** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**Form 10-Q**

 

 
| **x****Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|----------------------------------------------------------------------------------------------------|
| ** **                                                                                         |
| **For the  Quarterly Period Ended September 30, 2007**                                             |
| ** **                                                                                         |
| **Or**                                                                                             |
| ** **                                                                                         |
| **o****Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For the transition period from                    to                           **

 

 

**Commission file number                   0-23150**

 

 

**Ibis Technology Corporation**

(Exact name of registrantas specified in its charter)

 
| **Massachusetts**                | ** ** | **04-2987600**      |
|----------------------------------|------------|---------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer    |
| incorporation or  organization)  |       | Identification No.) |
|                             |       |                |

 
| **32  Cherry Hill Drive, Danvers, MA**    | ** ** | **01923**  |
|-------------------------------------------|------------|------------|
| (Address of principal  executive offices) |       | (Zip Code) |

 

 
| **(978)  777-4247**                                        |
|------------------------------------------------------------|
| (Registrant’s telephone  number, including area code) |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

 

 

Yes  x   No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer (as defined by Rule b-2of the Exchange Act).

 
| Large Accelerated Filer o |   | Accelerated Filer o |   | Non-Accelerated Filer x |
|---------------------------|--------|---------------------|--------|-------------------------|

 

 

Indicate by check mark whether the registrant is a shell Company (asdefined in Rule 12b-2 of the Exchange Act).

 

Yes  o   No x

 

 

 

14,316,629 shares of Common Stock, par value $.008,were outstanding on November 13, 2007.

 

 

 

----

 

**IBIS TECHNOLOGY CORPORATION**

 

**INDEX**

 
| ** **                        | **Page  Number**                                                                                                                        |
|-----------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| PART I - FINANCIAL  INFORMATION   |                                                                                                                                    |
|                              |                                                                                                                                    |   |
|                              | Item 1 — Financial  Statements:                                                                                                    |   |
| ** **                        | ** **                                                                                                                              | ** ** |
|                              | Balance Sheets  December 31, 2006 and September 30, 2007 (unaudited)                                                                    | 3 |
|                              |                                                                                                                                    |   |
|                              | Statements of Operations  Three Months Ended September 30, 2006 and 2007 and Nine Months Ended  September 30, 2006 and 2007 (unaudited) | 4 |
|                              |                                                                                                                                    |   |
|                              | Statements of Cash Flows  Nine Months Ended September 30, 2006 and 2007 (unaudited)                                                     | 5 |
|                              |                                                                                                                                    |   |
|                              |  Notes to Unaudited Interim Financial Statements                                                                                   | 6 |
|                              |                                                                                                                                    |   |
|                              | Item 2 — Management’s Discussion and  Analysis of Financial Condition and Results of Operations                               | 18 |
|                              |                                                                                                                                    |   |
|                              | Item 3 —  Quantitative and Qualitative Disclosure About Market Risk                                                                | 26 |
|                              |                                                                                                                                    |   |
|                              | Item 4 —  Controls and Procedures                                                                                                  | 27 |
|                              |                                                                                                                                    |   |
| PART II —  OTHER INFORMATION |                                                                                                                                    |
|                              |                                                                                                                                    |   |
|                              | Item  1 - Legal Proceedings                                                                                                             | 28 |
|                              |                                                                                                                                    |   |
|                              | Item  1A — Risk Factors                                                                                                            | 28 |
|                              |                                                                                                                                    |   |
|                              | Item 2 —  Unregistered Sales of Equity Securities and Use of Proceeds                                                              | 29 |
|                              |                                                                                                                                    |   |
|                              | Item 3 -  Defaults upon Senior Securities                                                                                               | 29 |
|                              |                                                                                                                                    |   |
|                              | Item 4 —  Submission of Matters to a Vote of Security Holders                                                                      | 29 |
|                              |                                                                                                                                    |   |
|                              | Item  5 - Other Information                                                                                                             | 29 |
|                              |                                                                                                                                    |   |
|                              | Item 6  — Exhibits                                                                                                                 | 29 |
|                              |                                                                                                                                    |   |
|                              | Signatures                                                                                                                              | 30 |

 

 

2

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**Part I — FINANCIAL INFORMATION**

 

**IBIS TECHNOLOGY CORPORATION**

 

**BALANCESHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                               | ** ** | **December 31,  2006** | ** ** | **September 30,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
|                                                                                                                                                     |       |                   |       |                    |       |
| **Assets**                                                                                                                                               | ** ** | ** **             | ** ** | ** **              | ** ** |
| **Current  Assets:**                                                                                                                                     | ** ** | ** **             | ** ** | ** **              | ** ** |
| Cash and cash  equivalents                                                                                                                               |       | $                      | 4,812,477  |                    | $          | 6,591,199 |   |
| Accounts  receivable, trade, net                                                                                                                         |       | 349,154                |       | 330,103                 |       |
| Inventories, net  (note 4)                                                                                                                               |       | 3,575,296              |       | 3,545,515               |       |
| Prepaid expenses  and other current assets                                                                                                               |       | 290,780                |       | 235,301                 |       |
| Total current  assets                                                                                                                                    |       | 9,027,707              |       | 10,702,118              |       |
| Property and  equipment                                                                                                                                  |       | 24,728,824             |       | 24,287,424              |       |
| Less: Accumulated  depreciation and amortization                                                                                                         |       | (20,744,772            | )          | (21,146,301             | )          |
| Net property and  equipment                                                                                                                              |       | 3,984,052              |       | 3,141,123               |       |
| Patents and  other assets, net                                                                                                                           |       | 777,082                |       | 539,307                 |       |
| Total assets                                                                                                                                             |       | $                      | 13,788,841 |                    | $          | 14,382,548 |   |
|                                                                                                                                                     |       |                   |       |                    |       |
| **Liabilities  and Stockholders’ Equity:**                                                                                                          | ** ** | ** **             | ** ** | ** **              | ** ** |
| **Current  Liabilities:**                                                                                                                                | ** ** | ** **             | ** ** | ** **              | ** ** |
| Accounts payable                                                                                                                                         |       | $                      | 409,705    |                    | $          | 310,081 |   |
| Accrued  liabilities (notes 5 and 6)                                                                                                                     |       | 973,994                |       | 722,323                 |       |
| Deferred revenue                                                                                                                                         |       | 150,000                |       | —                  |       |
| Total current  liabilities                                                                                                                               |       | 1,533,699              |       | 1,032,404               |       |
|                                                                                                                                                     |       |                   |       |                    |       |
| **Stockholders’  Equity:**                                                                                                                          | ** ** | ** **             | ** ** | ** **              | ** ** |
| Undesignated  preferred stock, $.01 par value                                                                                                            |       |                   |       |                    |       |
| Authorized  2,000,000 shares; none issued                                                                                                                |       | —                 |       | —                  |       |
| Common stock,  $.008 par value                                                                                                                           |       |                   |       |                    |       |
| Authorized  50,000,000 shares; issued and outstanding 10,915,481 shares and 14,316,629  shares at December 31, 2006 and September 30, 2007, respectively |       | 87,324                 |       | 114,533                 |       |
| Additional  paid-in capital                                                                                                                              |       | 93,798,393             |       | 99,073,314              |       |
| Accumulated  deficit                                                                                                                                     |       | (81,630,575            | )          | (85,837,703             | )          |
| Total  stockholders’ equity                                                                                                                         |       | 12,255,142             |       | 13,350,144              |       |
| Total  liabilities and stockholders’ equity                                                                                                         |       | $                      | 13,788,841 |                    | $          | 14,382,548 |   |
|                                                                                                                                                     |       |                   |       |                    |       |

 

 

 

See accompanyingnotes to unaudited interim financial statements.

 

3

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**IBISTECHNOLOGY CORPORATION**

 

**STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
| ** **                                                                                                                                                                                                                                                             | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
|                                                                                                                                                                                                                                                                   | ** ** | **2006**                              | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Net  Sales and revenue:**                                                                                                                                                                                                                                            | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and  other revenue                                                                                                                                                                                                                                             |       | $                                     | 183,006    |                                 | $          | 100,476 |   | $ | 466,226 |   | $ | 321,698 |   |
| Equipment  revenue                                                                                                                                                                                                                                                     |       | 7,040,857                             |       | 92,533                               |       | 13,060,870 |   | 466,504 |   |
| Total net sales  and revenue (notes 2 and 8)                                                                                                                                                                                                                           |       | 7,223,863                             |       | 193,009                              |       | 13,527,096 |   | 788,202 |   |
|                                                                                                                                                                                                                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| **Cost of  sales and revenue:**                                                                                                                                                                                                                                        | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of license  and other revenue                                                                                                                                                                                                                                     |       | —                                |       | —                               |       | — |   | — |   |
| Cost of  equipment revenue (includes share-based compensation expense of $5,530 and  $12,027 for the three and nine months ended September 30, 2006, respectively  and, $11,010 and $24,114 for the three and nine months ended September 30,  2007, respectively)     |       | 2,957,249                             |       | 179,006                              |       | 5,683,525 |   | 499,223 |   |
| Total cost of  sales and revenue                                                                                                                                                                                                                                       |       | 2,957,249                             |       | 179,006                              |       | 5,683,525 |   | 499,223 |   |
| Gross profit                                                                                                                                                                                                                                                           |       | 4,266,614                             |       | 14,003                               |       | 7,843,571 |   | 288,979 |   |
|                                                                                                                                                                                                                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| **Operating  expenses:**                                                                                                                                                                                                                                               | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative (includes share-based compensation expense of $37,138 and  $159,509 for the three and nine months ended September 30, 2006,  respectively, and $55,995 and $177,622 for the three and nine months ended  September 30, 2007, respectively) |       | 560,240                               |       | 499,361                              |       | 1,874,727 |   | 1,626,719 |   |
| Marketing and selling  (includes share-based compensation expense of $4,425 and $33,349 for the  three and nine months ended September 30, 2006, respectively, and $22,161 and  $53,842 for the three and nine months ended September 30, 2007, respectively)          |       | 219,470                               |       | 114,971                              |       | 835,986 |   | 474,892 |   |
| Research and  development (includes share-based compensation expense of $18,206 and $82,900  for the three and nine months ended September 30, 2006, respectively, and  $57,644 and $138,402 for the three and nine months ended September 30, 2007,  respectively)    |       | 1,342,981                             |       | 908,521                              |       | 4,028,874 |   | 2,936,401 |   |
| Total operating  expenses                                                                                                                                                                                                                                              |       | 2,122,691                             |       | 1,522,853                            |       | 6,739,587 |   | 5,038,012 |   |
|                                                                                                                                                                                                                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Income (loss)  from operations                                                                                                                                                                                                                                         |       | 2,143,923                             |       | (1,508,850                           | )          | 1,103,984 |   | (4,749,033 | ) |
|                                                                                                                                                                                                                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| **Other  income:**                                                                                                                                                                                                                                                     | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                                                                                                                                                                                                                                        |       | 86,644                                |       | 112,940                              |       | 240,291 |   | 235,777 |   |
| Other income:                                                                                                                                                                                                                                                          |       | 6,666                                 |       | 105,280                              |       | 93,038 |   | 307,384 |   |
| Total other  income                                                                                                                                                                                                                                                    |       | 93,310                                |       | 218,220                              |       | 333,329 |   | 543,161 |   |
|                                                                                                                                                                                                                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Income (loss)  before income taxes                                                                                                                                                                                                                                     |       | 2,237,233                             |       | (1,290,630                           | )          | 1,437,313 |   | (4,205,872 | ) |
|                                                                                                                                                                                                                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Income tax  expense                                                                                                                                                                                                                                                    |       | —                                |       | —                               |       | 1,256 |   | 1,256 |   |
|                                                                                                                                                                                                                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Net income  (loss) (notes 2 and 9)                                                                                                                                                                                                                                     |       | $                                     | 2,237,233  |                                 | $          | (1,290,630 | ) | $ | 1,436,057 |   | $ | (4,207,128 | ) |
|                                                                                                                                                                                                                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Earnings (loss)  per share:                                                                                                                                                                                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                                  |       | $                                     | 0.21       |                                 | $          | (0.09 | ) | $ | 0.13 |   | $ | (0.32 | ) |
| Diluted                                                                                                                                                                                                                                                                |       | $                                     | 0.20       |                                 | $          | (0.09 | ) | $ | 0.13 |   | $ | (0.32 | ) |
|                                                                                                                                                                                                                                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average  common shares outstanding                                                                                                                                                                                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                                  |       | 10,872,928                            |       | 14,316,629                           |       | 10,841,656 |   | 13,105,623 |   |
| Diluted (note 7)                                                                                                                                                                                                                                                       |       | 10,991,264                            |       | 14,316,629                           |       | 10,971,358 |   | 13,105,623 |   |

