Capitalized patent costs......... (27,076) (30,939) (22,192) (21,132)
--------- --------- --------- ---------
Net cash used in investing
activities..................... (276,513) (392,096) (140,162) (431,827)
</TABLE>

F-6
<PAGE> 68

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
--------------------- ---------------------
1997 1998 1998 1999
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS USED IN FINANCING
ACTIVITIES
Proceeds from common stock
issued......................... 148,230 145,381 157,938 11,672
Proceeds from long-term debt..... -- 200,000 -- 548,015
Repayments of long-term debt..... (195,595) (31,983) (24,885) (19,129)
Proceeds from revolving line of
credit......................... 210,000 -- -- 105,000
Repayments of revolving line of
credit......................... (210,000) (210,000) --
Repayments of notes payable --
related parties................ (207,000) -- -- --
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities........... (44,365) 103,398 (76,947) 645,558
--------- --------- --------- ---------
Net increase (decrease) in
cash........................... 127,723 (371,887) (449,999) (211,152)
Cash at beginning of year........ 555,353 683,076 683,076 311,189
--------- --------- --------- ---------
Cash at end of year.............. $ 683,076 $ 311,189 $ 233,077 $ 100,037
========= ========= ========= =========
Supplemental Disclosures:
Interest paid.................. $ 42,948 $ 10,835 $ 8,008 $ 45,330
========= ========= ========= =========
Income taxes paid.............. $ 83,815 $ 98,393 $ 98,393 --
========= ========= ========= =========
Obligations under capital
lease....................... -- $ 28,360 -- --
========= ========= ========= =========
Forgiveness of obligation to
stockholders................ -- $ 460,573 $ 460,573 --
========= ========= ========= =========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-7
<PAGE> 69

IMPLANT SCIENCES CORPORATION

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AS OF MARCH 31, 1999 AND FOR THE NINE MONTHS ENDED
MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED.)

1. DESCRIPTION OF BUSINESS

Implant Sciences Corporation is a provider of patented and proprietary
surface modification services to the medical device and semiconductor
industries. Ion implantation and thin film coating techniques are utilized to
enhance the surfaces for orthopedic implants (hip and knee total joint
replacements), to implant radioactive material into prostate seeds and coronary
stents, coatings on guidewires, stents and catheters for interventional
cardiology devices, and ion implantation of electronic dopants for the
semiconductor industry. The Company's principal markets are the orthopedic,
interventional cardiology and semiconductor markets.

During 1998 and 1999, the Company incurred operating losses and utilized
significant cash to fund operations. During this time the Company increased its
cash expenditures to develop its new products, increase capacity and equipment
and increase sales and marketing capabilities in anticipation of FDA approval
for its radioactive prostate seed (which was obtained on May 26, 1999) and
radioactive stent products. The Company has been utilizing its credit facilities
and cash and cash equivalents to finance operations. In order to be better
positioned to achieve its strategic objectives, the Company is attempting to
obtain equity financing through an initial public offering of its common stock.

The Company has experienced delays in completing its initial public
offering. Accordingly, the Company has implemented a number of programs to
reduce its use of cash, including operating expense reductions, while it
actively attempted to complete its initial public offering. The Company believes
that these programs will continue until such time as additional sources of
financing are obtained. Management of the Company has outlined and implemented a
plan of action to ensure that the Company has adequate sources of cash to meet
its working capital needs for at least the next twelve months. The key elements
of the plan are as follows:

- Timing of new product development expenditures has been closely tied to
timing of anticipated financing.

- Continued pursuit of government research grants.

- Pursuit of financing alternatives including bank financing, strategic
alliances, and capital contributions by management.

As a result of the above actions, management believes that its existing
cash resources and credit facilities should meet working capital requirements
over the next twelve months. However, unanticipated decreases in revenues,
increases in expenses or further delays in the process of obtaining equity
financing, may adversely impact the Company's cash position and require further
cost reductions.

F-8
<PAGE> 70
IMPLANT SCIENCES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INTERIM FINANCIAL STATEMENTS

The financial information at March 31, 1999, and for the nine months ended
March 31, 1998 and 1999, is unaudited but includes all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary for
a fair presentation of the financial position at such date and of the operating
results and cash flows for these periods. The results of operations and cash
flows for the nine months ended March 31, 1998 and 1999 are not necessarily
indicative of results that may be expected for the entire year.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

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

Short-Term Investment

Short-term investment consists of a U.S. Treasury bill with an original
maturity of six months. The investment is recorded at cost plus accrued interest
which approximates market value.

