** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20569**

**Form 10-Q**

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

**For the Quarterly Period Ended March 31,2006**

**Or**

**o****Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934**

For the transition periodfrom                                     to                                     

Commission filenumber      **0-23150**

**IbisTechnology Corporation**

(Exact name ofregistrant as 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’stelephone number, including area code)

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

Yes   x        No   o

 

Indicate by check markwhether the registrant is a large accelerarted filer, an excelerated filer, ora non-accelerated filer (as defined by Rule b-2 of the exchangeact).
| Large Accelerated Filer   o |   | Accelerated Filer   o |   | Non-Accelerated Filer   x |
|--------------------------------------------|--------|--------------------------------------|--------|------------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes   o        No   x

                10,816,029 sharesof Common Stock, par value $.008, were outstanding on May 15, 2006.

 

 

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**IBISTECHNOLOGY CORPORATION**

**INDEX**
| PART 1 -  FINANCIAL INFORMATION                                                                      | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|
|                                                                                                      | ** ** |
| Item 1 — Financial Statements:                                                                       | ** ** |
|                                                                                                      | ** ** |
| Balance Sheets  December 31, 2005 and March 31, 2006 (unaudited)                                |       |
|                                                                                                      |       |
| Statements  of Operations  Three Months Ended March 31, 2005 and 2006 (unaudited))                   |       |
|                                                                                                      |       |
|                                                                                                      |       |
| Statements  of Cash Flows  Three Months Ended March 31, 2005 and 2006 (unaudited)                    |       |
|                                                                                                      |       |
| Notes  to Unaudited Interim Financial Statements                                                          |       |
|                                                                                                      |       |
| Item 2 — Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       |
|                                                                                                      |       |
|                                                                                                      |       |
| Item 3 — Quantitative  and Qualitative Disclosure About Market Risk                                  |       |
|                                                                                                      |       |
| Item 4 — Controls and  Procedures                                                                    |       |
|                                                                                                      |       |
|                                                                                                      |       |
| PART II — OTHER  INFORMATION                                                                    |       |
|                                                                                                      |       |
| Item 1 —  Legal Proceedings                                                                          |       |
|                                                                                                      |       |
| Item 2 — Changes in  Securities                                                                      |       |
|                                                                                                      |       |
| Item 3 — Defaults upon  Senior Securities                                                            |       |
|                                                                                                      |       |
| Item 4 — Submission of  Matters to a Vote of Security Holders                                        |       |
|                                                                                                      |       |
| Item 5 — Other Information                                                                           |       |
|                                                                                                      |       |
| Item 6 — Exhibits and  Reports on Form 8-K                                                      |       |
|                                                                                                      |       |
| Signatures                                                                                                |       |

 

2

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**BALANCESHEETS**

**(Unaudited)**
| ** **                                                                                                                                                                                           | ** ** | **December 31,** | ** ** | **March 31** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | **2005**              | ** ** | **2006**          | ** ** |
| ** **                                                                                                                                                                                           | ** ** | ** **            | ** ** | ** **        | ** ** |
| **Assets**                                                                                                                                                                                           | ** ** | ** **            | ** ** | ** **        | ** ** |
| **Current  assets:**                                                                                                                                                                                 | ** ** | ** **            | ** ** | ** **        | ** ** |
| Cash and cash equivalents                                                                                                                                                                            |       | $                     | 6,856,874  |              | $          | 5,060,801 |   |
| Accounts receivable, trade, net                                                                                                                                                                      |       | 90,878                |       | 4,837,766         |       |
| Inventories, net (note 4)                                                                                                                                                                            |       | 6,276,650             |       | 4,197,201         |       |
| Prepaid expenses and other current assets                                                                                                                                                            |       | 615,702               |       | 586,832           |       |
| Total current assets                                                                                                                                                                                 |       | 13,840,104            |       | 14,682,600        |       |
| Property and  equipment                                                                                                                                                                              |       | 26,448,906            |       | 26,123,621        |       |
| Less: Accumulated depreciation and amortization                                                                                                                                                      |       | (21,352,154           | )          | (21,295,967       | )          |
| Net property and equipment                                                                                                                                                                           |       | 5,096,752             |       | 4,827,654         |       |
| Patents and  other assets, net                                                                                                                                                                       |       | 1,055,532             |       | 1,003,884         |       |
| Total assets                                                                                                                                                                                         |       | $                     | 19,992,388 |              | $          | 20,514,138 |   |
|                                                                                                                                                                                                 |       |                  |       |              |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                       | ** ** | ** **            | ** ** | ** **        | ** ** |
| **Current  liabilities:**                                                                                                                                                                            | ** ** | ** **            | ** ** | ** **        | ** ** |
| Accounts payable                                                                                                                                                                                     |       | $                     | 230,871    |              | $          | 525,667 |   |
| Accrued liabilities (notes 5 and 6)                                                                                                                                                                  |       | 1,201,695             |       | 1,235,892         |       |
| Deferred revenue                                                                                                                                                                                     |       | 7,263,000             |       | 5,963,000         |       |
| Total current liabilities                                                                                                                                                                            |       | 8,695,566             |       | 7,724,559         |       |
| Other long term liabilities                                                                                                                                                                          |       | —                |       | 1,640             |       |
| Total liabilities                                                                                                                                                                                    |       | 8,695,566             |       | 7,726,199         |       |
|                                                                                                                                                                                                 |       |                  |       |              |       |
| **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 10,816,029 shares and  10,816,029 shares at December 31, 2005 and March 31, 2006,  respectively  |       | 86,528                |       | 86,528            |       |
|                                                                                                                                                                                                 |       |                  |       |              |       |
| Additional paid-in capital                                                                                                                                                                           |       | 93,245,754            |       | 93,371,985        |       |
| Accumulated deficit                                                                                                                                                                                  |       | (82,035,460           | )          | (80,670,574       | )          |
| Total stockholders’ equity                                                                                                                                                                      |       | 11,296,822            |       | 12,787,939        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                     |       | $                     | 19,992,388 |              | $          | 20,514,138 |   |

 

See accompanyingnotes to unaudited interim financial statements.

3

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**STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                                                                             | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                             | ** ** | **March 31,**               | ** ** |
| ** **                                                                                             | ** ** | **2005**                         | ** ** | **2006** | ** ** |
| **Net  Sales and revenue:**                                                                            |       |                             |       |   |   |
| License and other revenue                                                                              |       | $                                | 68,234     |   | $ | 255,100 |   |
| Equipment revenue                                                                                      |       | 98,421                           |       | 6,005,722 |   |
| Total net sales and revenue (notes 2 and 6)                                                            |       | 166,655                          |       | 6,260,822 |   |
|                                                                                                   |       |                             |       |   |   |
| **Cost of  sales and revenue:**                                                                        |       |                             |       |   |   |
| Cost of license and other revenue                                                                      |       | —                           |       | — |   |
| Cost of equipment revenue (includes share-based  compensation expense of $0 and $5,352 respectively)   |       | 300,083                          |       | 2,672,792 |   |
| Total cost of sales and revenue                                                                        |       | 300,083                          |       | 2,672,792 |   |
| Gross profit  (loss)                                                                                   |       | (133,428                         | )          | 3,588,030 |   |
|                                                                                                   |       |                             |       |   |   |
| **Operating  expenses:**                                                                               |       |                             |       |   |   |
| General and  administrative (includes share-based compensation expense of $0 and $53,510 respectively) |       | 561,613                          |       | 639,618 |   |
| Marketing and  selling (includes share-based compensation expense of $0 and $18,571 respectively)      |       | 390,256                          |       | 316,461 |   |
| Research and development (includes share-based  compensation expense of $0 and $47,911 respectively)   |       | 1,682,663                        |       | 1,329,302 |   |
| Total operating expenses                                                                               |       | 2,634,532                        |       | 2,285,381 |   |
|                                                                                                   |       |                             |       |   |   |
| Income (loss) from operations                                                                          |       | (2,767,960                       | )          | 1,302,649 |   |
|                                                                                                   |       |                             |       |   |   |
| **Other  income (expense):**                                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Interest income                                                                                        |       | 40,524                           |       | 64,388 |   |
| Interest expense                                                                                       |       | 536                              |       | — |   |
| Other                                                                                                  |       | —                           |       | (895 | ) |
| Total other income                                                                                     |       | 39,988                           |       | 63,493 |   |
|                                                                                                   |       |                             |       |   |   |
| Income (loss) from continuing operations before  income taxes                                          |       | (2,727,972                       | )          | 1,366,142 |   |
|                                                                                                   |       |                             |       |   |   |
| Income tax  expense                                                                                    |       | 1,256                            |       | 1,256 |   |
| Income (loss)  from continuing operations                                                              |       | (2,729,228                       | )          | 1,364,886 |   |
|                                                                                                   |       |                             |       |   |   |
| Discontinued  operations:                                                                              |       |                             |       |   |   |
| Gain (loss) on  disposal                                                                               |       | 42,286                           |       | — |   |
| Income (loss)  from discontinued operations                                                            |       | 42,286                           |       | — |   |
|                                                                                                   |       |                             |       |   |   |
| Net income (loss) (note 2 and 9)                                                                       |       | $                                | (2,686,942 | ) | $ | 1,364,886 |   |
|                                                                                                   |       |                             |       |   |   |
| Earnings (loss)  per share:                                                                            |       |                             |       |   |   |
| Basic                                                                                                  |       |                             |       |   |   |
| Continuing operations                                                                                  |       | $                                | (0.25      | ) | $ | 0.13 |   |
| Discontinued operations                                                                                |       | $                                | —     |   | $ | — |   |
| Net income  (loss)                                                                                     |       | $                                | (0.25      | ) | $ | 0.13 |   |
|                                                                                                   |       |                             |       |   |   |
| Diluted                                                                                                |       |                             |       |   |   |
| Continuing operations                                                                                  |       | $                                | (0.25      | ) | $ | 0.12 |   |
| Discontinued operations                                                                                |       | $                                | —     |   | $ | — |   |
| Net income (loss)                                                                                      |       | $                                | (0.25      | ) | $ | 0.12 |   |
|                                                                                                   |       |                             |       |   |   |
| Weighted average  common shares outstanding                                                            |       |                             |       |   |   |
| Basic                                                                                                  |       | 10,719,595                       |       | 10,816,029 |   |
| Diluted (note 5)                                                                                       |       | 10,719,595                       |       | 10,961,430 |   |