 

 

See accompanying notes to unaudited interim financial statements.

 

4

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**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTSOF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
|                                                                        | ** ** | **2006**                                  | ** ** | **2007** | ** ** |
|                                                                        |       |                                      |       |   |   |
| **Cash  flows from operating activities:**                                  | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Net income  (loss)                                                          |       | $                                         | 1,436,057  |   | $ | (4,207,128 | ) |
| Adjustment to  reconcile net loss to net cash used in operating activities: |       |                                      |       |   |   |
| Share-based  compensation expense                                           |       | 287,785                                   |       | 393,980 |   |
| Depreciation and  amortization                                              |       | 1,158,384                                 |       | 1,145,889 |   |
| Changes in  operating assets and liabilities:                               |       |                                      |       |   |   |
| Accounts  receivable, trade                                                 |       | (290,517                                  | )          | 19,051 |   |
| Inventories                                                                 |       | 2,892,221                                 |       | 29,781 |   |
| Prepaid expenses  and other current assets                                  |       | 231,549                                   |       | 55,479 |   |
| Accounts payable                                                            |       | 566,421                                   |       | (99,624 | ) |
| Accrued  liabilities and deferred revenue                                   |       | (7,315,217                                | )          | (401,671 | ) |
|                                                                        |       |                                      |       |   |   |
| Net cash used in  operating activities                                      |       | (1,033,317                                | )          | (3,064,243 | ) |
|                                                                        |       |                                      |       |   |   |
| **Cash  flows from investing activities:**                                  | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Additions to  property and equipment, net                                   |       | (34,956                                   | )          | (8,134 | ) |
| Other assets                                                                |       | (90,358                                   | )          | (57,051 | ) |
|                                                                        |       |                                      |       |   |   |
| Net cash used in  investing activities                                      |       | (125,314                                  | )          | (65,185 | ) |
|                                                                        |       |                                      |       |   |   |
| **Cash  flows from financing activities:**                                  | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Exercise of  stock options and employeee stock option plan                  |       | 73,856                                    |       | 27,690 |   |
| Proceeds from  sales of common stock, net of issuance cost                  |       | —                                    |       | 4,880,460 |   |
|                                                                        |       |                                      |       |   |   |
| Net cash  provided by financing activities                                  |       | 73,856                                    |       | 4,908,150 |   |
|                                                                        |       |                                      |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                       |       | (1,084,775                                | )          | 1,778,722 |   |
| Cash and cash  equivalents, beginning of period                             |       | 6,856,874                                 |       | 4,812,477 |   |
|                                                                        |       |                                      |       |   |   |
| Cash and cash  equivalents, end of period                                   |       | $                                         | 5,772,099  |   | $ | 6,591,199 |   |
|                                                                        |       |                                      |       |   |   |

 

 

See accompanyingnotes to unaudited interim financial statements.

 

5

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**IBISTECHNOLOGY CORPORATION**

 

**NOTES TO UNAUDITED INTERIM FINANCIALSTATEMENTS**

 

**(1)****InterimFinancial Statements**

 

The accompanyingfinancial statements are unaudited and have been prepared by Ibis TechnologyCorporation (the “Company” or “Ibis”) in accordance with U.S. generallyaccepted accounting principles for interim financial information and inaccordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby U.S. generally accepted accounting principles for complete financialstatements.

 

In the opinion ofmanagement, the interim financial statements include all adjustments, whichconsist only of normal and recurring adjustments, necessary for a fairpresentation of the Company’s financial position and results of operations.Results of operations for the interim periods are not necessarily indicative ofthe results to be expected for the full year. These financial statements shouldbe read in conjunction with the financial statements of the Company as of andfor the year ended December 31, 2006, which are included in the Company’sAnnual Report on Form 10-K as filed on March 28, 2007.

 

**(2)****Summaryof Significant Accounting Policies**

 

*(a)**      **Revenue Recognition*

 

                The Company recognizes revenue from equipment salesand the sales of spare parts when all of the following criteria have beenmet:  (1) evidence exists that thecustomer is bound to the transaction; (2) the product has been delivered to thecustomer and, when applicable, the product has been installed and accepted bythe customer; (3) the sales price to the customer has been fixed or isdeterminable; and (4) collectibility of the sales price is reasonably assured.The Company recognizes revenue from implanter sales upon acceptance at thecustomer’s site. Revenue derived from contracts and services is recognized uponperformance. Provisions for anticipated losses are made in the period in whichsuch losses become determinable.

 

*(b)**      **Inventory Valuation and Reserve*

 

**               **Our policy for the valuation of inventory, including the determinationof obsolete or excess inventory, requires us to forecast the future demand forour products within specific time horizons, generally twelve months or less. Ifour forecasted demand for specific products is greater than actual demand andwe fail to reduce manufacturing output accordingly, we could be required torecord additional inventory reserves, which would have a negative impact on ourgross margin. We have reserved for obsolescence when engineering changes orother technological advances indicate that obsolescence has occurred.

** **

*(c)**Share-Based Compensation*

 

*               *On January 1,2006, the Company adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment,”(“SFAS 123(R)”) which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to employees and directors including employee stock options, employeestock purchases related to the 2000 Employee Stock Purchase Plan (“the ESPP”),restricted stock and other special equity awards based on grant date estimatedfair values. SFAS 123(R) supersedes the Company’s previous accounting underAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB 25”) for periods beginning in 2006. In March 2005, theSecurities and Exchange Commission issued SAB 107 relating to SFAS 123(R). TheCompany has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

 

***(d) Valuationof Long-Lived Assets***

*** ***

**               **Ibis reviews the valuation of long-lived assets, including property andequipment and licenses, under the provisions of SFAS No. 144, Accounting forImpairment or Disposal of Long-Lived Assets. Management is required to assess the recoverability of its long-livedassets or asset groups whenever events and circumstances indicate that thecarrying value may not be recoverable. In accordance with SFAS No. 144, when wedetermine that the carrying value of applicable long-lived assets may not berecoverable based upon the existence of one or more of the above indicators ofimpairment, we evaluate whether the carrying amount of the asset exceeds thesum of the undiscounted cash flows

** **

**6**

----

**expected to result from the useand eventual disposition of that asset or asset group. If such a circumstanceexists, we would measure an impairment loss to the extent the carrying amountof the particular long-lived asset or group exceeds its fair value. We woulddetermine the fair value based on a projected discounted cash flow method usinga discount rate determined by our management to be commensurate with the riskinherent in our current business model.**

 

*(e)*  *Accounting for Uncertainty in Income Taxes*

 

                In July 2006, the Financial Accounting StandardsBoard (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), whichclarifies the accounting and disclosure for uncertainty in tax positions, asdefined.  FIN 48 seeks to reduce thediversity in practice associated with certain aspects of the recognition andmeasurement related to accounting for income taxes.  This interpretation is effective for fiscalyears beginning after December 15, 2006 and prescribes a recognition thresholdand measurement attribute for the financial statement recognition andmeasurement of a tax position taken, or expected to be taken, in a tax return,and provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosures and transition.  As a result of the implementation of FIN 48,the Company recorded no adjustment for unrecognized income tax benefits.  At the adoption date of January 1, 2007 andalso at September 30, 2007, the Company had no unrecognized tax benefits.  Ibis classifies any interest and penaltiesrelated to income taxes as components of income tax expense.

 

                The tax years 2000 to 2006 remain open to examinationby the major taxing jurisdictions to which we are subject.  Preceding years also remain open toexamination by U.S. federal and state revenue authorities to the extent offuture utilization of net operating losses (NOLs) and research and development(R&D) tax credits generated in each preceding year.

 

                As of December 31, 2006, we had federal and stateNOLs of approximately $87,082,000 and $52,405,000, respectively and federal andstate R&D credit carryforwards of approximately $1,000,000 and $905,000,respectively, which can be used to offset future federal and state income taxliabilities prior to expiration on various dates through 2026.

