**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**Form 10-Q**

**x**                              QuarterlyReport Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934

**Forthe Quarterly Period Ended June 30, 2007**

**Or**

**o**                                 TransitionReport Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934

**Forthe transition period from                 to                 **

**Commissionfile 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 telephonenumber, including area code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes x   No o

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

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

 

Indicate by check mark whether the registrant is ashell Company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No x

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

 

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**IBISTECHNOLOGY CORPORATION**

**INDEX**
|                                                                                                                              | ** ** | **Page  Number** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
|                                                                                                                         |       |             |       |
| PART  I—FINANCIAL INFORMATION                                                                                           |       |             |       |
|                                                                                                                         |       |             |       |
| Item 1—Financial  Statements:                                                                                           |       |             |       |
| ** **                                                                                                                   | ** ** | ** **       | ** ** |
| Balance  Sheets December 31, 2006 and June 30, 2007 (unaudited)                                                              |       | 3                |       |
|                                                                                                                         |       |             |       |
| Statements  of Operations Three Months Ended June 30, 2006 and 2007 and Six Months Ended  June 30, 2006 and 2007 (unaudited) |       | 4                |       |
|                                                                                                                         |       |             |       |
| Statements  of Cash Flows Six Months Ended June 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                      |       | 17               |       |
|                                                                                                                         |       |             |       |
| Item 3—Quantitative  and Qualitative Disclosure About Market Risk                                                       |       | 25               |       |
|                                                                                                                         |       |             |       |
| Item 4—Controls  and Procedures                                                                                         |       | 26               |       |
|                                                                                                                         |       |             |       |
| PART II—OTHER  INFORMATION                                                                                              |       |             |       |
|                                                                                                                         |       |             |       |
| Item  1—Legal Proceedings                                                                                               |       | 27               |       |
|                                                                                                                         |       |             |       |
| Item  1A—Risk Factors                                                                                                   |       | 27               |       |
|                                                                                                                         |       |             |       |
| Item 2—Unregistered Sales of Equity Securities and Use  of Proceeds                                                     |       | 28               |       |
|                                                                                                                         |       |             |       |
| Item 3—Defaults upon Senior Securities                                                                                  |       | 28               |       |
|                                                                                                                         |       |             |       |
| 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**

**IBISTECHNOLOGY CORPORATION**

**BALANCESHEETS**

**(Unaudited)**
| ** **                                                                                                                                          | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                          | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| **Assets**                                                                                                                                          |       |                  |       |              |       |
| **Current assets:**                                                                                                                                 |       |                  |       |              |       |
| Cash and cash  equivalents                                                                                                                          |       | $                     | 4,812,477  |              | $          | 7,228,290 |   |
| Accounts  receivable, trade, net                                                                                                                    |       | 349,154               |       | 395,797           |       |
| Inventories, net  (note 4)                                                                                                                          |       | 3,575,296             |       | 3,564,546         |       |
| Prepaid expenses  and other current assets                                                                                                          |       | 290,780               |       | 323,569           |       |
| Total current  assets                                                                                                                               |       | 9,027,707             |       | 11,512,202        |       |
| Property and equipment                                                                                                                              |       | 24,728,824            |       | 24,288,169        |       |
| Less:  Accumulated depreciation and amortization                                                                                                    |       | (20,744,772           | )          | (20,873,053       | )          |
| Net property and  equipment                                                                                                                         |       | 3,984,052             |       | 3,415,116         |       |
| Patents and other  assets, net                                                                                                                      |       | 777,082               |       | 603,140           |       |
| Total assets                                                                                                                                        |       | $                     | 13,788,841 |              | $          | 15,530,458 |   |
|                                                                                                                                                |       |                  |       |              |       |
| **Liabilities and Stockholders’  Equity**                                                                                                      |       |                  |       |              |       |
| **Current liabilities:**                                                                                                                            |       |                  |       |              |       |
| Accounts payable                                                                                                                                    |       | $                     | 409,705    |              | $          | 357,379 |   |
| Accrued  liabilities (notes 5 and 6)                                                                                                                |       | 973,994               |       | 675,193           |       |
| Deferred revenue                                                                                                                                    |       | 150,000               |       | —            |       |
| Total current  liabilities                                                                                                                          |       | 1,533,699             |       | 1,032,572         |       |
|                                                                                                                                                |       |                  |       |              |       |
| **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 June 30, 2007, respectively |       | 87,324                |       | 114,533           |       |
| Additional  paid-in capital                                                                                                                         |       | 93,798,393            |       | 98,930,426        |       |
| Accumulated  deficit                                                                                                                                |       | (81,630,575           | )          | (84,547,073       | )          |
| Total  stockholders’ equity                                                                                                                    |       | 12,255,142            |       | 14,497,886        |       |
| Total liabilities and  stockholders’ equity                                                                                                    |       | $                     | 13,788,841 |              | $          | 15,530,458 |   |

 

See accompanying notes tounaudited interim financial statements.

3

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**IBIS TECHNOLOGY CORPORATION**

**STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                                                                                                                                                                                                                                | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                                                                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                                                                                                                                                                | ** ** | **2006**                         | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Net  Sales and revenue:**                                                                                                                                                                                                                               |       |                             |       |                           |       |   |   |   |   |
| License and other revenue                                                                                                                                                                                                                                 |       | $                                | 28,120     |                           | $          | 137,078 |   | $ | 283,220 |   | $ | 221,222 |   |
| Equipment revenue                                                                                                                                                                                                                                         |       | 14,291                           |       | 128,052                        |       | 6,020,013 |   | 373,971 |   |
| Total net sales and revenue (notes 2 and 8)                                                                                                                                                                                                               |       | 42,411                           |       | 265,130                        |       | 6,303,233 |   | 595,193 |   |
|                                                                                                                                                                                                                                                      |       |                             |       |                           |       |   |   |   |   |
| **Cost of  sales and revenue:**                                                                                                                                                                                                                           |       |                             |       |                           |       |   |   |   |   |
| Cost of license and other revenue                                                                                                                                                                                                                         |       | —                           |       | —                         |       | — |   | — |   |
| Cost of equipment revenue (includes share-based  compensation expense of $5,661 and $13,105 for the three and six months ended  June 30, 2007, respectively, and $1,144 and $6,497 for the three and six  months ended June 30, 2006, respectively)       |       | 53,484                           |       | 204,379                        |       | 2,726,276 |   | 320,217 |   |
| Total cost of sales and revenue                                                                                                                                                                                                                           |       | 53,484                           |       | 204,379                        |       | 2,276,276 |   | 320,217 |   |
| Gross profit (loss)                                                                                                                                                                                                                                       |       | (11,073                          | )          | 60,751                         |       | 3,576,957 |   | 274,976 |   |
| ** **                                                                                                                                                                                                                                                | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  expenses:**                                                                                                                                                                                                                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and administrative (includes share-based  compensation expense of $59,333 and $121,627 for the three and six months  ended June 30, 2007, respectively, and $68,861 and $122,371 for the three and  six months ended June 30, 2006, respectively) |       | 674,869                          |       | 566,878                        |       | 1,314,487 |   | 1,127,358 |   |
| Marketing and selling (includes share-based  compensation expense of $15,820 and $31,681 for the three and six months  ended June 30, 2007, respectively, $10,353 and $28,924 for the three and six  months ended June 30, 2006, respectively)            |       | 300,055                          |       | 139,434                        |       | 616,516 |   | 359,921 |   |
| Research and development (includes share-based  compensation expense of $37,103 and $80,758 for the three and six months  ended June 30, 2007, respectively, and $16,782 and $64,693 for the three and  six months ended June 30, 2006, respectively)     |       | 1,356,591                        |       | 963,518                        |       | 2,685,893 |   | 2,027,880 |   |
| Total operating expenses                                                                                                                                                                                                                                  |       | 2,331,515                        |       | 1,669,830                      |       | 4,616,896 |   | 3,515,159 |   |
| Loss from operations                                                                                                                                                                                                                                      |       | (2,342,588                       | )          | (1,609,079                     | )          | (1,039,939 | ) | (3,240,183 | ) |
| ** **                                                                                                                                                                                                                                                | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  income (expense):**                                                                                                                                                                                                                              | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                                                                                                                                                                                                                           |       | 89,259                           |       | 65,947                         |       | 153,647 |   | 122,837 |   |
| Other                                                                                                                                                                                                                                                     |       | 87,267                           |       | 96,392                         |       | 86,372 |   | 202,104 |   |
| Total other income                                                                                                                                                                                                                                        |       | 176,526                          |       | 162,339                        |       | 240,019 |   | 324,941 |   |
| Loss before income taxes                                                                                                                                                                                                                                  |       | (2,166,062                       | )          | (1,446,740                     | )          | (799,920 | ) | (2,915,242 | ) |
| Income tax  expense                                                                                                                                                                                                                                       |       | —                           |       | —                         |       | 1,256 |   | 1,256 |   |
| Net loss (notes 2 and 9)                                                                                                                                                                                                                                  |       | $                                | (2,166,062 | )                              | $          | (1,446,740 | ) | $ | (801,176 | ) | $ | (2,916,498 | ) |
| Earnings (loss)  per share:                                                                                                                                                                                                                               |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                     |       | $                                | (0.20      | )                              | $          | (0.11 | ) | $ | (0.07 | ) | $ | (0.23 | ) |
| Diluted                                                                                                                                                                                                                                                   |       | $                                | (0.20      | )                              | $          | (0.11 | ) | $ | (0.07 | ) | $ | (0.23 | ) |
|                                                                                                                                                                                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Weighted average  common shares outstanding                                                                                                                                                                                                               |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                                     |       | 10,835,385                       |       | 13,431,999                     |       | 10,825,761 |   | 12,490,084 |   |
| Diluted (note 7)                                                                                                                                                                                                                                          |       | 10,835,385                       |       | 13,431,999                     |       | 10,825,761 |   | 12,490,084 |   |

 

See accompanying notes to unaudited interim financial statements.

