** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20569**

 

**Form10-Q**

 

**ý****Quarterly Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the Quarterly Period Ended June30, 2004**

 

**Or**

 

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

 

**For the transition period from                             to                              **

 

**Commissionfile number     0-23150**

 

**Ibis Technology Corporation**

(Exact name ofregistrant as specified in its charter)

 
| **Massachusetts**                                                | ** ** | **04-2987600**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **32  Cherry Hill Drive, Danvers, MA**                           | ** ** | **01923**                             |
| (Address of principal  executive offices)                        |       | (Zip Code)                            |
|                                                             |       |                                  |
| **(978)  777-4247**                                              |
| (Registrant’s telephone  number, including area code)       |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be 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 to suchfiling requirements for the past 90 days.

 

Yes  ý        No  o

 

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

 

Yes  o        No  ý *

 

----

* The Company previously reported on its Form10-K forthe fiscal year ended December 31, 2003 and the Form 10-Q for the fiscalquarter ended March 31, 2004 that it was an accelerated filer, however, pleasenote that the Company is not and was not an accelerated filer prior to the dateof this filing.

 

10,668,023 sharesof Common Stock, par value $.008, were outstanding on August 12, 2004.

 

 

----

 

**IBIS TECHNOLOGY CORPORATION**

 

**INDEX**

 
| PART 1 - FINANCIAL INFORMATION                                                                                                 |       |
|--------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                     | ** ** |
| Item 1 –  Financial Statements:                                                                                           |       |
| ** **                                                                                                                     | ** ** |
| Balance Sheets  December 31, 2003 and June 30, 2004 (unaudited)                                                                |       |
|                                                                                                                           |       |
| Statements  of Operations  Three Months Ended June 30, 2003 and 2004 and Six Months Ended June 30, 2003  and 2004 (unaudited)) |       |
|                                                                                                                           |       |
| Statements  of Cash Flows  Six Months Ended June 30, 2003 and 2004 (unaudited)                                                 |       |
|                                                                                                                           |       |
| Notes  to Unaudited Interim Financial Statements                                                                               |       |
|                                                                                                                           |       |
| Item 2 – Management’s Discussion and Analysis of  Financial Condition and Results of Operations                      |       |
|                                                                                                                           |       |
| Item 3 – Quantitative and Qualitative Disclosure  About Market Risk                                                       |       |
|                                                                                                                           |       |
| Item 4 – Controls and Procedures                                                                                          |       |
|                                                                                                                           |       |
| PART II – OTHER INFORMATION                                                                                               |       |
|                                                                                                                           |       |
| Item  1 - Legal Proceedings                                                                                                    |       |
|                                                                                                                           |       |
| Item 2 – Changes in  Securities                                                                                           |       |
|                                                                                                                           |       |
| Item 3 -  Defaults upon Senior Securities                                                                                      |       |
|                                                                                                                           |       |
| Item  4 – Submission of Matters to a Vote of Security Holders                                                             |       |
|                                                                                                                           |       |
| Item  5 - Other Information                                                                                                    |       |
|                                                                                                                           |       |
| Item 6 -  Exhibits and Reports on Form 8-K                                                                                     |       |
|                                                                                                                           |       |
| Signatures                                                                                                                     |       |

 

2

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**IBIS TECHNOLOGY CORPORATION**

 

**BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                    | ** ** | **December 31,  2003** | ** ** | **June 30,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
|                                                                                                                          |       |                   |       |               |       |
| **Assets**                                                                                                                    |       |                   |       |               |       |
| **Current  assets:**                                                                                                          |       |                   |       |               |       |
| Cash and cash  equivalents                                                                                                    |       | $                      | 14,174,716 |               | $          | 13,955,136 |   |
| Accounts  receivable, trade, net (note 5)                                                                                     |       | 123,548                |       | 40,380             |       |
| Unbilled revenue  (note 5)                                                                                                    |       | 528,581                |       | 75,000             |       |
| Inventories  (note 3)                                                                                                         |       | 1,758,449              |       | 6,511,799          |       |
| Prepaid expenses  and other current assets                                                                                    |       | 247,602                |       | 382,037            |       |
| Total current  assets                                                                                                         |       | 16,832,896             |       | 20,964,352         |       |
| Property and  equipment                                                                                                       |       | 40,584,764             |       | 36,911,394         |       |
| Less:  Accumulated depreciation and amortization                                                                         |       | (23,743,179            | )          | (25,571,529        | )          |
| Net property and  equipment                                                                                                   |       | 16,841,585             |       | 11,339,865         |       |
| Patents and  other assets, net                                                                                                |       | 1,668,558              |       | 1,524,157          |       |
| Total assets                                                                                                                  |       | $                      | 35,343,039 |               | $          | 33,828,374 |   |
|                                                                                                                          |       |                   |       |               |       |
| **Liabilities  and Stockholders’ Equity**                                                                                |       |                   |       |               |       |
| **Current  liabilities:**                                                                                                     |       |                   |       |               |       |
| Capital lease  obligation, current                                                                                            |       | $                      | 1,184,399  |               | $          | 435,858 |   |
| Accounts payable                                                                                                              |       | 404,512                |       | 1,701,769          |       |
| Accrued  liabilities                                                                                                          |       | 2,384,915              |       | 2,361,258          |       |
| Deferred revenue                                                                                                              |       | 252,000                |       | 4,942,000          |       |
| Total current  liabilities                                                                                                    |       | 4,225,826              |       | 9,440,885          |       |
| Total  liabilities                                                                                                            |       | 4,225,826              |       | 9,440,885          |       |
|                                                                                                                          |       |                   |       |               |       |
| **Stockholders’  equity:**                                                                                               |       |                   |       |               |       |
| Undesignated  preferred stock, $.01 par value.  Authorized 2,000,000 shares; none issued                                      |       | —                 |       | —             |       |
| Common stock,  $.008 par value.                                                                                               |       |                   |       |               |       |
| Authorized  50,000,000 shares; issued and outstanding 10,651,170 shares and 10,668,023  shares in 2003 and 2004, respectively |       | 85,209                 |       | 85,344             |       |
| Additional  paid-in capital                                                                                                   |       | 92,903,618             |       | 93,013,198         |       |
| Accumulated  deficit                                                                                                          |       | (61,871,614            | )          | (68,711,053        | )          |
| Total  stockholders’ equity                                                                                              |       | 31,117,213             |       | 24,387,489         |       |
| Total  liabilities and stockholders’ equity                                                                              |       | $                      | 35,343,039 |               | $          | 33,828,374 |   |

