**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**Form 10-Q**

 

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

 

**For the Quarterly Period Ended March 31,2008**

** **

**Or**

** **

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

** **

**For the transition period from                         to                         **

 

**Commission file number 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  o                   No  x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer x                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

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

 

Yes  o                   No  x

 

14,317,482 shares ofCommon Stock, par value $.008, were outstanding on July 8, 2008.

 

 

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**IBIS TECHNOLOGY CORPORATION**

 

**INDEX**

 
| ** **                                                                                                 | **Page**   |
|------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                 | **Number** |
| PART I - FINANCIAL  INFORMATION                                                                       |       |
|                                                                                                       |       |
| Item  1 – Financial Statements:                                                                       |       |
| ** **                                                                                                 | ** ** |
| Balance Sheets  December 31, 2007 and March 31, 2008 (unaudited)                                 | 3          |
|                                                                                                       |       |
| Statements of  Operations Three Months Ended March 31, 2007 and 2008 (unaudited)                      | 4          |
|                                                                                                       |       |
| Statements of  Cash Flows Three months Ended March 31, 2007 and 2008 (unaudited)                      | 5          |
|                                                                                                       |       |
| Notes to Unaudited Interim Financial Statements                                                            | 6          |
|                                                                                                       |       |
| Item 2 –  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 18         |
|                                                                                                       |       |
| Item 3 –  Quantitative and Qualitative Disclosure About Market Risk                                   | 26         |
|                                                                                                       |       |
| Item 4 –  Controls and Procedures                                                                     | 27         |
|                                                                                                       |       |
| PART II –  OTHER INFORMATION                                                                     |       |
|                                                                                                       |       |
| Item  1 - Legal Proceedings                                                                                | 28         |
|                                                                                                       |       |
| Item  1A – Risk Factors                                                                               | 28         |
|                                                                                                       |       |
| Item 2 – Unregistered Sales of  Equity Securities and Use of Proceeds                            | 29         |
|                                                                                                       |       |
| Item 3 - Defaults upon Senior Securities                                                                   | 29         |
|                                                                                                       |       |
| Item 4 – Submission of Matters to a Vote of Security  Holders                                         | 29         |
|                                                                                                       |       |
| Item  5 - Other Information                                                                                | 29         |
|                                                                                                       |       |
| Item 6 –  Exhibits                                                                                    | 29         |
|                                                                                                       |       |
| Signatures                                                                                                 | 30         |

 

2

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** **

**IBIS TECHNOLOGY CORPORATION**

** **

**BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                    | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **2007**              | ** ** | **2008**           | ** ** |
|                                                                                                                                                                                          |       |                  |       |               |       |
| **Assets**                                                                                                                                                                                    |       |                  |       |               |       |
| **Current  Assets:**                                                                                                                                                                          |       |                  |       |               |       |
| Cash and cash  equivalents                                                                                                                                                                    |       | $                     | 5,770,072  |               | $          | 4,970,979 |   |
| Accounts  receivable, trade, net                                                                                                                                                              |       | 308,768               |       | 314,956            |       |
| Inventories, net  (note 4)                                                                                                                                                                    |       | 1,790,394             |       | 1,790,242          |       |
| Prepaid expenses  and other current assets                                                                                                                                                    |       | 165,925               |       | 205,290            |       |
| Total current  assets                                                                                                                                                                         |       | 8,035,159             |       | 7,281,467          |       |
| Property and  equipment                                                                                                                                                                       |       | 19,598,897            |       | 19,598,897         |       |
| Less:  Accumulated depreciation and amortization                                                                                                                                              |       | (18,026,667           | )          | (18,180,745        | )          |
| Net property and  equipment                                                                                                                                                                   |       | 1,572,230             |       | 1,418,152          |       |
| Patents and  other assets, net                                                                                                                                                                |       | 155,444               |       | 148,650            |       |
| Total assets                                                                                                                                                                                  |       | $                     | 9,762,833  |               | $          | 8,848,269 |   |
|                                                                                                                                                                                          |       |                  |       |               |       |
| **Liabilities  and Stockholders’ Equity:**                                                                                                                                               |       |                  |       |               |       |
| **Current  Liabilities:**                                                                                                                                                                     |       |                  |       |               |       |
| Accounts payable                                                                                                                                                                              |       | $                     | 260,372    |               | $          | 251,751 |   |
| Accrued  liabilities (note 5)                                                                                                                                                                 |       | 471,219               |       | 431,035            |       |
| Total current  liabilities                                                                                                                                                                    |       | 731,591               |       | 682,786            |       |
|                                                                                                                                                                                          |       |                  |       |               |       |
| **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  14,317,482 shares and 14,317,482 shares at December 31, 2007 and  March 31, 2008, respectively |       | 114,540               |       | 114,540            |       |
| Additional  paid-in capital                                                                                                                                                                   |       | 99,087,089            |       | 99,173,739         |       |
| Accumulated  deficit                                                                                                                                                                          |       | (90,170,387           | )          | (91,122,796        | )          |
| Total  stockholders’ equity                                                                                                                                                              |       | 9,031,242             |       | 8,165,483          |       |
| Total  liabilities and stockholders’ equity                                                                                                                                              |       | $                     | 9,762,833  |               | $          | 8,848,269 |   |

 

See accompanyingnotes to unaudited interim financial statements.

 

3

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**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTS OF OPERATIONS**

**(Unaudited)**

** **
| ** **                                                                                                                                                              | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                                                                              | ** ** | **2007**                         | ** ** | **2008** | ** ** |
| **Net  Sales and revenue:**                                                                                                                                             |       |                             |       |   |   |
| License and  other revenue                                                                                                                                              |       | $                                | 84,144     |   | $ | 62,908 |   |
| Equipment  revenue                                                                                                                                                      |       | 245,919                          |       | 268,106 |   |
| Total net sales  and revenue (notes 2 and 7)                                                                                                                            |       | 330,063                          |       | 331,014 |   |
|                                                                                                                                                                    |       |                             |       |   |   |
| **Cost of  sales and revenue:**                                                                                                                                         |       |                             |       |   |   |
| Cost of license  and other revenue                                                                                                                                      |       | —                           |       | — |   |
| Cost of  equipment revenue (includes share-based compensation expense of $7,444 and  $5,225 for the three months ended March 31, 2007, and 2008,  respectively)    |       | 115,838                          |       | 298,057 |   |
| Total cost of  sales and revenue                                                                                                                                        |       | 115,838                          |       | 298,057 |   |
| Gross profit                                                                                                                                                            |       | 214,225                          |       | 32,957 |   |
|                                                                                                                                                                    |       |                             |       |   |   |
| **Operating  expenses:**                                                                                                                                                |       |                             |       |   |   |
| General and  administrative (includes share-based compensation expense of $62,294 and  $39,144 for the three months ended March 31, 2007, and 2008,  respectively) |       | 561,736                          |       | 529,273 |   |
| Marketing and  selling (includes share-based compensation expense of $15,861 and $10,562 for  the three months ended March 31, 2007, and 2008, respectively)       |       | 220,487                          |       | 88,249 |   |
| Research and  development (includes share-based compensation expense of $43,655 and $31,719  for the three months ended March 31, 2007, and 2008, respectively)    |       | 1,064,362                        |       | 648,041 |   |
| Total operating  expenses                                                                                                                                               |       | 1,846,585                        |       | 1,265,563 |   |
|                                                                                                                                                                    |       |                             |       |   |   |
| Loss from  operations                                                                                                                                                   |       | (1,632,360                       | )          | (1,232,606 | ) |
|                                                                                                                                                                    |       |                             |       |   |   |
| **Other  income:**                                                                                                                                                      |       |                             |       |   |   |
| Interest income                                                                                                                                                         |       | 56,890                           |       | 55,085 |   |
| Other income                                                                                                                                                            |       | 105,712                          |       | 225,112 |   |
| Total other  income                                                                                                                                                     |       | 162,602                          |       | 280,197 |   |
|                                                                                                                                                                    |       |                             |       |   |   |
| Loss before  income taxes                                                                                                                                               |       | (1,469,758                       | )          | (952,409 | ) |
|                                                                                                                                                                    |       |                             |       |   |   |
| Income tax  expense                                                                                                                                                     |       | —                           |       | — |   |
|                                                                                                                                                                    |       |                             |       |   |   |
| Net loss                                                                                                                                                                |       | $                                | (1,469,758 | ) | $ | (952,409 | ) |
|                                                                                                                                                                    |       |                             |       |   |   |
| Earnings (loss)  per share:                                                                                                                                             |       |                             |       |   |   |
| Basic                                                                                                                                                                   |       | $                                | (0.13      | ) | $ | (0.07 | ) |
| Diluted                                                                                                                                                                 |       | $                                | (0.13      | ) | $ | (0.07 | ) |
|                                                                                                                                                                    |       |                             |       |   |   |
| Weighted average  common shares outstanding                                                                                                                             |       |                             |       |   |   |
| Basic                                                                                                                                                                   |       | 11,537,703                       |       | 14,317,482 |   |
| Diluted (note 6)                                                                                                                                                        |       | 11,537,703                       |       | 14,317,482 |   |

 

See accompanying notes to unaudited interim financial statements.