 

                Utilization ofNOL and R&D credit carryforwards may be subject to a substantial annuallimitation due to ownership change limitations that have occurred previously orthat could occur in the future as provided by Section 382 of the InternalRevenue Code of 1986 and similar state provisions.  These ownership changes may limit the amountof NOL and R&D credit carryforwards that can be utilized annually to offsetfuture taxable income and tax.  Ingeneral, an ownership change, as defined in Section 382, results fromtransactions which increase the ownership of certain 5% or greater shareholdersor public groups in the stock of a corporation by more than 50 percentagepoints over a three-year period.  Sincethe Company’s formation, the Company has raised capital through the issuance ofcapital stock onseveraloccasions which, combined with the purchasing shareholders’ subsequentdisposition of those shares, may have resulted in a change of control, asdefined in Section 382, or could result in a change of control in the futureupon subsequent disposition.  The Companyhas not currently completed a study to assess whether a change of control hasoccurred or whether there have been multiple changes of control since theCompany’s formation.  If the Company hasexperienced a change of control at any time since formation, or if Ibisexperiences a change of control in the future, utilization of the NOL andR&D credit carryforwards would be subject to an annual limitation underSection 382.  Any limitation may resultin expiration of all or a portion of the NOL or R&D credit carryforwardsbefore utilization.  Until a study iscompleted and any limitation known, no amounts are being presented as anuncertain tax position under FIN 48.

 

*(f) New AccountingPronouncements*

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles and expands disclosures about fair valuemeasurements. SFAS 157 is effective for financial statements issued for fiscalyears

 

7

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beginning after November 15, 2007 and interim periodswithin those fiscal years. The Company is currently evaluating thepotential impact of SFAS No. 157 on its financial position and results ofoperations.

 

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities — Including an Amendment of FASB Statement No. 115”(“SFAS No. 159”). SFAS No. 159 permits entities to choose to measuremany financial instruments and certain other items at fair value and iseffective as of the beginning of the Company’s fiscal year beginning afterNovember 15, 2007. The Company is currently evaluating the potentialimpact of SFAS No. 159 on its financial position and results of operations.

 

**(3)****Liquidity**

 

Historically, theCompany has financed its operations and met its capital requirements throughfunds generated from operations, the issuance of common stock, equipment linesof credit, a working capital line of credit, a term loan, sales-leasebackarrangements and collaborative arrangements. In July 2004, the Companydiscontinued its wafer manufacturing business to focus exclusively on theequipment manufacturing business. The Company will maintain a research anddevelopment effort focused on continuous improvement of the equipmentcapabilities and for supporting our equipment customers’ needs.

 

As of September30, 2007, the Company had cash and cash equivalents of $6.6 million, includingthe gross proceeds from the financing of $5.3 million from the sale of 3.4million shares of common stock and 2.5 million common stock warrants ,receivedin the nine months ended September 30, 2007 During that period, Ibis used $3.1 million of cash for operating activitiesas compared to $1.0 million in the nine months ended September 30, 2006, theprimary difference being the affect on net income of $7.1 million from the saleof two implanters in 2006, the associated decrease in deferred revenue of $7.2million and the associated reduction of inventory of approximately $2.8million. The principal use of cash during the nine months ended September 30,2007 was to fund operations. At September 30, 2007, Ibis had commitments topurchase approximately $0.1 million in material. Our headcount for the quarterended September 30, 2007 was 30 employees.

 

Based on cash flowprojections developed by management, the Company believes it will havesufficient cash resources to support current operations until at least Februaryof 2009. This expectation however, is based on the Company’s current operatingplan and general sales outlook, each of which may change rapidly. In January2007, the Company announced that to conserve cash it was reducing its operatingexpenses by approximately 40% which involved cost cutting measures consistingof headcount reductions, an employee outsourcing agreement at a neighboringbusiness for a minimum of six months under a staffing services agreement,salary reductions and reducing consumable expenses. On February 16, 2007, theCompany entered into a purchase agreement pursuant to which it agreed to sellapproximately 3.4 million unregistered shares of its common stock andapproximately 2.5 million warrants exercisable for common stock to SpecialSituation Funds for an aggregate purchase price of approximately $5.3 millionin a two-tranche financing. The first closing of the February 2007 financing,at which the Company received approximately $2.2 million in proceeds, occurredon February 20, 2007. Pursuant to stockholder approval received at the IbisAnnual Meeting on May 10, 2007, the Company sold the remainder of thesecurities at a second closing, at which the Company received approximately$3.1 million in proceeds. In connection with the transaction, the Company alsoentered into a registration rights agreement with the investors. The Companypaid a placement fee to a placement agent of approximately $0.3 million, whichrepresents a cash fee equal to 5% of the aggregate gross proceeds received bythe company in both closings of the financing. The Company also issued to theplacement agent an aggregate of 179,619 warrants exercisable for common stockwith a dollar value equal to 5% of the aggregate gross proceeds. Totaltransaction costs associated with the financing were approximately $0.4 million,providing net cash to the Company of $4.9 million. All of the securities weresold in a private placement pursuant to Regulation D of the Securities Act.

 

                The Company intends to continue to invest resourcesin research and development capabilities. Changes in technology or sales growthbeyond currently established capabilities may require further investment.Further adoption of the technology and the timing of future equipment ordersare dependent on the continuing qualification of implanters and improvementprograms at the device manufacturers, among other factors. At present time,the Company has only

 

 

8

----

 

oneof the four major wafer manufacturers as its current prospective customer. Wecurrently do not have an order backlog for implanters, nor do we havevisibility to the timing of the next order from our customer. The timing of future orders is importantand difficult to predict because customers can delay orders and/or requestearly shipment, either of which could cause the need for additional cashrequirements. Forecasting future revenue, on a quarter-by-quarter basis,remains exceedingly difficult and significant variations, quarter to quarter,are likely. Further, because some of the materials and components the Companyuses to build its implanter have long lead times, the Company may purchase someor all of these long lead time items prior to receipt of an order by itscustomers. When this is the case, those parts and materials bear the risk of beingsubject to excess and obsolescence. The Company expects to continue to exploreequity offerings and other forms of financing in order to finance future growthand our research and development programs. There can be no assurance, however,that our actual needs will not exceed expectations or that we will be able tofund our operations on a long-term basis in the absence of other sources. Therealso can be no assurance that any additional required longer term financingwill be available through additional bank borrowings, debt or equity offeringsor otherwise, or that if such financing is available, that it will be availableon terms acceptable to us. Should we be unable to secure an order for animplanter from our customers within a reasonable timeframe in the future,notwithstanding the belief that the Company has sufficient cash for the 2008fiscal year, we may be unable to continue to invest in research, developmentand manufacturing capabilities, pursue and maintain relationships, partnershipsand alliances with third parties or maintain or replace key personnel.

 

9

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** **

** **

** **

**(4)****Inventories**

** **
| Inventories  consist of the following: | ** ** | ** **                 | ** ** | ** **                  | ** ** |
|----------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **December 31,**

**2006** | ** ** | **September 30,**

**2007** | ** ** |
|                                   |       |                       |       |                        |       |
| Raw materials                          |       | $                          | 1,445,182  |                        | $          | 1,437,480 |   |
| Work in process                        |       | 2,130,114                  |       | 2,108,035                   |       |
| Total equipment  inventory             |       | $                          | 3,575,296  |                        | $          | 3,545,515 |   |

** **

**(5) Accrued Liabilities**

** **

**                            **Current accrued liabilities were asfollows:
|                       | ** ** | **December  31,**

**2006** | ** ** | **September  30,**

**2007** | ** ** |
|----------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | ** **                  | ** ** | ** **                   | ** ** |
| Accrued vacation           |       | $                           | 156,213    |                         | $          | 148,808 |   |
| Accrued warranty           |       | 435,979                     |       | 244,605                      |       |
| Accrued payroll            |       | 128,343                     |       | 96,637                       |       |
| Accrued expenses           |       | 253,459                     |       | 232,273                      |       |
| Total accrued  liabilities |       | $                           | 973,994    |                         | $          | 722,323 |   |

** **

** **

**(6) Accrued Warranty**

** **

At the time that revenueis recognized for the sale of an implanter a liability for warranty is alsoestablished. An estimate of the warranty cost is made based on the number ofyears involved and the Company’s prior experience. As material and labor isused during the warranty period the liability is reduced based on thesecharges. At the end of the warranty term the balance in the liability iseliminated and adjusted through cost of sales, the account charged atinception. A reconciliation of warranty liability for the period ended December31, 2006 and September 30, 2007 is as follows:

** **
| Warranty balance  December 31, 2005  |   | $        | 653,133 |   |
|--------------------------------------|--------|----------|---------|--------|
| Expense incurred  - 2006             |   | (160,939 | )       |
| Initiated - 2006                     |   | 608,220  |    |
| Expired — 2006                  |   | (664,435 | )       |
| Warranty balance  December 31, 2006  |   | 435,979  |    |
| Expense incurred  - 2007             |   | (31,727  | )       |
| Expired — 2007                  |   | (159,647 | )       |
| Warranty balance  September 30, 2007 |   | $        | 244,605 |   |

** **

** **

**10**

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**(7) Net Income (Loss) Per Share**

 

**               **Net loss forthe quarter ended September 30, 2007 of $1.3 million or a loss of $0.09 pershare, included stock-based compensation expense under Statement of FinancialAccounting Standards No. 123R, “Share-Based Payment,” (“SFAS 123R”) of $0.2million or $0.01 per share related to employee stock options, and employeestock purchases. Net loss for the nine months ended September 30, 2007 of $4.2million or $0.32 per share, included stock- based compensation expense under(SFAS 123R) of $0.4 million or $0.03 per share, related to employee stockoptions, andemployee stockpurchases. Net income for the quarter ending September 30, 2006 was $2.2million or $0.20 per diluted share, including stock-based compensation expenseof $0.1 million, or $0.01 per share. Net income for the nine-month period endedSeptember 30, 2006 of $1.4 million, or $0.13 per diluted share includedstock-based compensation expense under (SFAS 123R) of $0.3 million, or $0.03per share related to employee stock options and employee stock purchases.

 

Net income (loss)per share of common stock is computed based upon the weighted average number ofshares outstanding during each period and including the dilutive effect, ifany, of stock options and warrants. SFAS 128 requires the presentation of basicand diluted earnings (loss) per share for all periods presented. As the Companywas in a net loss position for the three and nine months ended September 30,2007, common stock equivalents of 877 and 5,130 respectively, were excludedfrom the diluted loss per share calculation, as they would be antidilutive. Asa result, diluted loss per share is the same as basic loss per share for theseperiods presented. For the three and nine months ended September 30, 2006, theCompany did report both basic and diluted earnings per share because itreported net income in those periods.

 

11

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**(8) Industry Segments**

 

                The Company’s current reportable segments are SIMOXEquipment and Other Products or Services. For purposes of segment reporting,equipment, equipment spares and field service revenue are combined and reportedas SIMOX Equipment. Other services and license revenue are combined andreported as Other Products or Services.

 

                The table below provides unaudited information forthe three and nine months ended September 30, 2006 and 2007 pertaining to theCompany’s two industry segments.

