Our Board of Directors has concluded that Dr. McGann is qualified to serve as a director based on his experience and leadership as an executive of a public company and his knowledge of the security industry and specific expertise in explosives trace detection.

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Robert P. Liscouski, joined us on February 2, 2015 as Executive Vice President, Business Development. He has served on our Board of Directors since May 2009. From July 2009 until November 2013, Mr. Liscouski served as a partner at Secure Strategy Group, a homeland security-focused banking and strategic advisory firm that had been retained by us to assist with our efforts to acquire additional capital. Mr. Liscouski also serves as a senior partner at Edge360, a leading security technology and situational awareness solutions provider to the homeland security marketplace that was been retained by us in fiscal 2013. Mr. Liscouski was the first Assistant Secretary for Infrastructure Protection for the Department of Homeland Security, serving from March 2003 to February 2005. Mr. Liscouski’s private sector experience includes serving as the CEO of Content Analyst, a software company that automates the analysis and categorization of large volumes unstructured text and data, as Director of Information Assurance for The Coca-Cola Company and Vice President, Law Enforcement Division, for ORION Scientific Systems. Mr. Liscouski’s government experience includes 11 years as a Special Agent with the Diplomatic Security Service of the U.S. Department of State with assignments including being the State Department representative to INTERPOL, Mobile Training Team Leader, Beirut and Rome, and five years with the Bergen County, NJ, Prosecutor’s Office as an undercover and homicide investigator. Mr. Liscouski is a Senior Fellow at the Center of Strategic and International Studies in Washington, D.C. and served for 12 years as an advisor to the U.S. government on technology matters. Mr. Liscouski holds a B.S. degree in Criminal Justice from John Jay College of Criminal Justice and a Master of Public Administration degree from the Kennedy School of Government, Harvard University.

Our Board of Directors has concluded that Mr. Liscouski is qualified to serve as a director based on his experience and leadership roles in public safety and security as a senior official with the Department of Homeland Security and based on his experience and leadership roles in the private sector.

Michael C. Turmelle, has served on our Board of Directors since December 2005.  Since February 2015, Mr. Turmelle has served as President of Hayward Tyler Inc., a provider of horizontal and vertical pumps. From November 2007 through January 2015, Mr. Turmelle served as the Principle of SFTT Consulting, assisting companies in the renewable energy, medical devices and security markets with financial, strategic, and operational issues.  From 1987 until October 2007, Mr. Turmelle worked for SatCon Technology Corporation, holding several positions including Chief Financial Officer from 1991 until 2000 and Chief Operating Officer from 2000 to 2005.  Mr. Turmelle holds a B.A. degree in Economics from Amherst College and a Financial Management Program certificate from General Electric.

Our Board of Directors has concluded that Mr. Turmelle is qualified to serve as a director based on his past and current leadership and executive roles, financial and operational skills, business judgment and knowledge of corporate governance matters.

James M. Simon, Jr., has served as the Chief Executive Officer of Intelligence Enterprises LLC, a privately held management-consulting firm specializing in advising companies and governments around the world on a variety of matters including business development, contract capture, M&A, as well as strategic program initiatives, since January 2003.  Since November 2012, he has also taught cyber security in the Department of Criminal Justice at The University of Alabama.  From January 2010 to September 2012, Mr. Simon served as Microsoft’s Chief Strategist for its worldwide public sector and its executive sponsor for the State of Alabama.  In 2004, he founded Microsoft’s Institute for Advanced Technology in Governments, and for five years, led its efforts to connect Microsoft's world-leading advanced research and development activities with the global public sector.  Mr. Simon served in the US Army from 1969 to 1973 and the US Army Reserve from 1973 to 1997, was a principle negotiator for the Conventional Forces in Europe Treaty from 1990 to 1993, and, following his appointment by President Clinton and confirmation by the Senate, served as Assistant Director of Central Intelligence for Administration from 1998 to 2003.  Mr. Simon has served on a number of corporate boards, the most recent being GeoEye, Inc., a provider of satellite imagery, that was acquired by DigitalGlobe, Inc.  Mr. Simon holds a B.A. degree in Political Science from The University of Alabama and an M.A. in International Relations from the University of Southern California.

Our Board of Directors has concluded that Mr. Simon is qualified to serve as a director based on his past and current leadership and executive roles in national and international security, his extensive service as a director of corporate boards and his extensive experience working with senior government and industry leaders worldwide.

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Background of Executive Officers

Brenda L. Baron has served as our Vice President, Manufacturing since February 2009, having joined the company in April 2004. Ms. Baron developed the Security Division’s manufacturing operations, as well as manufacturing, test, and documentation control. Prior to joining the Company, Ms. Baron served as Documentation Engineer with the instrumentation division of Milipore Corporation, from 2002 to 2004, and was employed at Ion Track Instruments, an explosive trace detector manufacturer, as Configuration Manager, from 1998 to 2001, where she played a key role in bringing handheld, bench top, and portal trace detectors into production.

Roger P. Deschenes joined us in June 2008 as Controller, was promoted to Vice President, Finance in January 2009 and to Chief Financial Officer in July 2010. Mr. Deschenes has more than 25 years of accounting and financial leadership experience with publicly traded and private companies. Prior to joining Implant Sciences, Mr. Deschenes served as Vice President, Finance with Beacon Roofing Supply, Inc. from 2006 to 2007. From 1990 to 2006, Mr. Deschenes served in several senior accounting and financial capacities at Saucony, Inc. including: Vice President, Controller, Chief Accounting Officer and Assistant Treasurer. Saucony, Inc. was sold to Stride Rite, Inc. in 2005. Mr. Deschenes received a B.S. in Business Administration from Salem State University and is a Certified Management Accountant.

Dr. Darryl K. Jones joined us in May 2012 as Vice President, Sales and Marketing and assumed responsibility for our Technical Services in March 2014. From 2009 until he joined the Company, Dr. Jones served as Vice President, Global Product Management at Morpho Detection, Inc., a business unit of the Safran Group. From 2006 through 2009, Dr. Jones served as General Manager, Global Security Sales at GE Security and served as Global Business Manager at GE Healthcare from 2003 through 2006. Dr. Jones holds a Ph.D. in Optical Science and Engineering from the University of Alabama in Huntsville, a Master of Arts degree in Physics and a B.A. from Fisk University.

Todd A. Silvestri joined us in September 2008 as Vice President, Advanced Technology and Product Development and is directly responsible for the design and commercialization of the Company’s advanced explosive trace detection solutions. Previously, Mr. Silvestri was Senior Vice President of Century Capital Partners, assisting his clients in defining optimal exiting strategies, securing capital, and expanding into foreign markets. Prior to that, he led new product development for Environmental Systems Products, where he was responsible for expanding the company’s traditional business-to-government services into new frontiers by commercializing products and services for private business clients and consumers. In 2003, Mr. Silvestri founded APAC Global LLC providing consulting in the areas of company establishment, localization/relocation of operations, supply chain management, and organizational design primarily focused with small to medium sized companies expanding to, or within, the Asia Pacific Region. Mr. Silvestri holds an M.B.A. from the Kellogg School of Management at Northwestern University, as well as a B.S. in Chemical Engineering from Clarkson University.

Vote Required

A plurality of the votes properly cast by the holders of Common Stock with respect to each nominee is required for the election of that nominee as a director.

Recommendation of the Board

The Board recommends a vote “FOR” the election of the nominees to the Board to serve until the 2016 Annual Meeting and until their successors are duly elected and qualify.

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PROPOSAL NO. 2:  RATIFICATION OF APPOINTMENT OF OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

The Audit Committee of our Board of Directors appointed Marcum LLP (“Marcum”) as our independent registered public accounting firm to audit our consolidated financial statements for the fiscal year ending June 30, 2015. Marcum LLP has served as the Company’s independent registered public accountant since April 2010.  Marcum acts as our principal independent registered public accounting firm.

The Audit Committee and the Board believe that the appointment of Marcum LLP as the Company’s independent registered public accountant is in the best interests of the Company and its stockholders, and the Company is requesting that the stockholders ratify the appointment of Marcum LLP as the Company’s independent registered public accountant for the fiscal year ending June 30, 2015. Representatives of Marcum LLP will be present at the Annual Meeting with the opportunity to make a statement if they desire to do so and to respond to appropriate questions from stockholders.

Vote Required

The affirmative vote of a majority of the votes properly cast by the holders of Common Stock is required to ratify the appointment of Marcum LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2015.  Abstentions will not affect the outcome of the vote on the proposal.

Recommendation of the Board of Directors

The Board recommends a vote “FOR” the ratification of the appointment of Marcum LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2015.

PROPOSAL NO. 3: APPROVAL OF AMENDMENT TO THE COMPANY’S RESTATED ARTICLES OF ORGANIZATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK

Our Restated Articles of Organization, as amended, currently authorizes the issuance of up to 200,000,000 shares of Common Stock. As of March 31, 2015, there were 74,303,120 shares of Common Stock outstanding. In addition, we have reserved 89,777,540 shares for future issuance pursuant to the conversion of principal debt and interest by DMRJ Group, LLC, one of our secured lenders, and 25,164,178 shares for future issuance pursuant to the exercise of outstanding stock options and warrants. Thus, as of March 31, 2015, we have 10,361,376 shares of authorized Common Stock available for future issuance.

Our Board of Directors has approved, subject to stockholder approval, an amendment to the Restated Articles of Organization to increase the number of authorized shares of Common Stock to 250,000,000 (the “Amendment”). The additional shares of Common Stock authorized by the Amendment, if and when issued, would have the same rights and privileges as the shares of Common Stock previously authorized. A copy of the Amendment is set forth in Appendix A hereto.

The additional shares of Common Stock authorized by the Amendment could be issued at the discretion of the Board of Directors from time to time for any proper corporate purpose, including, without limitation, the acquisition of other businesses, the raising of additional capital for use in our business, a split of or dividend on then outstanding shares or in connection with any employee stock plan or program. Any future issuances of authorized shares of Common Stock may be approved by the Board of Directors without further action by the stockholders. The availability of additional shares of Common Stock would be particularly important in the event that the Board of Directors needs to undertake any of the foregoing actions on an expedited basis in order to avoid the time and expense of seeking stockholder approval in connection with the contemplated issuance of Common Stock, where such approval might not otherwise be required. The Board of Directors has no present agreement, arrangement or commitment to issue any of the shares for which approval is sought.