 

4

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**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTS OF CASH FLOWS**

**(Unaudited)**

** **
| ** **                                                                  | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **March 31,**               | ** ** |
| ** **                                                                  | ** ** | **2007**                         | ** ** | **2008** | ** ** |
|                                                                        |       |                             |       |   |   |
| **Cash  flows from operating activities:**                                  |       |                             |       |   |   |
|                                                                        |       |                             |       |   |   |
| Net loss                                                                    |       | $                                | (1,469,758 | ) | $ | (952,409 | ) |
| Adjustment to  reconcile net loss to net cash used in operating activities: |       |                             |       |   |   |
| Share-based  compensation expense                                           |       | 129,254                          |       | 86,650 |   |
| Depreciation and  amortization                                              |       | 388,709                          |       | 173,077 |   |
| Changes in  operating assets and liabilities:                               |       |                             |       |   |   |
| Accounts  receivable, trade                                                 |       | 104,315                          |       | (6,188 | ) |
| Inventories                                                                 |       | 46,353                           |       | 152 |   |
| Prepaid expenses  and other current assets                                  |       | (66,285                          | )          | (39,365 | ) |
| Accounts payable                                                            |       | (34,724                          | )          | (8,621 | ) |
| Accrued  liabilities                                                        |       | (284,968                         | )          | (40,184 | ) |
|                                                                        |       |                             |       |   |   |
| Net cash used in  operating activities                                      |       | (1,187,104                       | )          | (786,888 | ) |
|                                                                        |       |                             |       |   |   |
| **Cash  flows from investing activities:**                                  |       |                             |       |   |   |
| Other assets                                                                |       | —                           |       | (12,205 | ) |
|                                                                        |       |                             |       |   |   |
| Net cash used in  investing activities                                      |       | —                           |       | (12,205 | ) |
|                                                                        |       |                             |       |   |   |
| **Cash  flows from financing activities:**                                  |       |                             |       |   |   |
| Proceeds from  sales of common stock, net of issuance cost                  |       | 1,986,302                        |       | — |   |
|                                                                        |       |                             |       |   |   |
| Net cash  provided by financing activities                                  |       | 1,986,302                        |       | — |   |
|                                                                        |       |                             |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                       |       | 799,198                          |       | (799,093 | ) |
|                                                                        |       |                             |       |   |   |
| Cash and cash  equivalents, beginning of period                             |       | 4,812,477                        |       | 5,770,072 |   |
|                                                                        |       |                             |       |   |   |
| Cash and cash  equivalents, end of period                                   |       | $                                | 5,611,675  |   | $ | 4,970,979 |   |

 

See accompanyingnotes to unaudited interim financial statements.

 

5

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTES TO UNAUDITED INTERIM FINANCIALSTATEMENTS**

 

**(1) InterimFinancial Statements**

 

The accompanying financial statements are unaudited and have beenprepared by Ibis Technology Corporation (the “Company” or “Ibis”) in accordancewith U.S. generally accepted accounting principles for interim financialinformation and in accordance with the instructions to Form 10-Q and Article 10of Regulation S-X. Accordingly, they do not include all of the information andfootnotes required by U.S. generally accepted accounting principles forcomplete financial statements.

 

In the opinion of management, the interim financial statements includeall adjustments, which consist only of normal and recurring adjustments,necessary for a fair presentation of the Company’s financial position andresults of operations. Results of operations for the interim periods are notnecessarily indicative of the results to be expected for the full year. Thesefinancial statements should be read in conjunction with the financialstatements of the Company as of and for the year ended December 31, 2007,which are included in the Company’s Annual Report on Form 10-K as filed onMay 28, 2008.

 

**(2) Summaryof Significant Accounting Policies**

 

*(a)**      **Revenue Recognition*

 

The Company recognizes revenue from equipment sales and the sales ofspare 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 thecustomer has been fixed or is determinable; and (4) collectibility of thesales price is reasonably assured. The Company recognizes revenue fromimplanter sales upon acceptance at the customer’s site. Revenue derived fromcontracts and services is recognized upon performance. Provisions foranticipated losses are made in the period in which such losses becomedeterminable.

 

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

 

The Company policy forthe valuation of inventory, including the determination of obsolete or excessinventory, requires us to forecast the future demand for our products withinspecific time horizons, generally twelve months or less. If the Company forecasteddemand for specific products is greater than actual demand and we fail toreduce manufacturing output accordingly, we could be required to recordadditional inventory reserves, which would have a negative impact on theCompany gross margin. The Company has reserved for obsolescence whenengineering changes or other technological advances indicate that obsolescencehas occurred.

 

*(c) Share-BasedCompensation*

 

The Company adopted Statement of FinancialAccounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS123(R)”) which requires the measurement and recognition of compensation expensefor all share-based payment awards made to employees and directors includingemployee stock options, employee stock purchases related to the 2000 EmployeeStock Purchase Plan (“the ESPP”), restricted stock and other special equityawards based on grant date 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). In December 2007 the Securities and ExchangeCommission released SAB 110, which modifies SAB 107 to extend the use of the “simplifiedmethod” regarding the calculation and use of the expected term of share optionsutilized in SFAS 123(R) share based payments. The Company currentlyutilizes the simplified method in these calculations.

 

(d) Valuation of Long-Lived Assets

 

The Company reviews thevaluation of long-lived assets, including property and equipment and licenses,under the provisions of SFAS No. 144, “Accounting for Impairment orDisposal of Long-Lived Assets”. Management is required to assess the recoverability of its long-livedassets or asset groups whenever events and circumstances indicate 

 

6

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTES TO UNAUDITED INTERIMFINANCIAL STATEMENTS**

 

that the carrying value may not be recoverable. Inaccordance with SFAS No. 144, when the Company determines that thecarrying value of applicable long-lived assets may not be recoverable basedupon the existence of one or more of the above indicators of impairment, theCompany evaluates whether the carrying amount of the asset exceeds the sum ofthe undiscounted cash flows expected to result from the use and eventualdisposition of that asset or asset group. If such a circumstance exists, TheCompany would measure an impairment loss to the extent the carrying amount ofthe particular long-lived asset or group exceeds its fair value. The Companywould determine the fair value based on a projected discounted cash flow methodusing a discount rate determined by the Company’s management to be commensuratewith the risk inherent in the Company’s current business model.

 

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

 

In July 2006, the Financial Accounting Standards Board (FASB)issued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes – an interpretation of FASB Statement No. 109” (“FIN 48”), whichclarifies the accounting and disclosure for uncertainty in tax positions, asdefined.  FIN 48 seeks to reduce thediversity in practice associated with certain aspects of the recognition andmeasurement related to accounting for income taxes.  This interpretation is effective for fiscalyears beginning after December 15, 2006 and prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken, or expected to be taken, in a tax return,and provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosures and transition. As a result of theimplementation of FIN 48, the Company recorded no adjustment for unrecognizedincome tax benefits. At March 31, 2008, the Company had no unrecognizedtax benefits.  Ibis classifies anyinterest and penalties related to income taxes as components of income taxexpense.

 

The tax years 2000 to 2006 remain open to examination by the majortaxing jurisdictions to which the Company is subject. Preceding years alsoremain open to examination by U.S. federal and state revenue authorities to theextent of future utilization of net operating losses (NOLs) and research anddevelopment (R&D) tax credits generated in each preceding year.

 

As of December 31, 2007, the Company had federal and state NOLs ofapproximately $92.7 million and $58.0 million, respectively and federal andstate credit carryforwards of approximately $1.2 million and $1.2 million,respectively, which can be used to offset future federal and state income taxliabilities prior to expiration on various dates through 2027.

 

Utilizationof NOL and R&D credit carryforwards may be subject to a substantial annuallimitation due to ownership change limitations that have occurred previously orthat could occur in the future as provided by Section 382 of the InternalRevenue Code of 1986 and similar state provisions.  These ownership changes may limit the amountof NOL and R&D credit carryforwards that can be utilized annually to offsetfuture taxable income and tax.  Ingeneral, an ownership change, as defined in Section 382, results fromtransactions which increase the ownership of certain 5% or greater shareholdersor public groups in the stock of a corporation by more than 50 percentagepoints over a three-year period. Since the Company’s formation, the Company hasraised capital through the issuance of capital stock on several occasionswhich, combined with the purchasing shareholders’ subsequent disposition ofthose shares, may have resulted in a change of control, as defined in Section 382,or could result in a change of control in the future upon subsequentdisposition. The Company has not currently completed a study to assess whethera change of control has occurred or whether there have been multiple changes ofcontrol since the Company’s formation. If the Company has experienced a change of control at any time sinceformation, or if Ibis experiences a change of control in the future,utilization of the NOL and R&D credit carryforwards would be subject to anannual limitation under Section 382. Any limitation may result in expiration of all or a portion of the NOLor R&D credit carryforwards before utilization.  Until a study is completed and any limitationknown, no amounts are being presented as an uncertain tax position under FIN48.

 

*(f) New Accounting Pronouncements*

 

InSeptember 2006, the Financial Accounting Standards Board (FASB) issuedSFAS No. 157, *Fair Value Measurement*.SFAS No. 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles and establishes ahierarchy that categorizes and prioritizes the sources to be used to estimatefair value. SFAS No. 157 also expands financial statement disclosuresabout fair value measurements. On February 6, 

 

7

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTES TO UNAUDITED INTERIM FINANCIALSTATEMENTS**

 

2008,the FASB issued FASB Staff Position (FSP) 157-b, which delayed the effectivedate of SFAS No. 157 for one year for all nonfinancial assets andnonfinancial liabilities, except those that are recognized or disclosed at fairvalue in the financial statements on a recurring basis (at least annually).SFAS No. 157 and FSP 157-b are effective for financial statements issuedfor fiscal years beginning after November 15, 2007. The Company haselected a partial deferral of SFAS No. 157 under the provisions of FSP157-b related to the measurement of fair value used when evaluating goodwill,other intangible assets and other long-lived assets for impairment and valuingasset retirement obligations and liabilities for exit or disposal activities.At this time, we have adopted the FAS 157 as it relates to the Company’sfinancial assets and liabilities only. The impact of partially adopting SFAS No. 157effective January 1, 2008 was not material to our financial statements.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities—Including an Amendment of SFAS 115*, whichpermits companies to choose to measure many financial instruments and certainother items at fair value.  The objectiveof SFAS No. 159 is to improve financial reporting by providing companieswith the opportunity to mitigate volatility in reported earnings caused bymeasuring related assets and liabilities differently without having to applycomplex hedge accounting provisions. Unrealized gains and losses on items for which the fair value option hasbeen elected are reported in earnings. This statement is effective forfinancial statements issued for fiscal years beginning after November 15,2007. The Company adopted SFAS No. 159 on January 1, 2008 and did notelect the fair value option for any financial instruments under the provisionsof SFAS No. 159.