 

 
| ** **                                                   | ** ** | **SIMOX**

**Equipment** | ** ** | **Other Products  Or Services** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|---------------------------------|------------|------------|------------|
| ** **                                                   | ** ** | ** **               | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Net  Revenue**                                             | ** ** | ** **               | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Three Months  Ended September 30, 2006                       |       | $                        | 7,040,857  |                            | $          | 183,006    |       | $ | 7,223,863 |   |
| Three Months  Ended September 30, 2007                       |       | $                        | 92,533     |                            | $          | 100,476    |       | $ | 193,009 |   |
| Nine Months  Ended September 30, 2006                        |       | $                        | 13,060,870 |                            | $          | 466,226    |       | $ | 13,527,096 |   |
| Nine Months  Ended September 30, 2007                        |       | $                        | 466,504    |                            | $          | 321,698    |       | $ | 788,202 |   |
|                                                         |       |                     |       |                            |       |       |       |
| **Operating  Income (Loss)**                                 | ** ** | ** **               | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Three Months  Ended September 30, 2006                       |       | 2,521,157                |       | 183,006                         |       | 2,704,163  |       |
| Three Months  Ended September 30, 2007                       |       | (1,109,965               | )          | 100,476                         |       | (1,009,489 | )          |
| Nine Months  Ended September 30, 2006                        |       | 2,512,485                |       | 466,226                         |       | 2,978,711  |       |
| Nine Months  Ended September 30, 2007                        |       | (3,444,012               | )          | 321,698                         |       | (3,122,314 | )          |
| ** **                                                   | ** ** | ** **               | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Assets**                                                   | ** ** | ** **               | ** ** | ** **                      | ** ** | ** ** | ** ** |
| September 30,  2007                                          |       | 7,335,624                |       | 200,951                         |       | 7,536,575  |       |
|                                                         |       |                     |       |                            |       |       |       |
| **Capital  Expenditures**                                    | ** ** | ** **               | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Three Months  Ended September 30, 2006                       |       | 7,119                    |       | —                          |       | 7,119      |       |
| Three Months  Ended September 30, 2007                       |       | —                   |       | —                          |       | —     |       |
| Nine Months  Ended September 30, 2006                        |       | 34,956                   |       | —                          |       | 34,956     |       |
| Nine Months  Ended September 30, 2007                        |       | —                   |       | —                          |       | —     |       |
| ** **                                                   | ** ** | ** **               | ** ** | ** **                      | ** ** | ** ** | ** ** |
| **Depreciation and Amortization  of Property and Equipment** | ** ** | ** **               | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Three Months  Ended September 30, 2006                       |       | 367,620                  | ** ** | **—**                      |       | 367,620    |       |
| Three Months  Ended September 30, 2007                       |       | 357,039                  |       | —                          |       | 357,039    |       |
| Nine Months  Ended September 30, 2006                        |       | 1,112,605                |       | —                          |       | 1,112,605  |       |
| Nine Months  Ended September 30, 2007                        |       | 1,094,487                |       | —                          |       | 1,094,487  |       |

 

12

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The table below providesthe reconciliation of reportable segment operating loss and assets to Ibis’totals.

 
| ** **                                                   | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **Segment Reconciliation**                                   | ** ** | **2006**                              | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Net Income  (Loss):                                          |       |                                  |       |                                 |       |   |   |   |   |
| Total operating  income (loss) for reportable segments       |       | $                                     | 2,704,163  |                                 | $          | (1,009,489 | ) | $ | 2,978,711 |   | $ | (3,122,314 | ) |
| Corporate  general and administrative expenses               |       | (560,240                              | )          | (499,361                             | )          | (1,874,727 | ) | (1,626,719 | ) |
| Net other income                                             |       | 93,310                                |       | 218,220                              |       | 333,329 |   | 543,161 |   |
| Income tax  expense                                          |       | —                                |       | —                               |       | (1,256 | ) | (1,256 | ) |
|                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Net loss                                                     |       | $                                     | 2,237,233  |                                 | $          | (1,290,630 | ) | $ | 1,436,057 |   | $ | (4,207,128 | ) |
|                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Capital  Expenditures:                                       |       |                                  |       |                                 |       |   |   |   |   |
| Total capital  expenditures for reportable segments          |       | $                                     | 7,119      |                                 | —     |   | $ | 34,956 |   | — |   |
| Corporate  capital expenditures                              |       | —                                |       | 1,880                                |       | — |   | 8,134 |   |
| Total capital  expenditures                                  |       | $                                     | 7,119      |                                 | $          | 1,880 |   | $ | 34,956 |   | $ | 8,134 |   |
|                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Depreciation and  Amortization:                              |       |                                  |       |                                 |       |   |   |   |   |
| Total  depreciation and amortization for reportable segments |       | $                                     | 367,620    |                                 | $          | 357,039 |   | $ | 1,112,605 |   | $ | 1,094,487 |   |
| Corporation  depreciation and amortization                   |       | 14,987                                |       | 14,916                               |       | 45,779 |   | 51,402 |   |
| Total  depreciation and amortization                         |       | $                                     | 382,607    |                                 | $          | 371,955 |   | $ | 1,158,384 |   | $ | 1,145,889 |   |

 
|  

 

Assets                                 |   |   |   |   | ** ** | **Balance  as of**

**September  30,**

**2007** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|--------|--------|--------|--------|------------|--------------------------------------------------|------------|------------|------------|
| Total assets for  reportable segments                  |   |   |   |   |       | $                                                | 7,536,575  |       |       |   |
| Cash & cash  equivalents not allocated to segments |   |   |   |   |       | 6,591,199                                        |       |       |       |
| Other  unallocated assets                              |   |   |   |   |       | 254,774                                          |       |       |       |
| Total assets for  reportable segments                  |   |   |   |   |       | $                                                | 14,382,548 |       |       |   |

 

 

**(9) Employee Stock Benefit Plans**

 

**               **Net loss for the nine months endedSeptember 30, 2007 included stock-based compensation expense under SFAS 123(R)of $0.4 million. Of this expense, twenty two percent came from options issuedprior to December 31, 2005 and are valued using the accrual method, which isconsistent with prior periods, while seventy two percent came from optionsissued after January 1, 2006 and are valued using the straight-line proratedmethod, which was adopted in 2006 under the new guidance, and six percent camefrom the employee stock purchase plan valuation. Net income for the nine monthsended September 30, 2006 included stock-based compensation expense under SFAS123(R) of $0.3 million. Of this expense, fifty eight percent came from optionsissued prior to December 31, 2005 and are valued using the accrual method,which is consistent with prior periods, while eighteen percent came fromoptions issued in 2006 and are valued using the straight-line prorated methodwhich was adopted in 2006 under the new guidance, and twenty four percent camefrom the employee stock purchase plan valuation.

 

13

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*Employee Stock Purchase Plan*

 

                The Company maintains an employee stock purchase planwhere eligible employees may purchase common stock through payroll deduction ofup to 15% of compensation with a limit of $21,250. The price per share is thelower of 85% of the market price at the beginning or end of each offeringperiod (generally 6 months). The 2000 Employee Stock Purchase Plan, as amended,provides for purchases by employees of up to an aggregate of 600,000 sharesthrough May 31, 2010. During the nine months ended September 30, 2006 andSeptember 30, 2007, the Company issued 56,085 and 22,771 shares, respectively,under the Purchase Plan. At September 30, 2007, 146,893 shares were availablefor purchase under the Purchase Plan.

 

*Employee Stock Option Plan*

 

**               **The Company has stock-based compensationplans under which employees and directors may be granted options to purchase commonstock. Options are generally granted with exercise prices at not less than thefair market value on the grant date, generally vest over 4 years and expire in10 years after the grant date. As of September 30, 2007, a total of 4.7 millionshares are authorized for grant under the Company’s stock-based compensationplans. The number of common shares reserved for granting of future awards toemployees and directors under these plans was 1.5 million at September 30,2007. The remaining unrecognized compensation expense on stock options atSeptember 30, 2007 was $0.8 million. The weighted average period over which thecost is expected to be recognized is approximately 2 years.

 

                As of September 30, 2007, the Company had four equitycompensation plans under which our equity securities have been authorized forissuance to our employees and/or directors: the 2000 Employee Stock PurchasePlan, as amended (described above), the 1993 Employee, Director and ConsultantStock Option Plan, as amended, (the 1993 Plan); the 1997 Employee, Directorsand Consultant Stock Option Plan, as amended; and the 2007 Employee,Director and Consultant Equity Plan, (the 2007 Plan). The 1993 Plan has expiredand there are no options available for issuance; however, the 1993 Plan continuesto govern all options, awards and other grants granted and outstanding underthe 1993 Plan.

 

*Distribution and Dilutive Effectof Options*

 

The following table illustrates the grant dilution and exercise dilution**:**

** **
| ** **                          | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **2006**                              | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2007** | ** ** |
|                                |       |                                  |       |                                 |       |   |   |   |   |
| Shares of common  stock outstanding |       | 10,873,139                            |       | 14,316,629                           |       | 10,873,139 |   | 14,316,629 |   |
|                                |       |                                  |       |                                 |       |   |   |   |   |
| Granted                             |       | —                                |       | 15,000                               |       | 140,500 |   | 612,500 |   |
| Canceled/forfeited                  |       | (13,642                               | )          | (42,152                              | )          | (165,156 | ) | (215,969 | ) |
| Expired                             |       | —                                |       | (12,750                              | )          | — |   | (14,000 | ) |
| Net options  granted                |       | (13,642                               | )          | (39,902                              | )          | (24,656 | ) | 382,531 |   |
|                                |       |                                  |       |                                 |       |   |   |   |   |
| Grant dilution  (1)                 |       | 0.0                                   | %          | (0.3%                                | )          | 0.0 | % | 2.7 | % |
|                                |       |                                  |       |                                 |       |   |   |   |   |
| Exercised                           |       | 625                                   |       | —                               |       | 1,025 |   | — |   |
| Exercised  dilution (2)             |       | 0.0                                   | %          | 0.0                                  | %          | 0.0 | % | 0.0 | % |

----

(1) The percentage forgrant dilution is computed based on net options granted as a percentage ofshares of common stock outstanding.

 

(2) The percentage forexercise dilution is computed based on options exercised as a percentage ofshares of common stock outstanding.

 

14

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Basic and dilutedshares outstanding for the three and nine months ended September 30, 2007 were14,316,629 and 13,105,623 shares respectively. During the three and nine monthsending September 30, 2007, the dilutive effect of in-the-money employee stockoptions were 877 and 5,130 shares or 0.0% and 0.0% of the basic sharesoutstanding based on the Company’s average share price of $1.34.