Inventories

Inventories consist of gold and other precious metal raw materials used in
the manufacturing process and are carried at the lower of cost (first-in,
first-out) or market.

Property and Equipment and Capital Lease

Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets as
follows:

<TABLE>
<S> <C>
Leasehold improvements............. life of lease
Furniture and fixtures............. 5-7 years
Machinery and equipment............ 7 years
</TABLE>

Equipment under the capital lease is being amortized over the life of the
lease.

Warranty Costs

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

Income Taxes

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

F-9
<PAGE> 71
IMPLANT SCIENCES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Patent Costs

The costs to obtain patents are capitalized. The Company amortizes the cost
of patents ratably over their legal lives commencing with the month in which the
patents are issued. As of June 30, 1998, there were four patents issued.
Accumulated amortization at June 30, 1997 and 1998 was $10,627 and $15,699,
respectively.

Concentrations of Credit Risk

The Company grants credit to its customers, primarily large corporations in
the medical device and semiconductor industries. The Company performs periodic
credit evaluations of customer financial condition and does not require
collateral. Receivables are generally due within thirty days. Credit losses have
historically been minimal, which is consistent with management's expectations.

The Company has three major customers which accounted for the following
annual revenue:

<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Company A................................. $1,482,000 $1,229,000
Company B (see Note 5).................... 350,000 --
Company C................................. 148,000 175,000
</TABLE>

Total accounts receivable at June 30, 1997 and 1998 for Company A was
approximately $223,000 and $138,000, respectively.

Stock Based Compensation

The Company accounts for its stock based compensation arrangements under
the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,
rather than the alternative fair value accounting method provided for under FAS
No. 123, Accounting for Stock-Based Compensation. Under APB 25, when the
exercise price of options granted to employees and non-employee directors under
these plans equals the market price of the underlying stock on the date of
grant, no compensation expense is recorded.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

Revenue Recognition

Revenues are recognized at the time product is shipped. During fiscal 1996,
the Company was awarded a non-recurring, long-term, fixed price contract to
build one piece of customized manufacturing equipment, which was completed in
fiscal 1997. Revenues under this contract were recognized as costs were
incurred. The Company uses the percentage-of-completion method under the
contract and measures progress towards the completion using the cost-to-cost
method.

F-10
<PAGE> 72
IMPLANT SCIENCES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Contract revenue under cost-sharing research and development agreements is
recognized as eligible research and development expenses are incurred. The
Company's obligation with respect to these agreements is to perform the research
on a best-efforts basis.

RESEARCH AND DEVELOPMENT COSTS

All costs of research and development activities are expensed as incurred.
The Company performs research and development for itself and under contracts
with others, primarily the U.S. government. Company funded research and
development includes the excess of expenses over revenues on its commercial and
government research contracts and, therefore, is included in cost of product and
contract research revenues in the accompanying statement of operations.

The Company funded and customer funded research and development costs for
1997 and 1998 were as follows:

<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Company funded........................... $522,765 $495,098
Customer funded.......................... 118,539 289,530
-------- --------
Total research and
development................. $641,304 $784,628
======== ========
</TABLE>

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, Reporting Comprehensive Income and Statement No. 131,
Disclosures About Segments of an Enterprise and Related Information. Statement
No. 130 establishes standards for the reporting and display of comprehensive
income and its components. Statement No. 131 establishes standards for public
companies to report information about operating segments in financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and customers. Statement 131 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements retroactively in 1999.
Under Statement 131 the Company believes that it will operate in one business
segment. Accordingly, the Company does not anticipate that the adoption of this
statement will have a significant effect on the Company's disclosures. Statement
130, which will be adopted in 1999, will not have a significant impact on the
Company's disclosures.

EARNINGS PER SHARE

In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share. This Standard revises certain
methodology for computing earnings per common share (EPS) and requires the
reporting of two earnings per share figures: basic earnings per share and
diluted earnings per share. Basic earnings per common share are computed by
dividing net income by the weighted-average number of common shares outstanding.
Diluted earnings per share are computed by dividing net income by the sum of the
weighted-average number of common shares outstanding plus
F-11
<PAGE> 73
IMPLANT SCIENCES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

the dilutive effect of shares issuable through the exercise of stock options
(common stock equivalents).