 

**(3) Liquidity**

 

The Company’s financialstatements for the fiscal year ended December 31, 2007 were preparedassuming the Company would continue as a going concern; however, the Company’srecurring losses and accumulated deficit raise substantial doubt about itsability to continue as a going concern. The Company’s ability to continue as agoing concern is an issue raised as a result of recurring losses fromoperations and net capital deficiency and is subject to the Company’s abilityto secure additional orders of the Company’s implanter equipment or, in thealternative, identify and consummate a strategic transaction, including thepotential a sale of the Company, or other strategic alternative.

 

As of March 31, 2008, the Company had cash and cash equivalents of$5.0 million, including the gross proceeds from the financing of $5.3 millionfrom the sale of 3.4 million shares of common stock and 2.5 million commonstock warrants in the year ended December 31, 2007.

 

During the three months ended March 31, 2008, the Company used$0.8 million of cash for operating activities as compared to $1.2 million inthe three months ended March 31, 2007. To date, the Company’s workingcapital requirements have been funded primarily through debt (capital leases)and equity financings, including the 2007 financing discussed below. Theprincipal uses of cash during the three months ended March 31, 2008, wereto fund operations. At March 31, 2008, the Company had commitments topurchase approximately $0.1 million in material. Headcount for the quarter endedMarch 31, 2008 was 20 employees.

 

Cash flow projectionsdeveloped by management indicate the Company believes it will have sufficientcash resources to support current operations through June 2009. However,since the Company began selling implanters in 1996, the Company has only sold atotal of eight Ibis 1000 oxygen implanters at an average sale price ofapproximately $4.0 million each and four i2000 oxygen implanters at a sellingprice between $6.0 and $8.0 million.  Themost recent order received was in October 2005, for which the Companyrecognized revenue in the quarter ended September 30, 2006. The Companydid not record implanter revenue during 2007 and, as of June 2008, doesnot have an order for an implanter. At present time, only one of the four majorwafer manufacturers are counted as a current prospective customer. The Companycurrently does not have a backlog for implanters, nor does it have visibilityto the timing of the next order from any customer. The Company’s failure toobtain any orders for implanters in the foreseeable future, notwithstandingmanagement’s belief that the Company has sufficient cash for the 2008 fiscalyear, or to obtain other sources of offsetting revenue, will have a materialadverse impact on the Company’s business and hinder its ability to continue asa going concern. The Company’s continuing inability to generate revenue likelywill result in the inability 

 

8

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTESTO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

to continue to invest inresearch development and manufacturing capabilities, hinder the ability topursue and maintain relationships, partnerships and alliances with thirdparties, result in a loss of key personnel by way of workforce reduction or byvoluntary termination of employment, limit its ability to secure financing onacceptable terms, if at all, and create greater volatility in the trading ofthe Company’s common stock.

 

In January 2007, theCompany announced that to conserve cash it was reducing its operating expensesby approximately 40% which involved cost cutting measures consisting ofheadcount reductions, consulting at a neighboring business for a minimumof six months under a staffing services agreement, salary reductions and reducing consumable expenses. On February 16,2007, the Company entered into a purchase agreement pursuant to which it agreedto sell unregistered shares of its common stock and warrants exercisable forcommon stock to Special Situation Funds for an aggregate purchase price of $5.3million in a two-tranche financing. The first closing, at which the Companyreceived approximately $2.2 million in proceeds, occurred on February 20,2007. Pursuant to stockholder approval, received at the Company Annual Meetingon May 10, 2007, the Company sold the remainder of the securities at asecond closing, at which the Company received approximately $3.1 million inproceeds. In connection with the transaction, the Company also entered into aregistration rights agreement with the investors. The Company paid a placementfee to a placement agent, of approximately $0.3 million, which represents acash fee equal to 5% of the gross proceeds and warrants exercisable for commonstock with a dollar value equal to 5% of the aggregate gross proceeds receivedby the company in both closings of the financing. The Company also issued tothe placement agent an aggregate of 179,619 warrants, exercisable for commonstock, with a dollar value equal to 5% of the aggregate gross proceeds. Totaltransaction costs associated with the financing were approximately $0.4million, providing net cash to the Company of $4.9 million.****Allof the securities were sold in a private placement pursuant to Regulation D ofthe Securities Act.

 

On December 10, 2007, the Company received a letter from theNasdaq Stock Market advising that for the previous 30 consecutive businessdays, the bid price of the Company’s common stock (the “Common Stock”) hadclosed below the minimum $1.00 per share requirement for continued inclusion onthe Nasdaq Global Market pursuant to Nasdaq Marketplace Rule 4450(a)(5).

 

Nasdaq stated in its letter that in accordance with Nasdaq Marketplace Rule 4450(e)(2),the Company will be provided 180 calendar days, or until June 9, 2008, toregain compliance with the minimum bid price requirement. The bid price of theCommon Stock must close at $1.00 per share or more for a minimum of 10consecutive business days to achieve compliance.

 

If the Company did notregain compliance with the minimum bid price requirement by June 9, 2008,the Nasdaq staff would provide the Company with written notification that theCommon Stock would be delisted from the Nasdaq Global Market. At that time, theCompany may appeal the delisting determination to a Nasdaq ListingsQualifications Panel pursuant to applicable Nasdaq rules. Alternatively, NasdaqMarketplace Rule 4450(i) may permit the Company to transfer theCommon Stock to the Nasdaq Capital Market if the Common Stock satisfies allcriteria, other than compliance with the minimum bid price requirement, forinitial inclusion on such market.

 

OnJune 5, 2008, the Company participated in a hearing of the Nasdaq ListingQualifications Panel (the “Panel”) to address the delayed filing of the Company’sForm 10-K and the Form 10-Q, as well as additional complianceconcerns.  The Panel is currentlyconsidering the Company’s request for continued listing.

 

In February 2008, the Company announcedthe engagement of the investment bankBlueLake Partners, LLC for the purpose of assessing strategic alternatives forIbis, including a potential sale of the Company and/or its assets. The Companycan give no assurance that it will identify an alternative that allowsstockholders to realize an increase in the value of the Company’s stock. Therecan also be no assurance that a transaction or other strategic alternative,once identified, evaluated and consummated, will provide greater value to thestockholders than that reflected in the current stock price. In fact, if the Companyis unable to recognize revenue through the sale of its products pursuant to thecurrent operating plan, and if a viable strategic alternative is notidentified, the Company may be unable to continue as a going concern. Further,in pursuit of the highest value for shareholders, the Board of Directors mayalso consider alternatives that include a liquidation of assets and theresulting cash distribution per share 

 

9

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTES TO UNAUDITED INTERIM FINANCIALSTATEMENTS**

 

after payment of outstanding liabilities. In such case, any per-sharecash liquidation distribution could be less than the purchase price per sharethat stockholders may have paid for the Company’s securities.

 

TheCompany received a letter from the Nasdaq Stock Market dated April 16,2008 advising that Nasdaq had not received the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007, as required by NasdaqMarketplace Rule 4310(c)(14).  The Companyreceived an additional letter from Nasdaq dated May 19, 2008 informing theCompany that Nasdaq had not received the Company’s Quarterly Report on Form 10-Qfor the quarter ended March 31, 2008, as required by Nasdaq Marketplace Rule 4310(c)(14).  On May 28, 2008, the Company filed its Form 10-Kfor the year ended December 31, 2007 and, on June 2, 2008, filedAmendment No. 1 to correct certain inadvertent omissions.  The Company believes, that as a result of thefiling of this Form 10-Q, the Company is in compliance with Marketplace Rule 4310(c)(14).** **There can be noassurance that the Panel will grant the Company’s request for continuedlisting.

 

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

 

Inventoriesconsist of the following:

 
| ** **                 | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2007**              | ** ** | **2008**           | ** ** |
| ** **                 | ** ** | ** **            | ** ** | ** **         | ** ** |
| Raw  materials             |       | $                     | 328,802    |               | $          | 328,650 |   |
| Work  in process           |       | 1,461,592             |       | 1,461,592          |       |
| Total  equipment inventory |       | $                     | 1,790,394  |               | $          | 1,790,242 |   |

 

(5) Accrued Liabilities

 

Currentaccrued liabilities were as follows:

 
| ** **                 | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2007**              | ** ** | **2008**           | ** ** |
| ** **                 | ** ** | ** **            | ** ** | ** **         | ** ** |
| Accrued  vacation          |       | $                     | 129,903    |               | $          | 158,700 |   |
| Accrued  payroll           |       | 39,401                |       | 72,236             |       |
| Accrued  expenses          |       | 301,915               |       | 200,099            |       |
| Total  accrued liabilities |       | $                     | 471,219    |               | $          | 431,035 |   |

 

(6) Net Income (Loss) Per Share

 

Netloss for the quarter ended March 31, 2008 of $1.0 million or a loss of$0.07 per share, included share-based compensation expense under SFAS 123(R),of $0.1 million or $0.01 per share related to employee stock options, andemployee stock purchases. Net loss for the quarter ended March 31, 2007 of$1.5 million or $0.13 per share, included share-based compensation expenseunder SFAS 123(R) of $0.1 million or $0.01 per share, related to employeestock options, and employee stock purchases.