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**IBISTECHNOLOGY CORPORATION**

**STATEMENTSOF CASH FLOWS**

**(Unaudited)**
| ** **                                                                   | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **June 30,**              | ** ** |
| ** **                                                                   | ** ** | **2006**                       | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities:**                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | (801,176                       | )          | $ | (2,916,498 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                           |       |   |   |
| Share-based compensation expense                                             |       | 222,485                        |       | 247,171 |   |
| Depreciation and amortization                                                |       | 775,777                        |       | 773,934 |   |
| Changes in operating assets and liabilities:                                 |       |                           |       |   |   |
| Accounts receivable, trade                                                   |       | 26,111                         |       | (46,643 | ) |
| Inventories                                                                  |       | 1,508,960                      |       | 10,750 |   |
| Prepaid expenses and other current assets                                    |       | 98,895                         |       | (32,789 | ) |
| Accounts payable                                                             |       | 254,143                        |       | (52,326 | ) |
| Accrued liabilities and deferred revenue                                     |       | (1,360,478                     | )          | (448,801 | ) |
| Net cash provided by (used in) operating activities                          |       | 724,717                        |       | (2,465,202 | ) |
|                                                                         |       |                           |       |   |   |
| **Cash  flows from investing activities:**                                   |       |                           |       |   |   |
| Additions to  property and equipment, net                                    |       | (27,837                        | )          | (6,254 | ) |
| Other assets                                                                 |       | (69,278                        | )          | (24,802 | ) |
| Net cash used in investing activities                                        |       | (97,115                        | )          | (31,056 | ) |
| ** **                                                                   |       |                           |       |   |   |
| **Cash  flows from financing activities:**                                   |       |                           |       |   |   |
| Exercise of  stock options and employee stock purchase plan                  |       | 73,006                         |       | 27,690 |   |
| Proceeds from  sales of common stock, net of issuance cost                   |       | —                         |       | 4,884,381 |   |
| Net cash provided by financing activities                                    |       | 73,006                         |       | 4,912,071 |   |
| Net increase in cash and cash equivalents                                    |       | 700,608                        |       | 2,415,813 |   |
| Cash and cash  equivalents, beginning of period                              |       | 6,856,874                      |       | 4,812,477 |   |
| Cash and cash  equivalents, end of period                                    |       | $                              | 7,557,482  |   | $ | 7,228,290 |   |
|                                                                              |            |                                |            |  |  |  |  |

 

See accompanying notes tounaudited interim financial statements.

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**IBIS TECHNOLOGY CORPORATION**

**NOTESTO UNAUDITED INTERIM FINANCIAL STATEMENTS**

**(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 Companyrecognizes revenue from equipment sales and the sales of spare parts when allof the following criteria have been met: (1) evidence exists that the customeris bound to the transaction; (2) the product has been delivered to the customerand, when applicable, the product has been installed and accepted by thecustomer; (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)**Share-Based Compensation*

On January 1, 2006, the Company adoptedStatement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment,” (“SFAS 123(R)”) which requires the measurement and recognition ofcompensation expense for all share-based payment awards made to employees anddirectors including employee stock options, employee stock purchases related tothe 2000 Employee Stock Purchase Plan (“the ESPP”), restricted stock and otherspecial equity awards based on grant date estimated fair values. SFAS 123(R)supersedes the Company’s previous accounting under Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) forperiods beginning in 2006. In March 2005, the Securities and ExchangeCommission issued SAB 107 relating to SFAS 123(R). The Company has applied theprovisions of SAB 107 in its adoption of SFAS 123(R).

The Company’s financial statements as of and for the three and sixmonths ended June 30, 2006 and June 30, 2007 reflect the impact of SFAS 123(R).Share-based compensation expense recognized under SFAS 123(R) for the three andsix months ended June 30, 2006 and June 30, 2007 were both $0.1 million and$0.2 million, respectively or $0.01 and $0.02 per share, which consisted ofshare-based compensation expense related to employee stock options and theemployee stock purchase plan. Of this June 30, 2007 year-to-date expense,twenty six percent came from options issued prior to December 31, 2005 and arevalued using the accrual method, which is consistent with prior periods, whilesixty seven percent came from options issued after January 1, 2006 and arevalued using the straight-line prorated method, which was adopted in 2006 underthe new guidance, and seven percent came from the valuation of shares issuedunder the employee stock purchase plan. This compares to the expense for theyear-to-date period ended June 30, 2006 where sixty nine percent came fromoptions issued prior to December 31, 2005 and are valued using the accrualmethod, which is consistent with prior periods, while twelve percent come fromoptions issued in 2006 and are valued using the straight-line prorated method,which was adopted in 2006 under the new guidance and nineteen percent come fromthe valuation of shares issued under the employee stock purchase plan.

6

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SFAS 123(R) requires companies to estimatethe fair value of share-based payment awards on the date of grant using anoption-pricing model. The value of the portion of the award that is ultimatelyexpected to vest is recognized as expense over the requisite service periods inthe Company’s Statements of Operations.

Share-based compensation expense recognizedduring the period is based on the value of the portion of share-based paymentawards that is ultimately expected to vest during the period. Stock-basedcompensation expense recognized in the Company’s Statements of Operations forthe three and six months ended June 30, 2006 and June 30, 2007 includedcompensation expenses for share-based payment awards granted prior to, but notyet vested as of December 31, 2005, based on the grant date fair valueestimated in accordance with the pro forma provisions of SFAS 123, andcompensation expense for the share-based payment awards granted subsequent toDecember 31, 2005 based on the grant date fair value estimated in accordancewith the provisions of SFAS 123(R). As stock-based compensation expenserecognized in the Statements of Operations for the three and six months endedJune 30, 2006 and June 30, 2007 is based on awards ultimately expected to vest,it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeituresto be estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates.

Upon adoption of SFAS 123(R), the Company electedto retain its method of valuation for share-based awards granted beginning in2006 using the Black-Scholes option-pricing model (“Black-Scholes model”). TheCompany’s determination of fair value of share-based payment awards on the dateof grant using an option-pricing model is affected by the Company’s stock priceas well as assumptions regarding a number of highly complex and subjectivevariables. These variables include, but are not limited to the Company’sexpected stock price volatility over the term of the awards, and actual andprojected employee stock option exercise behaviors.

*(c)**Accounting for Uncertaintyin Income Taxes*

In July 2006, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”(“FIN 48”), which clarifies the accounting and disclosure for uncertainty intax positions, as defined. FIN 48 seeks to reduce the diversity in practiceassociated with certain aspects of the recognition and measurement related toaccounting for income taxes. This interpretation is effective for fiscal yearsbeginning after December 15, 2006 and prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken, or expected to be taken, in a tax return, and providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosures and transition. As a result of theimplementation of FIN 48, the Company recorded no adjustment for unrecognizedincome tax benefits. At the adoption date of January 1, 2007 and also at June30, 2007, the Company had no unrecognized tax benefits. Ibis classifies anyinterest and penalties related to income taxes as components of income taxexpense.

The tax years 2000to 2006 remain open to examination by the major taxing jurisdictions to whichwe are subject. Preceding years also remain open to examination by U.S. federaland state revenue authorities to the extent of future utilization of netoperating losses (NOLs) and research and development (R&D) tax creditsgenerated in each preceding year.

As of December 31,2006, we had federal and state NOLs of approximately $87,082,000 and$52,405,000, respectively and federal and state R&D credit carryforwards ofapproximately $1,000,000 and $905,000, respectively, which can be used tooffset future federal and state income tax liabilities prior to expiration onvarious dates through 2026.