The shares used for basic earnings per common share and diluted earnings
per common share are reconciled as follows:

<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
---------------------- ----------------------
1997 1998 1998 1999
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Average shares
outstanding for basic
earnings per share.... 2,929,806 3,523,368 3,452,598 3,854,892
Dilutive effect of stock
options............... 556,086 -- -- --
--------- --------- --------- ---------
Average shares
outstanding for
diluted earnings per
share................. 3,485,892 3,523,368 3,452,598 3,854,892
========= ========= ========= =========
</TABLE>

3. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Accrued compensation and benefits................ $549,366 $ 90,573
Deferred revenue................................. -- 125,000
Accrued income taxes............................. 14,900 --
Warranty......................................... 8,700 8,000
Accrued consulting fees.......................... -- 125,300
Other............................................ 121,606 218,562
-------- --------
$694,572 $567,435
======== ========
</TABLE>

4. RESEARCH AND DEVELOPMENT ARRANGEMENTS

The Company is the recipient of several grants under the U.S. Government's
Small Business Innovative Research (SBIR) program. These grants are firm
fixed-priced contracts and generally range in length from six to nine months.
Revenues under such arrangements were approximately $12,000 and $308,000 for the
years ended June 30, 1997 and 1998, respectively.

The Company also conducts research and development under cost-sharing
arrangements with its commercial customers. Revenues under such arrangements
were approximately $110,000 and $100,000 for the years ended June 30, 1997 and
1998, respectively.

F-12
<PAGE> 74
IMPLANT SCIENCES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. LONG-TERM CONTRACT

During 1996, the Company entered into a one-time contract as a
subcontractor under a cost-plus fixed fee arrangement at a total contract price
of approximately $1,933,000, as amended.

Amounts subject to retainage provisions were $13,500 at June 30, 1997. The
Company incurred general and administrative expenses relating to this contract
of approximately $88,000 for the year ended June 30, 1997. No general and
administrative expense relating to this contract were incurred for the year
ended June 30, 1998.

6. LONG-TERM DEBT

Maturities of long-term debt at June 30, 1998 are as follows:

<TABLE>
<S> <C>
Year ending June 30:
1999................................... $ 50,278
2000................................... 63,611
2001................................... 63,611
2002................................... 43,936
2003................................... 40,000
Thereafter............................. 13,333
--------
274,769
Less current portion..................... 50,278
--------
$224,491
========
</TABLE>

The Company finances its operations utilizing a Revolving Credit Facility
("Credit Facility") and two Equipment Term Loans under a Loan Agreement with its
bank. Both borrowings under the Loan Agreement are cross-collateralized and
cross-defaulted. The Loan Agreement has a first lien on substantially all of the
Company's assets.

The Credit Facility bears interest at the bank's base rate, plus 1% (9.5%
at June 30, 1998). Advances under the Credit Facility are limited to 70% of
qualifying accounts receivable and payable on demand. At June 30, 1998 the
Company had $300,000 available under the Credit Facility.

In August 1997, the Company refinanced one of its Term Loans. The Term Loan
is payable in 48 monthly installments of $1,968, and matures September 30, 2001.
Interest is payable monthly at the same rate as the Credit Facility.

In January 1998, the Company increased the amount available under its
Equipment Term Loan to $750,000. The Company may utilize this facility to
finance capital expenditures through October 1998. Principal repayments commence
November 1998 in sixty equal monthly installments. Interest is payable monthly
at 1% above the banks base rate commencing February 1998.

Under the provisions of its Loan Agreement, the Company is required to
maintain compliance with certain financial covenants including debt service
coverage, minimum levels of net worth and restrictions on indebtedness. At June
30, 1998, the Company's debt service coverage and net worth was less than the
required amounts. The Company's bank

F-13
<PAGE> 75
IMPLANT SCIENCES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

has waived its rights under the Loan Agreement with respect to compliance with
these financial covenants at June 30, 1998. The Company complied with these
covenants at September 30, 1998. In December 1998, the Company's bank changed
its loan compliance requirements from a quarterly basis to an annual basis. The
bank now measures compliance annually, consistent with the Company's fiscal year
end. Accordingly, amounts payable under the Loan Agreement are classified as
long-term in the accompanying balance sheet.