 

See accompanyingnotes to unaudited interim financial statements.

4

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**STATEMENTSOF CASH FLOWS**

**(Unaudited)**
| ** **                                                                                  | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                  | ** ** | **March 31,**               | ** ** |
| ** **                                                                                  | ** ** | **2005**                         | ** ** | **2006** | ** ** |
| ** **                                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Cash  flows from operating activities:**                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                          |       | $                                | (2,686,942 | ) | $ | 1,364,886 |   |
| Less: income  (loss) from discontinued operations                                           |       | 42,286                           |       | — |   |
| Income (loss)  from continuing operations                                                   |       | (2,729,228                       | )          | 1,364,886 |   |
| Adjustments to  reconcile net income (loss) to net cash used in operating  activities: |       |                             |       |   |   |
| Share-based compensation expense                                                            |       | —                           |       | 125,344 |   |
| Depreciation and amortization                                                               |       | 487,838                          |       | 387,598 |   |
| Changes in operating assets and liabilities:                                                |       |                             |       |   |   |
| Accounts receivable, trade                                                                  |       | 87,567                           |       | (4,746,888 | ) |
| Inventories                                                                                 |       | (46,970                          | )          | 2,080,336 |   |
| Prepaid expenses and other current assets                                                   |       | (114,367                         | )          | 28,870 |   |
| Accounts payable                                                                            |       | 56,286                           |       | 294,796 |   |
| Accrued liabilities and deferred revenue                                                    |       | 109,920                          |       | (1,264,163 | ) |
|                                                                                        |       |                             |       |   |   |
| Net cash used in operating activities of continuing  operations                             |       | (2,148,954                       | )          | (1,729,221 |   |
|                                                                                        |       |                             |       |   |   |
| **Cash  flows from investing activities of continuing operations:**                         |       |                             |       |   |   |
| Additions to  property and equipment, net                                                   |       | (46,291                          | )          | (23,681 | ) |
| Other assets                                                                                |       | 22,220                           |       | (43,171 | ) |
|                                                                                        |       |                             |       |   |   |
| Net cash (used in) investing activities of continuing  operations                           |       | (24,071                          | )          | (66,852 | ) |
|                                                                                        |       |                             |       |   |   |
| **Cash  flows from financing activities of continuing operations:**                         |       |                             |       |   |   |
| ** **                                                                                  |       |                             |       |   |   |
| Net cash provided by financing activities of continuing  operations                         |       | —                           |       | — |   |
|                                                                                        |       |                             |       |   |   |
| **Cash  flows of discontinued operations:**                                                 |       |                             |       |   |   |
| Operating cash  flows                                                                       |       | 23,475                           |       | — |   |
| Investing cash  flows                                                                       |       | 11,250                           |       | — |   |
| Net cash provided by discontinued operations                                                |       | 34,725                           |       | — |   |
|                                                                                        |       |                             |       |   |   |
| Net decrease in cash and cash equivalents                                                   |       | (2,138,300                       | )          | (1,796,073 | ) |
|                                                                                        |       |                             |       |   |   |
| Cash and cash  equivalents, beginning of period                                             |       | 7,726,072                        |       | 6,856,874 |   |
|                                                                                        |       |                             |       |   |   |
| Cash and cash  equivalents, end of period                                                   |       | $                                | 5,587,772  |   | $ | 5,060,801 |   |
|                                                                                        |       |                             |       |   |   |
| **Supplemental  disclosure of cash flow information:**                                      |       |                             |       |   |   |
| Cash paid during the  period for interest                                                   |       | $                                | 536        |   | $ | — |   |

 

See accompanyingnotes to unaudited interim financial statements.

5

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**NOTES TOUNAUDITED 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 accounting principlesgenerally accepted in the United States of America for interim financialinformation and in accordance with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements.

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, 2005, which are included in the Company’sAnnual Report on Form 10-K as filed on March 29, 2006.

**(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 customer is bound to the transaction; (2) theproduct (or service) has been delivered to the customer and, when applicable,the product (or service) has been installed (and completed) and accepted by thecustomer; (3) the sales price to the customer has been fixed or isdeterminable; and (4) collectibility of the sales price is reasonablyassured. The Company recognizes revenue from implanter sales upon acceptance atthe customer’s site. Revenue derived from contracts and services is recognizedupon performance. Significant management judgments and estimates must be madeand used in connection with revenue recognized in any period. Managementanalyzes various factors including a review of specific transactions,historical experience, credit worthiness of customers and current market andeconomic conditions. Changes in judgment based upon these factors could impactthe timing and amount of revenue and cost recognized.

*(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 estimated fair values. SFAS 123(R) supersedesthe Company’s previous accounting under Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in2006. In March 2005, the Securities and Exchange Commission issued SAB 107relating to SFAS 123(R). The Company has applied the provisions of SAB 107 inits adoption of SFAS 123(R).

The Company adopted SFAS 123(R) usingthe modified prospective transition method, which requires the application ofthe accounting standard as of January 1, 2006, the first day of theCompany’s fiscal year 2006. The Company’s financial statements as of and forthe three months ended March 31, 2006 reflect the impact of SFAS 123(R).In accordance with the modified prospective transition method, the Company’sfinancial statements for prior periods have not been restated to reflect, anddo not include, the impact of SFAS 123(R). Share-based compensation expenserecognized under SFAS 123(R) for the three months ended March 31,2006 was $0.1 million or $.01 per share, which consisted of share-basedcompensation expense related to employee stock options and the employee stockpurchase plan. Of this expense, seventy-five percent came from options issuedprior to December 31, 2005 and are valued using the accrual method, whichis consistent with prior periods, while five percent came from options issuedin 2006 and are valued using the straight-line prorated method, which wasadopted in 2006 under the new guidance, and twenty percent came from thevaluation of shares issued under the employee stock purchase plan. There was nostock-based compensation expense related to employee stock options or employeestock purchases recognized during the three months ended March 31, 2005because the Company elected  not to adoptthe recognition provisions,

6

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and instead provided footnote disclosure permissible under Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”).

SFAS 123(R) requires companies toestimate the fair value of share-based payment awards on the date of grantusing an option-pricing model. The value of the portion of the award that isultimately expected to vest is recognized as expense over the requisite serviceperiods in the Company’s Consolidated Statement of Operations. Prior to theadoption of SFAS 123(R) the Company accounted for stock-based awards toemployees and directors using the intrinsic value method in accordance withAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB 25”) as allowed under SFAS 123. Under the intrinsic valuemethod, stock-based compensation expense had not been recognized in the Company’sstatement of operations, when the exercise price of the Company’s stock optionsgranted to employees and directors equaled or exceeded the fair market value ofthe underlying stock at the date of grant.