Utilization of NOL and R&D credit carryforwards may be subject to asubstantial annual limitation due to ownership change limitations that haveoccurred previously or that could occur in the future as provided by Section382 of the Internal Revenue Code of 1986 and similar state provisions. Theseownership changes may limit the amount of NOL and R&D credit carryforwardsthat can be utilized annually to offset future 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. Since the Company’s formation, the Company hasraised capital through the issuance of capital stock on

7

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severaloccasions 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 Company has not currently completed a study toassess whether a change of control has occurred or whether there have beenmultiple changes of control since the Company’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 result in expiration of all or a portion of theNOL or R&D credit carryforwards before utilization. Until a study iscompleted and any limitation known, no amounts are being presented as anuncertain tax position under FIN 48.

*(d) New Accounting Pronouncements*

In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears. The Company has not yet determined the impact this FASB will have on ourresults from operations or financial position.

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities — Including an Amendment of FASBStatement No. 115” (“SFAS No. 159”). SFAS No. 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value and is effective as of the beginning of the Company’sfiscal year beginning after November 15, 2007. The Company is currentlyevaluating the potential impact of SFAS No. 159 on its financial positionand 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 Company discontinuedits wafer manufacturing business to focus exclusively on the equipmentmanufacturing business. The Company will maintain a

8

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research and developmenteffort focused on continuous improvement of the equipment capabilities and forsupporting our equipment customers’ needs.

As of June 30,2007, the Company had cash and cash equivalents of $7.2 million, including thegross proceeds from the financing of $5.3 million, received in the six monthsended June 30, 2007 from the sale of 3.4 million shares of common stock and 2.5million common stock warrants. During the six months ended June 30, 2007, Ibisused $2.5 million of cash for operating activities as compared to cash providedof $0.7 million in the six months ended June 30, 2006. The principal uses ofcash during the six months ended June 30, 2007 was to fund operations. At June30, 2007, Ibis had commitments to purchase approximately $0.1 million inmaterial. Our headcount for the quarter ended June 30, 2007 was 33 employees.

Cash flow projections developed by management indicate the Companybelieves it will have sufficient cash resources to support current operationsuntil at least November of 2008. This expectation however, is based on theCompany’s current operating plan and general sales outlook, each of which maychange rapidly. In January 2007 the Company announced that to conserve cash itwas reducing its operating expenses by approximately 40% which involved costcutting measures consisting of headcount reductions, an employee outsourcing agreementat a neighboring business for a minimum of six months under a staffing servicesagreement, salary reductions and reducing consumable expenses. On February 16,2007, the Company entered into a purchase agreement pursuant to which it agreedto sell approximately 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 in research, development andmanufacturing capabilities. Changes in technology or sales growth beyondcurrently established capabilities may require further investment. Furtheradoption of the technology and the timing of future equipment orders aredependent on the continuing qualification of implanters and improvementprograms at the device manufacturers, among other factors. At present timethe Company has only one of the four major wafer manufacturers as its currentprospective customer. We currently do not have an order backlog for implanters.The timing of futureorders is important and difficult to predict because customers can delay ordersand/or request early shipment, either of which could cause the need foradditional 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.

9

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

Inventories consist of the following:

|                            | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|----------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                 | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| Raw materials              |       | $                     | 1,445,182  |              | $          | 1,439,390 |   |
| Work in process            |       | 2,130,114             |       | 2,125,156         |       |
| Finished goods             |       | —                |       | —-           |       |
| Total equipment  inventory |       | $                     | 3,575,296  |              | $          | 3,564,546 |   |

 

**(5)****Accrued Liabilities**

Current accruedliabilities were as follows:

|                            | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|----------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                 | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| Accrued vacation           |       | $                     | 156,213    |              | $          | 165,549 |   |
| Accrued warranty           |       | 435,979               |       | 253,451           |       |
| Accrued payroll            |       | 128,343               |       | 49,832            |       |
| Accrued expenses           |       | 253,459               |       | 206,361           |       |
| Total accrued  liabilities |       | $                     | 973,994    |              | $          | 675,193 |   |

 

**(6)****Accrued Warranty**

At the time thatrevenue is recognized for the sale of an implanter a liability for warranty isalso established. An estimate of the warranty cost is made based on the numberof years 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 June 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        |   | (22,881  | )       |
| Initiated — 2007               |   | —   |    |
| Expired — 2007                 |   | (159,647 | )       |
| Warranty balance June  30, 2007     |   | $        | 253,451 |   |

 

**(7) NetIncome (Loss) Per Share**

Net loss for the quarter ended June 30, 2007 of $1.4million or a loss of $0.11 per share, included stock-based compensation expenseunder Statement of Financial Accounting Standards No. 123R, “Share-BasedPayment,” (“SFAS 123R”) of $0.1 million or $0.01 per share related to employeestock options, and employee stock purchases. Net loss for the six months endedJune 30, 2007 of $2.9 million or $0.23 per share, included stock-basedcompensation expense under (SFAS 123R) of $0.2 million

10

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or $0.02 per share, related to employee stock options, and employeestock purchases. Net loss for the quarter ending June 30, 2006 was $2.2 millionor a loss of $0.20 per share, including stock-based compensation expense of$0.1 million, or $0.01 per share. Net loss for the six-month period ended June30, 2006 of $0.8 million, or $0.07 per share included stock-based compensationexpense under (SFAS 123R) of $0.2 million, or $0.02 per share related toemployee stock options and employee stock purchases.

Net loss per shareof common stock is computed based upon the weighted average number of sharesoutstanding during each period and including the dilutive effect, if any, ofstock options and warrants. SFAS 128 requires the presentation of basic anddiluted earnings (loss) per share for all periods presented. As the Company wasin a net loss position for the three and six months ended June 30, 2006 andJune 30, 2007, common stock equivalents of 125,526, 135,073, 10,380 and 10,380,respectively, were excluded from the diluted loss per share calculation, asthey would be antidilutive. As a result, diluted loss per share is the same asbasic loss per share for all periods presented.

**(8)Industry Segments**

The Company’scurrent reportable segments are SIMOX Equipment and Other Products or Services.For purposes of segment reporting, equipment, equipment spares and fieldservice revenue are combined and reported as SIMOX Equipment. Other servicesand license revenue are combined and reported as Other Products or Services.

The table below provides unaudited information for thethree and six months ended June 30, 2006 and 2007 pertaining to the Company’stwo industry segments. 
| ** **                                                   | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  Or Services** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|-------------------------------------------|------------|------------|------------|
| **Net  Revenue**                                             |       |                 |       |                                      |       |       |       |
| Three Months  Ended June 30, 2006                            |       | $                    | 14,291     |                                      | $          | 28,120     |       | $ | 42,411 |   |
| Three Months  Ended June 30, 2007                            |       | $                    | 128,052    |                                      | $          | 137,078    |       | $ | 265,130 |   |
| Six Months Ended  June 30, 2006                              |       | $                    | 6,020,013  |                                      | $          | 283,220    |       | $ | 6,603,233 |   |
| Six Months Ended  June 30, 2007                              |       | $                    | 373,971    |                                      | $          | 221,222    |       | $ | 595,193 |   |
|                                                         |       |                 |       |                                      |       |       |       |
| **Operating  Income (Loss)**                                 |       |                 |       |                                      |       |       |       |
| Three Months  Ended June 30, 2006                            |       | (1,695,840           | )          | 28,120                                    |       | (1,667,720 | )          |
| Three Months  Ended June 30, 2007                            |       | (1,179,279           | )          | 137,078                                   |       | (1,042,201 | )          |
| Six Months Ended  June 30, 2006                              |       | (8,672               | )          | 283,220                                   |       | 274,548    |       |
| Six Months Ended  June 30, 2007                              |       | (2,334,047           | )          | 221,222                                   |       | (2,112,825 | )          |
|                                                         |       |                 |       |                                      |       |       |       |
| **Assets**                                                   |       |                 |       |                                      |       |       |       |
| June 30, 2007                                                |       | 7,772,941            |       | 174,158                                   |       | 7,947,099  |       |
|                                                         |       |                 |       |                                      |       |       |       |
| **Capital  Expenditures**                                    |       |                 |       |                                      |       |       |       |
| Three Months Ended  June 30, 2006                            |       | 4,156                |       | —                                    |       | 4,156      |       |
| Three Months  Ended June 30, 2007                            |       | —               |       | —                                    |       | —     |       |
| Six Months Ended  June 30, 2006                              |       | 27,837               |       | —                                    |       | 27,837     |       |
| Six Months Ended  June 30, 2007                              |       | —               |       | —                                    |       | —     |       |
| ** **                                                   | ** ** | ** **           | ** ** | ** **                                | ** ** | ** ** | ** ** |
| **Depreciation  and Amortization of Property and Equipment** | ** ** | ** **           | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Three Months  Ended June 30, 2006                            |       | 372,531              | ** ** | **—**                                |       | 372,531    |       |
| Three Months  Ended June 30, 2007                            |       | 368,693              |       | —                                    |       | 368,693    |       |
| Six Months Ended  June 30, 2006                              |       | 744,985              |       | —                                    |       | 744,985    |       |
| Six Months Ended June  30, 2007                              |       | 737,448              |       | —                                    |       | 737,448    |       |