 

10

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTESTO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

Net income (loss) per shareof common stock is computed based upon the weighted average number of sharesoutstanding during each period and including the dilutive effect, if any, ofstock options and warrants. Statementof Financial Accounting Standards No. 128, “Earnings per Share,” (“SFAS128”) requires the presentation of basic and diluted earnings (loss) per sharefor all periods presented. As the Company was in a net loss position for thethree months ended March 31, 2007 and 2008, common stock equivalents of8,416 and common stock warrants of 2,713,400 respectively, were excluded fromthe diluted loss per share calculation, as they would be antidilutive. As aresult, diluted loss per share is the same as basic loss per share for theperiod presented.

 

**(7) IndustrySegments**

 

The Company’s current reportable segments are SIMOX Equipment and OtherProducts or Services. For purposes of segment reporting, equipment, equipmentspares and field service revenue are combined and reported as SIMOX Equipment.Other services and license revenue are combined and reported as Other Productsor Services.

 

11

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTESTO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

The table below providesunaudited information for the three months ended March 31, 2007 and 2008pertaining to the Company’s two industry segments.

 
| ** **                                                   | ** ** | **SIMOX**     | ** ** | **Other Products** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|---------------|------------|-------------------------|------------|------------|------------|
| ** **                                                   | ** ** | **Equipment** | ** ** | **Or Services**    | ** ** | **Total**  | ** ** |
| **Net Revenue**                                              |       |          |       |                    |       |       |       |
| Three  Months Ended March 31, 2007                      |       | $             | 245,919    |                    | $          | 84,144     |       | $ | 330,063 |   |
| Three  Months Ended March 31, 2008                      |       | $             | 268,106    |                    | $          | 62,908     |       | $ | 331,014 |   |
|                                                         |       |          |       |                    |       |       |       |
| **Operating Income (Loss)**                                  |       |          |       |                    |       |       |       |
| Three  Months Ended March 31, 2007                      |       | (1,154,768    | )          | 84,144                  |       | (1,070,624 | )          |
| Three  Months Ended March 31, 2008                      |       | (766,241      | )          | 62,908                  |       | (703,333   | )          |
|                                                         |       |          |       |                    |       |       |       |
| **Assets**                                                   |       |          |       |                    |       |       |       |
| March 31,  2008                                         |       | 3,606,762     |       | 125,817                 |       | 3,732,579  |       |
|                                                         |       |          |       |                    |       |       |       |
| **Capital Expenditures**                                     |       |          |       |                    |       |       |       |
| Three  Months Ended March 31, 2007                      |       | —        |       | —                  |       | —     |       |
| Three  Months Ended March 31, 2008                      |       | —        |       | —                  |       | —     |       |
| ** **                                                   | ** ** | ** **    | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Depreciation and Amortization of Property and  Equipment** | ** ** | ** **    | ** ** | ** **              | ** ** | ** ** | ** ** |
| Three  Months Ended March 31, 2007                      |       | 368,755       |       | —                  |       | 368,755    |       |
| Three  Months Ended March 31, 2008                      |       | 153,586       |       | —                  |       | 153,586    |       |

 

12

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTESTO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

Thetable below provides the reconciliation of reportable segment operating lossand assets to Ibis’ totals.

 
| ** **                                                   | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **March 31,**               | ** ** |
| ** **                                                   | ** ** | **2007**                         | ** ** | **2008** | ** ** |
| **Segment Reconciliation**                              |       |                             |       |   |   |
| ** **                                                   |       |                             |       |   |   |
| Net  Income (Loss):                                          |       |                             |       |   |   |
| Total  operating loss for reportable segments                |       | $                                | (1,070,624 | ) | $ | (703,333 | ) |
| Corporate  general and administrative expenses               |       | (561,736                         | )          | (529,273 | ) |
| Net  other income                                            |       | 162,602                          |       | 280,197 |   |
| Income  tax expense                                          |       | $                                | —     |   | $ | — |   |
| Net  loss                                                    |       | $                                | (1,469,758 | ) | $ | (952,409 | ) |
|                                                         |       |                             |       |   |   |
| Depreciation  and Amortization:                              |       |                             |       |   |   |
| Total  depreciation and amortization for reportable segments |       | $                                | 368,755    |   | $ | 153,586 |   |
| Corporation  depreciation and amortization                   |       | 19,954                           |       | 19,491 |   |
| Total  depreciation and amortization                         |       | $                                | 388,709    |   | $ | 173,077 |   |

 
| ** **                                                  | ** ** | **March 31, 2008** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|
| Assets                                                      |       |                         |       |
| Total  assets for reportable segments                       |       | $                            | 3,732,579  |   |
| Cash &  cash equivalents not allocated to segments |       | 4,970,979                    |       |
| Other  unallocated assets                                   |       | 144,711                      |       |
| Total  assets                                               |       | $                            | 8,848,269  |   |

 

**(8) EmployeeStock Benefit Plans**

 

Net loss for the three months ended March 31, 2008 includedshare-based compensation expense under SFAS 123(R) of $0.1 million. Ofthis expense, fourteen percent came from options issued prior to December 31,2005 and are valued using the accrual method, which is consistent with priorperiods, while seventy eight percent came from options issued after January 1,2006 and are valued using the straight-line prorated method, which was adoptedin 2006 under the new guidance, and eight percent came from the employee stockpurchase plan valuation. Net income for the three months ended March 31,2007 included share-based compensation expense under SFAS 123(R) of $0.1million. Of this expense, twenty seven percent came from options issued priorto December 31, 2005 and are valued using the accrual method, which isconsistent with prior periods, while fifty eight percent came from optionsissued after January 1, 2006 and are valued using the straight-lineprorated method which was adopted in 2006 under the new guidance, and fifteenpercent came from the employee stock purchase plan valuation.

 

*EmployeeStock Purchase Plan*

 

The Company maintains an employee stock purchase plan where eligibleemployees may purchase common stock through payroll deduction of up to 15% ofcompensation with a limit of $21,250. The price per share is the lower of 85%of the market price at the beginning or end of each offering period (generally6 months). The 2000 Employee Stock Purchase Plan, as amended, provides forpurchases by employees of up to an aggregate of 600,000 shares 

 

13

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTESTO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

through May 31,2010. During the three months ended March 31, 2007 and March 31,2008, the Company issued no shares under the Purchase Plan. At March 31,2008, 146,038 shares were available for purchase under the Purchase Plan.

 

*EmployeeStock Option Plan*

 

The Company has share-based compensation plans under which employeesand directors may be granted options to purchase common stock. Options aregenerally granted with exercise prices at not less than the fair market valueon the grant date, generally vest over 4 years and expire in 10 years after thegrant date. As of March 31, 2008, a total of 4.7 million shares areauthorized for grant under the Company’s share-based compensation plans. Thenumber of common shares reserved for granting of future awards to employees anddirectors under these plans was 1.5 million at March 31, 2008. Theremaining unrecognized compensation expense on stock options at March 31,2008 was $0.4 million. The weighted average period over which the cost isexpected to be recognized is approximately 1 year.

 

As of March 31, 2008, the Company had four equity compensationplans under which our equity securities have been authorized for issuance toour employees and/or directors: the 2000 Employee Stock Purchase Plan, asamended (described above), the 1993 Employee, Director and Consultant StockOption Plan, as amended, (the 1993 Plan); the 1997 Employee, Directors andConsultant Stock Option Plan, as amended; and the 2007 Employee,Director and Consultant Equity Plan, (the 2007 Plan). The 1993 Plan has expiredand there are no options available for issuance; however, the 1993 Plancontinues to govern all options, awards and other grants granted andoutstanding under the 1993 Plan.

 

*Distributionand Dilutive Effect of Options*

 

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

** **
| ** **                          | ** ** | **Three months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 31,**               | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2008** | ** ** |
|                                |       |                             |       |   |   |
| Shares  of common stock outstanding |       | 12,315,481                       |       | 14,317,482 |   |
|                                |       |                             |       |   |   |
| Granted                             |       | 285,000                          |       | — |   |
| Canceled/forfeited                  |       | (50,520                          | )          | — |   |
| Expired                             |       | —                           |       | (93,707 | ) |
| Net  options granted                |       | 234,480                          |       | (93,707 | ) |
|                                |       |                             |       |   |   |
| Grant  dilution (1)                 |       | 1.9                              | %          | (0.7 | )% |
|                                |       |                             |       |   |   |
| Exercised                           |       | —                           |       | — |   |
| Exercised  dilution (2)             |       | 0.0                              | %          | 0.0 | % |

 

----

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

 

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

 

Basic and diluted shares outstanding for the three months ended March 31,2008were 14,317,482 shares. During the three months ending March 31, 2008, thedilutive effect of in-the-money employee stock options were zero shares basedon the Company’s average share price of $0.38.