 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 Consolidated Statement ofOperations for the quarter ended March 31, 2006, included compensationexpenses for share-based payment awards granted prior to, but not yet vested asof December 31, 2005, based on the grant date fair value estimated inaccordance with the pro forma provisions of SFAS 123, and compensation expensefor the share-based payment awards granted subsequent to December 31, 2005based on the grant date fair value estimated in accordance with the provisionsof SFAS 123(R). As stock-based compensation expense recognized in theConsolidated Statement of Operations for the quarter ended March 31, 2006is based on awards ultimately expected to vest, it has been reduced forestimated forfeitures. SFAS 123(R) requires forfeitures to be estimated atthe time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates.

Upon adoption of SFAS 123(R), the Companyelected to retain its method of valuation for share-based awards grantedbeginning in 2006 using the Black-Scholes option-pricing model (“Black-Scholesmodel”) which was also previously used for the Company’s pro forma informationrequired under SFAS 123. The Company’s determination of fair value ofshare-based payment awards on the date of grant using an option-pricing modelis affected by the Company’s stock price as well as assumptions regarding anumber of highly complex and subjective variables. These variables include, butare not limited to the Company’s expected stock price volatility over the termof the awards, and actual and projected employee stock option exercisebehaviors.

 (c)  New Accounting Pronouncements

The Company adopted FASB Statement No. 123(R) in  the first quarter of 2006 resulting instock-based compensation expense being recognized of $0.1 million or $0 .01 pershare. Of this expense, seventy-five percent came from options issued prior to December 31,2005 and are valued using the accrual method, which is consistent with priorperiods, while five percent came from options issued in 2006 and are valuedusing the straight-line prorated method, which was adopted in 2006 under thenew guidance, and twenty percent came from the employee stock purchase planvaluation.

In August 2001, the FASB issued Statement No. 143,“Accounting for Conditional Asset Retirement Obligations” which states “Anentity shall recognize the fair value of a liability for an asset retirementobligation in the period in which it is incurred if a reasonable estimate offair value can be made.”  FASB Interpretation No. 47 is aninterpretation of FASB Statement No. 143 which clarifies that the term *conditional asset retirement obligation*  refersto a legal obligation to perform an asset retirement activity in which thetiming and (or) method of settlement are conditional on a future event that mayor may not be within the control of the entity. The obligation to perform theasset retirement activity is unconditional even though uncertainty exists aboutthe timing and (or) method of settlement. Thus, the timing and (or) method ofsettlement may be conditional on a future event. Accordingly, an entity isrequired

7

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to recognize a liability for the fair value of aconditional asset retirement obligation if the fair value of the liability canbe reasonably estimated. The fair value of a liability for the conditionalasset retirement obligation should be recognized when incurred—generally uponacquisition, construction, or development and (or) through the normal operationof the asset. Uncertainty about the timing and (or) method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists. Statement No.143acknowledges that in some cases, sufficient information may not be available toreasonably estimate the fair value of an asset retirement obligation. ThisInterpretation also clarifies when an entity would have sufficient informationto reasonably estimate the fair value of an asset retirement obligation. FIN 47is effective for fiscal years beginning after December 15, 2005. TheCompany has determined that there is no additional impact from the adoption ofthis Statement.

In November 2004, the FASB issued Statement No. 151,*“Inventory Costs”*, to amend theguidance in Chapter 4, *“Inventory Pricing”*,of FASB Accounting Research Bulletin No. 43, *“Restatement and Revision of Accounting Research Bulletins.”*StatementNo. 151 clarifies the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage). The Statementrequires that those items be recognized as current-period charges. Additionally,Statement 151 requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities. Statement No. 151 is effective for fiscal years beginningafter June 15, 2005. The Company has determined that there is noadditional impact from the adoption of this Statement.

**(3) Liquidity**

Historically, theCompany has financed its operations and met its capital requirements throughfunds generated from operations, the issuance of common stock, equipment linesof credit, a working capital line of credit, a term loan, sales-leasebackarrangements and collaborative arrangements. In July 2004, the Companydiscontinued its wafer manufacturing business, which was characterized byvolatile production volumes and costs associated with periodic changes andcontinuing improvements in the process. Because of this unpredictability, andbecause it was also likely that additional capital investments would have to bemade to keep the wafer manufacturing process up to date, the Company decided todiscontinue the wafer manufacturing portion of the business in 2004 and tofocus exclusively on the equipment manufacturing business. The Company willmaintain a research and development effort focused on continuous improvement ofthe equipment capabilities and for supporting the Company’s equipment customers’needs.

As of March 31,2006, the Company had cash and cash equivalents of $5.1 million, including thedown payment of $2.5 million for the second i2000 SIMOX implanter orderreceived from SUMCO in the fourth quarter of 2005. Subsequent to the end of thequarter the Company received an additional $1.2 million associated with thefinal customer acceptance of the SUMCO implanter shipped in June 2005, andan additional $3.5 million associated with the recent factory acceptance andshipment of the second SUMCO i2000. During the quarter ended March 31,2006, Ibis used $1.7 million of cash for operating activities of continuingoperations as compared to $2.1 million in the quarter ended March 31,2005. The principal uses of cash during the quarter ended March 31, 2006were to fund operations and additions to property and equipment which totaled$0.1 million. At March 31, 2006, Ibis had commitments to purchaseapproximately $0.7 million in material. Our headcount for the quarter ended March 31,2006 was 46 employees.

The Company’s management believes that it will have sufficient cashresources including the cash on hand and the final payment upon customeracceptance of the second SUMCO unit at its plant in Japan, to supportoperations at current levels through at least the next twelve months. Thisexpectation however, is based on the Company’s current operating plan andgeneral sales outlook, each of which may change rapidly. The Company intends tocontinue to invest in research, development and manufacturing capabilities.Changes in technology or sales growth beyond currently established capabilitiesmay require further investment. Moreover, although Ibis is encouraged by the receipt

8

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of a second orderfrom SUMCO for an i2000 implanter and the opportunity to work with leadingwafer manufacturers like SUMCO to develop further both the i2000 implanter andto improve the SIMOX process, SOI technology is still in an early stage. 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. Revenue recognitionand receipt of the final 15% of the purchase price of the second Sumco implanter will be based on finalcustomer acceptance at the customer’s facility, which is expected to occur inthe third quarter of this year. The timing of final acceptance and revenuerecognition may vary depending on a number of factors, which include amongother things tool performance at the customer site, and no guarantees can begiven with respect to whether or when the Company will recognize revenue onthis transaction. The timing of future orders is important and difficult topredict because customers can delay orders and/or request early shipment,either of which could cause the need for additional cash requirements.Forecasting future revenue, on a quarter-by-quarter basis, remains exceedinglydifficult and significant variations quarter to quarter, are likely. Further,because some of the materials and components the Company uses to build itsimplanter have long lead times, the Company may purchase some or all of theselong lead time items prior to receipt of an order by its customers. When thisis the case, those parts and materials bare the risk of being subject to excessand obsolescence. The Company expects to continue to explore equity offeringsand other forms of financing and anticipates that we may be required to raiseadditional capital in the future in order to finance future growth and ourresearch and development programs. There can be no assurance, however, that ouractual needs will not exceed expectations or that we will be able to fund ouroperations on a long-term basis in the absence of other sources. There also canbe no assurance that any additional required longer term financing will beavailable through additional bank borrowings, debt or equity offerings orotherwise, or that if such financing is available, that it will be available onterms acceptable to us.