 

11

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The table belowprovides the reconciliation of reportable segment operating loss and assets toIbis’ totals.
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| **Segment Reconciliation**                              | ** ** | **2006**                         | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net Income (Loss):                                           |       |                             |       |                           |       |   |   |   |   |
| Total operating  income (loss) for reportable segments       |       | $                                | (1,667,720 | )                              | $          | (1,042,201 | ) | $ | 274,548 |   | $ | (2,112,825 | ) |
| Corporate  general and administrative expenses               |       | (674,868                         | )          | (566,878                       | )          | (1,314,487 | ) | (1,127,358 | ) |
| Net other income                                             |       | 176,526                          |       | 162,339                        |       | 240,019 |   | 324,941 |   |
| Income tax  expense                                          |       | —                           |       | —                         |       | (1,256 | ) | (1,256 | ) |
|                                                         | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                     |       | $                                | (2,166,062 | )                              | $          | (1,446,740 | ) | $ | (801,176 | ) | $ | (2,916,498 | ) |
| Capital Expenditures:                                        |       |                             |       |                           |       |   |   |   |   |
| Total capital  expenditures for reportable segments          |       | $                                | 4,156      |                           | $          | — |   | $ | 27,837 |   | $ | — |   |
| Corporate  capital expenditures                              |       | —                           |       | 6,254                          |       | — |   | 6,254 |   |
| Total capital  expenditures                                  |       | $                                | 4,156      |                           | $          | 6,254 |   | $ | 27,837 |   | $ | 6,254 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Depreciation and  Amortization:                              |       |                             |       |                           |       |   |   |   |   |
| Total  depreciation and amortization for reportable segments |       | $                                | 372,531    |                           | $          | 368,693 |   | $ | 744,985 |   | $ | 737,448 |   |
| Corporate  depreciation and amortization                     |       | 15,648                           |       | 16,532                         |       | 30,792 |   | 36,486 |   |
| Total  depreciation and amortization                         |       | $                                | 388,179    |                           | $          | 385,225 |   | $ | 775,777 |   | $ | 773,934 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| ** **                                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** | **Balance as of** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | ** **                       | ** ** | ** **                     | ** ** | **6/30/07** | ** ** | ** ** | ** ** |
| Assets:                                                      | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total assets for  reportable segments                        |       |                             |       |                           |       | $ | 7,947,099 |   |   |   |
| Cash & cash  equivalents not allocated to segments       |       |                             |       |                           |       | 7,228,290 |   |   |   |
| Other  unallocated assets                                    |       |                             |       |                           |       | 355,069 |   |   |   |
| Total assets                                                 |       |                             |       |                           |       | $ | 15,530,458 |   |   |   |

 

**(9)Employee Stock Benefit Plans**

Net loss for the sixmonths ended June 30, 2007 included stock-based compensation expense under SFAS123(R) of $0.2 million. Of this expense, twenty-six percent came from optionsissued prior to December 31, 2005 and are valued using the accrual method,which is consistent with prior periods, while sixty-seven percent came fromoptions issued after January 1, 2006 and are valued using the straight-lineprorated method, which was adopted in 2006 under the new guidance, and sevenpercent came from the employee stock purchase plan valuation. Net loss for thesix months ended June 30, 2006 included stock-based compensation expense underSFAS 123(R) of $0.2 million. Of this expense, sixty-nine percent came fromoptions issued prior to December 31, 2005 and are valued using the accrualmethod, which is consistent with prior periods, while twelve percent came fromoptions issued in 2006 and are valued using the straight-line prorated methodwhich was adopted in 2006 under the new guidance, and nineteen percent camefrom the employee stock purchase plan valuation.

12

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*EmployeeStock Purchase Plans*

The Companymaintains an employee stock purchase plan where eligible employees may purchasecommon stock through payroll deduction of up to 15% of compensation with alimit of $21,250. The price per share is the lower of 85% of the market priceat the beginning or end of each offering period (generally 6 months). The planprovides for purchases by employees of up to an aggregate of 600,000 sharesthrough May 31, 2010. During the six months ended June 30, 2006 and June 30,2007, the Company issued 56,085 and 22,771 shares, respectively, under thePurchase Plan. At June 30, 2007, 146,893 shares were available for purchaseunder the Purchase Plan.

*EmployeeStock Option Plan*

The Company hasstock-based compensation plans under which employees and directors may begranted options to purchase common stock. Options are generally granted withexercise prices at not less than the fair market value on the grant date,generally vest over 4 years and expire in 10 years after the grant date. As ofJune 30, 2007, a total of 4.7 million shares are authorized for grant under theCompany’s stock-based compensation plans. The number of common shares reservedfor granting of future awards to employees and directors under these plans was1.5 million at June 30, 2007. The remaining unrecognized compensation expenseon stock options at June 30, 2007 was $0.9 million. The weighted average periodover which the cost is expected to be recognized is approximately 2 years.

As of June 30,2007, the Company had four equity compensation plans under which our equitysecurities have been authorized for issuance to our employees and/or directors:the 2000 Employee Stock Purchase Plan, as amended (described above), the 1993Employee, Director and Consultant Stock Option Plan, as amended, (the 1993Plan); the 1997 Employee, Directors and Consultant Stock Option Plan, asamended; and the 2007 Employee, Director and Consultant Equity Plan, (the 2007Plan). The 1993 Plan has expired and there are no options available forissuance; however, the 1993 Plan continues to govern all options, awards andother grants granted and outstanding under the 1993 Plan.

*Distributionand Dilutive Effect of Options*

The following table illustrates the grant dilution and exercise dilution**:**
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** | **June 30**               | ** ** |
| ** **                          | ** ** | **2006**                         | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| Shares of common  stock outstanding |       | 10,872,514                       |       | 14,316,629                     |       | 10,872,514 |   | 14,316,629 |   |
| Granted                             |       | 7,500                            |       | 312,500                        |       | 140,500 |   | 597,500 |   |
| Canceled/forfeited                  |       | (10,984                          | )          | (124,547                       | )          | (151,514 | ) | (175,067 | ) |
| Expired                             |       | —                           |       | —                         |       | — |   | — |   |
| Net options  granted                |       | (3,484                           | )          | 187,953                        |       | (11,014 | ) | 422,433 |   |
| Grant dilution  (1)                 |       | (0.0                             | %)         | 1.3                            | %          | (0.0 | %) | 3.0 | % |
| Exercised                           |       | 400                              |       | —                         |       | 400 |   | — |   |
| Exercised dilution (2)              |       | 0.0                              | %          | 0.0                            | %          | 0.0 | % | 0.0 | % |

----

(1)             Thepercentage for grant dilution is computed based on net options granted as apercentage of shares of common stock outstanding.

(2)             Thepercentage for exercise dilution is computed based on options exercised as apercentage of shares of common stock outstanding.

Basic and dilutedshares outstanding for the three and six months ended June 30, 2007 were13,431,999 and 12,490,084 shares respectively. During the three and six monthsending June 30, 2007, the dilutive

13

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effect of in-the-money employeestock options were 10,380 and 10,380 shares or 0.1% and 0.1% of the basicshares outstanding based on the Company’s average share price of $1.43.