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Although the Board of Directors will issue Common Stock only when required or when the Board considers such issuance to be in our best interests, the issuance of additional Common Stock may, among other things, have a dilutive effect on the earnings per share (if any) and on the equity and voting rights of our existing stockholders. Furthermore, since the Company’s Amended and Restated By-Laws require the vote of a majority of shares of each class of stock in order to approve certain mergers and reorganizations, the proposed Amendment could permit the Board to issue shares to persons supportive of management’s position.  Such persons might then be in a position to vote to prevent a proposed business combination which is deemed unacceptable to the Board of Directors, although perceived to be desirable by some stockholders, including, potentially, a majority of stockholders. This could provide management with a means to block any majority vote which might be necessary to effect a business combination in accordance with applicable law, and could enhance the ability of our directors to retain their positions.

Additionally, the presence of such additional authorized but unissued shares of Common Stock could discourage unsolicited business combination transactions which might otherwise be desirable to stockholders. The Board of Directors is not currently aware of any attempt to take over or acquire us. While it may be deemed to have potential anti-takeover effects, the proposed Amendment to increase the authorized shares of Common Stock is not prompted by any specific effort or takeover threat currently perceived by management. In addition, we do not have any plans to implement additional measures having anti-takeover effects. The Board believes that the benefits of providing it with the flexibility to issue shares without delay for any proper business purpose, including as an alternative to an unsolicited business combination opposed by the Board, outweigh the possible disadvantages of dilution and discouraging unsolicited business combination proposals and that it is prudent and in the best interests of stockholders to provide the advantage of greater flexibility which will result from the Amendment.

Vote Required

The affirmative vote of the holders of a majority of the outstanding shares of Common Stock entitled to vote at the Annual Meeting will be required to approve the Amendment. Abstentions will be counted as present for purposes of determining if a quorum is present, and will have the same effect as a negative vote on this proposal.

Recommendation of the Board

The Board recommends a vote “FOR” the approval of the Amendment to the Restated Articles of Organization.

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PROPOSAL NO. 4:  AMENDMENT OF THE COMPANY’S 2004 STOCK OPTION PLAN

General

On December 14, 2004, our stockholders approved the adoption of our 2004 Stock Option Plan (as amended, the “2004 Plan”). On December 12, 2007, our stockholders approved an increase in the number of shares authorized under the 2004 Plan to 2,000,000. On March 13, 2012, our stockholders approved an increase in the number of shares authorized under the 2004 Plan to 4,000,000.  On September 7, 2012, the Board approved a proposal to amend the 2004 Plan to increase the number of shares of our Common Stock subject to the 2004 Plan by 16,000,000 shares to 20,000,000 shares (the “Amendment”). No stockholder approval of this last amendment was sought at that time.  

On September 7, 2012, the Board of Directors approved the following grants of stock options to purchase a total of 13,300,000 shares of Common Stock under the 2004 Plan:

Each of the options granted on September 7, 2012 has an exercise price of $1.40 per share. One-half of options granted to each of Messrs. Bolduc, Deschenes and Silvestri and Ms. Baron were immediately exercisable and the other one-half became exercisable on September 7, 2013. One-third of the new options granted to each of Drs. McGann and Jones were immediately exercisable, one-third became exercisable on September 7, 2013, and the remaining one-third became exercisable on September 7, 2014. Options granted to Messrs. Turmelle, Safir, Liscouski and Keating and the estate of Mr. Levangie were immediately exercisable in full. The option grant agreements provide that all of the options will expire on September 6, 2022, subject to earlier expiration such as upon the resignation, termination or cessation of a grantee’s employment with the Company. None of these options have been exercised to date.  The grants to Drs. McGann and Jones were also contingent on the receipt of stockholder approval to amend the 2004 Plan to increase the number of shares authorized under the 2004 Plan, within one year from the date of grant. Since stockholder approval was not received within one year from the date of grant, these options are deemed null and void. In addition, all incentive stock options (“ISOs”) under the 2004 Plan for all grantees listed above have been treated as stock options that do not qualify as ISOs (“non-qualified” options) since the amendment approved by the Board of Directors in September 2012 was not ratified by stockholders within one year of the grant of the stock options.  No additional shares may be issued under the 2004 Plan since the 2004 Plan expired by its terms on September 21, 2004 (ten years from the date of adoption).  

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The 2004 Plan, by its terms, does not require that the Company obtain stockholder approval to authorize the Plan or amendment to the Plan.  In addition, the Massachusetts Business Corporation Act also does not require stockholder approval.  Furthermore, although Rule 711 of the New York Stock Exchange Amex Company Guide, provides that stockholder approval is necessary for the adoption of or significant amendment to a compensation plan, the Company was only listed on the American Stock Exchange until 2009 and, therefore, the Company was not subject to Rule 711 in September 2012 when the Board of Directors increased the Plan from 4,000,000 shares to 20,000,000 shares.  However, under the Tax Code, the Board cannot issue ISOs under the Plan unless stockholder approval is obtained within one year of the adoption of the Plan or an amendment to the Plan raising the number of shares issuable under the Plan.  

On March 23, 2015, Bernard Miller filed a complaint on behalf of himself and other similarly situated shareholders in Massachusetts state court.  The case is entitled Miller v. Bolduc, et al, Suffolk Superior Court No. 15-00807-BLS2.  The Plaintiff seeks to require (i) the Company to convene a stockholders meeting since the last stockholder meeting was held on March 13, 2012 and (ii) the Company to seek shareholder approval of the September 2012 Amendment.  The Board of Directors had, in January 2015 when Dr. McGann was elected to be President and CEO, begun taking the steps necessary for the Company to conduct an annual shareholder meeting.  Among the issues to be decided by the Board were which matters to present for a shareholder vote, and the Board of Directors decided to include, among others, the September 2012 Amendment to the 2004 Stock Option Plan that Miller identified in his lawsuit.  In the event that this proposal is not approved by the stockholders, the Board would likely cancel the options that were granted pursuant to the amendment approved by the Board in 2012 and would likely find other ways to compensate those holders of options that are currently officers or directors of the Company.  There are no plans at this time regarding how to compensate such officers or directors but the Board of Directors may determine to pay them additional bonuses or grant them options or shares under the 2014 Plan (if Proposal No. 5 is approved) in order to provide them with an incentive to continue working for the Company.  

Mr. Bolduc, our former Chief Executive Officer and President, was granted options under the 2004 Plan to acquire 5,442,490 shares, exercisable at $1.40 per share on September 7, 2012 and options to acquire 75,000 shares, exercisable at $0.79 per share, on March 6, 2014. He was also granted an option under the 2014 Plan to acquire 300,000 shares, exercisable at $1.10. On January 16, 2015, the Company entered into a Separation Agreement with Mr. Bolduc that provided that these options would continue to be exercisable until the maturity date of the options notwithstanding termination of his employment and for the ability to exercise the vested options, on a cashless basis.  

The purpose of the Amendment is for the stockholders to approve the increase in the number of shares of Common Stock under the 2004 Plan so that the options granted on September 7, 2012 could be exercised by the holders.

If this proposal is not approved by the stockholders at the Annual Meeting, the stock options to purchase a total of 13,300,000 shares of Common Stock granted by the Board of Directors on September 7, 2012 would be cancelled.  

Why You Should Vote for the Amendment

A substantial number of options granted under the 2004 Plan are contingent on stockholder approval

The market for the talented engineering and other personnel on which we rely has grown increasingly competitive over the last year.  In order to retain and motivate our employees that received the 13,300,000 stock options as an essential part of their compensation packages when our Board of Directors adopted the Amendment on September 7, 2012, we believe that stockholder approval of the Amendment is necessary. If our stockholders do not approve the Amendment, all options granted on or after September 7, 2012 to the directors and officers listed above will be cancelled.  In addition, if these options are cancelled, we believe that the Board of Directors may be required to grant new options under the Company’s 2014 Stock Option Plan to retain and motivate the key employees currently employed by the Company who had previously been granted shares under the 2004 Plan. Therefore, we are asking our stockholders to approve the Amendment.

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Equity incentives are an important part of our compensation philosophy

Approval of the Amendment is critical to our ongoing effort to create stockholder value. Equity-based incentives are an integral part of our compensation program. We grant stock options to substantially all of our employees. Our emphasis on long-term incentive compensation through the granting of stock options is designed to align our employees’ interests with those of our stockholders, retain key employees through the term of the awards, and motivate our employees to strive for outstanding performance. We rely on stock options as an essential part of the compensation packages necessary for our Company to attract and retain experienced officers and employees. In addition, we believe that equity awards are an effective compensation vehicle because they offer significant potential value with a smaller impact on current income and cash flow.

Description of the Plan

A description of the principal features of the 2004 Plan (as amended by the Amendment) is set forth below. The summary is qualified in its entirety by the Amendment, a copy of which is attached to this Proxy Statement as Appendix B.

Purpose

The purpose of the 2004 Plan is to advance the interests of our Company and its stockholders by encouraging and facilitating the ownership of our stock by persons performing services for our Company in order to enhance our ability to attract, retain and reward such persons and motivate them to contribute to our growth and profitability.

Types of Awards

The 2004 Plan provides for the following types of awards: (i) incentive stock options and (ii) non-qualified stock options (collectively, “Awards”).

Stock Subject to the 2004 Plan

The Common Stock issued under the 2004 Plan consists of authorized but unissued shares or issued shares that have been reacquired by our Company in any manner. Subject to adjustment made in connection with a recapitalization, change in control and certain other events set forth in the 2004 Plan, the maximum number of shares the Board of Directors approved that was then subject to Awards pursuant to the 2004 Plan, as amended by the Amendment, was 20,000,000 shares of Common Stock.

Terms of Options

The 2004 Plan permitted grants of stock options intended to qualify as ISOs under Section 422 of the Internal Revenue Code, as amended (the “Code”), and non-qualified options. Options granted under the 2004 Plan would have been non-qualified options if they failed to qualify as ISOs or exceeded the annual limit on ISOs. Only employees of our Company were eligible to receive ISOs. Non-qualified options may have been granted to any persons eligible to receive ISOs and to our directors and consultants. The exercise price of an ISO may not have been less than 100% of the fair market value of the stock subject to the option on the date of grant (110% if the optionee is a 10% holder of our Common Stock). The term of an option could not be longer than ten years (or, in the case of a 10% holder of our Common Stock, five years if the option was an ISO) and may have been subject to restrictions on transfer. No option awarded to a prospective employee, consultant or director could become exercisable prior to the date on which such person commences service to our Company.

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Options may be exercised in whole or in part with written notice to the Company, accompanied by full payment of the exercise price for the number of shares being purchased. The exercise price may be paid in cash, by check or cash equivalent or by such other consideration as may be approved by the Board from time to time, including, in the Board’s discretion, by means of a “cashless” exercise, in which the optionee surrenders shares of Common Stock having a value equal to the sum of the aggregate exercise price of the option being exercised plus any taxes we may be required to withhold upon such exercise.