9

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(4) **Inventories**

Inventories consist of the following:

|                            | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2005**              | ** ** | **2006**           | ** ** |
| Raw materials              |       | $                     | 1,790,923  |               | $          | 1,993,125 |   |
| Work in process            |       | 1,980,513             |       | 2,051,506          |       |
| Finished goods             |       | 2,505,214             |       | 152,570            |       |
| Total equipment  inventory |       | $                     | 6,276,650  |               | $          | 4,197,201 |   |

 

(5) **Accrued Liabilities**

Current accruedliabilities were as follows at December 31, 2005 and March 31, 2006.

|                            | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2005**              | ** ** | **2006**           | ** ** |
| Accrued Vacation           |       | $                     | 125,468    |               | $          | 162,956 |   |
| Accrued Warranty           |       | 653,133               |       | 597,238            |       |
| Accrued Payroll            |       | 76,195                |       | 151,811            |       |
| Accrued Expenses           |       | 346,899               |       | 323,887            |       |
| Total accrued  liabilities |       | $                     | 1,201,695  |               | $          | 1,235,892 |   |

 

(6) **Accrued Warranty**

At the time that revenueis recognized for the sale of an implanter a liability for warranty is alsoestablished. An estimate of the warranty cost is made based on the number ofyears involved and the Company’s prior experience. As material and labor isused during the warranty period the liability is reduced based on thesecharges. At the end of the warranty term the balance in the liability iseliminated and adjusted through cost of sales, the account charged atinception. A reconciliation of warranty liability for the period ended December 31,2005 and March 31, 2006 is as follows:

| Warranty balance  December 31, 2004 |   | $        | 708,830 |   |
|------------------------------------------|--------|----------|---------|--------|
| Expense incurred  – 2005            |   | (31,061  | )       |
| Initiated – 2005                    |   | —   |    |
| Expired – 2005                      |   | (24,636  | )       |
| Warranty balance  December 31, 2005 |   | 653,133  |    |
| Expense incurred  —2006             |   | 1,046    |    |
| Initiated – 2006                    |   | 268,000  |    |
| Expired – 2006                      |   | (324,941 | )       |
| Warranty balance  March 31, 2006    |   | $        | 597,238 |   |

 

10

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** **

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

Net income for the quarter ended March 31, 2006included stock-based compensation expense under Statement of FinancialAccounting Standards No. 123R , “Share-Based Payment,” (SFAS 123R) of $0.1million related to employee stock options, and employee stock purchases. Netincome including pro forma stock-based compensation expense as disclosed in thefootnotes to the financial statements was $0.1 million for the quarterending March 31, 2005 was a loss of $2.8 million or $0.26 loss per share.There was no stock-based compensation expense related to employee stockoptions, or employee stock purchases under Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123”)in the quarter ended March 31, 2005 because the Company elected not toadopt the recognition provisions of SFAS 123 at that time.

Net income (loss)per share of common stock is computed based upon the weighted average number ofshares outstanding during each period and including the dilutive effect, ifany, of stock options and warrants. SFAS 128 requires the presentation of basicand diluted earnings (loss) per share for all periods presented. As the Companywas in a net loss position for the three months ended March 31, 2005,common stock equivalents of 0 ,were excluded from the diluted loss per sharecalculation, as they would be antidilutive. As a result, diluted loss per shareis the same as basic loss per share for the period ended March 31, 2005.

**(8) IndustrySegments**

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.

11

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The table belowprovides unaudited information for the three months ended March 31, 2005and 2006 pertaining to the Company’s two industry segments.
| ** **                                                   | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  Or Services** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|-------------------------------------------|------------|------------|------------|
| **Net Revenue**                                              |       |                 |       |                                      |       |       |       |
| Three Months  Ended March 31, 2005                      |       | $                    | 98,421     |                                      | $          | 68,234     |       | $ | 166,655 |   |
| Three Months  Ended March 31, 2006                      |       | $                    | 6,005,722  |                                      | $          | 255,100    |       | $ | 6,260,822 |   |
|                                                         |       |                 |       |                                      |       |       |       |
| **Operating Income (Loss)**                                  |       |                 |       |                                      |       |       |       |
| Three Months  Ended March 31, 2005                      |       | (2,274,580           | )          | 68,234                                    |       | (2,206,346 | )          |
| Three Months  Ended March 31, 2006                      |       | 1,687,168            |       | 255,100                                   |       | 1,942,268  |       |
|                                                         |       |                 |       |                                      |       |       |       |
| **Assets**                                                   | ** ** | ** **           | ** ** | ** **                                | ** ** | ** ** | ** ** |
| March 31,  2006                                         |       | 15,135,088           |       | 153,020                                   |       | 15,288,108 |       |
|                                                         |       |                 |       |                                      |       |       |       |
| **Capital Expenditures**                                     | ** ** | ** **           | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Three Months  Ended March 31, 2005                      |       | 46,291               |       | —                                    |       | 46,291     |       |
| Three Months  Ended March 31, 2006                      |       | 23,681               |       | —                                    |       | 23,681     |       |
|                                                         |       |                 |       |                                      |       |       |       |
| **Depreciation and Amortization  of Property and Equipment** |       |                 |       |                                      |       |       |       |
| Three Months  Ended March 31, 2005                      |       | 473,551              | ** ** | **—**                                |       | 473,551    |       |
| Three Months Ended  March 31, 2006                      |       | 372,454              |       | —                                    |       | 372,454    |       |

 

12

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

|                                                              | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **March 31,**               | ** ** |
| **Segment Reconciliation**                              | ** ** | ** **                       | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net Income  (Loss):                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Total operating income (loss) for reportable  Segments       |       | $                                | (2,206,346 | ) | $ | 1,942,268 |   |
| Corporate general & administrative expenses         |       | (561,614                         | )          | (639,619 | ) |
| Net other income                                             |       | 39,988                           |       | 63,493 |   |
| Income tax expense                                           |       | (1,256                           | )          | (1,256 | ) |
| Gain (loss) from discontinued operations                     |       | 42,286                           |       | — |   |
| Net income (loss)                                            |       | $                                | (2,686,942 | ) | $ | 1,364,886 |   |
|                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Capital  Expenditures:                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Total capital expenditures for reportable segments           |       | $                                | 46,291     |   | $ | 23,681 |   |
| Corporate capital expenditures                               |       | —                           |       | — |   |
| Total capital expenditures                                   |       | $                                | 46,291     |   | $ | 23,681 |   |
|                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Depreciation and  Amortization:                              | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Total depreciation and amortization for reportable  segments |       | $                                | 473,551    |   | $ | 372,454 |   |
| Corporate depreciation and amortization                      |       | 14,287                           |       | 15,144 |   |
| Total depreciation and amortization                          |       | $                                | 487,838    |   | $ | 387,598 |   |
|                                                         |       |                             |       |   |   |
|                                                         | ** ** | ** **                       | ** ** | **Balance as  of  3/31/2006** | ** ** |
| Assets:                                                      | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Total assets for reportable segments                         |       |                             |       | $ | 15,288,108 |   |
| Cash & cash equivalents not allocated to  Segments  |       |                             |       | 5,060,801 |   |
| Other unallocated assets                                     |       |                             |       | 165,229 |   |
| Total assets                                                 |       |                             |       | $ | 20,514,138 |   |
|                                                              |            |                                  |            |  |  |  |  |  |  |

 

 

 

**(9) Employee Stock BenefitPlans**

Net income for thequarter ended march 31, 2006 included stock-based compensation expense underSFAS 123 ( R ) of $ 0.1 million. Of this expense, seventy-five percent camefrom options issued prior to December 31, 2005 and are valued using theaccrual method, which is consistent with prior periods, while five percent camefrom options issued in 2006 and are valued using the straight-line proratedmethod, which was adopted in 2006 under the new guidance, and twenty percentcame from the employee stock purchase plan valuation. Net income for thequarter ended March 31, 2005 did not include any stock-based compensationexpense because the company did not adopt the recognition provisions of SFAS123.

13

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*Employee Stock Purchase Plan*

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 three months ended March 31, 2005and March 31, 2006 the company issued no shares under the Purchase Plan.At March 31, 2006, 268,091 shares were available for purchase under thePurchase Plan.

*Employee Stock Option Plan*

The Company hasstock-based compensation plans under which employees and directors may begranted options to purchase common stock. Options are generally granted with exerciseprices at not less than the fair market value on the grant date, generally vestover 4 years and expire in 10 years after the grant date. As of March 31,2006, a total of 2.9 million shares are authorized for grant under the Company’sstock-based compensation plans. The number of common shares reserved forgranting of future awards to employees and directors under these plans was 0.2million at March 31,2006. The remaining unrecognized compensation expenseon stock options at March 31, 2006 was $0.6 million. The weighted averageperiod over which the cost is expected to be recognized is approximately 2years

As of March 31,2006 the Company had three equity compensation plans under which our equitysecurities are authorized for issuance to our employees and/or directors: the1988 Employee and Directors Stock Option Plan, which has expired, the 1993Employee and Directors Stock Option Plan and the 1997 Employee and DirectorsStock Option Plan.