 

14

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

A summary of stock option transactions follows:

 
| ** **                                     | ** ** | **Options Outstanding** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **Options Available**   | ** ** | ** ** | ** ** | **Weighted average** | ** ** |
| ** **                                     | ** ** | **for**                      | ** ** | ** ** | ** ** | **exercise price of** | ** ** |
| ** **                                     | ** ** | **Grant**                    | ** ** | **Shares** | ** ** | **shares under plan** | ** ** |
|                                           |       |                         |       |   |   |   |   |
| Balance  outstanding as December 31, 2006 |       | 440,926                      |       | 1,354,385 |   | $ | 9.59 |   |
| Granted                                        |       | (612,500                     | )          | 612,500 |   | 1.47 |   |
| Exercised                                      |       | —                       |       | — |   | — |   |
| Cancelled/forfeited                            |       | 614,985                      |       | (614,985 | ) | 6.43 |   |
| Expired                                        |       | (443,411                     | )          | — |   | — |   |
| Additional  shares reserved                    |       | 1,500,000                    |       | — |   | — |   |
| Balance  outstanding as December 31, 2007 |       | 1,500,000                    |       | 1,351,900 |   | $ | 7.35 |   |
| Granted                                        |       | —                       |       | — |   | — |   |
| Exercised                                      |       | —                       |       | — |   | — |   |
| Cancelled/forfeited                            |       | 93,707                       |       | (93,707 | ) | 7.68 |   |
| Expired                                        |       | (93,707                      | )          | — |   | — |   |
| Additional  shares reserved                    |       | —                       |       | — |   | — |   |
| Balance  outstanding as March 31, 2008    |       | 1,500,000                    |       | 1,258,193 |   | $ | 7.33 |   |

 

The following tablesummarizes information concerning outstanding and exercisable options as of March 31,2008:

 
| **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | ** **                   | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | ** **                   | ** ** | **Average** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                   | ** ** | ** **                   | ** ** | **remaining** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**            | ** ** | **Number**                   | ** ** | **contractural** | ** ** | **exercise price** | ** ** | **Aggregate** | ** ** | **Options** | ** ** | **exercise price** | ** ** |
| **exercise prices**     | ** ** | **outstanding**              | ** ** | **life (years)** | ** ** | **per shares** | ** ** | **Intrinsic Value** | ** ** | **Exercisable** | ** ** | **per shares** | ** ** |
| $.01 - 6.00                  |       |                         | 871,534    |   | 7.0 |   | $ | 2.52 |   | $ | 0 |   | 496,859 |   | $ | 2.99 |   |
| $6.01 - 9.00                 |       |                         | 122,886    |   | 4.6 |   | $ | 7.90 |   |   |   | 110,386 |   | $ | 7.90 |   |
| $9.01 - 13.50                |       |                         | 142,673    |   | 2.5 |   | $ | 10.61 |   |   |   | 142,673 |   | $ | 10.61 |   |
| $13.51 - 20.26               |       |                         | 27,700     |   | 2.6 |   | $ | 18.34 |   |   |   | 27,700 |   | $ | 18.34 |   |
| $20.27 - 30.37               |       |                         | 8,250      |   | 1.5 |   | $ | 23.35 |   |   |   | 8,250 |   | $ | 23.35 |   |
| $30.38 - 45.55               |       |                         | 11,250     |   | 2.0 |   | $ | 37.24 |   |   |   | 11,250 |   | $ | 37.24 |   |
| $45.56 - 68.32               |       |                         | 73,900     |   | 1.8 |   | $ | 46.25 |   |   |   | 73,900 |   | $ | 46.25 |   |
| $68.33 - 98.71               |       |                         | —     |   | 0.0 |   | $ | .00 |   |   |   | — |   | $ | .00 |   |
|                         |       | 1,258,193                    |       | 5.8 |   | $ | 7.33 |   | $ | 0 |   | 871,018 |   | $ | 9.65 |   |

 

The aggregate intrinsic value in the preceding table represents thetotal pretax intrinsic value, based on the Company’s closing stock price of$0.26 as of March 31, 2008, which would have been received by the optionholders had all option holders exercised their options as of that date. Sinceall options that were exercisable were at a price higher than this closingprice the intrinsic value is $0. The fair value of stock options exercisable atMarch 31, 2007 and March 31, 2008 was $5.1 million and $3.4 million,respectively. The total number of in-the-money options exercisable as of March 31,2008 was zero.

 

15

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTESTO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

*Valuationand Expense Information under SFAS 123(R)*

 

The following table summarizes share-based compensation expense relatedto employee stock options and employee stock purchases under SFAS123 (R) forthe three months ended March 31, 2007 and 2008 which was allocated asfollows:

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **March 31, 2007**     | ** ** | **March 31, 2008**     | ** ** |
|                                                            |       |                             |       |                             |       |
| Cost  of sales                                                  |       | $                                | 7,444      |                             | $          | 5,225 |   |
| General  and administration                                     |       | 62,294                           |       | 39,144                           |       |
| Marketing  and selling                                          |       | 15,861                           |       | 10,562                           |       |
| Research  and development                                       |       | 43,655                           |       | 31,719                           |       |
| Share  based compensation expense included in operation expense |       | $                                | 129,254    |                             | $          | 86,650 |   |

 

The Company did not recognize any taxbenefits on the share-based compensation recorded in the periods based on thecurrent tax status of the Company.

 

The weighted-average estimated fair value of employee stock optionsgranted during the three months ended March 31, 2007 was $1.11 per share,using the Black-Scholes option-pricing model with the followingweighted-average assumptions:

 
| ** **                                              | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **March 31, 2007**     | ** ** |
|                                                    |       |                             |       |
| Expected  Volatility                                    |       | 100.12                           | %          |
| Risk  Free Interest Rate                                |       | 4.78                             | %          |
| Dividend  yield                                         |       | 0.00                             |       |
| Expected  option life (10 year contractual life option) |       | 6.25                             |       |

 

The Company did not grant any stock options during the three monthsended March 31, 2008.

 

The expected life of employee stock options is the anticipated averagetime that an option will be outstanding. The Company chose to use thesimplified method provided under SAB107, as updated by SAB 110, to estimate theexpected term for “plain vanilla” stock options. The expected term ascalculated under the simplified method is 6.25 years.

 

The Company determined the expected volatility of the stock price byusing a period equal to the expected life of the stock options, 6.25 years.Volatility was measured as the standard deviation of the difference in thenatural logarithms of the stock over the expected life of the options using thedaily closing stock price. This resulted in the volatility of 100.12%, for thethree months ended March 31, 2007.

 

The risk-free interest rate assumption is based upon observed treasurybill interest rates (risk free) appropriate for the expected term of theCompany’s employee stock options.

 

As share-based compensation expense recognized in the Statement ofOperations for the three months ended March 31, 2007 and March 31,2008 is actually based on awards ultimately expected to vest, it has beenreduced for annualized estimated forfeitures of 14.18% and 33.26%,respectively. SFAS 123(R) requires forfeitures to be estimated at the timeof grant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. Forfeitures were estimated based on historicalexperience.

 

16

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTESTO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

**(9) Legal Proceedings**

 

OnApril 26, 2007, the United Stares District Court in the District ofMassachusetts approved a settlement agreement in the consolidated securitiesclass action captioned *In re Ibis TechnologySecurities Litigation*, Civil Action No. 04-10446 RCL (D.Mass.).  The Company and its Chairman ofthe Board, Martin J. Reid, and the plaintiffs reached an agreement in principleto settle the securities class action, which the Company announced on October 2,2006. Thereafter, the parties executed a formal settlement agreement andsubmitted it for Court approval.  Thesettlement provides for a payment to the plaintiffs of $1.9 million.  The Court’s April 26, 2007 Order,certified the proposed class for settlement purposes only, approved the parties’settlement agreement, and dismissed the securities class action with prejudiceand in its entirety. The settlement was funded entirely by the Company’sinsurance carrier and did not have a material adverse affect on our business,results of operations and financial condition.

 

On April 10, 2007, the Company announced that the shareholderderivative action filed in February 2004 against certain of the Company’sdirectors and officers: Louis F. Matheson, Jr. v. Martin J. Reid et al.,Civ. Act. No. 04-10341 (RCL) (D. Mass) has been voluntarily dismissed bythe plaintiff. The notice of dismissal filed by the plaintiff dismissed theaction with prejudice. As set forth in the notice, the plaintiff will receive a$55,000 payment following the dismissal in consideration of plaintiff’sanalysis of information provided by the Company regarding, among other things,the Company’s contention that the litigation should be dismissed for failure tomake a demand on the Board of Directors before filing suit as required byMassachusetts law. The payment will be funded entirely by the Company’sinsurance carrier.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**PART I - ITEM 2**

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF****FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

Ibis Technology Corporation (“Ibis”) was formed in October 1987and commenced operations in January 1988. Ibis’ initial activitiesconsisted of producing and selling SIMOX-SOI wafers and conducting research anddevelopment activities. This effort led to the development of proprietaryoxygen implanters, the Ibis 1000, which we began selling in 1996, the nextgeneration implanter, the i2000ä, which we began selling in 2002, andalso to other proprietary process technology.

 

Initially,much of our revenue was derived from research and development contracts andsales of wafers for military applications. Over the years, the Company decidedto focus its business operations and sales strategy on the manufacture and saleof our implanter equipment products and de-emphasized the sale of wafers giventhat, among other things, we believed that the wafer manufacturing companieswere in the best position to manufacture SIMOX-SOI wafers using our implanterequipment in light of their expertise and operating efficiencies. As weannounced on July 21, 2004, we exited the wafer manufacturing business.Wafer product sales, as well as wafer revenue reported in subsequent periods,are reported net of associated costs, as loss from discontinued operations orother income after 2005 on our income statement. The Company believes that itsdecision to discontinue the wafer business permits broader strategiccollaboration efforts between Ibis and the wafer manufacturers. We reach thisconclusion for a number of reasons. First, we believe that tremendous pricepressure exists on commodity type products, such as silicon wafers, and this pressureis already eroding future price expectations of SOI wafers. Because thestarting wafer represents a significant component of the SOI wafer cost, webelieve that silicon wafer manufacturers should have a natural cost structureadvantage leading to a higher gross margin in large volume production, andtherefore should be able to manage such price pressure better than stand-aloneSOI producers that do not also produce the silicon wafer itself. Second, weexpect that the price pressure will encourage silicon wafer manufacturers toseek out higher margin products, like SOI wafers, to increase their margins.Third, we believe that silicon wafer manufacturers have traditionally developedproprietary intellectual property in silicon materials science, which can beapplied to designing optimal starting wafers for SOI production. We believethat this should give them an advantage in both minimizing wafer cost andmaximizing SOI wafer quality and yield. Fourth, our experience suggests thatsilicon wafer manufacturers already have a well-developed infrastructure formanufacturing, sale and marketing of large volumes of substrates. Lastly, webelieve that there is greater efficiency in producing the SOI wafer as part ofthe wafer manufacturers existing product flow, specifically avoiding the needto repackage, re-clean, re-inspect and re-ship substrates twice, once asstarting silicon wafers, and a second time as SOI wafers. Therefore, as aresult of these trends, we expect our ultimate customers will be drawn from thesesilicon wafer manufacturers and we plan to focus a majority of our technicaland marketing resources on the sale of implanters to the leading silicon wafermanufacturers and our key customers in the semiconductor industry who webelieve are the leaders in the adoption of SOI technology. We expect thatimplanter sales to chipmakers should be minimal, and that these sales will befocused on SOI processes that the chipmaker wishes to keep proprietary, such asselective (or patterned) SIMOX, or other specialty substrates.

