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CORRESP
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Implant Sciences Corresp 06-03-2005

June 3,
2005

Mr. Gary
Todd

Reviewing
Accountant

United
State Securities and Exchange Commission

Division
of Corporate Finance

450 Fifth
Street, N.W.

Washington,
D.C. 20549

      Re:

      Implant
      Sciences Corporation (the “Company”)

File
No. 001-14949

Dear Mr.
Todd:

In
connection with the Staff’s comment letter, dated April 21, 2005 regarding the
above-referenced matter, we hereby respectfully submit to you the following
responses electronically via EDGAR.

We would
like it to be noted, that in our response to comment #15, we have included
confidential information. While we need to provide as much detail to you as
possible, we would like the opportunity to summarize this information before
filing this document publicly.

For
convenience of your review, in the subsequent pages, we have repeated the
Staff’s questions and comments in bold type prior to our response.

Additionally,
the company acknowledges that:

      ·

      The
      company is responsible for the adequacy and accuracy of the disclosure in
      the filing;

      ·

      Staff
      comments or changes to disclosure in response to staff comments do not
      foreclose the Commission from taking any action with respect to the
      filing; and

      ·

      The
      Company may not assert staff comments as a defense in any proceeding
      initiated by the Commission or any person under the federal securities
      laws of the United States.

We thank
the Staff in advance for its consideration of the foregoing.  If you have
any questions or comments, please feel free to contact me at your earliest
convenience.

      Sincerely,

      Implant
      Sciences Corporation

      /s/
      Diane J. Ryan

      Diane
      J. Ryan

      VP
      Finance and CFO

Form
10-K for the year ended June 30, 2004

General

      1.

      Based
      on your market capitalization it appears that you may be required to exit
      the small business reporting system at the beginning of your June 2006
      fiscal year. Please carefully consider the small business eligibility
      requirements before you submit any filings for fiscal
      2006.

We
acknowledge that we may be required to exit the small business reporting system
beginning with our fiscal year 2006.

Item
6. Management’s Discussion and Analysis of Financial Condition and Results of
Operations

Results
of Operations - Page 14

      2.

      On
      page 15 you disclose a measure described as net loss “before giving effect
      to the charge for stock-based compensation.” That item is a non-GAAP
      measure as defined in Item 10(h) to Regulation S-B. Under Item 10(h)(2)(B)
      you may not adjust or smooth earnings for items reasonably likely to recur
      within two years or when there was similar charge or gain within the prior
      two years. You reported stock compensation expense in fiscal 2004 and 2003
      and you continue to report such charges in fiscal 2005. Accordingly, you
      should revise delete disclosure of this non-GAAP measure. The non-GAAP
      measure of adjusted expenses presented in the “Selling, General and
      Administrative” expense caption also suffers from this deficiency and
      should be similarly deleted.

We
acknowledge this comment and will remove this disclosure.

Liquidity
and Capital Resources - Page 15

      3.

      The
      discussion of cash flows from operating activities is basically a list of
      items from the cash flow statement. As set forth in FR-72, you should
      provide an analysis of operating cash flows focusing on the underlying
      drivers of those cash flows. Please expand or explain to us how the
      existing disclosure is reflective of the guidance from that
      Release.

We
propose to modify our disclosure in future filings in the following
manner:

During
the year ended June 30, 2004 we used $2,647,000 of cash to fund our operations.
This is approximately $1,210,000 more than the cash used to fund operations in
the year ended June 30, 2003. The primary use of cash during both periods was to
fund continued development of our explosives detection products. The primary
change from the year ended June 30, 2003 was related to the timing of payment on
certain government contracts. Much of our government contract work must adhere
to precise milestones for billing purposes. As such, the work is funded from
internal sources until the government is billed and cash payment is received.
Unbilled revenues recognized under government contracts accounts for most of the
$1,365,000 increase in our accounts receivable. During the year we also
transitioned our prostate seeds business from a distributor based sales model to
a direct, in-house sales force. This resulted in a short-term additional expense
while our sales force ramped up their efforts to cover the customer accounts
formally serviced by the distributor.