Options generally terminate three months after termination of an optionee’s service. If the optionee’s service terminates due to death or disability, the option, to the extent unexercised and exercisable on the date on which the optionee’s service terminated, may be exercised by the optionee, or the optionee’s executor, estate, legal representative or guardian, at any time within 12 months after the optionee’s service terminated. If the optionee is a member of our Board of Directors and the optionee’s service terminates because of his or her retirement as a director, and provided that such director at that time in good standing as determined by the Board, the option, to the extent unexercised and exercisable on the date on which the director’s service terminated, may be exercised by the director, or the director’s guardian or legal representative). In no event, however, may any option be exercised after its expiration date.

The ability to exercise options may be accelerated in the sole discretion of the Board, subject to compliance with the provisions of the 2004 Plan.

Transferability

During the lifetime of an optionee, an option may only be exercised by the optionee or by the optionee’s guardian or legal representative. Options are not assignable or transferable by the optionee, except by will or by the laws of descent and distribution. Notwithstanding the foregoing, non-qualified stock options may be assignable or transferable, to the extent permitted by the Board, in its sole discretion, and as set forth in the agreement evidencing such option.

Adjustments and Recapitalization

In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of our Company, the 2004 Plan provides that appropriate adjustments will be made in the number and class of shares subject to the 2004 Plan and to any outstanding options, as well as to the exercise price per share of any outstanding options.

Change in Control Provisions

In the event of a change in control of our Company, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be, may, without the consent of any optionee, either assume our Company’s rights and obligations under outstanding options or substitute for such outstanding options substantially equivalent options for, or in relation to, the acquiring entity’s capital stock.

Tax Withholding

Upon the exercise of an option, we have the right, but not the obligation, to deduct from the shares of Common Stock issuable, or to accept from the optionee the tender of, a number of whole shares of Common Stock having a fair market value, as determined by us, equal to all or any part of the federal, state, local and foreign taxes, if any, we are required by law to withhold with respect to such option, or the Common Stock acquired upon the exercise thereof. Alternatively or in addition, in our discretion, we have the right to require the participant, through payroll withholding, cash payment or otherwise, including by means of a cashless exercise, to make adequate provision for any such tax withholding obligations arising in connection with the option, or the shares acquired upon the exercise thereof.

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Federal Income Tax Consequences

The following is a summary of the principal U.S. federal income tax consequences to participants and our Company with respect to participation in the 2004 Plan. This summary is not a complete description of such consequences. Moreover, it does not describe all federal tax consequences under the 2004 Plan, nor does it discuss state, local or foreign tax consequences.

Non-qualified Stock Options

No taxable income is recognized by an optionee upon the grant of a non-qualified stock option. Upon exercise, the optionee will recognize ordinary income equal to the excess of the fair market value of the purchased shares on the exercise date over the exercise price paid for those shares. Assuming we comply with Section 162(m) of the Code, we will be entitled to an income tax deduction in the tax year in which the optionee recognizes the ordinary income. When the optionee disposes of shares granted as a non-qualified stock option, any difference between the sale price and the optionee’s exercise price, to the extent not recognized as taxable income as provided above, is treated as long-term or short-term capital gain or loss, depending on the holding period.

Vote Required

The affirmative vote of a majority of the votes properly cast by the holders of Common Stock is required to approve the Amendment.  Abstentions will not affect the outcome of the vote on the proposal.

Recommendation of the Board

The Board recommends a vote “FOR” the approval of the Amendment to the Implant Sciences 2004 Stock Option Plan.

PROPOSAL NO. 5:  APPROVAL OF THE COMPANY’S

AMENDED AND RESTATED 2014 STOCK OPTION PLAN

General

The Company is asking its stockholders to approve the Implant Sciences’ Amended and Restated 2014 Stock Option Plan (“2014 Plan”). The purpose of the 2014 Plan is to aid the Company in recruiting and retaining employees, officers, directors and consultants and to provide them with incentives that are aligned with the interests of the Company’s stockholders through equity grants that increase in value when the price of the Common Stock increases. The 2014 Plan provides for the grant of awards to the Company’s employees, officers, directors and consultants.

On July 2, 2014, the Board of Directors adopted the 2014 Plan. The 2014 Plan was adopted at the time the 2004 Plan terminated pursuant to its terms, which was in September 2014.  If the 2014 Plan is approved by stockholders, the plan will be effective as of July 2, 2014. Any equity awards granted by the Company after July 2, 2014 will be made under the 2014 Plan until it is terminated. The 2014 Plan will terminate on July 2, 2024, but awards granted prior to such date may vest and be exercisable beyond that date.  

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On July 2, 2014, the Board of Directors approved the following grants of options under the Plan:

Each of these options has an exercise price of $1.10 per share. Options granted to Messrs. Bolduc, McGann, Deschenes and Jones are intended to be treated as incentive stock options pursuant to Section 422 of the Code. Options granted to Messrs. Turmelle, Safir, Liscouski Keating are intended to be non-qualified options under the Code. One-third of each options will vest upon the last to occur of (i) the addition of the Company’s QS-B220 product to the Transportation Security Administration’s Qualified Product List for passenger checkpoint screening, (ii) the execution of an indefinite delivery/indefinite quantity contract with the Transportation Security Administration, and (iii) receipt of orders under that contract totaling not less than $20 million. The remainder of each option will vest in two equal installments on the first and second anniversaries of the initial vesting date. The options are subject to acceleration of vesting upon a “Change in Control,” as that term is defined in the Plan. The criteria established for the initial vesting of one-third of each option for the July 2, 2014 option grant was achieved on March 5, 2015. As such; the initial one-third of each option vested on that date.

Why You Should Vote for the 2014 Plan

Approval of the 2014 Plan is critical to our ongoing effort to create stockholder value. Equity-based incentives are an integral part of our compensation program. We grant stock options to substantially all of our employees. Our emphasis on long-term incentive compensation through the granting of stock options is designed to align our employees’ interests with those of our stockholders, retain key employees through the term of the awards, and motivate our employees to strive for outstanding performance. We rely on stock options as an essential part of the compensation packages necessary for our Company to attract and retain experienced officers and employees. In addition, we believe that equity awards are an effective compensation vehicle because they offer significant potential value with a smaller impact on current income and cash flow. If our stockholders do not approve the 2014 Plan, all options granted under the 2014 Plan to the directors and officers listed above will be cancelled.  In addition, if these options are cancelled, we believe that the Board of Directors will find another way to retain and motivate the key employees currently employed by the Company who had previously been granted shares under the 2014 Plan.  Therefore, we are asking our stockholders for approve the 2014 Plan.

Description of the 2014 Plan

A description of the principal features of the 2014 Plan is set forth below. The summary is qualified in its entirety by the detailed provisions of the 2014 Plan, a copy of which is attached to this Proxy Statement as Appendix C.

Purpose

The purpose of the 2014 Plan is to advance the interests of our Company and its stockholders by encouraging and facilitating the ownership of our stock by persons performing services for our Company in order to enhance our ability to attract, retain and reward such persons and motivate them to contribute to our growth and profitability.

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Types of Awards

The Plan provides for the following types of awards: (i) incentive stock options and (ii) non-qualified stock options (collectively, “Awards”).

Administration

The 2014 Plan will be administered by the Company’s Board of Directors (the “Board”). The Board may delegate any and all of its powers to administer the 2014 Plan to the Compensation Committee or to another committee of the Board. References in this description to the Board include any such appointed committee. The Board has the sole authority to construe and interpret the 2014 Plan and to make rules and regulations relating to implementation of the 2014 Plan, to select participants, to establish the terms and conditions of grants of options and to grant options, with broad authority to delegate responsibilities, except with respect to selection for participation of, and granting of options to, persons subject to Sections 16(a) and 16(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Members of the Board are eligible to receive options under the 2014 Plan.

Common Stock Subject to 2014 Plan

A total of 15,000,000 shares of Common Stock will be available for issuance under the 2014 Plan. Such maximum number of Common Stock available are subject to appropriate equitable adjustment in the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification or similar change in the capital structure of the Company affecting the Common Stock. The exercise price and any other limits or terms of an outstanding option will also be appropriately adjusted.

For the purpose of computing the total number of shares of Common Stock available for Options under the 2014 Plan, subject to adjustment as described in the preceding paragraph, the shares of Common Stock that may be issued under the 2014 Plan will consist of authorized but unissued or reacquired shares of Common Stock, treasury shares or any combination thereof. If an outstanding option for any reason expires or is terminated or canceled or if shares of Common Stock are acquired upon the exercise or award of an option, the shares of Common Stock allocable to the unexercised portion of such option or such repurchased shares of Common Stock will again be available for issuance under the 2014 Plan.

Eligibility and Limitations on Grants

Awards under the 2014 Plan may be granted under the 2014 Plan to all employees, officers, directors and consultants of the Company and its subsidiaries selected by the Board. Selection of the recipients of, and the nature and size of, awards granted under the 2014 Plan will be solely within the discretion of the Board.

Terms of Options

Incentive Stock Options

The shares of Common Stock in respect of which incentive stock options granted under the 2014 Plan and all other option plans of the Company are first exercisable by any participant during any calendar year may not have a fair market value (determined at the date of grant) in excess of $100,000 or such other limit as may be imposed by the Code. Incentive stock options will be exercisable for such period as determined by the Board, but not exceeding ten years from the date of grant. However, an incentive stock option granted to an employee who owns shares of Common Stock possessing more than 10% of the voting power of the Company (a “10% Owner”) will not be exercisable more than five years after the grant date.

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Non-Qualified Stock Options

Non-qualified stock options may be granted for such number of shares of Common Stock and will be exercisable for such period or periods as the Board determines, but not exceeding ten years from the date of grant.

Option Exercise Prices

The exercise price of each incentive stock option granted to an employee will be specified by the Board in the Option agreement and must be at least 100% of the fair market value of the underlying shares of Common Stock on the grant date. However, an incentive stock option granted to a 10% Owner must have an exercise price of at least 110% of the fair market value of the underlying shares of Common Stock on the grant date. The exercise price of non-qualified stock options may be less than the fair market value of the underlying shares of Common Stock on the date of grant and will be fixed by the Board. However, the Board does not currently intend to issue any options with exercise prices less than the fair market value of the underlying shares of Common Stock on the date of grant. For purposes of the 2014 Plan, the fair market value of a share of Common Stock on a particular date will be the closing price of the Common Stock on the American Stock Exchange or the exchange on which the Common Stock is listed, and if no trading occurs on such date, or the stock is traded on NASDAQ then the fair market value will mean the highest and lowest prices on the nearest trading day before such date. On May 6, 2015, the closing price of the Common Stock on the over-the-counter market was $0.75.

Exercise of Options

The exercise date of an option granted under the 2014 Plan will be fixed by the Board, but may not be later than ten years from the date of the grant. Options may be exercised in such installment as are fixed by the Board.