*Distribution and Dilutive Effectof Options*

The following tableillustrates the grant dilution and exercise dilution**:**

|                                    | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **March 31,**               | ** ** |
| ** **                         | ** ** | **2005**                         | ** ** | **2006** | ** ** |
| Shares of common stock outstanding |       | 10,719,595                       |       | 10,816,029 |   |
|                               |       |                             |       |   |   |
| Granted                            |       | —                           |       | 133,000 |   |
| Canceled/forfeited                 |       | (117,568                         | )          | (140,530 | ) |
| Expired                            |       | —                           |       | — |   |
| Net options  granted               |       | (117,568                         | )          | (7,530 | ) |
|                               |       |                             |       |   |   |
| Grant dilution(1)                  |       | (1.0                             | )%         | 0.0 | % |
|                               |       |                             |       |   |   |
| Exercised                          |       | —                           |       | — |   |
| Exercised dilution(2)              |       | —                           |       | — |   |

----

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

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

Basic and dilutedshares outstanding for the three months ended March 31, 2006 were10,816,029 shares and 10,961,430 shares. During the three months ending March 31,2006, the dilutive effect of in-the-money employee stock options was 145,401shares or 1.3% of the basic shares outstanding based on the Company’s averageshare price of $1.85.

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A summary of stock optiontransactions follows:
| ** **                                     | ** ** | **Options Outstanding** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **Options Available**   | ** ** | ** ** | ** ** | **Weighted average** | ** ** |
| ** **                                     | ** ** | **for**                      | ** ** | ** ** | ** ** | **exercise price of** | ** ** |
| ** **                                     | ** ** | **Grant**                    | ** ** | **Shares** | ** ** | **shares under plan** | ** ** |
| Balance outstanding at  December 31, 2004 |       | 158,218                      |       | 1,348,235 |   | $ | 14.06 |   |
| Granted                                        |       | (304,500                     | )          | 304,500 |   | 1.46 |   |
| Exercised                                      |       | —                       |       | — |   | — |   |
| Cancelled/forfeited                            |       | 331,473                      |       | (331,473 | ) | 12.95 |   |
| Expired                                        |       | —                       |       | — |   | — |   |
| Balance outstanding at  December 31, 2005 |       | 185,191                      |       | 1,321,262 |   | $ | 11.43 |   |
| Granted                                        |       | (133,000                     | )          | 133,000 |   | 3.43 |   |
| Exercised                                      |       | —                       |       | — |   | — |   |
| Cancelled/forfeited                            |       | 140,530                      |       | (140,530 | ) | 16.63 |   |
| Expired                                        |       | —                       |       | — |   | — |   |
| Balance outstanding at March 31, 2006     |       | 192,721                      |       | 1,313,732 |   | $ | 10.07 |   |

 

The followingtable summarizes information concerning outstanding and exercisable options asof March 31, 2006:
| **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | ** **                   | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | ** **                   | ** ** | **Average** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                   | ** ** | ** **                   | ** ** | **remaining** | ** ** | **average** | ** ** | ** ** | ** ** | ** ** | ** ** | **average** | ** ** |
| **Range of**            | ** ** | **Number**                   | ** ** | **contractual** | ** ** | **exercise price** | ** ** | **Aggregate** | ** ** | **Options** | ** ** | **exercise price** | ** ** |
| **exercise prices**     | ** ** | ** **                   | ** ** | **outstanding** | ** ** | **life (years)** | ** ** | **per share** | ** ** | **Intrinsic Value** | ** ** | **Exercisable** | ** ** | **per share** | ** ** |
| $.01 - 6.00                  |       | 665,600                      |       | 8.6 |   | $ | 3.12 |   | $ | 9,515 |   | 143,221 |   | $ | 4.96 |   |
| $6.01 - 9.00                 |       | 163,055                      |       | 5.9 |   | $ | 7.83 |   |   |   | 125,305 |   | $ | 7.82 |   |
| $9.01 - 13.50                |       | 308,852                      |       | 3.8 |   | $ | 10.18 |   |   |   | 299,102 |   | $ | 10.16 |   |
| $13.51 - 20.26               |       | 43,325                       |       | 4.5 |   | $ | 18.25 |   |   |   | 43,075 |   | $ | 18.27 |   |
| $20.27 - 30.37               |       | 10,250                       |       | 3.5 |   | $ | 24.10 |   |   |   | 10,250 |   | $ | 24.10 |   |
| $30.38 - 45.55               |       | 13,250                       |       | 4.0 |   | $ | 37.27 |   |   |   | 13,250 |   | $ | 37.27 |   |
| $45.56 - 68.32               |       | 106,400                      |       | 3.8 |   | $ | 46.48 |   |   |   | 106,400 |   | $ | 46.48 |   |
| $68.33 - 98.71               |       | 3,000                        |       | 3.9 |   | $ | 83.06 |   |   |   | 3,000 |   | $ | 83.06 |   |
| ** **                   |       | 1,313,732                    |       | 6.5 |   | $ | 10.07 |   | $ | 9,515 |   | 743,603 |   | $ | 15.40 |   |
|                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The aggregate intrinsicvalue in the preceding table represents the total pretax intrinsic value, basedon the company’s closing stock price of $3.55 as of March 31, 2006, whichwould have been received by the option holders had all option holders exercisedtheir options as of that date. The fair value of stock options vested at March 31,2006 and March 31, 2005 was $3.2 million and $3.5 million, respectively.The total number of in-the-money options exercisable as of March 31, 2006was 17,660. As of December 31, 2005 863,221 outstanding options wereexercisable, and the weighted average exercise price was $15.85.

15

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*Valuation and Expense Informationunder SFAS 123( R )*

The followingtable summarizes stock-based compensation expense related to employee stockoptions and employee stock purchases under SFAS123 (R ) for the three monthsended March 31, 2006 which was allocated as follows:

|                                                                  | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **March 31, 2006**     | ** ** |
| ** **                                                       | ** ** | **(in thousands)**          | ** ** |
| Cost of sales                                                    |       | $                                | 5          |   |
| Research and  development                                        |       | 48                               |       |
| Marketing and  selling                                           |       | 19                               |       |
| General and  administration                                      |       | 53                               |       |
| Stock-based  compensation expense included in operating expenses |       | $                                | 125        |   |

 

The company capitalized $ 1 thousand of stock-based compensation ininventory for the quarter ended March 31, 2006 and did not recognize anytax benefits on the stock-based compensation recorded in the quarter based onthe current tax status of the company.

The table below reflects net income per share, basic and diluted forthe three months ended March 31, 2006 compared with the pro formainformation for the three months ended March 31, 2005.
| ** **                                                                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2005**                                             | ** ** | **2006** | ** ** |
|                                                                                                  |       |                                                 |       |   |   |
| Net income  (loss) as reported for prior periods(1)                                                   |       | $                                                    | (2,686,942 | ) | N/A |   |
| Stock-based  compensations expense related to employee stock options and employee stock  purchases(2) |       | (135,331                                             | )          | (125,344 | ) |
| Net income  (loss) including the effect of stock-based compensation expense(3)                        |       | $                                                    | (2,822,273 | ) | $ | 1,364,886 |   |
|                                                                                                  |       |                                                 |       |   |   |
| Per share information,  basic and diluted:                                                            |       |                                                 |       |   |   |
|                                                                                                  |       |                                                 |       |   |   |
| Net income  (loss) as reported for the prior period(1)                                                |       | $                                                    | (0.25      | ) | N/A |   |
| Net income (loss),  including the effect of stock-based compensation expense(3)                       |       | $                                                    | (0.26      | ) | $ | 0.12 |   |

----

(1)  Net income(loss) and net income (loss) per share prior to 2006 did not includestock-based compensation expense related to employee stock options and employeestock purchases under SFAS123 because we did not adopt the recognitionprovisions of SFAS123.

(2)  Stock-basedcompensation expense prior to 2006 is calculated on the pro forma applicationof SFAS123 as previously disclosed in the notes to the Consolidated FinancialStatements.

(3)  Net income(loss) and net income (loss) per share prior to 2006 represents pro formainformation based on SFAS123 as previously disclosed in the notes to theConsolidated Financial Statements.

16

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Theweighted-average estimated fair value of employee stock options granted duringthe three months ended March 31, 2006 was $2.41 per share using the BlackScholes option-pricing model with the following weighted-average assumptions:
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **March 31, 2006**     | ** ** |
| Expected  volatility                                     |       | 103.72                           | %          |
| Risk free  interest rate                                 |       | 4.74                             | %          |
| Dividend yield                                           |       | 0.00                             |       |
| Expected option life  (10 year contractual life options) |       | 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 103.72 percent.

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 stock-basedcompensation expense recognized in the Consolidated Statement of Operations forthe first quarter of 2006 is actually based on awards ultimately expected tovest, it has been reduced for annualized estimated forfeitures of 16.2%. SFAS123 (R ) requires forfeitures to be estimated at the time of grant and revised,if necessary, in subsequent periods if actual forfeitures differ from thoseestimates. Forfeitures were estimated based on historical experience.