 

Our fundamental SIMOX-SOI technology has been developed, refined, andtested over the last dozen years. In 2002, we introduced the current generationof SIMOX-SOI technology, that included our second-generation oxygen implanter(i2000ä), and the MLD wafer process which waslicensed to us by IBM. We believe that the i2000’s flexibility, automation andoperator-friendly controls allow this tool to produce a wide range of SIMOX-SOIwafer products using a range of manufacturing processes, including Advantox®MLD and Advantox MLD-UT wafers. We also believe the ability of the i2000implanter to produce twelve-inch (or 300 mm) SIMOX-SOI wafers coupled with theMLD process positions us to capitalize on the growing SOI market. In 1999, wecommenced a program to design and develop the i2000, introduced it in March 2002,and began shipping 300 mm wafers implanted from this machine shortlythereafter. Customers who purchase the i2000 can utilize more than one SIMOXwafer manufacturing process on the implanter including the IBM MLD process,when licensed, as well as other SIMOX-SOI wafer manufacturing processes that donot require the IBM license.

 

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The Company’s financial statements for the fiscal year ended December 31,2007 were prepared assuming the Company would continue as a going concern;however, the Company’s recurring losses and accumulated deficit raisesubstantial doubt about its ability to continue as a going concern. The Company’sability to continue as a going concern is an issue raised as a result of recurringlosses from operations and net capital deficiency and is subject to the Company’sability to secure additional orders of our implanter equipment or, in thealternative, identify and consummate a strategic transaction, including thepotential a sale of the Company, or other strategic alternative.

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles 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 make estimateson matters that are inherently uncertain. Our most critical accounting policiesinclude: revenue recognition, inventory valuation and reserves, and theassessment of long-lived asset impairment. Actual results may differ from theseestimates under different assumptions or conditions. Below, we discuss thesepolicies further, as well as the estimates and judgments involved.

 

***Revenue Recognition****. *We recognize revenue from equipment salesand the sales 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 thecustomer has been fixed or is determinable; and (4) collectibility of thesales price is reasonably assured. We recognize revenue from implanter salesupon final customer acceptance at the customer’s site. Revenue derived fromcontracts and services is recognized upon performance. Significant managementjudgments and estimates must be made and used in connection with revenuerecognized in any period. Management analyzes various factors, including areview of specific transactions, historical experience, credit worthiness ofcustomers and current market and economic conditions. Changes in judgment basedupon these factors could impact the timing and amount of revenue and costrecognized.

 

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

 

**Valuationof Long-Lived Assets.**  Ibis reviews the valuation oflong-lived assets, including property and equipment and licenses, under theprovisions of SFAS No. 144, “Accounting for Impairment or Disposal ofLong-Lived Assets.”  Management isrequired to assess the recoverability of its long-lived assets or asset groupswhenever events and circumstances indicate that the carrying value may not berecoverable. Based on current conditions, factors we consider important andthat could trigger an impairment 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 to book value.

 

In accordance withSFAS No. 144, when we determine that the carrying value of applicablelong-lived assets may not be recoverable based upon the existence of one ormore of the above indicators of impairment, we evaluate whether the 

 

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carrying amount ofthe asset exceeds the sum of the undiscounted cash flows expected to resultfrom the use and eventual disposition of that asset or asset group. If such acircumstance exists, we would measure an impairment loss to the extent thecarrying amount of the particular long-lived asset or group exceeds its fairvalue. We would determine the fair value based on a projected discounted cashflow method using a discount rate determined by our management to becommensurate with the risk inherent in our current business model.

 

***FinancialCondition***

 

**During the fourth quarter ended December 31, 2007, a numberof unexpected developments occurred which impacted our assets, includingchanges in the projected cash flow generation and our projected utilization ofthe assets within our revised plans. As a result of our subsequent impairmentanalysis under the provisions of SFAS No. 144, Accounting for Impairment orDisposal of Long-Lived Assets, we recognized an impairment charge ofapproximately $1.6 million. Of this total impairment, approximately $1.3million related to fixed assets and the balance of $0.3 million was associatedwith certain patents. We further determined that our inventory was at risk ofobsolescence and we increased our inventory reserve approximately $1.8 million.**

 

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**Results of Operations**

 

***FirstQuarter Ended March 31, 2008 Compared to First Quarter Ended March 31,2007***

 

***License and Other Revenue***.  License and other revenue includes revenuederived from license agreements, characterization and other services. Licenseand other revenue decreased for the first quarter ended March 31, 2008 to$63 thousand from $84 thousand for the first quarter ended March 31, 2007,a decrease of $21 thousand or 25%. This decrease is attributable to decreasedlicense revenue 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 $268 thousand for the first quarter ended March 31,2008 from $246 thousand for the first quarter ended March 31, 2007,representing an increase of $22 thousand or 9%. Sales of spare parts accountedfor $255 thousand of equipment revenue and service revenue accounted for $13thousand for the first quarter ended March 31, 2008. This compares to $96thousand in sales of spare parts for the first quarter ended March 31,2007 and $150 thousand in service revenue for the first quarter ended March 31,2007. Sales of spare parts fluctuate depending on customer demand and whenwarranties expire on individual pieces of equipment.

 

***Total Cost of Sales and Revenue***.  Cost ofequipment revenue represents the cost of equipment, the cost for spare parts,and the costs of labor incurred for field service. Cost of equipment revenuefor the first quarter ended March 31, 2008 was $298 thousand, as comparedto $116 thousand for the first quarter ended March 31, 2007. This increaseof $182 thousand was primarily due to the expiration of the warranty on theimplanter in the first quarter ended March 31, 2007.

 

The gross margin for all sales was 10% for the first quarter ended March 31,2008 as compared to a gross margin of 65% for the first quarter ended March 31,2007. The decrease in the gross margin for all sales is primarily attributableto the reduced cost in the quarter ended March 31, 2007 from theexpiration of the warranty on the implanter.

 

***General and Administrative Expenses***.  General andadministrative expenses for the first quarter ended March 31, 2008 were$0.5 million as compared to $0.6 million for the first quarter ended March 31,2007. This was due to decreased payroll and payroll related expenses of $0.1million from reduced salaries and headcount.

 

***Marketing and Selling Expenses***.  Marketing andselling expenses for the first quarter ended March 31, 2008 were $0.1million as compared to $0.2 million for the first quarter ended March 31,2007. This was due to decreased payroll and payroll related expenses of $0.1million due to headcount reductions and labor costs charged out for consultingat a neighboring business in the quarter ended March 31, 2007.

 

***Research and Development Expenses.***  Internallyfunded research and development expenses decreased by $0.5 million or 39% to$0.6 million for the first quarter ended March 31, 2008, as compared to$1.1 million for the first quarter ended March 31, 2007. This was due to areduction in payroll and payroll related expenses of $0.1 million fromheadcount reductions and labor costs charged out for consulting at aneighboring business in the quarter ended March 31, 2007, along withreduced R&D material of $0.1 million and reduced depreciation andamortization of $0.3 million.

 

***Other Income (Expense)*****.**  Totalother income for the first quarter ended March 31, 2008 was $0.3 millionas compared to $0.2 million for the first quarter ended March 31, 2007.Other income increased in the quarter ended March 31, 2008, as a result ofthe sale of three Ibis 1000 implanters previously written off.

 

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**Liquidity and Capital Resources**

 

The Company’s financial statements for the fiscalyear ended December 31, 2007 were prepared assuming the Company wouldcontinue as a going concern; however, the Company’s recurring losses andaccumulated deficit raise substantial doubt about its ability to continue as agoing concern. The Company’s ability to continue as a going concern is an issueraised as a result of recurring losses from operations and net capitaldeficiency and is subject to the Company’s ability to secure additional ordersof our implanter equipment or, in the alternative, identify and consummate astrategic transaction, including the potential a sale of the Company, or otherstrategic alternative.

 

As of March 31, 2008, the Company had cash and cash equivalents of$5.0 million, including the gross proceeds from the financing of $5.3 millionfrom the sale of 3.4 million shares of common stock and 2.5 million commonstock warrants in the year ended December 31, 2007.

 

During the three months ended March 31, 2008, the Company used$0.8 million of cash for operating activities of continuing operations ascompared to $1.2 million in the three months ended March 31, 2007. Todate, the Company’s working capital requirements have been funded primarilythrough debt (capital leases) and equity financings, including the 2007financing discussed below. The principal uses of cash during the three monthsended March 31, 2008, were to fund operations. At March 31, 2008, theCompany had commitments to purchase approximately $0.1 million in material.Headcount for the quarter ended March 31, 2008 was 20 employees.