 

A summary of stockoption transactions follows:

 
| ** **                                 | ** ** | **Options Outstanding**                | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
|                                       | ** ** | **Options  Available**

**for  Grant** | ** ** | **Shares** | ** ** | **Weighted  average**

**exercise  price of**

**shares  under plan** | ** ** |
| ** **                                 | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance  outstanding as December 31, 2005  |       | 185,191                                |       | 1,321,262 |   | $ | 11.43 |   |
| Granted                                    |       | (201,721                               | )          | 201,721 |   | 3.17 |   |
| Exercised                                  |       | —                                 |       | (1,025 | ) | 1.36 |   |
| Cancelled/forfeited                        |       | 167,573                                |       | (167,573 | ) | 16.42 |   |
| Expired                                    |       | (10,117                                | )          | — |   | — |   |
| Additional  shares reserved                |       | 300,000                                |       | — |   | — |   |
| Balance  outstanding as December 31, 2006  |       | 440,926                                |       | 1,354,385 |   | $ | 9.59 |   |
| Granted                                    |       | (612,500                               | )          | 612,500 |   | 1.47 |   |
| Exercised                                  |       | —                                 |       | — |   | — |   |
| Cancelled/forfeited                        |       | 229,969                                |       | (229,969 | ) | 10.65 |   |
| Expired                                    |       | (14,000                                | )          | — |   | — |   |
| Additional  shares reserved                |       | 1,500,000                              |       | — |   | — |   |
| Balance  outstanding as September 30, 2007 |       | 1,544,395                              |       | 1,736,916 |   | 6.60 |   |
|                                       |       |                                   |       |   |   |   |   |

 

The following table summarizes information concerningoutstanding and exercisable options as of September 30, 2007:

 
| **Options  Outstanding**      | ** **    | **Options  Exercisable** |
|-------------------------------|---------------|--------------------------|
| **Range of  exercise prices** | ** **    | **Number  outstanding**  | ** ** | **Weighted  Average  remaining  contractural  life (years)** | ** ** | **Weighted  Average  exercise price  per shares** | ** ** | **Aggregate  Intrinsic Value** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Average  exercise price  per shares** | ** ** |
| $                             | .01 - 6.00    |                     | 1,213,727 |   | 8.3 |   | $ | 2.32 |   | $ | 0 |   | 356,610 |   | $ | 3.53 |   |
| $                             | 6.01 - 9.00   |                     | 128,454 |   | 5.0 |   | $ | 7.91 |   |   |   | 115,954 |   | $ | 7.91 |   |
| $                             | 9.01 - 13.50  |                     | 263,610 |   | 2.1 |   | $ | 10.20 |   |   |   | 260,860 |   | $ | 10.17 |   |
| $                             | 13.51 - 20.26 |                     | 31,825 |   | 3.0 |   | $ | 18.10 |   |   |   | 31,825 |   | $ | 18.10 |   |
| $                             | 20.27 - 30.37 |                     | 8,250 |   | 2.0 |   | $ | 23.35 |   |   |   | 8,250 |   | $ | 23.35 |   |
| $                             | 30.38 - 45.55 |                     | 11,250 |   | 2.5 |   | $ | 37.24 |   |   |   | 11,250 |   | $ | 37.24 |   |
| $                             | 45.56 - 68.32 |                     | 78,800 |   | 2.2 |   | $ | 46.35 |   |   |   | 78,800 |   | $ | 46.35 |   |
| $                             | 68.33 - 98.71 |                     | 1,000 |   | 2.5 |   | $ | 89.94 |   |   |   | 1,000 |   | $ | 89.94 |   |
|                          |          | 1,736,916                |   | 6.7 |   | $ | 6.59 |   | $ | 0 |   | 864,549 |   | $ | 11.29 |   |
|                               |               |                          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

The aggregateintrinsic value in the preceding table represents the total pretax intrinsicvalue, based on the Company’s closing stock price of $1.23 as of September 30,2007, which would have been received by the option holders had all optionholders exercised their options as of that date. Since all options that wereexercisable were at a price higher than this closing price the intrinsic valueis $0. The fair value of stock options vested at September 30, 2007 andSeptember 30, 2006 was $4.0 million and $4.9 million, respectively. The total numberof in-the-money options exercisable as of September 30, 2007 was zero. As ofDecember 31, 2006, 859,100 outstanding options were exercisable, and theweighted average exercise price was $13.41.

 

15

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*Valuation and Expense Informationunder SFAS 123(R)*

 

The followingtable summarizes stock-based compensation expense related to employee stockoptions and employee stock purchases under SFAS123 (R) for the three and ninemonths ended September 30, 2006 and 2007 which was allocated as follows:

 
| ** **                                                      | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                              | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                    | ** ** | **(in thousands)**                   | ** ** |
|                                                            |       |                                  |       |                                 |       |   |   |   |   |
| Cost of sales                                                   |       | $                                     | 6          |                                 | $          | 11 |   | $ | 12 |   | $ | 24 |   |
| General and  administration                                     |       | 38                                    |       | 56                                   |       | 160 |   | 178 |   |
| Marketing and  selling                                          |       | 4                                     |       | 22                                   |       | 33 |   | 54 |   |
| Research and  development                                       |       | 18                                    |       | 58                                   |       | 83 |   | 138 |   |
| Stock based  compensation expense included in operation expense |       | $                                     | 66         |                                 | $          | 147 |   | $ | 288 |   | $ | 394 |   |

 

As of September 30, 2007, the Company had capitalized $4.0 thousand ofstock-based compensation in inventory. The Company did not recognize any taxbenefits on the stock-based compensation recorded in the periods based on thecurrent tax status of the Company.

 

Theweighted-average estimated fair value of employee stock options granted duringthe three and nine months ended September 30, 2006, and the three and ninemonths ended September 30, 2007, were $0.00, 2.39 and $1.49, $1.04, per share,respectively, using the Black-Scholes option-pricing model with the followingweighted-average assumptions:

 
| ** **                                              | ** ** | **Three and Nine  Months Ended  September 30,** | ** ** | **Three and Nine  Months Ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                        | ** ** | **2007**                                        | ** ** |
|                                                    |       |                                            |       |                                            |       |
| Expected  Volatility                                    |       | 103.71                                          | %          | 97.32                                           | %          |
| Risk Free  Interest Rate                                |       | 4.76                                            | %          | 4.87                                            | %          |
| Dividend yield                                          |       | 0.00                                            |       | 0.00                                            |       |
| Expected option  life (10 year contractual life option) |       | 6.25                                            |       | 6.25                                            |       |

 

 

The expected lifeof employee stock options is the anticipated average time that an option willbe outstanding. The Company chose to use the simplified method provided underSAB107 to estimate the expected term for “plain vanilla” stock options. Theexpected term as calculated under the simplified method is 6.25 years.

 

The Companydetermined the expected volatility of the stock price by using a period equalto the expected life of the stock options, 6.25 years. Volatility was measuredas the standard deviation of the difference in the natural logarithms of thestock over the expected life of the options using the daily closing stockprice. This resulted in the volatility of 97.32% and 103.71%.

 

The risk-freeinterest rate assumption is based upon observed treasury bill interest rates(risk free) appropriate for the expected term of the Company’s employee stockoptions.

 

As share-basedcompensation expense recognized in the Statement of Operations for the threeand nine months ended September 30, 2006 and September 30, 2007 is actuallybased on awards ultimately expected to vest, it has been reduced for annualizedestimated forfeitures of 16.36% and 14.18 %, respectively. SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.Forfeitures were estimated based on historical experience.

 

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**(10) Legal Proceedings**

 

On April 26, 2007, theUnited Stares District Court in the District of Massachusetts approved asettlement agreement in the consolidated securities class action captioned *In re Ibis Technology Securities Litigation*, Civil ActionNo. 04-10446 RCL (D. Mass.). The Company and its Chairman of the Board, MartinJ. Reid, and the plaintiffs reached an agreement in principle to settle thesecurities class action, which the Company announced on October 2, 2006. Thereafter,the parties executed a formal settlement agreement and submitted it for Courtapproval. The settlement provides for a payment to the plaintiffs of $1.9million. The Court’s April 26, 2007 Order, certified the proposed class forsettlement purposes only, approved the parties’ settlement agreement, anddismissed the securities class action with prejudice and in its entirety. Thesettlement was funded entirely by the Company’s insurance carrier and did nothave a material adverse affect on our business, results of operations andfinancial condition.

 

On April 10, 2007,the Company announced that the shareholder derivative action filed in February2004 against certain of the Company’s directors and officers: Louis F.Matheson, Jr. v. Martin J. Reid et al., Civ. Act. No. 04-10341 (RCL) (D. Mass)has been voluntarily dismissed by the plaintiff. The notice of dismissal filedby the plaintiff dismissed the action with prejudice. As set forth in thenotice, the plaintiff will receive a $55,000 payment following the dismissal inconsideration of plaintiff’s analysis of information provided by the Companyregarding, among other things, the Company’s contention that the litigationshould be dismissed for failure to make a demand on the Board of Directorsbefore filing suit as required by Massachusetts law. The payment will be fundedentirely by the Company’s insurance carrier.

 

**(11) Subsequent Events**

 

                On November 5, 2007 IbisTechnology Corporation announced that President and Chief Executive OfficerCharles McKenna died unexpectedly on Friday, November 2, 2007. The Company’sBoard of Directors will be evaluating alternatives concerning the nextsteps necessary for Ibis Technology Corporation.

 

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**IBISTECHNOLOGY CORPORATION**

** **

**PART I -ITEM 2**

 

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

**OVERVIEW**

 

**Ibis Technology Corporation (“Ibis”) was formed in October1987 and commenced operations in January 1988. Ibis’ initial activitiesconsisted of producing and selling SIMOX-SOI wafers and conducting research anddevelopment activities. This effort led to the development of proprietaryoxygen implanters, the Ibis 1000, which we began selling in 1996, the nextgeneration implanter, the i2000**ä, which we began selling in 2002, and also to other proprietary processtechnology.