*Pro Forma Information Under SFAS123 for Periods Prior to Fiscal 2006*

As no stock optionswere granted during the three months ended March 31, 2005 there was nocalculation shown of the weighted-average estimated value of employee stockoptions granted during the three months ended March 31, 2005 using theBlack Scholes option-pricing model.

For purposes ofpro forma disclosures under SFAS 123, the estimated fair value of the optionsis assumed to be amortized to expense over the options’ vesting period.

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**(10) LegalProceedings**

Five class actionsecurities lawsuits have been filed in the United States District Court in theDistrict of Massachusetts against Ibis and its President and CEO: MartinSmolowitz v. Ibis Technology Corporation., et al., Civ. No. 03-12613(RCL) (D. Mass.); Fred Den v. Ibis Technology Corporation., et al., Civ. No. 04-10060(RCL) (D. Mass.); Weinstein v. Ibis Technology Corporation., et al., Civ. No. 04-10088(RCL) (D. Mass.); George Harrison v. Ibis Technology Corporation., et al., Civ.No. 04-10286 (RCL) (D. Mass.); and Eleanor Pitzer v. Ibis TechnologyCorporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). On June 4,2004, the Court entered an order consolidating these actions under the captionIn re Ibis Technology Securities Litigation, C.A. 04-10446 RCL. On July 6,2004, a consolidated amended class action complaint was filed which alleges,among other things, that the Company violated federal securities laws byallegedly making misstatements to the investing public relating to demand forcertain Ibis products and intellectual property issues relating to the sale ofthe i2000 oxygen implanter. The plaintiffs are seeking unspecified damages. On August 5,2004, we filed a motion to dismiss the consolidated amended complaint on thegrounds, among others, that it failed to state a claim on which the reliefcould be granted. On September 25, 2005, the Magistrate Judge issued areport and recommendation recommending that our motion be granted in part anddenied in part. We and the plaintiffs both filed partial objections to thereport and recommendation with the Court. On March 31, 2006, the courtadopted the Magistrate Judge’s report and recommendation, and thus granted inpart and denied in part our motion to dismiss the plaintiffs’ claims. While webelieve that the plaintiffs’ allegations are without merit, and we intend tovigorously defend against the suits, there can be no guarantee as to how theyultimately will be resolved.

In addition, Ibishas been named as a nominal defendant in a shareholder derivative action filedin February 2004 against certain of its directors and officers: Louis F.Matheson, Jr. v. Martin J. Reid et al., Civ. Act. No. 04-10341(RCL). The complaint alleges, among other things, that the alleged conductchallenged in the securities cases pending against Ibis in Massachusetts(described above) constitutes a breach of the defendants’ fiduciary duties toIbis. The complaint seeks unspecified money damages and other relief ostensiblyon behalf of Ibis. On June 4, 2004, the Court entered an order stayingthis matter pending the entry of a final order on any motion filed by theCompany to dismiss the consolidated class action complaint referenced above.

Litigation may betime-consuming, expensive and disruptive to normal business operations, and theoutcome of litigation is difficult to predict. An unfavorable resolution ofthese litigation matters could have a material adverse effect on our business,results of operations and financial condition.

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**PART I - ITEM 2**

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**OVERVIEW**

Ibis TechnologyCorporation (“Ibis”) was formed in October 1987 and commenced operationsin January 1988. Ibis’ initial activities consisted of producing andselling SIMOX-SOI wafers and conducting research and development activities.This effort led to the development of proprietary oxygen implanters, the Ibis1000, 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 of ourrevenue was derived from research and development contracts and sales of wafersfor military applications. Over the years, the Company decided to focus itsbusiness 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 July 21,2004, we exited the wafer manufacturing business. The Company believes that itsdecision to discontinue the wafer business permits broader strategiccollaboration efforts between Ibis and the wafer manufacturers. We willmaintain a research and development effort relating to wafers for our equipmentimprovement 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 encouragesilicon wafer manufacturers to seek out higher margin products, like SOIwafers, to increase their margins. Third, we believe that silicon wafermanufacturers have traditionally developed proprietary intellectual property insilicon materials science, which can be applied to designing optimal startingwafers for SOI production. We believe that this should give them an advantagein both minimizing wafer cost and maximizing SOI wafer quality and yield.Fourth, our experience 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 productflow, specifically avoiding the need to repackage, re-clean, re-inspect andre-ship substrates twice, once as starting silicon wafers, and a second time asSOI wafers. 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 wafersimplanted from this machine shortly thereafter. Customers who purchase thei2000 can utilize more than one SIMOX wafer manufacturing processes on theimplanter including the IBM MLD process, when licensed, as well as otherSIMOX-SOI wafer manufacturing processes that do not require the IBM license.

Because we havesold only a limited 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 March,2006. 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 the company believes it willbe accepted by the end of the third quarter of 2006. Revenue recognition forthis implanter will be based on final customer acceptance at their facility,the timing of which may vary depending on a number of factors, includingperformance of the tool.

**CriticalAccounting Policies**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that have a significant impact on the results we report in ourfinancial statements. Some of our accounting policies require us to makedifficult and subjective judgments, often as a result of the need to makeestimates on matters that are inherently uncertain. Our most criticalaccounting policies include: revenue recognition, inventory valuation andreserves, accounts receivable reserves and the assessment of long-lived assetimpairment. Actual results may differ from these estimates under differentassumptions or conditions. Below, we discuss these policies further, as well asthe estimates and judgments involved.

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***Revenue Recognition****.*We recognize revenue from equipment sales and thesales of spare parts when all of the following criteria have been met: (1) evidenceexists that the customer is bound to the transaction; (2) the product hasbeen delivered to the customer and, when applicable, the product has beeninstalled and accepted by the customer; (3) the sales price to the customer hasbeen fixed or is determinable; and (4) collectibility of the sales priceis reasonably assured. We recognize revenue from implanter sales upon finalcustomer acceptance at the customer’s site. Revenue derived from contracts andservices is recognized upon performance. Significant management judgments andestimates must be made and used in connection with revenue recognized in anyperiod. Management analyzes various factors, including a review of specifictransactions, historical experience, credit worthiness of customers and currentmarket and economic conditions. Changes in judgment based upon these factorscould impact the timing and amount of revenue and cost recognized.

***InventoryValuation and Reserves****.*Ourpolicy for the valuation of inventory, including the determination of obsoleteor excess inventory, requires us to forecast the future demand for our productswithin specific time horizons, generally twelve months or less. If ourforecasted demand for specific products is greater than actual demand and wefail to reduce manufacturing output accordingly, we could be required to recordadditional inventory reserves, which would have a negative impact on our grossmargin. We have reserved for obsolescence when engineering changes or othertechnological advances indicate that obsolescence has occurred. With thediscontinuance of the wafer manufacturing business and the write-off of allwafer inventory, the  reserves requiredare now focused on equipment based, or related inventory.

***AccountsReceivable Reserves****.*Accountsreceivable are reduced by an allowance for amounts that may becomeuncollectible in the future. The estimated allowance for uncollectible amountsis based primarily on a specific analysis of accounts in the receivableportfolio and a general reserve based on the aging of receivables andhistorical write-off experience. While management believes the allowance to beadequate, if the financial condition of our customers were to deteriorate,resulting in impairment of their ability to make payments, additionalallowances may be required and could materially impact our financial positionand results of operations.

***Valuation ofLong-Lived Assets****.*Ibisreviews the valuation of long-lived assets, including property and equipmentand licenses, under the provisions of SFAS No. 144, Accounting forImpairment or Disposal of Long-Lived Assets. Management is required to assessthe recoverability 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 to expectedhistorical or projected future operating results,

·                  Significant changes in the manner of our use of theacquired assets or the strategy of our overall business,

·                  Significant negative industry or economic trends,

·                  Significant decline in our stock price for a sustainedperiod, and

·                  Our market capitalization relative tobook value.

In accordance with SFAS No. 144,when we determine that the carrying value of applicable long-lived assets maynot be recoverable based upon the existence of one or more of the aboveindicators of impairment, we evaluate whether the carrying amount of the assetexceeds the sum of the undiscounted cash flows expected to result from the useand eventual disposition of that asset or asset group. If such a circumstanceexists, we would measure an impairment loss to the extent the carrying amountof the particular long-lived asset or group exceeds its fair value. We woulddetermine the fair value based on a projected discounted cash flow method usinga discount rate determined by our management to be commensurate with the riskinherent in our current business model.