A summary of stockoption transactions follows:
| ** **                                | ** ** | **Options Outstanding** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **Options Available**   | ** ** | ** ** | ** ** | **Weighted average** | ** ** |
| ** **                                | ** ** | **for**                      | ** ** | ** ** | ** ** | **exercise price of** | ** ** |
| ** **                                | ** ** | **Grant**                    | ** ** | **Shares** | ** ** | **shares under plan** | ** ** |
| Balance  outstanding at 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 at December 31, 2006 |       | 440,926                      |       | 1,354,385 |   | $ | 9.59 |   |
| Granted                                   |       | (597,500                     | )          | 597,500 |   | 1.47 |   |
| Exercised                                 |       | —                       |       | — |   | — |   |
| Cancelled/forfeited                       |       | 175,067                      |       | (175,067 | ) | 12.19 |   |
| Expired                                   |       | (3,250                       | )          | — |   | — |   |
| Additional  shares reserved               |       | 1,500,000                    |       | — |   | — |   |
| Balance outstanding at  June 30, 2007     |       | 1,515,243                    |       | 1,776,818 |   | $ | 6.60 |   |

 

Thefollowing table summarizes information concerning outstanding and exercisableoptions as of June 30, 2007:
|                                             | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                                  | ** ** | **Number**                   | ** ** | **remaining  contractual**   | ** ** | **exercise  price** | ** ** | **Aggregate  Intrinsic** | ** ** | **Options** | ** ** | **exercise  price** | ** ** |
| **Range of exercise prices** | ** ** | **outstanding**              | ** ** | **life (years)**        | ** ** | **per share** | ** ** | **Value** | ** ** | **Exercisable** | ** ** | **per share** | ** ** |
|                                             | $          | .01 - 6.00                   |       |                         | 1,234,637  |   | 8.6 |   | $ | 2.32 |   | $ | 12,594 |   | 314,250 |   | $ | 3.68 |   |
|                                        | $          | 6.01 - 9.00                  |       |                         | 129,704    |   | 5.2 |   | $ | 7.91 |   |   |   | 117,204 |   | $ | 7.91 |   |
|                                             | $          | 9.01 - 13.50                 |       |                         | 277,502    |   | 2.3 |   | $ | 10.17 |   |   |   | 272,877 |   | $ | 10.15 |   |
|                                        | $          | 13.51 - 20.26                |       |                         | 34,775     |   | 3.1 |   | $ | 18.09 |   |   |   | 34,775 |   | $ | 18.09 |   |
|                                             | $          | 20.27 - 30.37                |       |                         | 8,250      |   | 2.3 |   | $ | 23.35 |   |   |   | 8,250 |   | $ | 23.35 |   |
|                                        | $          | 30.38 - 45.55                |       |                         | 11,250     |   | 2.8 |   | $ | 37.24 |   |   |   | 11,250 |   | $ | 37.24 |   |
|                                             | $          | 45.56 - 68.32                |       |                         | 79,700     |   | 2.5 |   | $ | 46.35 |   |   |   | 79,700 |   | $ | 46.35 |   |
|                                        | $          | 68.33 - 98.71                |       |                         | 1,000      |   | 2.7 |   | $ | 89.94 |   |   |   | 1,000 |   | $ | 89.94 |   |
|                                             | ** ** |                         |       | 1,776,818                    |       | 6.9 |   | $ | 6.60 |   | $ | 12,594 |   | 839,306 |   | $ | 11.77 |   |

 

The aggregateintrinsic value in the preceding table represents the total pretax intrinsicvalue, based on the Company’s closing stock price of $1.53 as of June 30, 2007,which would have been received by the option holders had all option holdersexercised their options as of that date. The fair value of stock options vestedat June 30, 2007 and June 30, 2006 was $4.0 million and $4.8 million,respectively. The total number of in-the-money options exercisable as of June30, 2007 was 69,525. As of December 31, 2006, 859,100 outstanding options wereexercisable, and the weighted average exercise price was $13.41.

14

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*Valuation and Expense Informationunder SFAS 123(R)*

Thefollowing table summarizes stock-based compensation expense related to employeestock options and employee stock purchases under SFAS123 (R) for the three andsix months ended June 30, 2007 and June 30, 2006 which was allocated asfollows:

|                                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                         | ** ** | **(in thousands)**                       | ** ** |
|                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Cost of sales                                                   |       | $                                               | 1          |                                          | $          | 6 |   | $ | 6 |   | $ | 13 |   |
| General and  administration                                     |       | 69                                              |       | 59                                            |       | 122 |   | 121 |   |
| Marketing and  selling                                          |       | 10                                              |       | 16                                            |       | 29 |   | 32 |   |
| Research and  Development                                       |       | 17                                              |       | 37                                            |       | 65 |   | 81 |   |
| Stock-based  compensation expense included in operating expense |       | $                                               | 97         |                                          | $          | 118 |   | $ | 222 |   | $ | 247 |   |

 

As of June 30, 2007, the Company had capitalized $4 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 six months ended June 30, 2007, and the three and six monthsended June 30, 2006, were $1.52, $1.37, $2.15 and $2.39 per share,respectively, using the Black-Scholes option-pricing model with the followingweighted-average assumptions:

|                                                         | ** ** | **Three and Six  Months Ended  June 30, 2006** | ** ** | **Three and Six  Months Ended  June 30, 2007** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| Expected  Volatility                                    |       |                                                                    | 103.71     | %                                                                       |       |   | 97.96 | % |   |
| 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 97.96% 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 six months ended June 30, 2007 and June 30, 2006 is actually based onawards ultimately expected to vest, it has been reduced for annualizedestimated forfeitures of 14.18% and 16.36%, 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**

OnApril 26, 2007, the Court approved a settlement agreement in the consolidatedsecurities class action captioned *In re Ibis TechnologySecurities Litigation*, Civil Action No. 04-10446 RCL (D. Mass.). TheCompany and its Chairman of the Board, Martin J. Reid, and the plaintiffsreached an agreement in principle to settle the securities class action, whichthe Company announced on October 2, 2006. Thereafter, the parties executed aformal settlement agreement and submitted it for Court approval. The settlementprovides for a payment to the plaintiffs of $1.9 million. The Court’s April 26,2007 Order certified the proposed class for settlement purposes only, approvedthe parties’ settlement agreement, and dismissed the securities class actionwith 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, 2007the 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,in consideration 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.

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**IBIS TECHNOLOGY CORPORATION**

**PART I - ITEM 2**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**OVERVIEW**

Ibis TechnologyCorporation (“Ibis”) was formed in October 1987 and commenced operations inJanuary 1988. Ibis’ initial activities consisted of producing and sellingSIMOX-SOI wafers and conducting research and development activities. Thiseffort led to the development of proprietary oxygen implanters, the Ibis 1000,which we began selling in 1996, the next generation implanter, the i2000ä,which we began selling in 2002, and also to other proprietary processtechnology.

Initially, much ofour revenue was derived from research and development contracts and sales ofwafers for military applications. Over the years, the Company decided to focusits business operations and sales strategy on the manufacture and sale of ourimplanter equipment products and de-emphasized the sale of wafers given that,among other things, we believed that the wafer manufacturing companies were inthe best position to manufacture SIMOX-SOI wafers using our implanter equipmentin light of their expertise and operating efficiencies. As we announced on July21, 2004, we exited the wafer manufacturing business. The Company believes thatits decision to discontinue the wafer business permits broader strategiccollaboration efforts between Ibis and the wafer manufacturers. We havemaintained a research and development effort relating to wafers for ourequipment improvement programs.

We believe that amigration of SOI wafer manufacturing into the major silicon wafer suppliers istaking place. We reach this conclusion for a number of reasons. First, webelieve that tremendous price pressure exists on commodity type products, suchas silicon wafers, and this pressure is already eroding future priceexpectations of SOI wafers. Because the starting wafer represents a significantcomponent of the SOI wafer cost, we believe that silicon wafer manufacturersshould have a natural cost structure advantage leading to a higher gross marginin large volume production, and therefore should be able to manage such pricepressure better than stand-alone SOI producers that do not also produce thesilicon wafer itself. Second, we expect that the price pressure will encourage siliconwafer manufacturers to seek out higher margin products, like SOI wafers, toincrease their margins. Third, we believe that silicon wafer manufacturers havetraditionally developed proprietary intellectual property in silicon materialsscience, which can be applied to designing optimal starting wafers for SOIproduction. We believe that this should give them an advantage in bothminimizing wafer cost and maximizing SOI wafer quality and yield. Fourth, ourexperience suggests that silicon wafer manufacturers already have awell-developed infrastructure for manufacturing, sale and marketing of largevolumes of substrates. Lastly, we believe that there is greater efficiency inproducing the SOI wafer as part of the wafer manufacturers existing product flow,specifically avoiding the need to repackage, re-clean, re-inspect and re-shipsubstrates twice, once as starting silicon wafers, and a second time as SOIwafers. Therefore, as a result of these trends, we expect our ultimatecustomers will be drawn from these silicon wafer manufacturers and we plan tofocus a majority of our technical and marketing resources on the sale ofimplanters to the leading silicon wafer manufacturers and our key customers inthe semiconductor industry who we believe are the leaders in the adoption ofSOI technology. We expect that implanter sales to chipmakers should be minimal,and that these sales will be focused on SOI processes that the chipmaker wishesto keep proprietary, such as selective (or patterned) SIMOX, or other specialtysubstrates.