** **

                The development of the strategy for the SIMOX-SOIcontemplates the migration of SOI wafer manufacturing into the major siliconwafer suppliers will take place. We reach this conclusion for a number ofreasons. First, we believe that tremendous price pressure exists on commoditytype products, such as silicon wafers, and this pressure is already erodingfuture price expectations of SOI wafers. Because the starting wafer representsa significant component of the SOI wafer cost, we believe that silicon wafermanufacturers should have a natural cost structure advantage leading to ahigher gross margin in large volume production, and therefore should be able tomanage such price pressure better than stand-alone SOI producers that do notalso produce the silicon wafer itself. Second, we expect that the pricepressure will encourage silicon wafer manufacturers to seek out higher marginproducts, like SOI wafers, to increase their margins. Third, we believe thatsilicon wafer manufacturers have traditionally developed proprietaryintellectual property in silicon materials science, which can be applied todesigning optimal starting wafers for SOI production. We believe that thisshould give them an advantage in both minimizing wafer cost and maximizing SOIwafer quality and yield. Fourth, our experience suggests that silicon wafermanufacturers already have a well-developed infrastructure for manufacturing,sale and marketing of large volumes of substrates. Lastly, we believe thatthere is greater efficiency in producing the SOI wafer as part of the wafermanufacturers existing product flow, specifically avoiding the need torepackage, re-clean, re-inspect and re-ship substrates twice, once as startingsilicon wafers, and a second time as SOI wafers. Therefore, as a result ofthese trends, we expect our ultimate customers will be drawn from these siliconwafer manufacturers and we plan to focus a majority of our technical andmarketing resources on the sale of implanters to the leading silicon wafermanufacturers and our key customers in the semiconductor industry who webelieve are the leaders in the adoption of SOI technology. We expect thatimplanter sales to chipmakers should be minimal, and that these sales will befocused on SOI processes that the chipmaker wishes to keep proprietary, such asselective (or patterned) SIMOX, or other specialty substrates.

 

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Our fundamentalSIMOX-SOI technology has been developed, refined, and tested over the lastdozen years. In 2002, we introduced the current generation of SIMOX-SOItechnology, that included our second-generation oxygen implanter (i2000ä),and the MLD wafer process which was licensed to us by IBM. We believe that thei2000’s flexibility, automation and operator-friendly controls allow this toolto produce a wide range of SIMOX-SOI wafer products using a range ofmanufacturing processes, including Advantox® MLD and Advantox MLD-UTwafers. We also believe the ability of the i2000 implanter to producetwelve-inch (or 300 mm) SIMOX-SOI wafers coupled with the MLD process positionsus to capitalize on the growing SOI market. In 1999, we commenced a program todesign and develop the i2000, introduced it in March 2002, and began shipping300 mm wafers implanted from this machine shortly thereafter. Customers whopurchase the i2000 can utilize more than one SIMOX wafer manufacturing processon the implanter including the IBM MLD process, when licensed, as well as otherSIMOX-SOI wafer manufacturing processes that do not require the IBM license.

 

Because we havesold only a small number of implanters to date on an irregular basis, therecognition of revenue from the sale of even one implanter is likely to resultin a significant increase in the revenue during that quarter. We recognizeimplanter revenue in accordance with SAB 104, which includes, among othercriteria, the shipment and final customer acceptance of the implanter at thecustomer’s location. As a result, deferral of implanter revenue will berecorded on our balance sheet until the Company is able to meet these criteria.

 

                In January 2005, we announced the booking (i.e.receipt) of an order for one Ibis i2000 SIMOX implanter from SUMCO, a leadinginternational silicon wafer manufacturer. This system was factory accepted andshipped in the second quarter of 2005 and we received final customer acceptanceof the tool at the customer’s site in March 2006. In October of 2005, wereceived a second order for an i2000 SIMOX implanter from SUMCO and negotiateda master purchase agreement that will govern the general commercial terms offuture orders from SUMCO. This implanter was factory accepted by SUMCO at Ibis’facility in the first quarter of 2006. The implanter was shipped in April 2006and final customer acceptance at the customer’s facility occurred in August2006, with the revenue recognized in the quarter ended September 30, 2006. Atthe date of this report, we do not have an order for an implanter from ourcustomers. The Company believes, given the current order status, that it willnot record implanter revenue during 2007.

 

                If we are unableto obtain any orders for our implanters in the foreseeable future, or to obtainother sources of offsetting revenue, notwithstanding our belief that we havesufficient cash for the 2008 fiscal year, we may be unable to continue toconduct operations in manner consistent with our current operating plan.  Our inability to obtain orders or generaterevenue could result in our inability to continue to invest in research,development and manufacturing capabilities, hinder our ability to pursue andmaintain relationships, partnerships and alliances with third parties, resultin a loss of key personnel by way of workforce reduction or by voluntarytermination of employment, limit our ability to secure financing on acceptableterms, if at all, and create greater volatility in the trading of our commonstock. In January 2007, the Company announced that to conserve cash it wasreducing its operating expenses by approximately 40% which involved costcutting measures consisting of headcount reductions, an employee outsourcingagreement at a neighboring business for a minimum of six months under astaffing services agreement, salary reductions and reducing consumableexpenses. That agreement is now set to expire at the end of 2007.

 

The Company intends tocontinue to invest in research and development capabilities. Changes intechnology or sales growth beyond currently established capabilities mayrequire further investment. Further adoption of the technology and the timingof future equipment orders are dependent on the continuing qualification ofimplanters and improvement programs at the device manufacturers, among otherfactors. At present time, the Company has only one of the four major wafermanufacturers as its current prospective customer. We currently do not have anorder backlog for implanters, nor do we have visibility to the timing of thenext order from our customer. The timing of future orders is important anddifficult to predict because customers can delay orders and/or request earlyshipment, either of which could cause the need for additional cashrequirements. Forecasting future revenue, on a quarter-by-quarter basis,remains exceedingly difficult and significant variations quarter to quarter,are likely.

 

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**Critical Accounting Policies**

** **

                The preparation of financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that have a significant impact on the results wereport in our financial statements. Some of our accounting policies require usto make difficult and subjective judgments, often as a result of the need tomake estimates on matters that are inherently uncertain. Our most criticalaccounting policies include: revenue recognition, inventory valuation andreserves, and the assessment of long-lived asset impairment. Actual results maydiffer from these estimates under different assumptions or conditions. Below,we discuss these policies further, as well as the estimates and judgmentsinvolved.

 

***RevenueRecognition****. *We recognize revenue from equipment salesand the sales of spare parts when all of the following criteria have been met:(1) evidence exists that the customer is bound to the transaction; (2) theproduct has been delivered to the customer and, when applicable, the producthas been installed and accepted by the customer; (3) the sales price to thecustomer has been fixed or is determinable; and (4) collectibility of the salesprice is reasonably assured. We recognize revenue from implanter sales uponfinal customer acceptance at the customer’s site. Revenue derived fromcontracts and services is recognized upon performance. Significant managementjudgments and estimates must be made and used in connection with revenuerecognized in any period. Management analyzes various factors, including areview of specific transactions, historical experience, credit worthiness ofcustomers and current market and economic conditions. Changes in judgment basedupon these factors could impact the timing and amount of revenue and costrecognized.

 

***Inventory Valuation andReserves.**** *Ourpolicy for the valuation of inventory, including the determination of obsoleteor excess inventory, requires us to forecast the future demand for our productswithin specific time horizons, generally twelve months or less. If ourforecasted demand for specific products is greater than actual demand and wefail to reduce manufacturing output accordingly, we could be required to recordadditional inventory reserves, which would have a negative impact on our grossmargin. We have reserved for obsolescence when engineering changes or othertechnological advances indicate that obsolescence has occurred.

***Valuation of Long-LivedAssets.**** *Ibisreviews the valuation of long-lived assets, including property and equipmentand licenses, under the provisions of SFAS No. 144, Accounting for Impairmentor Disposal of Long-Lived Assets. Management is required to assess the recoverability of its long-livedassets or asset groups whenever events and circumstances indicate that thecarrying value may not be recoverable. Based on current conditions, factors weconsider important and that could trigger an impairment review include thefollowing:

**            •**              Significantunderperformance relative to expected historical or projected future operatingresults,

**            •**              Significant changesin the manner of our use of the acquired assets or the strategy of our overallbusiness,

**            •**              Significant negativeindustry or economic trends,

**            •**              Significant declinein our stock price for a sustained period, and

**            •**              Our marketcapitalization relative to book value.

In accordance with SFASNo. 144, when we determine that the carrying value of applicable long-livedassets may not be recoverable based upon the existence of one or more of theabove indicators of impairment, we evaluate whether the carrying amount of theasset exceeds the sum of the undiscounted cash flows expected to result fromthe use and eventual disposition of that asset or asset group. If such acircumstance exists, we would measure an impairment loss to the extent the carryingamount of the particular long-lived asset or group exceeds its fair value. Wewould determine the fair value based on a projected discounted cash flow methodusing a discount rate determined by our management to be commensurate with therisk inherent in our current business model.

 

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**Results of Operations**

 

***Third Quarter Ended September 30,2007 Compared to Third Quarter Ended September 30, 2006***

 

***License and Other Revenue***.  License andother revenue include revenue derived from license agreements, characterizationand other services. License and other revenue decreased for the third quarterended September 30, 2007 to $100 thousand from $183 thousand for the thirdquarter ended September 30, 2006, a decrease of $83 thousand or 45%. Thisdecrease is attributable to decreased license revenue from royalty fees relatedto equipment technology.

** **

                ***Equipment Revenue. ***Equipment revenue representsrevenue recognized from sales of implanters, spare parts and field servicerevenue. Equipment revenue decreased to $0.1 million for the third quarterended September 30, 2007 from $7.0 million for the third quarter endedSeptember 30, 2006, representing a decrease of $6.9 million. During the thirdquarter of 2007, there was no implanter revenue recognition as compared to thethird quarter of 2006 when revenue of $7.0 million was recognized for an i2000implanter. Sales of spare parts accounted for $65 thousand of equipment revenueand service revenue accounted for $27 thousand for the third quarter endedSeptember 30, 2007. This compares to $41 thousand in sales of spare parts forthe third quarter ended September 30, 2006 and no service revenue. Sales ofspare parts fluctuate depending on customer demand and when warranties expireon individual pieces of equipment.

 

***TotalCost of Sales and Revenue***.  Cost ofequipment revenue represents the cost of equipment, the cost for spare parts,and the costs of labor incurred for field service. Cost of equipment revenuefor the third quarter ended September 30, 2007 was $0.2 million, as compared to$3.0 million for the third quarter ended September 30, 2006. This decrease of$2.8 million was primarily due to the costs associated with the recognition ofrevenue for the i2000 implanter in the third quarter ended September 30, 2006.

 

              The gross margin for all saleswas 7% for the third quarter ended September 30, 2007 as compared to a grossmargin of 59% for the third quarter ended September 30, 2006. The decrease inthe gross margin for all sales is primarily attributable to the approximategross margin of 55% for the i2000 implanter sale recognized in the thirdquarter ended September 30, 2006 as compared to no implanter gross margin forthe quarter ended September 30, 2007.