Options issued under the 2014 Plan will not be transferable other than by will or the laws of descent and distribution, although they may be exercised during the grantee’s lifetime by his/her legal representative if he/she becomes incapacitated. All options must be exercised within three months after termination of the grantee’s affiliation with the Company, except that non-qualified stock options may remain outstanding: (i) for their entire term (A) following termination due to death or (B) with respect to options held by a director who retires in good standing, and (ii) for a period of one year following termination due to permanent disability.

Options may be exercised only upon the payment in full of the applicable exercise price in cash, or, if approved by the Board, by surrendering outstanding options or shares of Common Stock awarded. The Company will make appropriate arrangements for the satisfaction of all tax withholding requirements applicable to the exercise of each option. If the participant has not remitted to the Company the amount required to satisfy those tax withholding requirements, the Company may withhold from the value of the option any amount necessary to comply with those requirements. The Board may elect, in its sole discretion, to permit a participant to pay applicable taxes in cash, in shares of Common Stock otherwise issuable under the 2014 Plan withheld by the Company, or by a combination thereof.

Transferability

No option may be transferred except by will or the laws of descent and distribution and, during the lifetime of the participant to whom the Option was granted, may be exercised only by the participant or the participant’s guardian or legal representative. Notwithstanding the foregoing, a non-qualified stock option may be assigned or transferred to the extent permitted by the Board, in its sole discretion, and as set forth in the option agreement evidencing an option.

Term, Amendment and Termination of the 2014 Plan

The 2014 Plan will terminate ten years from its effective date. The Board may amend, terminate or suspend the 2014 Plan at any time. No amendment may adversely affect any outstanding option granted under the 2014 Plan without the consent of the affected participant

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Federal Income Tax Consequences

The following is a brief summary of the principal federal income tax consequences to the Company and participants in the 2014 Plan based on the current provisions of the Code and the existing regulations thereunder. This summary is not intended to be a complete statement of applicable law, nor does it address foreign, state or local tax laws or regulations.

Incentive Stock Options

A participant does not realize income on the grant of an incentive stock option. If a participant exercises an incentive stock option in accordance with the terms of the incentive stock option and does not dispose of the Common Stock acquired within two years from the grant date or within one year from the exercise date, the participant will not realize any ordinary taxable income by reason of the exercise and neither the Company nor its subsidiaries will be allowed a deduction by reason of the grant or exercise. The participant’s basis in the shares of Common Stock acquired upon exercise will be the amount paid upon exercise. Provided the participant holds the shares of Common Stock as a capital asset at the time of sale or other disposition of the shares of Common Stock, the gain or loss, if any, recognized on the sale or other disposition will be capital gain or loss. The amount of gain or loss will be the difference between the amount realized on the disposition of the shares of Common Stock and the participant’s basis in the shares of Common Stock. If a participant disposes of the shares of Common Stock within two years from the date of grant of the incentive stock option or within one year from the date of exercise (an “Early Disposition”), the participant will realize ordinary income at the time of disposition which will equal the excess, if any, of (1) the lesser of (a) the amount realized on the disposition or (b) the fair market value of the Common Stock on the date of exercise, over (2) the participant’s basis in the Common Stock. Also in this case, the Company or one of its subsidiaries will be entitled to a deduction in an amount equal to such income. If the participant holds the Common Stock as a capital asset at the time of disposition, the excess, if any, of the amount realized on disposition of the Common Stock over the fair market value of the Common Stock on the date of exercise will be long-term or short-term capital gain, depending upon the holding period of the Common Stock.

If a participant disposes of shares of Common Stock for less than the participant’s basis in the shares of Common Stock, the difference between the amount realized and such basis will be a long-term or short-term capital loss, depending upon the holding period of the Common Stock, provided the participant holds the Common Stock as a capital asset at the time of disposition.

Unless the participant makes an Early Disposition of such Common Stock, the excess of the fair market value of the Common Stock at the time the incentive stock option is exercised over the exercise price may constitute an adjustment in computing alternative minimum taxable income under Section 56 of the Code and may result in the imposition of the “alternative minimum tax” under Section 55 of the Code.

Non-Qualified Stock Options

A participant does not recognize taxable income on the date of grant of the non-qualified stock option, provided that the option does not have a readily ascertainable fair market value at the time it is granted. In general, the participant must recognize ordinary income at the time of exercise of the non-qualified stock option in the amount of the difference between the fair market value of the shares of Common Stock on the date of exercise and the exercise price. The amount of ordinary income recognized by a participant will be deductible by the Company in the year that the participant recognizes the income.

Common Stock acquired upon exercise of a non-qualified stock option will have a tax basis equal to its fair market value on the exercise date, and the holding period for the Common Stock generally will begin on the date of exercise. Upon subsequent disposition of the Common Stock, the participant will recognize a long-term capital gain or loss if the participant has held the Common Stock for more than one year prior to disposition, or short-term capital gain or loss if the participant has held the Common Stock for one year or less. Any such disposition will not result in additional tax consequences to the Company.

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Other Matters

The 2014 Plan is intended to comply with Sections 162(m) and 409A of the Code with respect to options granted to employees under the 2014 Plan. The Company intends to seek stockholder approval of the 2014 Plan to comply with the applicable requirements of the rules and regulations promulgated by the Securities and Exchange Commission and the applicable requirements of the Code in respect of incentive stock options as well as in a good faith effort to qualify compensation received as a result of options granted under the 2014 Plan as “performance-based” for purposes of Section 162(m).

Vote Required

The affirmative vote of a majority of the votes properly cast by the holders of Common Stock is required to approve the Amendment.  Abstentions will not affect the outcome of the vote on the proposal.  The approval of Proposal No. 4, the increase in the number of authorized shares under the 2004 Plan, will have no effect on this Proposal.  At this time, there is a sufficient number of shares under our Restated Articles of Organization to reserve the number of shares issuable under the 2014 Plan.

Recommendation of the Board

The Board recommends a vote “FOR” the approval of the 2014 Plan.

PROPOSAL NO. 6:  ANNUAL ADVISORY VOTE TO APPROVE NAMED EXECUTIVE OFFICER COMPENSATION

In accordance with SEC rules, Implant Sciences is asking stockholders to approve the following resolution at the Annual Meeting:

“RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation paid to the Company’s named executive officers for the fiscal year ended June 30, 2014, as disclosed in this Proxy Statement pursuant to Item 402 of Regulation S-K, including the compensation tables and narratives.”

The Compensation Committee’s determination of the 2014 compensation paid to the named executive officers (“NEOs”) is described in the “Executive Compensation” section of this Proxy Statement beginning on page 35. Stockholders are encouraged to read this section before deciding how to vote on this proposal.

 Vote Required

The affirmative vote of a majority of the votes properly cast by the holders of Common Stock on the matter is required to approve this proposal.  However, the vote on executive compensation is advisory and, therefore, not binding on the Company, the Board or the Compensation Committee. The Board and the Compensation Committee will consider the outcome of the vote when making future executive compensation decisions.

Recommendation of the Board

The Board recommends a vote “FOR” the approval of the resolution.  

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PROPOSAL NO. 7: ADVISORY VOTE ON THE FREQUENCY OF HOLDING AN ADVISORY VOTE ON EXECUTIVE COMPENSATION

In addition to the advisory vote on executive compensation in Proposal 6 above, in accordance with Section 14A of the Exchange Act, the Company is providing stockholders with an opportunity to vote, on an advisory basis, on whether future executive compensation advisory votes should be held every year, every two years, or every three years.

After careful consideration, the Board of Directors is recommending a vote in favor of holding an advisory vote on executive compensation every three years. In reaching this recommendation, the Board has considered the relevant legislative and regulatory requirements, the Company’s compensation programs and governance policies, and evolving industry practices.

The Board has determined that holding a vote every three years with the flexibility to hold a vote more frequently if appropriate is the best approach for the Company for the following reasons:

Stockholders may cast their vote on their preferred voting frequency by choosing the option of one year, two years or three years or may abstain from voting. In considering this vote, stockholders may wish to review the information presented in connection with the advisory vote on executive compensation (Proposal 6) above.

Vote Required

The vote on this proposal is not intended to approve or disapprove the recommendation of the Board of Directors. If one of the frequency options (one year, two years or three years) receives the vote’s highest number of the votes properly cast by the holders of Common Stock, it will be the frequency preferred by the stockholders. Because this vote is advisory and not binding on the Company or the Board of Directors, the Board will consider the vote, but may decide that it is in the best interests of the stockholders and the Company to hold an advisory vote on executive compensation more or less frequently than the option determined to be the frequency preferred by the stockholders.

Recommendation of the Board

The Board of Directors recommends a vote for the option of every THREE YEARS as the frequency with which stockholders are provided an advisory vote on executive compensation.

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EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes information as of June 30, 2014 about the Company’s outstanding equity compensation awards and shares of Common Stock reserved for future issuance under the Company’s equity compensation plans.

(1)

This total includes shares to be issued upon exercise of outstanding options under the equity compensation plans that have been approved by our stockholders (i.e., our 2000 Incentive and Non-Qualified Stock Option Plan and our 2004 Stock Option Plan). Our 2004 Stock Option Plan has been approved by our stockholders, however a September 2012 amendment to the plan increasing the number of shares issuable under the plan from 4,000,000 shares to 20,000,000 shares, has not been approved by our stockholders.

(2)

Our 2000 Incentive and Non-Qualified Stock Option Plan expired in October 2010 and our 2004 Stock Option Plan expired in May 2014. In July 2014, we adopted our 2014 Stock Option Plan and reserved 15,000,000 shares of common stock for issuance thereunder.  The 2014 Stock Option Plan has not been approved by our stockholders.

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CORPORATE GOVERNANCE

Board Meetings

The Board of Directors met three times and held four meetings by telephone conference call during the fiscal year ended June 30, 2014.  In addition, on one occasion the Directors adopted certain resolutions by unanimous written consent in lieu of a meeting. With the exception of Mr. Safir, each director attended at least 75% of the total number of meetings of the Board of Directors and of the committees on which he served during fiscal 2014.

Committees of the Board

The Board of Directors has four standing committees; Audit Committee, Compensation Committee, Nominating/Corporate Governance Committee, and Risk Management Committee.  The Committees of the Board are primarily responsible for considering and overseeing risks within their particular areas of concern. The membership of each committee, as of September 30, 2014, is indicated in the table below:

Director Independence

The Board of Directors has adopted director independence guidelines that are consistent with the definitions of “independence” as set forth in Section 301 of the Sarbanes-Oxley Act of 2002 and Rule 10A-3 under the Securities Exchange Act.  In accordance with these guidelines, the Board of Directors has reviewed and considered facts and circumstances relevant to the independence of each of our directors and director nominees and has determined that, each of the Company’s non-management directors and nominees, other than Mr. Liscouski, qualifies as “independent.”