7. RELATED-PARTY TRANSACTIONS

Accounts receivable from related parties as of June 30, 1998 consisted of a
loan of $137,500 to a principal shareholder. The interest rate on the loan,
which is unsecured, is six percent per annum. The entire amount of the principal
and accumulated interest will be due on December 9, 2003. This was accounted for
as a reduction of stockholders' equity.

Between 1984 and 1994, two officers, Dr. Armini and Dr. Bunker, of the
Company, were not paid certain compensation. As a result, deferred compensation
of $811,825 was accrued by the Company as the services were rendered. In 1996
and 1997, payments of $213,252 and $119,000, respectively, were made to these
individuals. The remaining obligation was included in accrued compensation in
the June 30, 1997 balance sheet.

During 1998, these individuals discharged the Company from the remaining
obligation of $461,000 which was recorded as an increase to Additional Paid-In
Capital, net of related tax effect of $186,500.

In 1998, as consideration for terminating an agreement with an acting Chief
Financial Officer and resignation from the Company's board of directors, the
Company provided the following benefits to the consultant: (i) a $60,000 lump
sum cash payment; (ii) 12 additional payments of $4,125 per month; (iii)
warrants, with a three-year term, to purchase 86,640 shares of the Common Stock
of the Company at a price of $17.31 per share; (iv) 12,000 shares of the Common
Stock of the Company; and (v) the forgiveness of an $18,750 employee advance. In
connection with this individual's agreement he was granted a three year term, to
purchase 9,000 shares of Common Stock of the Company at a price of $1.51 per
share. All such consideration was accrued as of June 30, 1998.

8. LEASE OBLIGATION

The Company has an operating lease for its manufacturing, research and
office space which expires on May 31, 2000. Under the terms of the lease, the
Company is responsible for their proportionate share of real estate taxes and
operating expenses relating to this facility. Total rental expense for fiscal
years ended June 30, 1997 and 1998 was $115,954 and $160,224, respectively.

Included in property and equipment at June 30, 1998 is equipment recorded
under a capital lease, net of accumulated depreciation of $28,360.

F-14
<PAGE> 76
IMPLANT SCIENCES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum rental of payments required under capital leases and
operating leases with noncancellable terms in excess of one year at June 30,
1998, together with the present value of net minimum lease payments:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE TOTAL
------- --------- --------
<S> <C> <C> <C>
Year ending June 30:
1999..................................... $ 6,578 $146,229 $152,807
2000..................................... 7,176 163,963 171,139
2001..................................... 7,176 -- 7,176
2002..................................... 7,176 -- 7,176
2003..................................... 6,578 -- 6,578
------- -------- --------
Net minimum lease payments............... $34,684 $310,192 $344,876
======== ========
Less finance charges..................... 7,520
-------
Present value of net minimum lease
payments.............................. $27,164
=======
</TABLE>

9. INCOME TAXES

The components of the income tax provision (benefit) are as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Current:
Federal............................................ $ 53,900 $(30,100)
State.............................................. 16,500 (5,600)
-------- --------
70,400 (35,700)
Deferred............................................. 91,000 (3,200)
-------- --------
$161,400 $(38,900)
======== ========
</TABLE>

The income tax provision (benefit) is greater than the amounts computed by
applying the statutory federal income tax rate of 34% to income before the
provision for income taxes, primarily as a result of state income taxes.

F-15
<PAGE> 77
IMPLANT SCIENCES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the Company's deferred tax assets as of June 30
are as follows:

<TABLE>
<CAPTION>
1997 1998
-------- -------
<S> <C> <C>
Deferred tax assets:
Deferred compensation............................... $185,000 $ --
Net operating loss and tax credit carryforwards..... 8,000 8,000
Other............................................... 14,000 18,000
-------- -------
Total deferred tax assets............................. 207,000 26,000
Deferred tax liabilities:
Tax over book depreciation.......................... 18,000 20,300
-------- -------
Total deferred tax liabilities........................ 18,000 20,300
-------- -------
Net deferred tax assets............................... $189,000 $ 5,700
======== =======
</TABLE>

10. STOCKHOLDERS' EQUITY

Each share of the Company's outstanding common stock has one vote. The 1992
Stock Option Plan (the "1992 Plan") provides for the grant of incentive stock
options and nonqualified stock options to employees. The exercise price of the
options equals 100% of the fair market value on the date of the grant, and vest
ratably over three years commencing with the second year. A total of 1,680,000
shares have been reserved for issuance under the 1992 Plan. (See Note 13)