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**Results of Operations**

***First Quarter Ended March 31, 2006 Compared to First Quarter EndedMarch 31, 2005***

***License and Other Revenue***.Contract and other revenue includes revenue derived from license agreements,characterization and other services. Contract and other revenue increased forthe first quarter ended March 31, 2006 to $255 thousand from $68 thousandfor the first quarter ended March 31, 2005, an increase of $187 thousandor 274%. This increase is attributable to a new sub-license agreement relatedto equipment technology valued at $175 thousand to Ibis and increased licenserevenue from royalty fees related to equipment technology.

***       Equipment Revenue.***Equipment revenue represents revenuerecognized from sales of implanters, spare parts and field service revenue.Equipment revenue increased to $6.0 million for the first quarter ended March 31,2006 from $0.1 million for the first quarter ended March 31, 2005, anincrease of $5.9 million. During the first quarter of 2006, revenue wasrecognized for an i2000 implanter of $6.0 million as compared to no implanterrevenue recognition in the first quarter of 2005. Field service revenueaccounted for $0 dollars of equipment revenue for the first quarter ended March 31,2006 as compared to $57 thousand of equipment revenue for the same period lastyear. Sales of spare parts accounted for $6 thousand of equipment revenue forthe first quarter ended March 31 2006 as compared to $41 thousand ofequipment revenue for the first quarter ended March 31, 2005. 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 or two year contract period.

***TotalNet Sales and Revenue***. Total sales and revenue for the first quarter ended March 31,2006 was $6.3 million, an increase of $6.1 million, from total net revenue of$0.2 million for the first quarter ended March 31, 2005. This increase isdue to revenue recognition of an i2000 implanter of $6.0 million during thefirst quarter of 2006 and an increase in license revenue of $0.2 million whichwas offset by a decrease in service and parts revenue of $0.1 million.

***TotalCost of Sales and Revenue***. Cost of equipment revenue represents the cost ofequipment, the cost for spare parts, and the costs of labor incurred for fieldservice. Cost of equipment revenue for the first quarter ended March 312006 was $2.7 million, as compared to $0.3 million for the first quarter ended March 31,2005. This increase of $2.4 million was primarily due to the costs associatedwith the recognition of revenue for the i2000 implanter in the first quarterended March 31, 2006.

Total cost ofsales and revenue including contract and other revenue as well as equipmentrevenue mentioned above for the first quarter ended March 31, 2006 was$2.7 million as compared to $0.3 million for the first quarter ended March 31,2005, an increase of $2.4 million or 791%. The gross margin for all sales was apositive 57% for the first quarter ended March 31, 2006 as compared to anegative gross margin of 80% for the first quarter ended March 31, 2005.This increase in the gross margin for all sales is attributable to theapproximate gross margin of 54% for the i2000 implanter sale recognized in thefirst quarter ended March 31, 2006, as compared to no implanter grossmargin for the quarter ended March 31, 2005 as well as the $0.3 millionreduction in cost from the expiration of the warranty associated with the i2000implanter sold to IBM.

***Generaland Administrative Expenses***. General and administrative expenses for the firstquarter ended March 31, 2006 were $0.6 million as compared to $0.5 millionfor the first quarter ended March 31, 2005, an increase of $0.1 million,or 14%. This is due to $0.1 million of stock-based compensation expense, whichimpacted the financial statements in compliance with the new accounting rule,in the quarter ended March 31, 2006.

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***Marketingand Selling Expenses***. Marketing and selling expenses for the first quarter ended March 31,2006 were $0.3 million as compared to $0.4 million for the first quarter ended March 31,2005. This was due to decreased payroll and payroll related expenses of $0.1million from headcount reductions.

***Researchand Development Expenses.***Internally funded research and development expensesdecreased by $0.4 million or 21% to $1.3 million for the first quarter ended March 31,2006, as compared to $1.7 million for the first quarter ended March 31,2005. This was due in part to a reduction in wafer research and developmentcosts of $0.2 million that are now supporting equipment development. Inaddition, reduced payroll and payroll related expenses of $0.1 million  and the reduction of repair andmaintenance  costs of $0.1 millioncontributed to these results.

***Other Income (Expense)*****.**Total other income for the first quarterended March 31, 2006 was $0.1 million as compared to $0.1 million for thefirst quarter ended March 31, 2005, or no net change. The increase ininterest income the quarter ended March 31, 2006 was due to the increasein interest rates.

#### **Liquidityand Capital Resources**

As of March 31,2006, Ibis had cash and cash equivalents of $5.1 million, including the downpayment of $2.5 million for the second i2000 SIMOX implanter order receivedfrom SUMCO in the fourth quarter of 2005. Subsequent to the end of the quarterthe Company received an additional $1.2 million associated with the finalcustomer acceptance of the SUMCO implanter shipped in June 2005, and anadditional $3.5 million associated with the recent factory acceptance andshipment of the second SUMCO i2000.

During the quarterended March 31, 2006, Ibis used $1.7 million of cash for operatingactivities of continuing operations as compared to $2.1 million in the quarterended March 31, 2005. To date, Ibis’ working capital requirements havebeen funded primarily through debt (capital leases) and equity financings. Theprincipal uses of cash during the quarter ended March 31, 2006 were tofund operations and additions to property and equipment which totaled $0.1million. At March 31, 2006, Ibis had commitments to purchase approximately$0.7 million in material to be used for the i2000 implanter currently underconstruction and general operating expenses. Our headcount for the year ended March 31,2006 was 46 employees.

The Company’smanagement believes that it will have sufficient cash resources including thecash on hand and the final payment upon customer acceptance of the second SUMCOunit at its plant in Japan, to support operations at current levels through atleast the next twelve months. This expectation however, is based on the Company’scurrent operating plan and general sales outlook, each of which may changerapidly. The Company intends to continue to invest in research and developmentand it’s manufacturing capabilities. Changes in technology or sales growthbeyond currently established capabilities may require further investment.Moreover, although Ibis is encouraged by the receipt of a second order fromSUMCO for an i2000 implanter and the opportunity to work with leading wafermanufacturers like SUMCO to develop further both the i2000 implanter and toimprove the SIMOX process, SOI technology is still in an early stage. Furtheradoption of the technology and timing of future equipment orders are dependenton the continuing qualification of implanters and improvement programs at thedevice manufacturers, among other factors. Revenue recognition and receipt ofthe final 15% of the purchase price of the second SUMCO implanter will be basedon final customer acceptance at the customer’s facility, which is expected tooccur in the third quarter of this year. The timing of final acceptance andrevenue recognition may vary depending on a number of additional factors, whichinclude among other things tool performance at the customer site, and noguarantees can be given with respect to whether or when the Company willrecognize revenue on this transaction The timing of future orders is importantbut 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

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quarter-by-quarter basisremains exceedingly difficult and significant variations quarter to quarter,are likely. Further,because some of the materials and components the Company uses to build itsimplanter have long lead times, the Company may purchase some or all of theselong lead time items prior to receipt of an order by its customers. When thisis the case, those parts and materials bare the risk of being subject to excessand obsolescence. The Company expects to continue to explore equityofferings and other forms of financing and anticipates that we may be requiredto raise additional capital in the future in order to finance future growth andour research and development programs. There can be no assurance, however, thatour actual needs will not exceed expectations or that we will be able to fundour operations on a long-term basis in the absence of other sources. There alsocan be no assurance that any additional required longer term financing will beavailable through additional bank borrowings, debt or equity offerings orotherwise, or that if such financing is available, that it will be available onterms acceptable to us.