Audit Committee and Audit Committee Financial Expert

The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act.  

The Board of Directors has determined that Mr. Hassett and Mr. Turmelle, who serves as the Chairman of the Audit Committee, are “audit committee financial experts” as defined in Item 407(d)(5)(ii) of Regulation S-K.

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The primary functions of the Audit Committee are to represent and assist the Board of Directors with the oversight of:

·

appointing, approving the compensation of, and assessing the independence of our independent auditors;

·

overseeing the work of our independent auditors, including through the receipt and consideration of certain reports from the independent auditors;

·

reviewing and discussing with management and the independent auditors our annual and quarterly financial statements and related disclosures;

·

coordinating the Board of Director’s oversight of our internal control over financial reporting, disclosure controls and procedures and code of conduct and ethics;

·

establishing procedures for the receipt and retention of accounting related complaints and concerns;

·

meeting independently with our independent auditors and management; and

·

preparing the audit committee report required by SEC rules.

In this context, the Audit Committee has met and held discussions with management and the Company's independent registered public accounting firm. During the fiscal year ended June 30, 2014, the Audit Committee held four meetings telephonically.

Compensation Committee

The Compensation Committee is responsible for implementing our compensation philosophies and objectives, establishing remuneration levels for our executive officers and implementing our incentive programs, including our equity compensation plans. During the fiscal year ended June 30, 2014, the Compensation Committee met two times. The responsibilities of the Compensation Committee are set forth in its written charter, which is posted on our website at www.implantsciences.com.

Compensation is paid to our executive officers in both fixed and discretionary amounts which are established by the Board of Directors based on existing contractual agreements and the determinations of the Compensation Committee after recommendations by our Chief Executive Officer (other than with respect to himself).  Pursuant to its charter, the responsibilities of the Compensation Committee are (i) to assist the Board of Directors in discharging its responsibilities in respect of compensation of our senior executive officers; (ii) review and analyze the appropriateness and adequacy of our annual, periodic or long-term incentive compensation programs and other benefit plans and administer those compensation programs and benefit plans; and (iii) review and recommend compensation for directors, consultants and advisors.  Except for the delegation of authority to the Chief Executive Officer to grant certain de minimus equity compensation awards to our non-executive employees, the Compensation Committee has not delegated any of its responsibilities to any other person.

In February 2013, the Committee, acting on behalf of the Board of Directors, retained CFS Consulting, Inc., to analyze the Company’s then-current base salary levels for its officers, establish typical market annual cash incentive award values, and provide recommendations regarding base salary ranges and annual bonus values. CFS Consulting also performed a market review of total compensation for non-management directors. Consistent with CFS Consulting’s recommendations, in June 2013, the Board of Directors approved an amended and restated employment agreement for Mr. Bolduc and, in August 2013, the Board of Directors approved bonuses for the Company’s officers with respect to fiscal 2013, the payment of which was contingent upon the achievement of certain performance milestones, base salary adjustments with respect to the Company’s officers with respect to fiscal 2014, and additional option grants to the Company’s officers. We did not achieve these milestones and no bonus was payable to the Company’s officers.

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Nominating/Corporate Governance Committee

The Board has not yet appointed a chairman of the Nominating/Corporate Governance Committee.  The Nominating/Corporate Governance Committee leads the Board’s effort at ensuring we have qualified directors by: (i) identifying individuals qualified to become Board members consistent with criteria approved by the Board and recommending to the Board a group of director nominees for each annual meeting of stockholders; (ii) recommending nominees to fill any vacancies which may occur during the year; (iii) considering candidates for nominees as directors of the Company who are recommended by stockholders entitled to do so under our Amended and Restated By-Laws; and (iv) ensuring that the Audit, Compensation and Nominating/Corporate Governance Committees of the Board have qualified and experienced directors, at least two of whom must be “independent.” The Board has adopted a written charter for the Nominating/Corporate Governance Committee, which is posted on our website at www.implantsciences.com.

In the event that the Nominating/Corporate Governance Committee or the Board identifies the need to fill a vacancy or to add a new member to fill a newly created position on the Board with specific criteria, the Nominating/Corporate Governance Committee initiates a search process and keeps the Board apprised of its progress. The Nominating/Corporate Governance Committee may seek input from members of the Board, the Chief Executive Officer and other management and, if necessary, hire a search firm. In addition, as a matter of policy, the Nominating/Corporate Governance Committee will consider candidates for Board membership properly recommended by stockholders. The initial candidate or candidates, including anyone recommended by a stockholder, who satisfy the specific criteria for Board membership and otherwise qualify for membership on the Board are reviewed and evaluated by the Nominating/Corporate Governance Committee. The evaluation process for candidates recommended by stockholders is the same as the process used to evaluate candidates recommended by any other source. During the fiscal year ended June 30, 2014, the Nominating/Corporate Governance Committee did not meet.

When identifying, evaluating and considering potential candidates for membership on our Board, including those who might be recommended or nominated by shareholders, the Nominating/Corporate Governance Committee considers among other factors, relevant business and financial experience, integrity and willingness to devote the necessary time and energy. Although the Company's corporate governance guidelines do not prescribe specific diversity standards, as a matter of practice, the Board considers diversity in the context of the Board as a whole and takes into account considerations relating to ethnicity, gender, cultural diversity and the range of perspectives that the directors bring to their work. Our Board seeks independent directors with a broad diversity of experience, professions, skills, geographic representation and backgrounds that will enhance the quality of the Board’s deliberations and decisions.

Risk Oversight; Risk Management Committee

The Board of Directors is responsible for oversight of our risk management process. Mr. Liscouski serves as the Chairman, focusing on risk management issues. Our senior management is responsible for risk management on a day-to-day basis, including identifying risks, managing risks, and reporting and communicating risks to the Board of Directors. The Board of Directors, including the Risk Management Committee, reviews various areas of significant risk to the Company, and advises management on policies, strategic initiatives, annual reports on internal controls and other actions. Specific examples of risks primarily overseen by the full Board of Directors include competition risks, industry risks, economic risks, business operations and employee compensation risks and risks related to acquisitions and dispositions. During the fiscal year ended June 30, 2014, the Risk Management Committee did not meet.

Board Leadership Structure

We have not had a chairman since the resignation of our former Chairman of the Board in January 2015. We intend to appoint a new chairman following the 2015 Annual Meeting.

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Code of Ethics

We have adopted a code of ethics that applies to our chief executive officer, chief operating officer and chief financial officer.  The code of ethics is posted on our website at www.implantsciences.com.We intend to include on our website any amendments to, or waivers from, any provision of our code of ethics that applies to our chief executive officer, chief operating officer and chief financial officer that relates to any element of the code of ethics definition enumerated in Item 406 of Regulation S-K.

Transactions with Related Persons, Promoters and Certain Control Persons

Transactions with related parties, including, but not limited to, members of the Board of Directors, are reviewed and approved by all members of the Board of Directors.  In the event a transaction with a member of the Board is contemplated, the Director having a beneficial interest in the transaction is not permitted to participate in the decision-making and approval process.  The policies and procedures surrounding the review, approval or ratification of related party transactions are not in writing, nevertheless, such reviews, approvals and ratifications of related party transactions are documented in the minutes of the meetings of the Board of Directors and any such transactions are committed to writing between the related party and the Company in an executed engagement agreement.

Robert Liscouski, a member of our Board of Directors, had served as a partner at Secure Strategy Group, a homeland security-focused banking and strategic advisory firm that has been retained by us to assist with our efforts to acquire additional capital.  During the years ended June 30, 2014 and 2013, this advisory firm was paid $0 and $66,000, respectively. We terminated our relationship with Secure Strategy Group on March 31, 2013. On March 5, 2014, we executed a settlement agreement and release with Secure Strategy Group and recognized a non-cash benefit of $118,000 in our consolidated statement of operations and comprehensive income and, as of June 30, 2014, our obligation to Secure Strategy Group was $0.

In April 2011, we entered into an advisory and consulting agreement with Mr. Liscouski to assist our U.S. government sales and marketing team with our efforts to advance our interests with the U.S. government.  During the years ended June 30, 2014 and 2013, Mr. Liscouski was paid $180,000 and $180,000, respectively. As of June 30, 2014, we had no obligation to Mr. Liscouski.

Mr. Liscouski also serves as a senior partner at Edge360, a leading security technology and situational awareness solutions provider to the homeland security marketplace that has been retained by us.  During the fiscal years ended June 30, 2014 and 2013, this advisory firm was paid $4,000 and $27,000, respectively.  On August 31, 2013, we terminated our relationship with Edge360 and, as of June 30, 2014, we had no obligation to Edge360.

On June 4, 2009, Michael Turmelle, a member of our Board of Directors loaned $100,000 to us. See Note 12 of Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended June 30, 2014.

On December 31, 2013 and June 2, 2014, Roger Deschenes, our Chief Financial Officer, advanced $60,000 and $100,000, respectively, for working capital purposes.  The advances were payable on demand and bore interest at 0% and 15%, respectively.  During fiscal year 2014, these advances and $200 of interest were repaid. On August 15, 2014, August 29, 2014, September 18, 2014 and October 2, 2014, Mr. Deschenes advanced $100,000, $125,000, $125,000 and $100,000, respectively, for working capital purposes, of which $225,000 of principal and $1,135 of interest has been repaid to Mr. Deschenes as of December 31, 2014. The advances are payable on demand and bear interest at 15%. On January 23, 2015 and January 26, 2015, we remitted $175,000 and $61,000, respectively, to Mr. Deschenes in payment of the principal and $11,000 of accrued interest owed to Mr. Deschenes. As of March 31, 2015 our obligation to Mr. Deschenes was $0.

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Review, Approval or Ratification of Transactions with Related Persons

Our Audit Committee, among other duties, is charged to review, and if appropriate, ratify all agreements and transactions which had been entered into with related parties, as well as review and ratify all future related party transactions.

Stockholder Communications with the Board

Pursuant to procedures set forth in our by-laws, our Nominating/Corporate Governance Committee will consider stockholder nominations for directors if we receive timely written notice, in proper form, of the intent to make a nomination at a meeting of stockholders.  To be timely, the notice must be received within the time frame identified in our by-laws, discussed below.  To be in proper form, the notice must, among other matters, include each nominee’s written consent to serve as a director if elected, a description of all arrangements or understandings between the nominating stockholder and each nominee and information about the nominating stockholder and each nominee.  These requirements are detailed in our amended and restated by-laws, which were attached as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2007.  A copy of our by-laws will be provided upon written request.

Our by-laws require advance notice of any proposal by a stockholder intended to be presented at an annual meeting that is not included in our notice of annual meeting and proxy statement because it was not timely submitted under the preceding paragraph, or made by or at the direction of any member of the Board of Directors, including any proposal for the nomination for election as a director.