In order
to fund our continuing investment in our growing businesses, we raised
$9,891,000, net of issuance costs, in private placements of preferred and common
stock and an additional $559,000 through the exercise of employee stock options
and issuances from the Employee Stock Purchase Plan. We expect to use this cash
to help fund our operations and to invest in new business opportunities. In
addition, we used $1,579,000 of the cash raised to repay the loan on
semiconductor manufacturing equipment purchased in 2002.

We expect
the cash we have on hand combined with our cash flow from operations will be
sufficient to fund our working capital in the next twelve months.

We
acknowledge that as set forth in FR-72, a registrant should provide an analysis
of operating cash flows instead of providing a list of items in its statement of
cash flows.

      4.

      As
      a related matter, if you cite changes in components of working capital in
      explaining operating cash flows you should also identify and describe
      reasons for the cited changes. In general, MD&A should present
      reasonably detailed analysis of significant changes in working capital or
      components thereof.

We
acknowledge your comment and will incorporate this form of disclosure as
discussed in the previous comment.

Financial
Statements

Report
of Independent Registered Public Accounting Firm - Page 23

      5.

      The
      second paragraph of the audit report should refer to the PCAOB by its full
      name. That is, it should refer to the standards of the Public Company
      Accounting Oversight Board (United
States).

We
acknowledge your comment and will incorporate this change in future
filings.

Statements
of Operations - Page 25

      6.

      With
      respect to the government contract research and development cost-sharing
      or best efforts arrangements, show us that what you report as contract
      revenue should not be presented as a cost offset pursuant to the
      government contract audit guide. Refer specifically to paragraphs 3.49
      through 3.56 to that publication. This response should be detailed and
      specific to the underlying
arrangements.

We have
considered the guidance included in the AICPA Audit and Accounting Guides -
Audit of Federal Government Contractors (the Audit Guide) and believe based upon
that guidance that our government contract revenue should not be presented as a
cost offset. A summary of our analysis is as follows:

Paragraph
3.49 states “questions of accounting may arise when subcontract costs or the
cost of special equipment to perform the contract, even though included in the
contract price, represent such a substantial amount in relation to the
contractor's other costs of performance that inclusion of such costs in sales
and costs of sales might distort significantly the contractor's volume of
activity” The current contracts that we have do not provide for a substantial
amount of subcontract costs or the cost of special equipment.

Paragraph
3.50 states “The discussion and conclusions of this section relate only to
arrangements in which the federal government is the sole or principal expected
ultimate customer (including foreign military sales) for the research and
development or for products directly resulting from the R&D activity subject
to the arrangement, and do not relate to projects in which federal government
funding is incidental.” We do not believe that section 3.50 applies to the
Company because the federal government is not the expected sole or principal
ultimate customer. However, we have performed the following analysis of the
factors discussed in paragraph 3.53:

“The
committee believes that certain arrangements are different from production-type
contracts covered in SOP 81-1 and that such activities are research and
development as previously defined in paragraph 3.51. Consequently, the committee
believes that contract accounting principles do not apply to those arrangements
meeting all of the following conditions:

      a.

      Activities
      performed in connection with the contractual arrangement qualify as
      research and development as defined by FASB Statement No. 2.
       Yes.

      b.

      The
      contractor retains a right to the data and results of the research and
      development activities. Yes.

      c.

      The
      contractual arrangement obligates the contractor to perform only on a
      best-efforts basis to achieve the agreed-upon objectives of the research
      and development activity, rather than to deliver a product or service
      meeting defined performance or other (such as design) specifications.
      Yes.

      d.

      At
      the inception of the contract, the contractor and the customer enter into
      the arrangement with the expectation that costs will be incurred in excess
      of amounts to be funded. This condition will be met if contractual or
      other documentation specifically evidences acknowledgment of this
      expectation by both the contractor and the customer. Implicit in this
      condition is the existence of significant uncertainty at the date the
      contractor enters into the arrangement regarding the likelihood of
      successfully securing follow-on contracts related to the research and
      development activity. No
      - For
      the contracts that Implant Sciences has obtained, there are no such
      arrangements or expectations of costs to be incurred in addition to those
      incurred under the contract.

      e.