The following table presents the activity of the 1992 Plan for the years
ended June 30, 1997 and 1998:

<TABLE>
<CAPTION>
1997 1998
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period......... 1,428,000 $ .78 1,533,000 $ .82
Granted.................................... 105,000 1.38 55,200 3.94
Exercised.................................. -- -- (630,000) .46
Canceled................................... -- -- (240,000) 1.51
--------- ----- --------- -----
Outstanding at end of period............... 1,533,000 $ .82 718,200 $1.14
========= ===== ========= =====
Options exercisable at end of period....... 1,108,002 $ .58 513,000 $ .78
========= ===== ========= =====
Weighted average fair value per share of
options granted during the period........ $ .11 $ .47
===== =====
</TABLE>

F-16
<PAGE> 78
IMPLANT SCIENCES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The following table presents weighted average price and life information
about significant option groups outstanding at June 30, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES NUMBER LIFE (YRS) PRICE NUMBER PRICE
- -------- ------- ----------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
$ .42 318,000 5.05 $ .42 318,000 $ .42
1.38 375,000 8.02 1.38 195,000 1.38
7.00 25,200 9.74 7.00 -- --
------- -------
718,200 513,000
======= =======
</TABLE>

The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-based
Compensation(FAS 123). If the compensation cost for the option plans had been
determined based on the fair value at the grant date for grants in 1997 and
1998, consistent with the provisions of FAS 123, the pro forma net income for
1997 and 1998, would have decreased by $45,000 and $55,000 respectively, and by
$.01 per share and $.01 per share-diluted, respectively.

The fair value of options and warrants issued at the date of grant were
estimated using the Minimum-Value method with the following weighted average
assumptions:

<TABLE>
<CAPTION>
OPTIONS GRANTED
-------------------------
1997 1998
---------- -----------
<S> <C> <C>
Expected life (years)............... 5 5
Risk free interest rate............. 6.9%-6.96% 5.55%-5.75%
Dividend yield...................... 0% 0%
</TABLE>

The Company has never declared nor paid dividends and does not expect to do
so in the foreseeable future.

The effects on 1997 and 1998 pro forma net income of expensing the
estimated fair value of stock options are not necessarily representative of the
effects on the results of operations for future years as the periods presented
include only two and three years, respectively, of option grants under the
Company's plans.

11. ROYALTY AGREEMENT

Under the terms of the sale of a former product line, the Company is
entitled to minimum annual royalties which aggregate $175,000 over four years.
During 1997 and 1998, the Company recognized approximately $75,000 and $44,000,
respectively, of royalties under this arrangement.

F-17
<PAGE> 79
IMPLANT SCIENCES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

12. 401(k) PLAN

The Company has a defined contribution retirement plan which contains a
401(k) program. All employees who are 21 years of age and who have completed one
year of service during which they worked at least 1,000 hours are eligible for
participation in the plan. The Company may make discretionary contributions. The
Company made contributions to the plan of $1,100 and $3,200 in 1997 and 1998,
respectively.

13. SUBSEQUENT EVENTS

In connection with a planned initial public offering of the Company's
Common Stock, the Company amended and restated its Articles of Organization in
September 1998. The amendment, among other things, included the following:

- The Company's Board of Directors and Stockholders increased the
authorized Common Stock to 20,000,000 shares.

- The Company's Board of Directors and Stockholders authorized 5,000,000
shares of Preferred Stock ($.10 par value). The Board of Directors was
also authorized to issue the Preferred Stock in one or more series,
and to fix the powers, designations, preferences and other rights,
including dividend rights, conversion rights, voting rights,
redemption terms and liquidation preferences without any further
action by the Company's stockholders.

- The Board of Directors and Stockholders declared a 7-for-1 stock split
effected in the form of a stock dividend.

Except for historical share amounts in the accompanying balance sheet and
statement of changes in stockholders' equity, the Company has restated all
historical share and per-share data to give retroactive effect to the 7-for-1
stock split effected in the form of a stock dividend. Upon distribution of the
shares the par value of the shares distributed will be transferred from
additional paid-in-capital to Common Stock.