The Board will give appropriate attention to written communications that are submitted by stockholders, and will respond if and as appropriate.  Stockholders who wish to send communications on any topic to the Board should address such communications to Board of Directors c/o Chief Executive Officer, Implant Sciences Corporation, 500 Research Drive, Unit 3, Wilmington, MA 01887.

DIRECTOR COMPENSATION

The following table sets forth the annual compensation of our non-employee directors for the fiscal year ended June 30, 2014, which consists of annual cash retainers, board and committee meeting fees and equity awards in the form of options pursuant to the 2004 Stock Option Plan.  Employee directors do not receive any separate compensation for their service on the Board.

(1)

The amount reported in this column for the non-employee director represents the dollar amount recognized for financial statement reporting purposes in fiscal 2014, with respect to options granted to non-employee directors, determined in accordance with Statement of Accounting Standards Codification 718-10-25 Compensation – Stock Compensation. See Note 2 of Notes to Consolidated Financial Statements set forth in this Annual Report on Form 10-K for the assumptions used in determining the value of such awards.  

(2)

Mr. Liscouski received $180,000 of other compensation for consulting services provided to us, including attendance at meetings with agencies of the U.S. government. In addition, as described under Item 13 below, Mr. Liscouski had served as a partner at Secure Strategy Group, and serves as a senior partner at Edge360, firms that had been retained by us.  Mr. Liscouski received compensation from Secure Strategy Group and/or Edge360 in fiscal 2014 for services those firms provided to us.

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Grants of Plan-Based Awards to Non-Employee Directors

The following table sets forth the individual grants of plan-based awards to our non-employee directors in fiscal year ended June 30, 2014.

(1)

Options granted on August 13, 2013 were exercisable in three equal annual installments commencing on August 13, 2014, subject to the Company’s achievement of certain performance milestones on or before February 1, 2014. The Company did not achieve the milestones and, therefore, the options expired on February 1, 2014.

 (2)

Options granted on March 6, 2014 vest and become exercisable in full upon the later of (i) the addition of the Company’s QS-B220 Product to the Transportation Security Administration (“TSA”) Qualified Product List for passenger checkpoint screening and (ii) the receipt of an initial order for such products under an indefinite delivery/indefinite quantity contract with the TSA. As of October 22, 2014, none of these options has vested.

(3)

Exercisable with respect to 100,000 shares on March 31, 2014 and two equal annual installments on the first and second anniversary.

Additional Information to Understand the Director Compensation Table

Fees paid to our non-employee directors in connection with their service as directors are as follows: $30,000 annual retainer to each director; $1,000 for each Board of Directors meeting attended; $750 for each committee meeting attended; and $500 for each Board of Directors meeting or committee meeting in which the director participates by telephone conference call.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, THE BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

Information related to securities authorized for issuance under equity compensation plans as of the end of fiscal 2014 is included in Item 5 of Part II of our Annual Report on Form 10-K for the year ended June 30, 2014.

The following table sets forth the beneficial ownership of shares of our Common Stock, as of June 2, 2015, of (i) each person known by us to beneficially own 5% or more of such shares; (ii) each of our directors and executive officers named in the Summary Compensation Table; and (iii) all of our current executive officers, directors, and significant employees as a group.  Except as otherwise indicated, all shares are beneficially owned, and the persons named as owners hold investment and voting power. The percentage of outstanding shares in the following table assumes that the number of shares previously authorized by the Board under each of the 2004 Plan and the 2014 Plan have been approved by stockholders.

Beneficial ownership has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934.  Under this rule, certain shares may be deemed to be beneficially owned by more than one person, if, for example, persons share the power to vote or the power to dispose of the shares.  In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares, for example, upon exercise of an option or warrant, within 60 days of June 2, 2015.  In computing the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such person, and only such person, by reason of such acquisition rights.  As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date.

*Less than 1%.

(1) Unless otherwise indicated, the business address of the stockholders named in the table above is Implant Sciences Corporation, 500 Research Drive, Unit 3, Wilmington, MA 01887.

(2)

Based on 74,553,120 outstanding shares as of June 2, 2015.

(3)

Includes 958,449 shares of Common Stock, which may be purchased within 60 days of June 2, 2015 upon the exercise of stock options.

(4)

Resigned January 16, 2015.  Includes 5,617,490 shares of Common Stock, which may be purchased within 60 days of June 2, 2015 upon the exercise of stock options.

(5)

Includes 1,208,498 shares of Common Stock, which may be purchased within 60 days of June 2, 2015 upon the exercise of stock options.

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(6)

Includes 233,333 shares of Common Stock, which may be purchased within 60 days of June 2, 2015 upon the exercise of stock options.

(7)

Includes 150,000 shares of Common Stock, which may be purchased within 60 days of June 2, 2015 upon the exercise of stock options.

(8)

Includes 375,000 shares of Common Stock, which may be purchased within 60 days of June 2, 2015 upon the exercise of stock options.

(9) Includes 880,949 shares of Common Stock, which may be purchased within 60 days of June 2, 2015 upon the exercise of stock options.

(10) Includes 428,399 shares of Common Stock, which may be purchased within 60 days of June 2, 2015 upon the exercise of stock options.

(11) Includes 1,131,798 shares of Common Stock, which may be purchased within 60 days of June 2, 2015 upon the exercise of stock options.

(12) Includes 428,399 shares of Common Stock, which may be purchased within 60 days of June 2, 2015 upon the exercise of stock options.

(13) Includes 875,949 shares of Common Stock, which may be purchased within 60 days of June 2, 2015 upon    the exercise of stock options.

(14) See footnotes (3) through (13).

AUDIT-RELATED MATTERS

REPORT OF THE AUDIT COMMITTEE

In accordance with its charter, the Audit Committee assists the Board in fulfilling its responsibilities in a number of areas. These responsibilities are described in the Audit Committee’s written charter, which is posted on the Company’s website at www.implantsciences.com.

The Audit Committee has reviewed and discussed the audited financial statements with management and the independent registered public accounting firm. The Audit Committee discussed with the independent registered public accounting firm matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended (AICPA, Professional Standards, Vol. 1 AU 380), and as adopted by the Public Company Accounting Oversight Board in Rule 3200T. The Audit Committee has discussed with the independent registered public accounting firm the auditor's independence from the Company and management. In addition, the Audit Committee received the written disclosures and the letter from the independent registered public accounting firm required by the applicable requirements of the Public Company Accounting Oversight Board Ethics and Independence Rule 3526, regarding the independent public accounting firm’s communications with the Audit Committee concerning independence.

In reliance on the reviews and discussions referred to above, the Audit Committee approved that the audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended June 30, 2014.

Members of the Audit and Finance Committee

Michael C. Turmelle (Chairman)

John J. Hassett

Howard Safir

PRE-APPROVAL POLICIES AND PROCEDURES

The Audit Committee has the authority to approve all audit and non-audit services that are to be performed by the Company’s independent registered public accounting firm.  Generally, the Company may not engage its independent registered public accounting firm to render audit or non-audit services unless the service is specifically approved in advance by the Audit Committee (or a properly delegated subcommittee thereof).  All Audit-related fees, Tax fees and All other fees were approved by the Audit Committee.

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SERVICES PROVIDED BY THE INDEPENDENT REGISTERED ACCOUNTANTS

The following is a summary of the fees billed to us by Marcum for professional services rendered for the fiscal years ended June 30, 2014 and 2013 and fees billed to us by Romito, Tomasetti & Associates, P.C. for tax compliance services. The Audit Committee considered and discussed with Marcum the provision of non-audit services to us and the compatibility of providing such services with maintaining their independence as our auditors.

Audit Fees.  Consist of fees billed for professional services rendered for the audit of our annual financial statements and review of financial statements included in our quarterly reports and other professional services provided in connection with regulatory filings.

Audit-Related Fees.  Consist of fees billed for assurance and related services that related to the performance of the audit or review of our financial statements and are not otherwise reported under “Audit Fees”. 

Tax Fees.  Consist of fees billed for professional services for tax compliance, tax advice and tax planning.  These services include assistance regarding federal and state tax compliance and acquisitions.

All Other Fees.  Consist of fees billed for professional services other than those fees described above.

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EXECUTIVE COMPENSATION

Summary Compensation Table

The following table provides information concerning compensation earned in our last two fiscal years, ended June 30, 2014 and 2013, by our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and our other most highly compensated executive officers whose total compensation exceeded $100,000 for the fiscal years ended June 30, 2014 and 2013 (together, the “Named Executive Officers”):

(1)

As of October 22, 2014, no bonus compensation has been awarded to the Named Executive Officers with respect to fiscal 2014. In August 2013, the Board of Directors approved contingent bonuses for the Named Executive Officers in the amounts set forth below:

The payment of these bonuses was contingent on the Company’s receipt of certain governmental approvals for its QS-B220 benchtop explosives and narcotics detector by December 31, 2013 and the execution of a procurement contract with a specific agency of the United States government on or before February 1, 2014. The Board of Directors determined that the Company did not achieve the milestones and, therefore, no bonuses were payable to the Company’s officers with respect to fiscal 2013.

 (2)

The amount reported in this column for the Named Executive Officer represents the dollar amount recognized for financial statement reporting purposes in fiscal 2014 and 2013, with respect to options granted to the Named Executive Officers, determined in accordance with Accounting Standards Codification 718-11-25 Compensation – Stock Compensation.  See Note 2 of Notes to Consolidated Financial Statements set forth in our Annual Report on Form 10-K for the assumptions used in determining the value of such awards.

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(3)

Included in “all other compensation” for Mr. Bolduc with respect to fiscal 2014 is $100,000 of accrued vacation pay that was utilized on March 4, 2014 to exercise an incentive stock option and pay the required withholding taxes resulting from exercise of the stock option. All other compensation also includes, but is not limited to, vehicle allowances, legal fees, key man life insurance premiums and premiums paid by us for disability and group term life insurance for the chief executive officer and all named executive officers, are set forth in the following table:

(4)

 Mr. Bolduc resigned from his positions as Chief Executive Officer and President of the Company, as well as from his seat on the Company’s Board of Directors and his position as Chairman of the Board, effective January 16, 2015.

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Grants of Plan-Based Awards to Named Executive Officers

The following table sets forth the individual grants of plan-based awards to the Named Executive Officers in the fiscal year ended June 30, 2014. Please see the “Outstanding Equity Awards at 2014 Fiscal Year-End” for the outstanding stock option awards and unvested stock awards held by each of the Named Executive Officers as of June 30, 2014.

(1)

Options granted on August 13, 2013 were exercisable in three equal annual installments commencing on August 13, 2014, subject to the Company’s achievement of certain performance milestones on or before February 1, 2014. The Company did not achieve the milestones and, therefore, the options expired on February 1, 2014.