      The
      research and development arrangement is not combined with other contracts
      or segmented in accordance with paragraphs 35 through 42 of SOP 81-1.
      Yes.
      Each of the contracts are standalone contracts, negotiated individually,
      and are not combined with other
contracts.

      f.

      The
      federal government is the sole or principal expected ultimate customer
      (including foreign military sales) for the research and development
      activity or products directly resulting from the R&D activity subject
      to the arrangements. No.
      For many of these contracts, the federal government is not the sole
      expected customer for the research and development activities. The Company
      enters into these contracts with the expectation that they will offer
      resulting products to commercial customers as well as government
      customers.

Since not
all of the
above criteria from paragraph 3.53 have been met, the Company believes this
further supports its conclusion that these research and development contracts
should be accounted for as production-type contracts.

Summary
of Significant Accounting Policies - Page 30

Revenue
Recognition - Page 33

Accounts
Receivable - Page 34

      7.

      In
      a supplemental response, tell us why approximately 45% of your government
      contract revenues for fiscal 2004 were unbilled as of June 30, 2004. Tell
      us when the unbilled amounts were billed and collected. If they were not
      subsequently billed and collected explain why. The narrative response
      should be detailed and specific. With respect to disclosure, you should
      expand MD&A or the notes to financial statements to describe why such
      a significant portion of the government contract revenue was unbilled at
      June 30, 2004, including disclosure about the expected timing of billing
      and collection.

In
response to your comments regarding unbilled government contract revenues, the
reason that 45% of our government contracts were unbilled as of June 30, 2004,
is due to the timing between completing the work and the permitted billing cycle
under the contract. The majority of the unbilled items were invoiced in July and
August, many of which were paid in the same period. Some invoices were not paid
until the second or third quarter of fiscal 2005.

We will
include additional disclosure information should a significant portion of the
government contract revenue be unbilled.

Item
8a. Controls and Procedures - Page 46

      8.

      We
      note your statement that a “control system, no matter how well conceived
      and operated, can provide only reasonable, not absolute, assurance that
      the objectives of the internal control system are met.” Please revise to
      state clearly, if true, that your disclosure controls and procedures are
      designed to provide reasonable
      assurance of achieving their objectives and whether your principal
      executive officer and principal financial officer concluded that your
      disclosure controls and procedures are effective at the reasonable
      assurance level. In the alternative, remove the references to the level of
      assurance of your disclosure controls and procedures. Please refer to
      Section II.F.4 of Management’s Reports on Internal Control Over Financial
      Reporting and Certification of Disclosure in Exchange Act Periodic
      Reports, SEC Release No. 33-8238, available on our website at
      http://www.sec.gov/rules/final/33-8238.htm.

We
acknowledge that we must clarify our statement regarding Controls and Procedures
to state that our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and that our principal
executive officer and principal financial officer will evaluate and state
whether they conclude that the controls and procedures are effective at that
reasonable assurance level.

      9.

      We
      note the statements that the chief executive officer and chief financial
      officer have concluded that the company’s disclosure controls and
      procedures are effective “except as described in the following
      paragraphs.” Given the exception noted, it remains unclear whether your
      chief executive officer and chief financial officer have concluded that
      your disclosure controls and procedures are effective. Please revise your
      disclosure to state, in clear and unqualified language, the conclusions
      reached by your chief executive officer and your chief financial officer
      on the effectiveness of your disclosure controls and procedures. For
      example, if true, you can state that your disclosure controls and
      procedures are effective including consideration of the identified
      matters, so long as you provide appropriate disclosure explaining how the
      disclosure controls and procedures were determined to be effective in
      light of the identified matters. Or, if true, you can state that given the
      identified matters, your disclosure controls and procedures are not
      effective. You should not, however, state the conclusion in your current
      disclosure, which appears to state that your disclosure controls and
      procedures are effective except to the extent they are not
      effective.

We
acknowledge that we must clearly state whether our Disclosure Cont