 

Cash flow projectionsdeveloped by management indicate the Company believes it will have sufficientcash resources to support current operations through June 2009. However,since the Company began selling implanters in 1996, the Company has only sold atotal of eight Ibis 1000 oxygen implanters at an average sale price ofapproximately $4.0 million each and four i2000 oxygen implanters at a sellingprice between $6.0 and $8.0 million.  Themost recent order received was in October 2005, for which the Companyrecognized revenue in the quarter ended September 30, 2006. The Companydid not record implanter revenue during 2007 and as of July 7, 2008, doesnot have an order for an implanter. At present time, only one of the four majorwafer manufacturers are counted as a current prospective customer. The Companycurrently does not have a backlog for implanters, nor does it have visibilityto the timing of the next order from any customer. The Company’s failure toobtain any orders for implanters in the foreseeable future, notwithstanding thebelief that the Company has sufficient cash for the 2008 fiscal year, or toobtain other sources of offsetting revenue, will have a material adverse impacton the Company’s business and hinder its ability to continue as a goingconcern. The Company’s continuing inability to generate revenue likely willresult in the inability to continue to invest in research development andmanufacturing capabilities, hinder the ability to pursue and maintainrelationships, partnerships and alliances with third parties, result in a lossof key personnel by way of workforce reduction or by voluntary termination ofemployment, limit its ability to secure financing on acceptable terms, if atall, and create greater volatility in the trading of the Company’s commonstock.

 

In January 2007, theCompany announced that to conserve cash it was reducing its operating expensesby approximately 40% which involved cost cutting measures consisting ofheadcount reductions, consulting at a neighboring business for a minimumof six months under a staffing services agreement, salary reductions and reducing consumable expenses. On February 16,2007, the Company entered into a purchase agreement pursuant to which it agreedto sell unregistered shares of its common stock and warrants exercisable forcommon stock to Special Situation Funds for an aggregate purchase price of $5.3million in a two-tranche financing. The first closing, at which the Companyreceived approximately $2.2 million in proceeds, occurred on February 20,2007. Pursuant to stockholder approval, received at the Company Annual Meetingon May 10, 2007, the Company sold the remainder of the securities at asecond closing, at which the Company received approximately $3.1 million inproceeds. In connection with the transaction, the Company also entered into aregistration rights agreement with the investors. The Company paid a placementfee to a placement agent, of approximately $0.3 million, which represents acash fee equal to 5% of the gross proceeds and warrants exercisable for commonstock with a dollar value equal to 5% of the aggregate gross proceeds receivedby the company in both closings of the financing. The Company also issued tothe placement agent an 

 

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aggregate of 179,619warrants, exercisable for common stock, with a dollar value equal to 5% of theaggregate gross proceeds. Total transaction costs associated with the financingwere approximately $0.4 million, providing net cash to the Company of $4.9million.****All of the securities were sold in aprivate placement pursuant to Regulation D of the Securities Act.

 

On December 10, 2007, the Company received a letter from theNasdaq Stock Market advising that for the previous 30 consecutive businessdays, the bid price of the Company’s common stock (the “Common Stock”) hadclosed below the minimum $1.00 per share requirement for continued inclusion onthe Nasdaq Global Market pursuant to Nasdaq Marketplace Rule 4450(a)(5).

 

Nasdaq stated in its letter that in accordance with Nasdaq Marketplace Rule 4450(e)(2),the Company will be provided 180 calendar days, or until June 9, 2008, toregain compliance with the minimum bid price requirement. The bid price of theCommon Stock must close at $1.00 per share or more for a minimum of 10consecutive business days to achieve compliance.

 

If the Company did notregain compliance with the minimum bid price requirement by June 9, 2008,the Nasdaq staff would provide the Company with written notification that theCommon Stock would be delisted from the Nasdaq Global Market. At that time, theCompany may appeal the delisting determination to a Nasdaq ListingsQualifications Panel pursuant to applicable Nasdaq rules. Alternatively, NasdaqMarketplace Rule 4450(i) may permit the Company to transfer theCommon Stock to the Nasdaq Capital Market if the Common Stock satisfies allcriteria, other than compliance with the minimum bid price requirement, forinitial inclusion on such market.

 

In February 2008,the Company announced the engagement of the investment bank BlueLake Partners, LLC for thepurpose of assessing strategic alternatives for Ibis, including a potentialsale of the Company and/or its assets. The Company can give no assurance that it will identify analternative that allows stockholders to realize an increase in the value of theCompany’s stock. There can also be no assurance that a transaction or otherstrategic alternative, once identified, evaluated and consummated, will providegreater value to the stockholders than that reflected in the current stockprice. In fact, if the Company is unable to recognize revenue through the saleof its products pursuant to the current operating plan, and if a viablestrategic alternative is not identified, the Company may be unable to continueas a going concern. Further, in pursuit of the highest value for shareholders,the Board of Directors may also consider alternatives that include aliquidation of assets and the resulting cash distribution per share afterpayment of outstanding liabilities. In such case, any per-share cashliquidation distribution could be less than the purchase price per share thatstockholders may have paid for the Company’s securities.

 

OnJune 5, 2008, the Company participated in a hearing of the Nasdaq ListingQualifications Panel (the “Panel”) to address the delayed filing of the Company’sForm 10-K and the Form 10-Q, as well as additional complianceconcerns.  The Panel is currentlyconsidering the Company’s request for continued listing.

 

TheCompany received a letter from the Nasdaq Stock Market dated April 16,2008 advising that Nasdaq had not received the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007, as required by NasdaqMarketplace Rule 4310(c)(14).  TheCompany received an additional letter from Nasdaq dated May 19, 2008informing the Company that Nasdaq had not received the Company’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2008, as requiredby Nasdaq Marketplace Rule 4310(c)(14). On May 28, 2008, the Company filed its Form 10-K for the yearended December 31, 2008 and, on June 2, 2008, filed Amendment No. 1to correct certain inadvertent omissions. The Company believes, that as a result of the filing of this Form 10-Q,the Company is in compliance with Marketplace Rule 4310(c)(14).** **There can be noassurance that the Panel will grant the Company’s request for continuedlisting.

 

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**Business Risk Factors**

 

ThisForm 10-Q contains express or implied forward-looking statements withinthe meaning of the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995 that relate to future events or our futurefinancial performance. In some cases, you can identify forward-lookingstatements by terminology, such as “may,” “will,” “should,” “could,” “expect,” “plan,”“anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,” “potential”or “continue” or the negative of such terms or other comparable terminology,although not all forward-looking statements contain such terms. In addition,these forward-looking statements include, but are not limited to, statementsregarding, among other things: (i) the Company’s ability to conduct itsoperations in a manner consistent with its current plan and to obtainadditional implanter orders to continue as a going concern, (ii) regainingcompliance with the minimum bid price, stockholders’ equity and market value ofpublicly held shares requirements and the continued inclusion of the Company’sCommon Stock on the Nasdaq Global Market, (iii) the Company’s expectationsregarding future orders for i2000 implanters, (iv) the Company’sexpectations regarding it’s strategic alternatives, including the potentialsale of the Company, (v) the continued employment of key management andtechnical personnel, and attaining implanter improvements to the degree and inthe timeframe necessary to meet our customer’s expectations, (vi) thetiming of our major customer’s ramping to production quantities on the i2000implanter and the sustained production worthiness of the i2000 implanter, (vii) thereliance on a single or small number of large customers, interest in and demandfor, and market acceptance of, the Company’s SIMOX-SOI technology including theCompany’s implanters, (viii) the involvement generally of the siliconwafer manufacturing industry in the SOI wafer market and the ability of thewafer manufacturer’s to produce sufficiently low cost SIMOX-SOI wafersutilizing both our SIMOX equipment and technology, as well as other equipmentmanufacturer’s tools, (ix) the timing and likelihood of revenuerecognition on orders for the Company’s implanters, (x) the Company’sbelief that wafer manufacturers will become the primary suppliers of SIMOX-SOIwafers to the chipmaking industry, (xi) the throughput and production capacityof the i2000 implanter for manufacturing 300-mm SIMOX-SOI wafers, attainingimplanter improvements to the degree and in the timeframe necessary to meetcustomer expectations, and the ability of the i2000 implanter to achieveacceptable production yields, (xii) the Company’s plan to focus on supplyingimplanters to wafer manufacturers, (xiii) the ability to operate with existingcapital resources or to secure financing and to continue as a going concern and(xiv) the Company’s expectation of having sufficient cash for operations. Suchstatements are neither promises nor guarantees but rather are subject to risksand uncertainties, which could cause actual results to differ materially fromthose described in the forward-looking statements. Such risks and uncertaintiesinclude, but are not limited to: future continued migration to SOI technologyand market acceptance of SIMOX; the level of demand for the Company’s products;limited customers and products; lack of order backlog and visibility to thetiming of new orders; the Company’s ability to pursue and maintain furtherstrategic relationships, partnerships and alliances with third parties; loss ofkey personnel; the Company’s ability to protect its proprietary technology; thepotential trends in the semiconductor industry generally; the ease with whichthe i2000 can be installed and qualified in fabrication facilities; thelikelihood that implanters, if ordered, will be qualified and accepted bycustomers without substantial delay, modification, or cancellation, in whole orin part; the likelihood and timing of revenue recognition on such transactions;the impact of rapidly changing technology; the possibility of the impact ofcompetitive products, technologies and pricing; the impact of rapidly changingtechnology; the possibility of further asset impairment and resulting charges;equipment capacity and supply constraints or difficulties; the Company’slimited history in selling implanters; general economic conditions; and otherrisks and uncertainties described elsewhere in this Form 10-Q and in theCompany’s Securities and Exchange Commission filings from time to time,including but not limited to those set forth in the Company’s annual report on Form 10-Kfor the year ended December 31, 2007. All information set forth in this Form 10-Qis as of the date of this Form 10-Q, and Ibis undertakes no duty to updatethis information, unless required by law.