(2)

Options granted on March 6, 2014 vest and become exercisable in full upon the later of (i) the addition of the Company’s QS-B220 Product to the Transportation Security Administration (“TSA”) Qualified Product List for passenger checkpoint screening and (ii) the receipt of an initial order for such products under an indefinite delivery/indefinite quantity contract with the TSA. The options expire on March 5, 2024. As of October 22, 2014, none of these options has vested.

Employment Agreements; Change in Control and Severance Provisions

Separation Agreement

On January 16, 2015, Glenn D. Bolduc, resigned from his positions as Chief Executive Officer and President of the Company), as well as his seat on the Company’s Board of Directors and his position as Chairman of the Board effective on that date.

In connection with and prior to Mr. Bolduc’s resignations, Mr. Bolduc entered into a Separation Agreement and Release (the “Separation Agreement”) with the Company.  The Separation Agreement provides that Mr. Bolduc’s resignation will be deemed an involuntary termination without cause pursuant to his Amended and Restated Employment Agreement dated as of June 25, 2013.  In this regard, and subject to the terms contained in the Employment Agreement, Mr. Bolduc is entitled to receive: (i) annual base salary for 18 months on a regular payroll basis; (ii) a pro rata portion of any bonus earned in 2015; (iii) continuation of coverage under and contributions to health care, dental and life insurance benefits for a 12 month period; and (iv) transfer of any key man life insurance.

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Additionally, pursuant to the terms of the Separation Agreement: (i) Mr. Bolduc agreed to consent to a modification of the Company’s Change of Control Payment Plan (“CIC Plan”), currently being considered by the Board of Directors, under which, in the event the Company is sold, Mr. Bolduc’s share in the CIC Plan will be reduced to 4% of the net sales price of the Company, as defined in an amended CIC Plan, and under which the aggregate share of all other participants in the CIC Plan will be 8.5% of the net sales price; (ii) the Company agreed that Mr. Bolduc shall continue to have the use of an apartment in New York City through the end of the current lease, all lease obligations of said apartment, including but not limited to rent payments and utilities, to be paid by the Company; (iii) the Company agreed to pay Mr. Bolduc’s attorney the sum of $40,000 towards legal fees related to the negotiation of the Separation Agreement and related matters; (iv) the Company amended Mr. Bolduc’s existing stock options permitting Mr. Bolduc to exercise those options which are vested as of his separation date through the maturity date of said options and to provide for the ability to exercise the vested options on a cashless basis, all other terms of Mr. Bolduc’s options remained unchanged ; and (v) Mr. Bolduc agreed to release all claims against the Company.

Employment Agreements in Effect During Fiscal 2014

Mr. Glenn D. Bolduc

On June 25, 2013, we amended and restated our employment agreement with Mr. Bolduc. The amended agreement contemplated that it would remain in effect through June 30, 2016, after which, the agreement would automatically renew for additional one-year periods unless notice of non-renewal was given by either party. The agreement establishes Mr. Bolduc’s base salary at the rate of $400,000 per year. Mr. Bolduc’s base salary was subject to annual review, and any increases would be made in the discretion of the Board of Directors upon the recommendation of the Compensation Committee.

The agreement also provided that Mr. Bolduc was eligible to receive cash bonuses of up to 50% of his annualized base salary for the fiscal years ended June 30, 2013, June 30, 2014 and for subsequent fiscal years. The amount of the bonus payable with respect to any fiscal year, if any, was determined by the Board, in its sole discretion, provided that no bonus would be payable unless we achieved certain revenue and adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets established by the Board for the respective fiscal year.  We did not achieve these targets and no bonus was payable to Mr. Bolduc for the fiscal year ended June 30, 2014. In August 2013, the Board awarded Mr. Bolduc a bonus of $50,000 with respect to the fiscal year ended June 30, 2013, which payment of was contingent on the Company receipt of certain governmental approvals for its QS-B220 desktop explosives and narcotics detector by December 31, 2013 and the execution of a procurement contract with a specific agency of the United States government on or before February 1, 2014 (the “Bonus Milestones”). We did not achieve these milestones and no bonus was paid to Mr. Bolduc for the fiscal year ended June 30, 2013. During the year ended June 30, 2013, Mr. Bolduc was paid bonuses of $136,250 and $162,500, representing bonuses earned in our fiscal years ended June 30, 2009 and June 30, 2012, respectively.

Mr. Bolduc was eligible to receive such additional compensation as the Board may, in its sole discretion, have awarded from time to time. In addition, Mr. Bolduc received a car allowance and was eligible to participate in our employee fringe benefit programs or programs readily available to employees of comparable status and position.

Under the terms of the agreement, the Company could have terminated the agreement at any time without cause, on 30 days’ prior written notice. The agreement provides, however, for the payment of 18 months’ salary and a pro rata portion of any bonus compensation earned during the year of termination, as well as the continuation of certain benefits for 12 months, as separation payments in the event that Mr. Bolduc’s employment was terminated by us without “cause” or if Mr. Bolduc resigned for “good reason” (as those terms were defined in the agreement). The agreement also provided that, if Mr. Bolduc resigned for “good reason,” all stock options and shares of restricted stock then held by Mr. Bolduc would become fully vested and exercisable as of the date of such resignation.

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In the event that, within 12 months after a “change of control” (as that term was defined in the Company’s Change of Control Plan, as adopted by the Board on September 7, 2012), Mr. Bolduc’s employment was terminated without cause, or Mr. Bolduc resigned for good reason, the agreement provided (i) for the payment of 36 months’ salary and a pro rata portion of any bonus compensation earned during the year of termination, and (ii) that all stock options and shares of restricted stock then held by Mr. Bolduc would become fully vested and exercisable as of the date of such termination or resignation.

The Company was not required to continue to pay any amounts to Mr. Bolduc or to continue to provide certain benefits following termination of the agreement unless Mr. Bolduc executed a general release in favor of us substantially in the form annexed to the agreement and the period during which Mr. Bolduc revoked the release had expired without any such revocation.

The agreement included certain restrictions against competition and solicitation of our employees and customers for a period of one year after Mr. Bolduc’s resignation or termination.

Dr. William J. McGann

In March 2012, we entered into a three-year employment agreement with Dr. William J. McGann, our Chief Operating Officer, pursuant to which Dr. McGann received a base salary of $270,000 in the fiscal year ended June 30, 2014. After the third year, the agreement will automatically continue unless notice of termination is given by either party.  We may terminate the agreement at any time without cause, on 30 days’ written notice.  The agreement, however, provides for payment of twelve months’ salary and a pro rata portion of any bonus compensation earned during the year of termination, as well as the continuation of certain benefits, as separation payments in the event that Dr. McGann employment is terminated by us without “cause” or Dr. McGann resigns for “good reason” (as those terms are defined in the agreement).  Dr. McCann’s base salary is subject to annual review, and any increases will be made in the discretion of the Board of Directors upon the recommendation of the Compensation Committee.

The agreement provides that Dr. McGann was eligible to receive incentive compensation in an amount of up to $137,500 for the fiscal year ended June 30, 2014 upon the achievement of certain performance milestones to be established by the Board of Directors.  We did not achieve these milestones and no bonus was payable to Dr. McGann for the fiscal year ended June 30, 2014. In August 2013, however, the Board awarded Dr. McGann a bonus of $41,250 with respect to the fiscal year ended June 30, 2013, payment of which was contingent on the achievement of the Bonus Milestones described above. We did not achieve these milestones and no bonus was payable to Dr. McGann for the fiscal year ended June 30, 2013. Incentive compensation, if any, for subsequent fiscal years will be based on performance milestones to be established by mutual agreement between the Company and Dr. McGann within 60 days after commencement of each such fiscal year.

Dr. Darryl K. Jones

In May, 2012, we entered into a three-year employment agreement with Dr. Darryl K. Jones, our Vice President of Sales and Marketing, pursuant to which Dr. Jones received a base annual salary of $245,000 in the fiscal year ended June 30, 2014. After the third year, the agreement will automatically continue unless notice of termination is given by either party. We may terminate the agreement at any time without cause, on 30 days’ written notice. The agreement, however, provides for payment of twelve months’ salary and a pro rata portion of any bonus compensation earned during the year of termination, as well as the continuation of certain benefits, as separation payments in the event that Dr. Jones employment is terminated by us without “cause” or Dr. Jones resigns for “good reason” (as those terms are defined in the agreement). Dr. Jones’s base salary is subject to annual review, and any increases will be made in the discretion of the Board of Directors upon the recommendation of the Compensation Committee.

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The agreement provides for Dr. Jones was eligible to receive incentive compensation in an amount of up to $122,500 for the fiscal year ended June 30, 2014 upon the achievement of certain performance milestones to be established by the Board of Directors. We did not achieve these milestones and no bonus was payable to Dr. Jones for the fiscal year ended June 30, 2014.  In August 2013, however, the Board awarded Dr. Jones a bonus of $29,375 with respect to the fiscal year ended June 30, 2013, payment of which was contingent on the achievement of the Bonus Milestones described above. We did not achieve these milestones and no bonus was payable to Dr. Jones for the fiscal year ended June 30, 2013. Incentive compensation, if any, for subsequent fiscal years will be based on performance milestones to be established by mutual agreement between the Company and Dr. Jones within 60 days after commencement of each such fiscal year.

Potential Payments Upon Termination or Change in Control

The following table describes the estimated incremental compensation upon (i) termination by the Company of the Mr. Bolduc without “cause,” or (ii) termination by Mr. Bolduc for “good reason,” including certain changes in control involving the Company.  The estimated incremental compensation assumes the triggering event had occurred on June 30, 2014.  Benefits generally available to all employees are not included in the table.  The actual amount of compensation can only be determined at the time of termination or change in control.

(1)

We are required to continue to pay Mr. Bolduc annual base salary then in effect for 18 months (36 months if Mr. Bolduc’s employment is terminated without “cause” or he resigns for “good reason” within 12 months following a change in control) on a regular payroll basis and Messrs. McGann and Jones’ annual base salary then in effect for 12 months on a regular payroll basis.

(2)

Represents estimated out-of-pocket COBRA health insurance and dental premium expenses to be paid by us on behalf of Messrs. Bolduc, McGann and Jones after termination.  Estimated out-of-pocket COBRA health insurance premium incurred by Messrs. Bolduc, McGann and Jones over the 12-month period following termination to be reimbursed by us.  Currently, Mr. Bolduc does not subscribe to health or dental benefits provided by us.

(3)

Represents estimated life insurance premiums to be paid by us on behalf of Messrs. Bolduc, McGann and Jones after termination.  We are required to continue in full force and effect, at our expense, the life insurance benefits provided in in these officers’ employment agreements for a period of 12 months after termination of the respective officer’s employment or until such officer becomes employed, whichever occurs first.  