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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-UT wafers. We alsobelieve the ability of the i2000 implanter to produce twelve-inch (or 300 mm)SIMOX-SOI wafers coupled with the MLD process positions us to capitalize on thegrowing SOI market. In 1999, we commenced a program to design and develop thei2000, introduced it in March 2002 and began shipping 300 mm wafers implantedfrom this machine shortly thereafter. Customers who purchase the i2000 canutilize more than one SIMOX wafer manufacturing processes on the implanterincluding the IBM MLD process, when licensed, as well as other SIMOX-SOI wafermanufacturing 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, weannounced the booking (i.e. receipt) of an order for one Ibis i2000 SIMOXimplanter from SUMCO, a leading international silicon wafer manufacturer. Thissystem was factory accepted and shipped in the second quarter of 2005 and wereceived final customer acceptance of the tool at the customer’s site in March2006. In October of 2005, we received a second order for an i2000 SIMOXimplanter from SUMCO and negotiated a master purchase agreement that willgovern the general commercial terms of future orders from SUMCO. This implanterwas factory accepted by SUMCO at Ibis’ facility in the first quarter of 2006.The implanter was shipped in April 2006 and final customer acceptance at thecustomer’s facility occurred in August, 2006, with the revenue recognized inthe quarter ended September 30, 2006. At the date of this report, we do nothave an order for an implanter from our customers. The Company believes, givenour policies regarding revenue recognition, it is likely that the Company willnot record implanter revenue during 2007.

**CriticalAccounting Policies**

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that have asignificant impact on the results we report in our financial statements. Someof our accounting policies require us to make difficult and subjectivejudgments, often as a result of the need to make estimates on matters that areinherently uncertain. Our most critical accounting policies include: revenuerecognition, inventory valuation and reserves, and the assessment of long-livedasset impairment. Actual results may differ from these estimates underdifferent assumptions or conditions. Below, we discuss these policies further,as well as the estimates and judgments involved.

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***Revenue Recognition****. *Werecognize revenue from equipment sales and the sales of spare parts when all ofthe following criteria have been met: (1) evidence exists that the customer isbound to the transaction; (2) the product has been delivered to the customerand, when applicable, the product has been installed and accepted by thecustomer; (3) the sales price to the customer has been fixed or isdeterminable; and (4) collectibility of the sales price is reasonably assured.We recognize revenue from implanter sales upon final customer acceptance at thecustomer’s site. Revenue derived from contracts and services is recognized uponperformance. Significant management judgments and estimates must be made andused in connection with revenue recognized in any period. Management analyzesvarious factors, including a review of specific transactions, historicalexperience, credit worthiness of customers and current market and economicconditions. Changes in judgment based upon these factors could impact thetiming and amount of revenue and cost recognized.

***InventoryValuation and Reserves****. *Our policy for the valuation ofinventory, including the determination of obsolete or excess inventory,requires us to forecast the future demand for our products within specific timehorizons, generally twelve months or less. If our forecasted demand forspecific products is greater than actual demand and we fail to reducemanufacturing output accordingly, we could be required to record additionalinventory reserves, which would have a negative impact on our gross margin. Wehave reserved for obsolescence when engineering changes or other technologicaladvances indicate that obsolescence has occurred.

***Valuation ofLong-Lived Assets****. *Ibis reviews the valuation of long-livedassets, including property and equipment and licenses, under the provisions ofSFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.  Management is required to assess therecoverability of its long-lived assets or asset groups whenever events andcircumstances indicate that the carrying value may not be recoverable. Based oncurrent conditions, factors we consider important and that could trigger animpairment review include the following:

·                  Significant underperformance relative toexpected historical or projected future operating results,

·                  Significant changes in the manner of ouruse of the acquired assets or the strategy of our overall business,

·                  Significant negative industry or economictrends,

·                  Significant decline in our stock pricefor a sustained period, and

·                  Our market capitalization relative tobook 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 thecarrying amount of the particular long-lived asset or group exceeds its fairvalue. We would determine the fair value based on a projected discounted cashflow method using a discount rate determined by our management to becommensurate with the risk inherent in our current business model.

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**Results of Operations**

***Second Quarter Ended June 30, 2007 Compared to Second Quarter EndedJune 30, 2006***

***License and Other Revenue***.  License and other revenue includes revenuederived from license agreements, characterization and other services. Licenseand other revenue increased for the second quarter ended June 30, 2007 to $137thousand from $28 thousand for the second quarter ended June 30, 2006, anincrease of $109 thousand or 388%. This increase is attributable to increasedlicense revenue from royalty fees related to equipment technology along with anon-refundable supplemental license option fee from a new sub-licenseagreement, entered into during the first quarter ended March 31, 2006 whichrelated to equipment technology.

***EquipmentRevenue.***  Equipment revenue represents revenuerecognized from sales of implanters, spare parts and field service revenue.Equipment revenue increased to $128 thousand for the second quarter ended June 30,2007 from $14 thousand for the second quarter ended June 30, 2006, representingan increase of $114 thousand. Sales of spare parts accounted for all ofequipment revenue for the second quarter ended June 30, 2007. Sales of spareparts fluctuate depending on customer demand and when warranties expire onindividual pieces of equipment. Warranty expense is calculated on ouranticipated replacement costs for equipment accepted by our customers over aone or two year contract period.

***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 second quarter ended June 30, 2007 was $204 thousand, as compared to$53 thousand for the second quarter ended June 30, 2006. This increase of $151thousand was primarily due to the increased volume of sales of spare parts inthe second quarter ended June 30, 2007 along with the decrease in manufacturingoverhead being absorbed from less production in the second quarter ended June30, 2007.

              The gross margin for all saleswas a positive 23% for the second quarter ended June 30, 2007 as compared to anegative gross margin of 26% for the second quarter ended June 30, 2006. Theincrease in the gross margin for all sales is attributable to the increasedlicense revenue along with increased spare parts sold in the second quarterended June 30, 2007.

***Generaland Administrative Expenses***.  General andadministrative expenses for the second quarter ended June 30, 2007 were $0.6million as compared to $0.7 million for the second quarter ended June 30, 2006.This was due to decreased payroll and payroll related expenses of $0.1 millionfrom reduced salaries and headcount. Expenses include $0.1 million ofstock-based compensation expense, which impacted the financial statements incompliance with the new accounting rule, in the quarter ended June 30, 2007 andthe quarter ended June 30, 2006.

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***Marketingand Selling Expenses***.  Marketing and selling expensesfor the second quarter ended June 30, 2007 were $0.1 million as compared to$0.3 million for the second quarter ended June 30, 2006. This was due todecreased payroll and payroll related expenses of $0.2 million due to headcountreductions and labor costs transferred for consulting at a neighboring businessin the quarter ended June 30, 2007.

 ***Research and DevelopmentExpenses.***  Internallyfunded research and development expenses decreased by $0.4 million or 29% to$1.0 million for the second quarter ended June 30, 2007, as compared to $1.4million for the second quarter ended June 30, 2006. This was due to a reductionin payroll and payroll related expenses of $0.2 million from headcountreductions and labor costs transferred for consulting at a neighboring businessin the quarter ended June 30, 2007, along with reduced R&D material of $0.1million and reduced consumable expenses and utilities of $0.1 million.

***Other Income (Expense)*****.**  Totalother income for the second quarter ended June 30, 2007 was $0.2 million ascompared to $0.2 million for the second quarter ended June 30, 2006. Otherincome was flat in the quarter ended June 30, 2007 as a result of outsideconsulting done at a neighboring business under a staffing services agreementbut was offset by reduced miscellaneous income from the sale of assetspreviously written off and reduced interest income.

***SixMonths Ended June 30, 2007 Compared to Six Months Ended June 30, 2006***

***Licenseand Other Revenue***.  License and other revenue includesrevenue derived from license agreements, characterization and otherservices.  License and other revenue was$0.2 million for the six months ended June 30, 2007 as compared to $0.3 millionfor the six months ended June 30, 2006. The decrease is attributable to a newsublicense agreement related to equipment technology valued at $0.2 million forthe six months ended June 30, 2006 and was offset by increased license revenuefrom royalty fees related to equipment technology for the six months ended June30, 2007.

***EquipmentRevenue.***  Equipment revenue represents revenuerecognized from the sale of implanters, spare parts and field service revenue.Equipment revenue was $0.4 million for the six months ended June 30, 2007 ascompared to $6.0 million for the six months ended June 30, 2006, a decrease of$5.6 million. During the six months ended June 30, 2007, there was no implanterrevenue recognized for an i2000 implanter as compared to $6.0 millionrecognized for an i2000 implanter in the first six months of 2006. Fieldservice revenue accounted for $0.2 million of equipment revenue for the sixmonths ended June 30, 2007 as compared to $0 dollars of equipment revenue forthe same period last year. Sales of spare parts accounted for $0.2 million ofequipment revenue for the six months ended June 30, 2007 as compared to $0dollars of equipment revenue for the six months ended June 30, 2006. Sales ofspare parts fluctuate depending on customer demand and when warranties expireon individual pieces of equipment. Warranty expense is calculated on ouranticipated replacement costs for equipment accepted by our customers over aone of two year contract period.