 

***Generaland Administrative Expenses***.  General andadministrative expenses for the third quarter ended September 30, 2007 were$0.5 million as compared to $0.6 million for the third quarter ended September30, 2006. This was due to decreased payroll and payroll related expenses of$0.1 million from reduced salaries and headcount. Expenses include $0.1 millionof stock-based compensation expense, which impacted the financial statements incompliance SFAS 123 (R) , in the quarter ended September 30, 2007 and thequarter ended September 30, 2006.

 

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***Marketingand Selling Expenses***.  Marketing and selling expensesfor the third quarter ended September 30, 2007 were $0.1 million as compared to$0.2 million for the third quarter ended September 30, 2006. This was due todecreased payroll and payroll related expenses of $0.1 million due to headcountreductions and labor costs charged out for consulting at a neighboring businessin the quarter ended September 30, 2007.

 

 ***Research and DevelopmentExpenses.***  Internallyfunded research and development expenses decreased by $0.4 million or 32% to$0.9 million for the third quarter ended September 30, 2007, as compared to$1.3 million for the third quarter ended September 30, 2006. This was due to areduction in payroll and payroll related expenses of $0.2 million fromheadcount reductions and labor costs charged out for consulting at aneighboring business in the quarter ended September 30, 2007, along withreduced R&D material of $0.1 million and reduced equipment repairs andutilities of $0.1 million.

 

***Other Income (Expense)*****.**  Total other income for the third quarterended September 30, 2007 was $0.2 million as compared to $0.1 million for thethird quarter ended September 30, 2006. Other income increased in the quarterended September 30, 2007, as a result of outside consulting provided to aneighboring business under a staffing services agreement.

 

 

***Nine Months Ended September 30, 2007 Compared to Nine Months EndedSeptember 30, 2006***

 

***Licenseand Other Revenue***.  License and other revenueinclude revenue derived from license agreements, characterization and otherservices.  License and other revenue was$0.3 million for the nine months ended September 30, 2007, as compared to $0.5million for the nine months ended September 30, 2006. The decrease isattributable to the payment for an initial sublicense agreement related toequipment technology valued at $0.2 million for the nine months ended September30, 2006 which is not recurring.

** **

**               ***EquipmentRevenue**. *Equipment revenue represents revenue recognized fromthe sale of implanters, spare parts and field service revenue. Equipmentrevenue was $0.5 million for the nine months ended September 30, 2007, ascompared to $13.1 million for the nine months ended September 30, 2006, adecrease of $12.6 million. During the nine months ended September 30, 2007,there was no implanter revenue recognized for an i2000 implanter as compared to$13.0 million recognized for two i2000 implanters in the first nine months of2006. Field service revenue accounted for $0.2 million of equipment revenue forthe nine months ended September 30, 2007, as compared to $0 dollars ofequipment revenue for the same period last year. Sales of spare parts accountedfor $0.3 million of equipment revenue for the nine months ended September 30,2007, as compared to $0.1 million of equipment revenue for the nine monthsended September 30, 2006. Sales of spare parts fluctuate depending on customerdemand and when warranties expire on individual pieces of equipment.

 

***TotalCost of Sales and Revenue***.  Cost ofequipment revenue represents the cost of equipment and spare parts, along withlabor incurred for field service. Cost of equipment revenue for the nine monthsended September 30, 2007, was $0.5 million, compared to $5.7 million for thenine months ended September 30, 2006. The decrease of $5.2 million wasprimarily due to the costs associated with the recognition of revenue for twoi2000 implanters in the nine months ended September 30, 2006.

 

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 The gross margin for all sales was 37% for thenine months ended September 30, 2007, as compared to the gross margin of 58%for the nine months ended September 30, 2006. This decrease in the gross marginfor all sales is attributable to the approximate gross margin of 54% and 55%for the two i2000 implanter sales recognized in the nine months ended September30, 2006.

 

***Generaland Administrative Expenses***.  General andadministrative expenses for the nine months ended September 30, 2007, were $1.6million compared to $1.9 million for the nine months ended September 30, 2006.This was due to decreased payroll and payroll related expenses of $0.3 millionfrom reduced salaries and headcount.

 

***Marketingand Selling Expenses***.  Marketing and selling expenseswere $0.5 million for the nine months ended September 30, 2007, as compared to$0.8 million for the nine months ended September 30, 2006. This decrease wasdue to decreased payroll and payroll related expenses of $0.3 million fromheadcount reductions and labor costs charged out for consulting at aneighboring business in the nine months ended September 30, 2007.

 

***Researchand Development Expenses.***  Internallyfunded research and development expenses decreased by $1.1 million or 27%, to$2.9 million for the nine months ended September 30, 2007, as compared to $4.0million for the nine months ended September 30, 2006. This was due to areduction in payroll and payroll related expenses of $0.6 million fromheadcount reductions and labor costs charged out for consulting at aneighboring business in the nine months ended September 30, 2007. In addition,reduced R&D material of $0.3 million, equipment repair expense of $0.1million, and occupancy expenses of $0.1 million contributed to this reduction.

 

***OtherIncome (Expense)*****.**  Total other income for the nine months endedSeptember 30, 2007 was $0.5 million as compared to $0.3 million for the ninemonths ended September 30, 2006, an increase of $0.2 million. Other incomeincreased in the nine months ended September 30, 2007, as a result of outsideconsulting provided to a neighboring business under a staffing servicesagreement.

 

 

#### **Liquidity andCapital Resources**

 

As of September30, 2007, the Company had cash and cash equivalents of $6.6 million, includingthe gross proceeds from the financing of $5.3 million from the sale of 3.4million shares of common stock and 2.5 million common stock warrants, receivedin the nine months ended September 30, 2007. During that period, Ibis used $3.1million of cash for operating activities as compared to $1.0 million in thenine months ended September 30, 2006, the primary difference being the affecton net income of $7.1 million from the sale of two implanters in 2006, theassociated decrease in deferred revenue of $7.2 million and the associatedreduction of inventory of approximately $2.8 million. The principal uses ofcash during the nine months ended September 30, 2007 was to fund operations. AtSeptember 30, 2007, Ibis had commitments to purchase approximately $0.1 millionin material. Our headcount for the quarter ended September 30, 2007 was 30employees.

 

                Basedon cash flow projections developed by management, the Company believes itwill have sufficient cash resources to support current operations until atleast February of 2009. This expectation however, is based on the Company’scurrent operating plan and general sales outlook, each of which may changerapidly. In January 2007, the Company announced that to conserve cash it wasreducing its operating expenses by approximately 40% which involved costcutting measures consisting of headcount reductions, an employee outsourcingagreement at a neighboring business for a minimum of six months under a staffingservices agreement, salary reductions and reducing consumable expenses. OnFebruary 16, 2007, the Company entered into a purchase agreement pursuant towhich it agreed to sell approximately 3.4 million unregistered shares of itscommon stock and approximately 2.5 million warrants exercisable for commonstock to Special Situation Funds for an aggregate purchase price ofapproximately $5.3 million in a two-tranche financing. The first closing of theFebruary 2007 financing, at which the Company received approximately $2.2million in proceeds, occurred on February 20, 2007. Pursuant to stockholderapproval

 

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received at the Ibis Annual Meeting on May10, 2007, the Company sold the remainder of the securities at a second closing,at which the Company received approximately $3.1 million in proceeds. Inconnection with the transaction, the Company also entered into a registrationrights agreement with the investors. The Company paid a placement fee to aplacement agent of approximately $0.3 million, which represents a cash feeequal to 5% of the aggregate gross proceeds received by the company in bothclosings of the financing. The Company also issued to the placement agent anaggregate of 179,619 warrants exercisable for common stock with a dollar valueequal to 5% of the aggregate gross proceeds. Total transaction costs associatedwith the financing were approximately $0.4 million, providing net cash to theCompany of $4.9 million. All of the securities were sold in a private placementpursuant to Regulation D of the Securities Act.

 

                The Company intends to continue to invest resources inresearch and development capabilities. Changes in technology or sales growthbeyond currently established capabilities may require further investment.Further adoption of the technology and the timing of future equipment ordersare dependent on the continuing qualification of implanters and improvementprograms at the device manufacturers, among other factors. At presenttime, the Company has only one of the four major wafer manufacturers as itscurrent prospective customer. We currently do not have an order backlog forimplanters, nor do we have visibility to the timing of the next order from ourcustomer. The timingof future orders is important and difficult to predict because customers candelay orders and/or request early shipment, either of which could cause theneed for additional cash requirements. Forecasting future revenue, on aquarter-by-quarter basis, remains exceedingly difficult and significantvariations quarter to quarter, are likely. Further, because some of thematerials and components the Company uses to build its implanter have long leadtimes, the Company may purchase some or all of these long lead time items priorto receipt of an order by its customers. When this is the case, those parts andmaterials bear the risk of being subject to excess and obsolescence. TheCompany expects to continue to explore equity offerings and other forms offinancing in order to finance future growth and our research and developmentprograms. There can be no assurance, however, that our actual needs will notexceed expectations or that we will be able to fund our operations on along-term basis in the absence of other sources. There also can be no assurancethat any additional required longer term financing will be available throughadditional bank borrowings, debt or equity offerings or otherwise, or that ifsuch financing is available, that it will be available on terms acceptable tous. Should we be unable to secure an order for an implanter from our customerswithin a reasonable timeframe in the future, not withstanding the belief thatthe Company has sufficient cash for the 2008 fiscal year, we may be unable tocontinue to invest in research, development and manufacturing capabilities,pursue and maintain relationships, partnerships and alliances with thirdparties or maintain or replace key personnel.