Change of Control Payment Plan

On September 7, 2012, the Board of Directors adopted the Implant Sciences Corporation Change of Control Payment Plan, the purpose of which is to reward management for the increases in shareholder value generated between January 2009 and the adoption of the plan.  

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On January 2, 2009, the closing price of our Common Stock on the NYSE Amex LLC was $0.18 per share. On the date the plan was adopted, the closing price of the Common Stock on the OTC Markets Group’s OTCPK tier was $1.40. Our Board of Directors believed that this increase in shareholder value was directly attributable to the dedication and hard work of our management team, employees and directors. The Board also believed, however, that our management and directors owned significantly less equity in the Company than do the officers and directors of most publicly traded early-stage (i.e., turn-around) businesses. Accordingly, our management and directors have not significantly benefitted from the increase in shareholder value between January 2009 and September 2012, and the plan is intended to provide value to our management and directors equivalent to the value they would have earned during that period had they owned a more significant portion of our equity.  

On February 26, 2015, the Board of Directors amended and restated the Implant Sciences Corporation Change of Control Payment Plan in order to modify certain provisions relating to the calculation and amounts of payment to which certain of our key employees and directors are entitled following a Change in Control.

The following is a summary of the material terms of the Change of Control Plan, as amended. This summary is qualified in its entirety by reference to the complete plan, as amended, a copy of which was filed as Exhibit 10.1 to our Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 4, 2015.

Sums Payable Under the Plan and Applicable Percentages.  The plan provides for change of control payments based on a percentage of net proceeds of a change of control after subtracting amounts that a participant would receive in the change of control transaction as a result of the participant’s ownership of certain stock options of the Company.  Change of control payments are calculated as (a) the product of (i) net proceeds of a change of control, multiplied by (ii) the applicable percentage granted to the participant, reduced, but not below zero, by (b) any portion of the net proceeds or any other consideration which are payable to such participant with respect to the at-risk options or with respect to shares of capital stock of the Company acquired upon the exercise of at-risk options.  The options deemed to be “at-risk” are identified in Appendix A of the plan.  The applicable percentage of net proceeds to be received by each participant is as follows:

The Company has reserved .87% for future issuance by the Board of Directors.

*Applicable percentage received by a Participant in the event of Participant’s termination without Cause or Resignation for Good Reason after the Effective Date but on or before June 30, 2015,

**Applicable percentage received by a Participant in the event of Participant’s termination without Cause or Resignation for Good Reason after June 30, 2015 but on or before December 31, 2015.

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In the plan, net proceeds is defined as the aggregate consideration paid in connection with a change of control, after payment of (i) all secured indebtedness of the Company and any controlled subsidiary, together with all accrued but unpaid interest thereon and all other obligations related thereto, including without limitation all indebtedness owed to DMRJ Group, LLC, and to the holders of promissory notes issued pursuant to that certain note purchase agreement dated as of March 19, 2014, between the Company and certain other parties thereto, and (ii) all other obligations and liabilities of the Company and any controlled subsidiary, including all expenses related to such change of control.  Net proceeds shall be deemed to include (i) any consideration to be paid to the Company, any controlled subsidiary, or the Company’s stockholders (as the case may be) that is to be held in escrow and (ii) any consideration to be paid to the Company, any controlled subsidiary, or the Company’s stockholders (as the case may be) that is based on the future outcome or performance of the Company or any controlled subsidiary in the form of an earn-out according to the terms of the change of control. Upon any release from escrow and/or any payment of an earn-out, the Company shall make the change of control payments attributable to such amounts upon the same payment schedule and under the same terms and conditions as apply to the corresponding payments to the Company, any controlled subsidiary, or the Company’s stockholders (as the case may be) and in compliance with Section 409A of the Internal Revenue Code.

The change in control payments will be payable to participants, or their respective beneficiaries, in cash, no later than 30 days after the net proceeds are received by the Company.

The Change of Control Plan is unfunded and all Plan Benefits will be paid only from our general assets.

Participants.  The Board has designated each of our officers and directors, including the estate of Mr. Joseph E. Levangie, a former member of the Board of Directors, as eligible to receive benefits under the Change of Control Plan upon the effective time of a “Change of Control” (as defined in the plan).  In the event that a participant is terminated by the Company for cause or resigns without good reason, such participant’s eligibility immediately terminates.  

Additionally, a participant’s termination without cause or resignation for good reason prior to or after a change of control will not affect the eligibility of such participant or his or her beneficiary to receive a change of control payment; provided, however, that, (x) in the event of a participant’s termination without cause or resignation for good reason on or before June 30, 2015, then, for purposes of the definition of change of control payment, the percentage applicable to such participant shall be as set forth in Column B in the table under the heading “Sums Payable Under the Plan and Applicable Percentages” above; and (y) in the event of a participant’s termination without cause or resignation for good reason after June 30, 2015 but on or before December 31, 2015, the percentage applicable to such participant shall be as set forth in Column C in the table under the heading “Sums Payable Under the Plan and Applicable Percentages” above.

Termination for cause and resignation for good reason are defined in the plan.

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Definition of “Change of Control”. As defined in the Change of Control Plan, the term “Change of Control” means the occurrence of any one of the following events:

(i)

a merger or consolidation in which:

a.

the Company is a constituent party or

b.

a more than fifty percent (50%) owned subsidiary of the Company, measured by the total fair market value and the total voting power of the outstanding shares of the capital stock of such subsidiary, or a controlled subsidiary, is a constituent party,

where any one person, or more than one person acting as a group (other than certain excluded persons, as defined therein), acquires ownership of the stock of the Company or controlled subsidiary that, together with the stock then held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company or controlled subsidiary (determined on a fully diluted basis assuming the exercise, conversion or exchange of all exercisable, convertible or exchangeable securities, respectively);

(ii)

the sale, lease, transfer, exclusive license or other disposition by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole to any one Person, or more than one person acting as a group, other than excluded person(s), in a single transaction or in a series of related transactions during the twelve (12) month period ending on the date of the most recent disposition to such person or persons, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Company; or

(iii)

the sale, exchange or transfer to any one person, or more than one person acting as a group (other than certain excluded persons, as defined therein) in a single transaction or in a series of related transactions during the twelve (12) month period ending on the date of the most recent transfer to such person or persons, of at least a majority, by voting power (determined on a fully diluted basis, assuming the exercise, conversion or exchange of all exercisable, convertible or exchangeable securities, respectively), of the outstanding shares of capital stock of the Company.

Obligations of the Participants. No participant will be eligible to receive Plan Benefits unless such participant has executed an Agreement Related to Nondisclosure, Noncompetition and Other Matters, in the form attached as Exhibit B to the Change of Control Plan. Such agreement provides, generally, that (i) all confidential information concerning our business or financial affairs in the participant’s possession is the Company’s exclusive property; (ii) the participant must disclose to us ideas and inventions conceived of by the participant during his service to the Company or within one year afterward and, with certain exceptions, assign all rights in such ideas and inventions to us; and (iii) during his service to the Company and for a period of one year afterward, the participant may not, directly or indirectly, compete with us, induce any of our employees to terminate their relationships with us or contact or solicit the business of any of our customers or prospective customers.

In addition, in order to ensure a smooth transition after a Change of Control, a successor entity to the Company may require, as a condition to the payment of any Plan Benefit, that a participant who is an employee of the Company or one of its affiliates on the date of the Change of Control continue to provide services to, and remain employed by, the successor entity for up to 30 days following the Change of Control, provided that during such 30-day period the participant must continue to receive at least the same base salary that was in effect immediately prior to the Change of Control.

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Taxation of Plan Benefits.

Withholding Taxes. We may withhold from Plan Benefits amounts which it determines are necessary to satisfy its obligation to withhold federal, state and local income taxes or other taxes or amounts required to be withheld.

Section 4999 Gross-Up Payments. In the event that the compensation payable to or for the benefit of a participant upon a Change of Control (whether pursuant to the Change of Control Plan or otherwise) (the “Parachute Payments”) would subject the participant to the excise tax levied on certain “excess parachute payments” under Section 4999 of the Code, we must make an additional payment to the participant in an amount such that, after reduction for all taxes, the remaining amount equals the excise tax described in Section 4999 of the Code and all related interest and penalties due with respect to such participant's Parachute Payments.

Amendment; Termination. The Board or the Compensation Committee (or another committee designated by the Board) may terminate the Change of Control Plan effective on at least 30 days’ prior notice to each participant. Any such termination or amendment; however, that imposes additional obligations on, or impairs the rights of, a participant under the Plan will not be effective without the participant’s written consent.

Outstanding Equity Awards at 2014 Fiscal Year-End

The following table provides information regarding outstanding stock options held by each Named Executive Officer as of June 30, 2014.

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(1)

Exercisable in two equal annual installments commencing on September 7, 2012.

(2)

Exercisable in full upon the later of (i) the addition of the Company’s QS-B220 Product to the Transportation Security Administration (“TSA”) Qualified Product List for passenger checkpoint screening and (ii) the receipt of an initial order for such products under an indefinite delivery/indefinite quantity contract with the TSA.

(3)

Exercisable on April 1, 2012.

2014 Option Exercises and Stock Vested

The following table provides information regarding the exercise of option awards by any of the Named Executive Officers, during the fiscal year ended June 30, 2014:

Compensation Committee Interlocks and Insider Participation

None of the Compensation Committee members (i) has ever been an officer or employee of the Company or (ii) was a participant in a “related person” transaction in fiscal 2014. None of the Company’s executive officers serves, or in fiscal 2014 served, as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving as a member of the Company’s Board of Directors or the Compensation Committee.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our executive officers, directors and persons who beneficially own more than 10% of a registered class of our securities to file reports of ownership and changes in ownership with the SEC.  Based solely on a review of copies of such forms submitted to the Company, we believe that all persons subject to the requirements of Section 16(a) filed such reports on a timely basis in fiscal 2014, with the exception of Mr. Bolduc, who filed one such report on July 10, 2014 with respect to the exercise of an incentive stock option on March 5, 2014 to purchase 276,400 shares of our Common Stock, and Mr. Safir, who filed one such report on August 21, 2013 with respect to the grant of a non-qualified stock option on August 13, 2013 to purchase 25,000 shares of our Common Stock.

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PROCEDURES FOR SUBMITTING STOCKHOLDER PROPOSALS

Proposals for Inclusions in the Proxy Statement

Stockholder proposals, including director nominations, intended for inclusion in our proxy statement for the 2016 Annual Meeting (expected to be held in July 2016) pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 must be submitted to us on or before January 12, 2016 so that they may be considered by us for inclusion in our proxy statement relating to that meeting.

Proposals Not Included in the Proxy Statement