***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 six monthsended June 30, 2007 was $0.3 million, compared to $2.7 million for the sixmonths ended June 30, 2006. The decrease of $2.4 million was primarily due tothe costs associated with the recognition of revenue for the i2000 implanter inthe six months ended June 30, 2006.

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 The gross margin for all sales was a positive46% for the six months ended June 30, 2007 as compared to a positive grossmargin of 57% for the six months ended June 30, 2006. This decrease in thegross margin for all sales is attributable to the approximate gross margin of54% for the i2000 implanter sale recognized in the six months ended June 30,2006.

***General and Administrative Expenses***.  General and administrative expenses for thesix months ended June 30, 2007 were $1.1 million compared to $1.3 million forthe six months ended June 30, 2006. This was due to decreased payroll andpayroll related expenses of $0.2 million from reduced salaries and headcount.

***Marketing and Selling Expenses***.  Marketing and selling expenses were $0.4million for the six months ended June 30, 2007 as compared to $0.6 million forthe six months ended June 30, 2006. This decrease was due to decreased payrolland payroll related expenses of $0.2 million from headcount reductions andlabor costs transferred for consulting at a neighboring business in the sixmonths ended June 30, 2007.

***Research and Development Expenses.***  Internally funded research and developmentexpenses decreased by $0.7 million or 24%, to $2.0 million for the six monthsended June 30, 2007, as compared to $2.7 million for the six months ended June30, 2006. This was due to a reduction in payroll and payroll related expensesof $0.4 million from headcount reductions and labor costs transferred forconsulting at a neighboring business in the six months ended June 30, 2007. Inaddition, reduced R&D material of $0.1 million, consumable expenses of $0.1million and occupancy expenses of $0.1 million contributed to these results.

***Other Income (Expense)*.**  Total other income for the six months endedJune 30, 2007 was $0.3 million as compared to $0.2 million for the six monthsended June 30, 2006, an increase of $0.1 million. Other income increased in thesix months ended June 30, 2007 as a result of outside consulting done at aneighboring business under a staffing services agreement.

#### **Liquidityand Capital Resources**

As of June 30,2007, the Company had cash and cash equivalents of $7.2 million, including thegross proceeds from the financing of $5.3 million, received in the six monthsended June 30, 2007 from the sale of 3.4 million shares of common stock and 2.5million common stock warrants. During the six months ended June 30, 2007, Ibisused $2.5 million of cash from operating activities as compared to cashprovided of $0.7 million in the six months ended June 30, 2006. The principaluses of cash during the six months ended June 30, 2007 was to fund operations.At June 30, 2007, Ibis had commitments to purchase approximately $0.1 millionin material. Our headcount for the quarter ended June 30, 2007 was 33employees.

Cash flowprojections developed by management indicate the Company believes it will havesufficient cash resources to support current operations until at least Novemberof 2008. 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 

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Companyalso entered into a registration rights agreement with the investors. TheCompany paid a placement fee to a placement agent of approximately $0.3million, which represents a cash fee equal to 5% of the aggregate gross proceedsreceived by the company in both closings of the financing. The Company alsoissued to the placement agent an aggregate of 179,619 warrants exercisable forcommon stock with a dollar value equal to 5% of the aggregate gross proceeds.Total transaction costs associated with the financing were approximately $0.4million, providing net cash to the Company of $4.9 million. All of thesecurities were sold in a private placement pursuant to Regulation D of theSecurities Act.

The Company intends to continue to invest in research, development andmanufacturing capabilities. Changes in technology or sales growth beyondcurrently established capabilities may require further investment. Furtheradoption of the technology and the timing of future equipment orders aredependent on the continuing qualification of implanters and improvementprograms at the device manufacturers, among other factors.

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. 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 remainsexceedingly difficult and significant variations quarter to quarter, arelikely. Further, because some ofthe materials and components the Company uses to build its implanter have longlead times, the Company may purchase some or all of these long lead time itemsprior to receipt of an order by its customers. When this is the case, thoseparts and materials 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 if suchfinancing is available, that it will be available on terms acceptable to us.

**Business Risk Factors**

This Form 10-Q contains express or implied forward-looking statementswithin the meaning of the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995 that relate to future events or our futurefinancial performance. In some cases, you can identify forward-lookingstatements by terminology, such as “may,” “will,” “should,” “could,” “expect,” “plan,”“anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential”or “continue” or the negative of such terms or other comparable terminology,although not all forward-looking statements contain such terms. In addition,these forward-looking statements include, but are not limited to, statementsregarding, among other things: (i) the Company’s expectations regarding futureorders for i2000 implanters, (ii) the Company’s ability to conduct itsoperations in a manner consistent with its current plan and existing capitalresources or otherwise to obtain additional implanter orders or to securefinancing to continue as a going concern, (iii) the continued employment of keymanagement and technical personnel, and attaining implanter improvements to thedegree and in the timeframe necessary to meet our customer’s expectations, (iv)the timing of our major customer’s ramping to production quantities on thei2000 implanter and the sustained production worthiness of the i2000 implanter,(v) the reliance on a single or small number of large customers, interest inand demand for, and market acceptance of, the Company’s SIMOX-SOI technologyincluding the Company’s implanters, (vi) the involvement generally of thesilicon wafer manufacturing industry in the SOI wafer market and the ability ofthe wafer manufacturer’s to produce sufficiently low cost SIMOX-SOI wafersutilizing both 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 i2000

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 implanter for manufacturing 300-mm SIMOX-SOIwafers, attaining implanter improvements to the degree and in the timeframenecessary to meet customer expectations, and the ability of the i2000 implanterto achieve acceptable production yields, (x) the Company’s plan to focus onsupplying implanters to wafer manufacturers, and (xi) the Company’s expectationof having sufficient cash for operations. Such statements are neither promisesnor guarantees but rather are subject to risks and uncertainties, which couldcause actual results to differ materially from those described in theforward-looking statements. Such risks and uncertainties include, but are notlimited to: future continued migration to SOI technology and market acceptanceof SIMOX; the level of demand for the Company’s products; the Company’s abilityto pursue and maintain further strategic relationships, partnerships andalliances with third parties; the Company’s ability to protect its proprietarytechnology; the potential trends in the semiconductor industry generally; theease with which the i2000 can be installed and qualified in fabricationfacilities; the likelihood that implanters, if ordered, will be qualified andaccepted by customers without substantial delay, modification, or cancellation,in whole or in part; the likelihood and timing of revenue recognition on suchtransactions; the impact of competitive products, technologies and pricing; theimpact 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 under certainof our contractual obligations is contained in Note 8 to the ConsolidatedFinancial Statements in our 2006 Annual Report on Form 10-K.

**Effects of Inflation**

Ibis believes that overthe past three years inflation has not had a significant impact on Ibis’ salesor operating results.

 

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**IBIS TECHNOLOGYCORPORATION**

**PART I - ITEM 3**

**QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The exposure ofmarket risk associated with risk-sensitive instruments is currently notmaterial to the Company. The Company will begin to transact its service saleswith Japanese customers in Yen, which will introduce the potential for acurrency exchange gain or loss on those transactions. The Company plans tocontinue to transact its sales for implanter equipment and all othertransactions denominated in United States dollars. The Company investsprimarily in money market funds and short-term commercial paper, holds itsinvestments until maturity and has not entered into hedging transactions.

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**IBIS TECHNOLOGYCORPORATION**

**PART I - ITEM 4**

**CONTROLS AND PROCEDURES**

(a)                                  Evaluationof Disclosure Controls and Procedures. As of June 30, 2007, the Company’smanagement, with the participation of its principal executive officer andprincipal financial officer, evaluated the effectiveness of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15(b) promulgated underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon that evaluation, the Company’sChief Executive Officer and Chief Financial Officer concluded that, as of June30, 2007, the Company’s disclosure controls and procedures were effective inensuring that material information required to be disclosed by the Company inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms, including ensuring thatsuch material information is accumulated and communicated to the Company’smanagement, including the Company’s Chief Executive Officer and the Company’sChief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure.

(b)                                 Changesin Internal Controls. There were no changes in our internal control overfinancial reporting, identified in connection with the evaluation of suchinternal control that occurred during our last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

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**IBIS TECHNOLOGYCORPORATION**

**PART II**

**OTHER INFORMATION**

Item 1 - LegalProceedings

On April 26, 2007, the Court approved a settlement agreement in theconsolidated securities class action captioned *In re IbisTechnology Securities 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 parties executeda 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 purposes only,approved the parties’ settlement agreement, and dismissed the securities classaction with prejudice and in its entirety. The settlement was funded entirely by the Company’s insurance carrierand did not have a material adverse affect on our business, results ofoperations and financial condition.