 

 

**BusinessRisk Factors**

 

                This Form 10-Qcontains express or implied forward-looking statements within the meaning ofthe “safe harbor” provisions of the Private Securities Litigation Reform Act of1995 that relate to future events or our future financial performance. In somecases, you can identify forward-looking statements by terminology, such as “may,”“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”“project,” “predict,” “intend,” “potential” or “continue” or the negative ofsuch terms or other comparable terminology, although not all forward-lookingstatements contain such terms. In addition, these forward-looking statementsinclude, but are not limited to, statements regarding, among other things: (i)the Company’s expectations regarding future orders for i2000 implanters, (ii)the Company’s ability to conduct its operations in a manner consistent with itscurrent plan and to obtain additional implanter orders to continue as a goingconcern, (iii) the continued employment of key management and technicalpersonnel, and attaining implanter improvements to the degree and in thetimeframe necessary to meet our customer’s expectations, (iv) the timing of ourmajor customer’s ramping to production quantities on the i2000 implanter andthe sustained production worthiness of the i2000 implanter, (v) the reliance ona single or small number of large customers, interest in and demand for, andmarket acceptance of, the Company’s SIMOX-SOI technology including the Company’simplanters, (vi) the involvement generally of the silicon wafer manufacturingindustry in the SOI wafer market and the ability of the wafer manufacturer’s toproduce sufficiently low cost SIMOX-SOI wafers utilizing both

 

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our SIMOX equipment and technology, as well as other equipmentmanufacturer’s tools, (vii) the timing and likelihood of revenue recognition onorders for the Company’s implanters, (viii) the Company’s belief that wafermanufacturers will become the primary suppliers of SIMOX-SOI wafers to thechipmaking industry, (ix) the throughput and production capacity of the i2000implanter for manufacturing 300-mm SIMOX-SOI wafers, attaining implanterimprovements to the degree and in the timeframe necessary to meet customerexpectations, and the ability of the i2000 implanter to achieve acceptableproduction yields, (x) the Company’s plan to focus on supplying implanters towafer manufacturers, xi) the ability to operate with existing capital resourcesor to secure financing and to continue as a going concern and (xii) the Company’sexpectation of having sufficient cash for operations. Such statements areneither promises nor guarantees but rather are subject to risks anduncertainties, which could cause actual results to differ materially from thosedescribed in the forward-looking statements. Such risks and uncertaintiesinclude, but are not limited to: future continued migration to SOI technologyand market acceptance of SIMOX; the level of demand for the Company’s products;limited customers and products; lack of order backlog and visibility to thetiming of new orders; the Company’s ability to pursue and maintain furtherstrategic relationships, partnerships and alliances with third parties; loss ofkey personnel; the Company’s ability to protect its proprietary technology; thepotential trends in the semiconductor industry generally; the ease with whichthe i2000 can be installed and qualified in fabrication facilities; thelikelihood that implanters, if ordered, will be qualified and accepted bycustomers without substantial delay, modification, or cancellation, in whole orin part; the likelihood and timing of revenue recognition on such transactions;the impact of rapidly changing technology; the possibility of the impact ofcompetitive products, technologies and pricing; the impact of rapidly changingtechnology; the possibility of further asset impairment and resulting charges;equipment capacity and supply constraints or difficulties; the Company’slimited history in selling implanters; general economic conditions; and otherrisks and uncertainties described elsewhere in this Form 10-Q and in theCompany’s Securities and Exchange Commission filings from time to time,including but not limited to those set forth in the Company’s annual report onForm 10-K for the year ended December 31, 2006. All information set forth inthis Form 10-Q is as of the date of this Form 10-Q, and Ibis undertakes no dutyto update this information, unless required by law.

 

**Off-Balance Sheet Arrangements**

 

We do not have anyoff-balance sheet arrangements as defined in Regulation S-K Section303(a)(4)(ii).

 

**Contractual Obligations**

 

We have no significantcontractual obligations not fully recorded on our Balance Sheets or fullydisclosed in the Notes to our Financial Statements.  Information about future payments undercertain of our contractual obligations is contained in Note 8 to theConsolidated Financial Statements in our 2006 Annual Report on Form 10-K.

 

 

**Effects of Inflation**

 

**Ibis believes that over the past three years inflation hasnot had a significant impact on Ibis’ sales or operating results.**

 

 

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**IBISTECHNOLOGY CORPORATION**

** **

**PART I —ITEM 3**

 

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

 

                The exposure of market riskassociated with risk-sensitive instruments is currently not material to theCompany. The Company will begin to transact its service sales with Japanesecustomers in Yen, which will introduce the potential for a currency exchangegain or loss on those transactions. The Company plans to continue to transactits sales for implanter equipment and all other transactions denominated inUnited States dollars. The Company invests primarily in money market funds andshort-term commercial paper, holds its investments until maturity and has notentered into hedging transactions.

 

 

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**IBISTECHNOLOGY CORPORATION**

 

**PART I —ITEM 4**

 

**CONTROLSAND PROCEDURES**

 

 

(a)          Evaluation of Disclosure Controls and Procedures. Asof September 30, 2007, the Company’s management, with the participation of itsprincipal executive officer and principal financial officer, evaluated theeffectiveness of the Company’s disclosure controls and procedures pursuant toRule 13a-15(b) promulgated under the Securities Exchange Act of 1934, asamended (the “Exchange Act”).  Based uponthat evaluation, the Company’s Executive Chairman and Chief Financial Officerconcluded that, as of September 30, 2007, the Company’s disclosure controls andprocedures were effective in ensuring that material information required to bedisclosed by the Company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms,including ensuring that such material information is accumulated andcommunicated to the Company’s management, including the Company’s ExecutiveChairman and the Company’s Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure.

(b)         Changes in Internal Controls. There were no changes inour internal control over financial reporting, identified in connection withthe evaluation of such internal control that occurred during our last fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**IBISTECHNOLOGY CORPORATION**

** **

**PART II**

 

**OTHER INFORMATION**

 

Item 1 - LegalProceedings

 

On April 26, 2007, the United States District Court in the District ofMassachusetts approved a settlement agreement in the consolidated securitiesclass action captioned *In re Ibis TechnologySecurities Litigation*, Civil Action No. 04-10446 RCL (D.Mass.).  The Company and its Chairman ofthe Board, Martin J. Reid, and the plaintiffs reached an agreement in principleto settle the securities class action, which the Company announced on October2, 2006.  Thereafter, the partiesexecuted a formal settlement agreement and submitted it for Court approval.  The settlement provides for a payment to theplaintiffs of $1.9 million.  The Court’sApril 26, 2007 Order, certified the proposed class for settlement purposesonly, approved the parties’ settlement agreement, and dismissed the securitiesclass action with prejudice and in its entirety.  The settlement was funded entirely by theCompany’s insurance carrier and did not have a material adverse affect on ourbusiness, results of operations and financial condition.

 

On April 10, 2007,the Company announced that the shareholder derivative action filed in February2004 against certain of the Company’s directors and officers: Louis F.Matheson, Jr. v. Martin J. Reid et al., Civ. Act. No. 04-10341 (RCL) (D. Mass)has been voluntarily dismissed by the plaintiff. The notice of dismissal filedby the plaintiff dismissed the action with prejudice. As set forth in thenotice, the plaintiff will receive a $55,000 payment following the dismissal inconsideration of plaintiff’s analysis of information provided by the Companyregarding, among other things, the Company’s contention that the litigationshould be dismissed for failure to make a demand on the Board of Directorsbefore filing suit as required by Massachusetts law. The payment will be fundedentirely by the Company’s insurance carrier.

 

**Item 1A. Risk Factors**

 

Except as described in this Item 1A, there are no material changes tothe risk factors described in the “Risk Factors” section in our Annual Reporton Form 10-K for the fiscal year ended December 31, 2006, as updated by therisk factors described in our Quarterly Reports on Form 10-Q for the quartersended March 31, 2007 and June 30, 2007.

 

Given the settlement described in Item No. 1 above, the “Risk Factor”in the Company’s  Annual Report on Form10-K for the year ended December 31, 2006, under the heading “***Securities Litigation Could Resultin Substantial Cost and Divert the Attention of Key Personnel, Which CouldSeriously Harm Our Business”***, these matters have been resolved in theirentirety.

 

                *We Have Only Received Limited Orders for Our Oxygen ImplanterEquipment. If We Are Unable to Secure Additional Orders Within a ReasonableTimeframe in the Future, or Otherwise Obtain Offsetting Revenue, We May BeUnable to Continue to Conduct Operations in a Manner Consistent with OurCurrent Plan.*

 

                Since we began sellingimplanters in 1996, we have only sold a total of eight Ibis 1000 oxygenimplanters at an average sale price of approximately $4.0 million each and fouri2000 oxygen implanters at a selling price between $6.0 and $8.0 million.  The most recent order received was in October2005, for which the Company recognized revenue in the quarter ended September30, 2006.  At the date of this report, wedo not have an order for an implanter from our customers. The Company believes,given the current order status, that it will not record implanter revenueduring 2007. At present time, we only have one of the four major wafermanufacturers as our current prospective customer.   Although the sale of one implanter wouldgenerally represent a substantial portion of our annual revenue, we do notexpect to sell more than a limited number of implanters in the nearfuture.   We currently do not have abacklog for implanters, nor do we have visibility to the timing of the nextorder from any customer.  Our failure toobtain any orders for our implanters in the foreseeable future, notwithstandingour belief that we have sufficient cash for the 2008 fiscal year, or to obtainother sources of offsetting revenue, would have a material adverse impact onour business and hinder our ability to continue as a going concern.  Our inability to generate revenue couldresult in our inability to continue to invest in research, development andmanufacturing capabilities, hinder our ability to pursue and maintainrelationships, partnerships and alliances with third parties, result in a lossof key personnel by way of workforce reduction or by voluntary termination ofemployment, limit our ability to secure financing on acceptable terms, if atall, and create greater volatility in the trading of our common stock.

 

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Item 2 - UnregisteredSales ofEquity Securities and Use of Proceeds

 

                                                                                                                None.

 

Item 3 - Defaults uponSenior Securities

 

                                                                                                                None

 

Item 4 - Submission ofMatters to a Vote of Security Holders

 

                                                                                                                None

 

Item 5 - OtherInformation

 

                                                                                                                None

 

Item 6 - Exhibits

 

(a)                                  Exhibits furnished as Exhibits hereto:

 
| Exhibit No. |   | Description                                                                                    |
|-------------|--------|------------------------------------------------------------------------------------------------|
|        |   |                                                                                           |
| 31.1        |   | Certification of Martin  J. Reid pursuant to Section 302 of the Sarbanes-Oxley Act of 2002     |
|        |   |                                                                                           |
| 31.2        |   | Certification of  William J. Schmidt pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|        |   |                                                                                           |
| 32.1        |   | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                       |
|        |   |                                                                                           |

 

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** **

**SIGNATURES**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|                    |   | Ibis Technology Corporation |                                         |
|-------------------------|--------|-----------------------------|----------------------------------------------|
|                    |   |                        |                                         |   |
| Date: November 13, 2007 |   | By:                         | /s/William J. Schmidt                        |   |
|                    |   |                        | William J. Schmidt                           |   |
|                    |   |                        | Chief Financial Officer, Treasurer and Clerk |
|                    |   |                        | (principal financial and accounting officer) |
|                    |   |                        |                                         |   |
| Date: November 13, 2007 |   | By:                         | /s/Martin J. Reid                            |   |
|                    |   |                        | Martin J. Reid                               |
|                    |   |                        | Executive Chairman                           |
|                    |   |                        |                                         |   |
|                         |        |                             |                                              |  |  |

 

 

 

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