In addition, in September 1998, the Company adopted two new employee
benefit plans, the 1998 Incentive and Nonqualified Stock Option Plan ("Incentive
Plan") and the 1998 Employee Stock Purchase Plan ("Stock Purchase Plan"). Upon
the adoption of the 1998 Option Plan, the 1992 Option Plan was terminated. No
new stock options will be granted under the 1992 Option Plan, which has been
superseded by the 1998 Option Plan.

The Incentive Plan provides for the grant of incentive stock options and
nonqualified stock options to officers and key employees for the purchase of up
to 1,680,000 shares of Common Stock. Options granted to purchase shares of
Common Stock are exercisable as determined by an appointed committee consisting
of two or more non-employee directors (Committee), expire within ten years from
date of grant and have an exercise price not less than the fair market value of
the Company's Common Stock on the date of grant. However, in the case of
qualified options, if an employee owns more than 10% of the voting power of all
classes of stock, the option granted will be at 110% of the fair market value of
the Company's Common Stock on the date of grant and will expire over a period
not to exceed five years.

F-18
<PAGE> 80
IMPLANT SCIENCES CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

In January 1999, the shares authorized and reserved for issuance under the
1998 Stock Option Plan were reduced from 1,680,000 shares to 240,000 shares of
authorized and unissued Common Stock.

Under the terms of the Incentive Plan each non-employee director, upon
election and each subsequent reelection to the Board of Directors, shall
automatically receive a Nonqualified Option to purchase 2,000 shares of Common
Stock subject to the same terms and conditions referred to in the immediately
preceding paragraph.

The 1998 Employee Stock Purchase Plan ("Purchase Plan") provides for the
issuance of 141,000 shares of common stock thereunder. Under the Purchase Plan,
eligible employees may purchase common shares at a price per share equal to 85%
of the lower of the fair market value of the common stock on the first or last
day of a one-year offering period. Participation in the offering period is
limited to $25,000 in any calendar year.

On January 7, 1999, the Company entered into Loan Agreements with ten
employees. Pursuant to the terms of these Agreements, the Company loaned a total
of $137,500 to these ten employees for the purpose of exercising a total of
321,642 options to purchase Common Stock. The interest rate on the loans, which
are unsecured, is six percent per annum. The entire amount of the principal and
accumulated interest will be due within three years. This was accounted for as a
reduction of stockholders' equity.

On June 8, 1999 the Company amended and restated its Articles of
Organization. The amendment, among other things, included the following:

- The Board of Directors and Stockholders declared a 6-for-7 reverse
stock split of its Common Stock.

- The Board of Directors and Stockholders increased the authorized
Common Stock, affected by the reverse stock split, from 17,142,857 to
20,000,000 shares.

Except for historical share amounts in the accompanying balance sheet and
statement of changes in stockholders' equity, the Company has restated all
historical share and per-share data to give retroactive effect to the 6-for-7
reverse stock split. Upon return of the shares the par value of the shares
returned will be transferred to additional paid-in-capital from Common Stock.

F-19
<PAGE> 81

INSIDE BACK COVER

On this page appear photographs of an ion implanter, the production
facilities and orthopedic hips being ion implanted knee components, radiopaque
coatings, hip components and radioactive prostate seeds.
<PAGE> 82

- ------------------------------------------------------
- ------------------------------------------------------

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 4
Risk Factors.......................... 8
Use of Proceeds....................... 13
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 26
Management............................ 40
Principal Stockholders................ 47
Certain Transactions.................. 49
Legal Proceedings..................... 50
Description of Securities............. 51
Shares Eligible for Future Sale....... 55
Underwriting.......................... 57
Legal Matters......................... 59
Experts............................... 59
Where You Can Find More Information... 60
Glossary.............................. 61
Index to Financial Statements......... F-1
</TABLE>

------------------------

UNTIL JULY 19, 1999 (25 DAYS AFTER THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT) ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------

1,000,000 UNITS
EACH CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE REDEEMABLE COMMON STOCK
PURCHASE WARRANT
[IMPLANT SCIENCES LOGO]
--------------------

PROSPECTUS
--------------------

WESTPORT RESOURCES
INVESTMENT SERVICES, INC.

SCHNEIDER SECURITIES, INC.

WEATHERLY SECURITIES CORPORATION
June 23, 1999

- ------------------------------------------------------
- ------------------------------------------------------