On April 10, 2007the 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.)hasbeen voluntarily dismissed by the plaintiff. The notice of dismissal filed bythe plaintiff dismissed the action with prejudice. As set forth in the notice,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

Exceptas described in this Item 1A, there are no material changes to the risk factorsdescribed in the “Risk Factors” section in our Annual Report on Form 10-K forthe fiscal year ended December 31, 2006, as updated by the risk factorsdescribed in our Quarterly Report on Form 10-Q for the quarter ended March 31,2007.

Giventhe settlement described in Item No. 1 above, the “Risk Factor” in the Company’s  Annual Report on Form 10-K for the year endedDecember 31, 2006, under the heading “***Securities Litigation Could Result in Substantial Cost andDivert the Attention of Key Personnel, Which Could Seriously Harm Our Business”***, these mattershave been resolved in their entirety.

***The issuance of shares inconnection with the February 2007 financing and the exercise of the relatedwarrants will dilute the value of our shares of common stock and could causethe price of our shares of common stock to decline.***

Prior to the February 2007financing, there were 10,915,481 shares outstanding and there were 370,786shares of common stock reserved for issuance under our equity incentive andstock purchase plans.  In connection withthe first closing of the two tranche financing, we issued 1,400,000 shares ofcommon stock and warrants to purchase 1,124,434****sharesof common stock, including warrants to purchase 74,434****sharesof common stock issued to TN Capital Equities, Ltd., which served as placementagent, and its designees.  At the secondclosing, we sold an additional 1,978,377 shares of common stock and warrants topurchase 1,588,966****shares ofcommon stock, including 105,185****to theplacement agent and its designees.  As ofAugust 14, 2007, Special Situation Funds and its affiliates beneficially ownapproximately 37% of our capital stock, all of which was purchased in theFebruary 2007 financing.

The exercise of the warrantsissued in the February 2007 financing will result in dilution in the value ofthe shares of our outstanding common stock and the voting power representedthereby. In addition, the exercise price of the warrants may be lowered underthe price adjustment provisions in the event of a “dilutive issuance,” that is,if we issue common stock at any time prior to their maturity at a per shareprice below such conversion or exercise price, either directly or in connectionwith the issuance of securities that are convertible into, or exercisable for,shares of our

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commonstock. A reduction in the exercise price may result in the issuance of asignificant number of additional shares upon the exercise of the warrants.

The warrants do notestablish a “floor” that would limit reductions in such conversion price orexercise price. The downward adjustment of the exercise price of these warrantscould result in further dilution in the value of the shares of our outstandingcommon stock and the voting power represented thereby.

No prediction can be made asto the effect, if any, that future sales of shares of our common stock, or theavailability of shares for future sale, will have on the market price of ourcommon stock prevailing from time to time. Sales of substantial amounts ofshares of our common stock in the public market, or the perception that suchsales could occur, may adversely affect the market price of our common stockand may make it more difficult for us to sell our equity securities in thefuture at a time and price which we deem appropriate.

To the extent the security holderswho have purchased our common shares and the holders of our warrants exercisesuch securities and then sell the shares of our common stock they receive uponexercise, our stock price may decrease due to the additional amount of sharesavailable in the market. The subsequent sales of these shares could encourageshort sales by our security holders and others, which could place furtherdownward pressure on our stock price. Moreover, holders of these warrants mayhedge their positions in our common stock by shorting our common stock, whichcould further adversely affect our stock price.

Item 2 - UnregisteredSales ofEquity Securities and Use of Proceeds

OnMay 14, 2007, Ibis sold 1,978,377 million unregistered shares of its commonstock and 1,483,781 million warrants exercisable for common stock to SpecialSituations Funds in the second closing of the Company’s February 2007financing. Pursuant to the purchase agreement entered into on February 16,2007, the Company agreed to sell unregistered shares of its common stock andwarrants exercisable for common stock to Special Situations Funds for anaggregate purchase price of $5.3 million in a two-tranche financing. Thefirst closing of the February 2007 financing, at which the Companyreceived approximately $2.2 million in proceeds occurred on February 20,2007. Pursuant to stockholder approval received at the Ibis Annual Meeting onMay 10, 2007, the Company sold the remainder of the securities at a secondclosing, at which the Company received approximately $3.1 million inproceeds.   Proceeds are to be used tofund working capital and for other general corporate purposes.

All of the securities were sold in a privateplacement pursuant to Regulation D of the Securities Act.

The warrants issued in the February 2007 financingare exercisable at an exercise price of $1.50 per share. The exercise price andnumber of shares issuable upon exercise of the warrants are subject toadjustment in the event of stock dividends, stock splits, dilutive issuancesand other similar events. The warrants have a term of five years, are be fullyexercisable from the date of issuance, and may be exercised on a cashless basisunder specified conditions.

In connection with the transaction, the Company alsoentered into a registration rights agreement with the investors.  The Company registered for resale the sharesand shares underlying the warrants issued in the first closing on Form S-3(Reg. No. 333-142115) and registered for resale the shares and sharesunderlying the warrants issued in the second closing on Form S-3 (Reg. No.333-143288).

The Company paid an placement fee to a placementagent of approximately $0.3 million, which represents a cash fee equal to 5% ofthe aggregate gross proceeds received by the Company in both closings of thefinancing.  The Company also issued tothe placement agent an aggregate of 179,619 warrants exercisable for commonstock with a dollar value equal to 5% of the aggregate gross proceeds.

Item 3 - Defaultsupon Senior Securities

None

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Item 4 - Submissionof Matters to a Vote of Security Holders

Information  relating to matters submitted to Stockholdersat the annual meeting ofstockholders of Ibis Technology held on May 10, 2006 was previously included inthe Company’s Quarterly Report on Form 10Q for the quarter ended March 31,2007.

Item 5 - OtherInformation

Effective August 13, 2007, the Company entered intoa Change of Control Agreement with Charles M. McKenna, the Company’s Presidentand Chief Executive Officer. In the event that Mr. McKenna’s employment isterminated within two years of a Change of Control (as defined in hisagreement) of the Company, he will be paid a lump sum equal to twice thehighest annual salary for the preceding three year period. Annual salaryincludes base salary and bonus and excludes reimbursements and amountsattributable to stock options and other non-cash compensation. Under theagreements, Mr. McKenna will also be provided health benefits for two yearsfollowing termination or until the date he becomes eligible for such coverageoffered by a subsequent employer if earlier. These severance compensation andbenefits replace, and are provided in lieu of, any severance compensation andbenefits that may be provided under any other agreement. A “Change of Control”is deemed to occur upon (i) a sale or transfer of all or substantially all ofthe Company’s assets; (ii) a merger or consolidation in which the Company isnot the continuing or surviving corporation or the Company’s votingstockholders do not continue to hold 50% of the voting stock of the continuingor surviving corporation, or (iii) any person, together with affiliates andassociates, acquires, directly or indirectly, securities representing 30% ofthe then outstanding shares of common stock or the combined voting power of allthen outstanding securities having the right to vote in an election of theBoard of Directors of the Company.

Item 6 - Exhibits

(a)                                  Exhibits furnished as Exhibits hereto:

| Exhibit No. | ** ** | **Description**                                                                                       | ** ** |
|------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| 10.1             |       | Form of Stock Option Agreement under 2007 Employee,  Director and Consultant Equity Plan              |       |
|             |       |                                                                                                  |       |
| 10.2             |       | Form of Director Stock Option Agreement under 2007  Employee, Director and Consultant Equity Plan     |       |
|             |       |                                                                                                  |       |
| 10.3             |       | Change of Control Agreement, dated August 13, 2007,  between the Registrant and Charles M. McKenna    |       |
| ** **       |       |                                                                                                  |       |
| 31.1             |       | Certification of Charles M. McKenna, Ph.D. 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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**IBIS TECHNOLOGYCORPORATION**

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                        | Ibis Technology Corporation |
|------------------------|-----------------------------|
|                   |                        |
|                   |                        |
| Date: August 14,  2007 | By:                         | /s/William J. Schmidt |
|                   |                        | William J. Schmidt |
|                   |                        | Chief Financial Officer, Treasurer and Clerk |
|                   |                        | (principal financial and accounting officer) |
|                   |                        |   |
|                   |                        |   |
| Date: August 14,  2007 | By:                         | /s/Charles M. McKenna, Ph.D. |
|                   |                        | Charles M. McKenna, Ph.D. |
|                   |                        | President and Chief Executive Officer |

 

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