**Business Risk Factors**

This Form 10-Qcontains express or implied forward-looking statements within the meaning ofthe “safe harbor” provisions of the Private Securities Litigation Reform Act of1995 that relate to future events or our future financial performance. In somecases, you can identify forward-looking statements by terminology, such as “may,”“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”“project,” “predict,” “intend,” “potential” or “continue” or the negative ofsuch terms or other comparable terminology, although not all forward-lookingstatements contain such terms. In addition, these forward-looking statementsinclude, but are not limited to, statements regarding, among other things: (i) theon-site acceptance of the second i2000 implanter ordered by SUMCO, (ii) attainingimplanter improvements to the degree and in the timeframe necessary to meetSUMCO’s expectations, (iii)  the timing and likelihood of revenuerecognition on, andpayment for SUMCO’s second order, (iv) the timing ofSUMCO’s ramping to production quantities on the i2000 implanter and thesustained production worthiness of the i2000 implanter, (v) the relianceon a small number of large customers, interest in and demand for, and market acceptance of,the Company’s SIMOX-SOI technology including the Company’s implanters, (vi) theinvolvement generally of the silicon wafer manufacturing industry in the SOIwafer market and the ability of the wafer manufacturer’s to producesufficiently low cost SIMOX-SOI wafers utilizing both our SIMOX equipment andtechnology, as well as other equipment manufacturer’s tools, (vii) the Company’sability to conduct its operations in a manner consistent with its current planand existing capital resources or otherwise to obtain additional implanterorders or to secure financing to continue as a going concern, (viii) thetiming and likelihood of revenue recognition on orders for the Company’simplanters, (ix) the timing and impact of the Company’s decision todiscontinue its wafer manufacturing and sales operation, (x) the Company’s belief that wafermanufacturers will become the primary suppliers of SIMOX-SOI wafers to thechipmaking industry, (xi) the throughput and production capacity of the i2000implanter for manufacturing 300-mm SIMOX-SOI wafers, attaining implanterimprovements to the degree and in the timeframe necessary to meet customerexpectations, and the ability of the i2000 implanter to achieve acceptableproduction yields, (xii) the Company’s plan to focus on supplying implanters towafer manufacturers, (xiii) the Company’s expectations regarding future ordersfor i2000 implanters, and (xiv) the Company’s expectation of having sufficientcash for operations. Such statements are neither promises nor guarantees butrather are subject to risks and uncertainties, which could cause actual resultsto differ materially from those described in the forward-looking statements.Such risks and uncertainties include, but are not limited to: future continuedmigration to SOI technology and market acceptance of SIMOX; the level of demandfor the Company’s products; the Company’s ability to pursue and maintainfurther strategic relationships, partnerships and alliances with third parties;the Company’s ability to protect its proprietary technology; the potentialtrends in the semiconductor industry generally; the ease with which the i2000can be installed and qualified in fabrication facilities; the likelihood thatimplanters, if ordered, will be qualified and accepted by customers withoutsubstantial delay, modification, or cancellation, in whole or in part; thelikelihood and timing of revenue recognition on such transactions; the impactof competitive products, technologies and pricing; the impact of rapidlychanging technology; the possibility of further asset impairment and resultingcharges; 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 inthe Company’s Securities

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and Exchange Commissionfilings from time to time, including but not limited to those set forth in theCompany’s annual report on Form 10-K for the year ended December 31,2005. All information set forth in this Form 10-Q is as of the dateof this Form 10-Q, and Ibis undertakes no duty to update thisinformation, unless required by law.

**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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**PART I — ITEM 3**

**QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The exposure ofmarket risk associated with risk-sensitive instruments is not material to theCompany, as the Company does not transact its sales denominated in other thanUnited States dollars, invests primarily in money market funds and short-termcommercial paper, holds its investments until maturity and has not entered intohedging transactions.

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**PART I — ITEM 4**

**CONTROLS AND PROCEDURES**

(a)          Evaluation of DisclosureControls and Procedures. As of March 31, 2006, the Company’s management,with the participation of its principal executive officer and principalfinancial officer, evaluated the effectiveness of the Company’s disclosurecontrols and procedures pursuant to Rule 13a-15(b) promulgatedunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Basedupon that evaluation, the Company’s Chief Executive Officer and Chief FinancialOfficer concluded that, as of March 31, 2006,  the Company’s disclosure controls and procedureswere effective in ensuring that material information required to be disclosedby the Company in the reports that it files or submits under the Exchange Actis recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms,including ensuring that such material information is accumulated andcommunicated to the Company’s management, including the Company’s ChiefExecutive Officer and the Company’s Chief Financial Officer, as appropriate toallow timely decisions regarding required disclosure.

(b)         Changes in InternalControls. There were no changes in our internal control over financialreporting, identified in connection with the evaluation of such internalcontrol that occurred during our last fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

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**PART II**

**OTHERINFORMATION**
| Item 1 — | Legal Proceedings |
|---------------|-------------------|

 

Five class actionsecurities lawsuits have been filed in the United States District Court in theDistrict of Massachusetts against Ibis and its President and CEO: MartinSmolowitz v. Ibis Technology Corporation., et al., Civ. No. 03-12613(RCL) (D. Mass.); Fred Den v. Ibis Technology Corporation., et al., Civ. No. 04-10060(RCL) (D. Mass.); Weinstein v. Ibis Technology Corporation., et al., Civ. No. 04-10088(RCL) (D. Mass.); George Harrison v. Ibis Technology Corporation., et al., Civ.No. 04-10286 (RCL) (D. Mass.); and Eleanor Pitzer v. Ibis TechnologyCorporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). On June 4,2004, the Court entered an order consolidating these actions under the captionIn re Ibis Technology Securities Litigation, C.A. 04-10446 RCL. On July 6,2004, a consolidated amended class action complaint was filed which alleges,among other things, that the Company violated federal securities laws byallegedly making misstatements to the investing public relating to demand forcertain Ibis products and intellectual property issues relating to the sale ofthe i2000 oxygen implanter. The plaintiffs are seeking unspecified damages. On August 5,2004, we filed a motion to dismiss the consolidated amended complaint on thegrounds, among others, that it failed to state a claim on which the reliefcould be granted. On September 25, 2005, the Magistrate Judge issued areport and recommendation recommending that our motion be granted in part anddenied in part. We and the plaintiffs have both filed partial objections to thereport and recommendation with Court. On March 31, 2006, the court adoptedthe Magistrate Judge’s report and recommendation, and thus granted in part anddenied in part our motion to dismiss the plaintiffs’ claims. While we believethat the plaintiffs’ allegations are without merit, and we intend to vigorouslydefend against the suits, there can be no guarantee as to how they ultimatelywill be resolved.

In addition, Ibishas been named as a nominal defendant in a shareholder derivative action filedin February 2004 against certain of its directors and officers: Louis F.Matheson, Jr. v. Martin J. Reid et al., Civ. Act. No. 04-10341(RCL). The complaint alleges, among other things, that the alleged conductchallenged in the securities cases pending against Ibis in Massachusetts(described above) constitutes a breach of the defendants’ fiduciary duties toIbis. The complaint seeks unspecified money damages and other relief ostensiblyon behalf of Ibis. On June 4, 2004, the Court entered an order stayingthis matter pending the entry of a final order on any motion filed by theCompany to dismiss the consolidated class action complaint referenced above.

Litigation may betime-consuming, expensive and disruptive to normal business operations, and theoutcome of litigation is difficult to predict. An unfavorable resolution ofthese litigation matters could have a material adverse effect on our business,results of operations and financial condition.
| Item 1A. | Risk Factors |
|----------|--------------|

 

For information regarding risk factors, please referto Item 1A in the Company’s  AnnualReport on Form 10-K for the year ended December 31, 2005.
| Item 2 —  | Unregistered Sales of Equity Securities and use of  Proceeds |
|---------------------|--------------------------------------------------------------|
|                | None                                                         |
|                |                                                         |
| Item 3 —       | Defaults upon Senior Securities                              |
|                | None                                                         |
|                |                                                         |
| Item 4 —       | Submission of Matters to a Vote of Security Holders          |
|                |                                                         |
|                | None                                                         |
|                |                                                         |
| Item 5 —       | Other Information                                            |
|                |                                                         |
|                | None                                                         |

 

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| ** **    | **OTHER INFORMATION** |
|---------------|-----------------------|
| ** **    |                  |
| Item 6 — | Exhibits              |
|          |                  |
|          | (a)                   | Exhibits furnished as Exhibits hereto: |
|          |                  |   |
| ** **    | ** **            | **Exhibit No.** | ** ** | **Description** |
|          |                  | 31.1 |   | Certification of Martin J. Reid pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
|          |                  |   |   |   |
|          |                  | 31.2 |   | Certification of William J. Schmidt pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
|          |                  |   |   |   |
|          |                  | 32.1 |   | Certification pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

Pursuant to 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: May 15, 2006 | By:                    | /s/William J.  Schmidt                       |   |
|                    |                        | William J. Schmidt                           |   |
|                    |                        | Chief Financial Officer, Treasurer and Clerk |   |
|                    |                        | (principal financial and accounting officer) |   |
|                    |                        |                                         |   |
|                    |                        |                                         |   |
| Date: May 15, 2006 | By:                         | /s/Martin J.  Reid                           |   |
|                    |                        | Martin J. Reid                               |   |
|                    |                        | President and Chief Executive Officer        |   |

 

 

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