 

**Off-BalanceSheet Arrangements**

 

We do not have anyoff-balance sheet arrangements as defined in Regulation S-K Section 303(a)(4)(ii).

 

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**ContractualObligations**

 

We have nosignificant contractual obligations not fully recorded on our Balance Sheets orfully disclosed in the Notes to our Financial Statements.  Information about future payments undercertain of our contractual obligations is contained in Note 9 to theConsolidated Financial Statements in our 2007 Annual Report on Form 10-K.

 

**Effects of Inflation**

 

Ibis believes that over the past three years inflationhas not had a significant impact on Ibis’ sales or operating results.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**PART I – ITEM 3**

 

**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Theexposure of market risk associated with risk-sensitive instruments is currentlynot material to the Company. The Company transacts its service sales withJapanese customers in Yen, which will introduce the potential for a currencyexchange gain or loss on those transactions. The Company plans to continue totransact its sales for implanter equipment and all other transactionsdenominated in United States dollars. The Company invests primarily in moneymarket funds and short-term commercial paper, holds its investments untilmaturity and has not entered into hedging transactions.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**PART I – ITEM 4**

 

**CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

The Company conducted an evaluation under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, regardingthe effectiveness of the Company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)as of the end of the period covered by this report. Based on this evaluation,management has concluded that because the material weakness in internal controlover financial reporting described below, had not yet been fully remediated at March 31,2008, our disclosure controls and procedures were not effective as of March 31,2008. Notwithstanding the existence of the material weakness described below,management has concluded that, based on their knowledge, the consolidatedfinancial statements in this Form 10-Q fairly present, in all materialrespects, the Company’s financial position, results of operations and cashflows for the periods and dates presented.

 

In our *Management’sReport on Internal Control over Financial Reporting*filed with ourAnnual Report on Form 10-K for the fiscal year ended December 31,2007, management’s assessment identified a material weakness in the Company’sinternal control over financial reporting. Specifically:

 

·                  The Company did not maintain effectivepolicies and procedures to ensure a sufficiently detailed management review ofthe preliminary financial statements including consideration of the impact ofnon-routine transactions on the financial statements.  These deficienciesresulted in material adjustments to inventory reserves; property, plant andequipment and patents, errors in the income tax disclosures, and omissions ofrequired disclosures in the Company’s 2007 preliminary financial statementswhich were corrected prior to issuance.

 

**Changesin Internal Control over Financial Reporting**

 

SinceDecember 31, 2007, including the period covered by this Quarterly Reporton Form 10-Q, we have made certain changes to our internal controls overfinancial reporting, which are likely to have a material effect on suchcontrols.  For a discussion of thesechanges, please refer to Item 9A, Controls and Procedures, in our Annual Reporton Form 10-K for the year ended December 31, 2007.

 

Managementrecognizes that the enhancements to our internal controls over financialreporting require continual monitoring and evaluation for effectiveness. Thedevelopment of these actions is an interactive process and has evolved as theCompany evaluates and improves our internal controls over financialreporting.  Management continues toreview progress on these activities on a consistent and ongoing basis at the seniormanagement level in conjunction with our Audit Committee.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**PART II**

 

**OTHERINFORMATION**

 

Item 1 - LegalProceedings

 

On April 26, 2007, the United StatesDistrict Court in the District of Massachusetts approved a settlement agreementin the consolidated securities class action captioned *In re IbisTechnology Securities Litigation*, Civil Action No. 04-10446 RCL(D. Mass.).  The Company and its Chairmanof the Board, Martin J. Reid, and the plaintiffs reached an agreement inprinciple to settle the securities class action, which the Company announced onOctober 2, 2006.  Thereafter, theparties executed a formal settlement agreement and submitted it for Courtapproval.  The settlement provides for apayment to the plaintiffs of $1.9 million. The Court’s April 26, 2007 Order, certified the proposed class forsettlement purposes only, approved the parties’ settlement agreement, anddismissed the securities class action with prejudice and in its entirety.  The settlement was funded entirely by theCompany’s insurance carrier and did not have a material adverse affect on ourbusiness, results of operations and financial condition.

 

On April 10, 2007, the Company announced that the shareholderderivative action filed in February 2004 against certain of the Company’sdirectors and officers: Louis F. Matheson, Jr. v. Martin J. Reid et al.,Civ. Act. No. 04-10341 (RCL) (D. Mass) has been voluntarily dismissed bythe plaintiff. The notice of dismissal filed by the plaintiff dismissed theaction with prejudice. As set forth in the notice, the plaintiff will receive a$55,000 payment following the dismissal in consideration of plaintiff’sanalysis of information provided by the Company regarding, among other things,the Company’s contention that the litigation should be dismissed for failure tomake a demand on the Board of Directors before filing suit as required byMassachusetts law. The payment will be funded entirely by the Company’s insurancecarrier.

 

Item 1A.                                                   Risk Factors

 

Exceptas described in this Item 1A, there are no material changes to the risk factorsdescribed in the “Risk Factors” section in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007.

 

***The Company Received Notice from the Nasdaq StockMarket that Nasdaq had not received the Company’s Form 10-Q for thequarter year ended March 31, 2008, as required by Marketplace Rule 4310(c)(14).***

 

OnMay 19, 2008, the Company received a letter from the Nasdaq Stock Marketinforming the Company that Nasdaq had not received the Company’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2008, as requiredby Nasdaq Marketplace Rule 4310(c)(14). Accordingly, Nasdaq notified theCompany that the Nasdaq Listing Qualifications Panel (the “Panel”) willconsider the matter in rendering a determination regarding the Company’scontinued listing on the Nasdaq Global Market. On June 5, 2008, the Company participated in a hearing of the Panelto address the delayed filing of the Company’s Form 10-K and the Form 10-Q,as well as additional compliance concerns. The Panel is currently considering the Company’s request for continuedlisting.

 

OnMay 28, 2008, the Company filed its Form 10-K for the year ended December 31,2008 and, on June 2, 2008, filed Amendment No. 1 to correct certaininadvertent omissions.  The Companybelieves, that as a result of the filing of this Form 10-Q, the Company isin compliance with Marketplace Rule 4310(c)(14).

 

***The Company Received Notices from the Nasdaq StockMarket that it Has Not Maintained the Minimum Bid Price, Stockholders’ Equityand Market Value of Publicly Held Shares Requirds for Continued Inclusion onthe Nasdaq Global Market.***

 

On June 11, 2008, the Company received a letter from the NasdaqStock Market notifying the Company that the bid price of the Company’s CommonStock had closed less than $1.00 per share over the previous 30 consecutivebusiness days and, as a result, the Company does not comply with NasdaqMarketplace Rule 4450(a)(5).  TheCompany previously announced that it received a letter on December 10,2007 from Nasdaq advising that, for the previous 30 consecutive business days,the bid price of the Common Stock had closed below the minimum $1.00 per

 

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sharerequirement.  The Company was provided180 calendar days from the letter date, or until June 9, 2008, to regaincompliance.

 

On June 3, 2008, the Company announced that it received a letterfrom Nasdaq dated May 29, 2008 informing the Company that it does notcomply does not comply with the minimum $10,000,000 stockholders’ equityrequirement, as required by Marketplace Rule 4450(a)(3).

 

On April 28, 2008, the Company announced that it had received aNasdaq letter dated April 23, 2008 notifying the Company that for the last30 consecutive trading days, the Company’s Common Stock had not maintained theminimum market value of publicly held shares (“MVPHS”) of $5,000,000, asrequired for continued inclusion by Nasdaq Marketplace Rule 4450(a)(2).The Company has been provided 90 calendar days, or until July 22, 2008, toregain compliance. The MVPHS of common stock must be $5,000,000 or greater fora minimum of 10 consecutive trading days to comply.

 

OnJune 5, 2008, the Company participated in a hearing of the Panel toaddress the delayed filing of the Company’s Form 10-K and the Form 10-Q,as well as additional compliance concerns. The Panel is currently considering the Company’s request for continuedlisting.  There can be no assurance thatthe Panel will grant the Company’s request for continued listing. If theCompany’s common stock does not qualify for, or is subsequently delisted fromthe Nasdaq Global Market and is unable to transfer to the Nasdaq Capital Market,investors may have difficulty converting their investment into cashefficiently.  The price of our commonstock and the ability of holders to sell such stock would be adverselyaffected, and we would be required to comply with the initial listing requirementsto be re-listed on Nasdaq.

 

Item 2 – UnregisteredSales ofEquity Securities and Use of Proceeds

 

None.

 

Item 3 - Defaults uponSenior Securities

 

None

 

Item 4 - Submission ofMatters to a Vote of Security Holders

 

None

 

Item5 - Other Information

 

None

 

Item 6 - Exhibits

 

(a)                                  Exhibits furnished as Exhibits hereto:

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

 

29

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

 

 
|                    | Ibis Technology  Corporation |
|-------------------------|------------------------------|
|                    |                         |
|                    |                         |
| Date: July 8, 2008 | By:                          | /s/William  J. Schmidt |
|                    |                         | William  J. Schmidt |
|                    |                         | Chief  Financial Officer, Treasurer and Clerk |
|                    |                         | (principal  financial and accounting officer) |
|                    |                         |   |
| Date: July 8, 2008 | By:                          | /s/Martin  J. Reid |
|                    |                         | Martin  J. Reid |
|                    |                         | President  and Chief Executive Officer |

 

30

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