 

See accompanyingnotes to unaudited interim financial statements.

 

3

----

 

**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                             | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **2003**                         | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| **Net  Sales and revenue:**                            |       |                             |       |                           |       |   |   |   |   |
| Product sales                                          |       | $                                | 3,532,200  |                           | $          | 1,888,506 |   | $ | 4,207,900 |   | $ | 3,737,746 |   |
| Contract and  other revenue                            |       | 27,601                           |       | 82,664                         |       | 526,065 |   | 172,915 |   |
| Equipment  revenue                                     |       | 8,162,188                        |       | 120,589                        |       | 8,396,175 |   | 238,246 |   |
| Total net sales  and revenue (notes 2 and 6)           |       | 11,721,989                       |       | 2,091,759                      |       | 13,130,140 |   | 4,148,907 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| **Cost  of sales and revenue:**                        |       |                             |       |                           |       |   |   |   |   |
| Cost of product  sales                                 |       | 4,631,928                        |       | 3,185,153                      |       | 7,505,843 |   | 6,441,776 |   |
| Cost of contract  and other revenue                    |       | 9,845                            |       | 5,209                          |       | 28,002 |   | 12,151 |   |
| Cost of  equipment revenue                             |       | 3,685,849                        |       | 372,426                        |       | 3,805,702 |   | 699,081 |   |
| Total cost of  sales and revenue                       |       | 8,327,622                        |       | 3,562,788                      |       | 11,339,547 |   | 7,153,008 |   |
| Gross profit  (loss                                    |       | 3,394,367                        |       | (1,471,029                     | )          | 1,790,593 |   | (3,004,101 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| **Operating  expenses:**                               |       |                             |       |                           |       |   |   |   |   |
| General and  administrative                            |       | 567,794                          |       | 572,034                        |       | 1,186,547 |   | 1,203,525 |   |
| Marketing and  selling                                 |       | 305,936                          |       | 425,312                        |       | 660,469 |   | 765,967 |   |
| Research and  development                              |       | 1,297,660                        |       | 886,905                        |       | 3,033,296 |   | 1,872,173 |   |
| Total operating  expenses                              |       | 2,171,390                        |       | 1,884,251                      |       | 4,880,312 |   | 3,841,665 |   |
| Profit (loss)  from operations                         |       | 1,222,977                        |       | (3,355,280                     | )          | (3,089,719 | ) | (6,845,766 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| **Other  income (expense):**                           |       |                             |       |                           |       |   |   |   |   |
| Interest income                                        |       | 14,053                           |       | 14,342                         |       | 39,898 |   | 37,786 |   |
| Interest expense                                       |       | (11,003                          | )          | (18,595                        | )          | (12,975 | ) | (31,452 | ) |
| Other                                                  |       | (1                               | )          | 1,249                          |       | 3,725 |   | 1,249 |   |
| Total other  income                                    |       | 3,049                            |       | (3,004                         | )          | 30,648 |   | 7,583 |   |
| Profit (loss)  before income taxes                     |       | 1,226,026                        |       | (3,358,284                     | )          | (3,059,071 | ) | (6,838,183 | ) |
| Income tax  expense                                    |       | —                           |       | —                         |       | 1,256 |   | 1,256 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss) (note2)                             |       | $                                | 1,226,026  |                           | $          | (3,358,284 | ) | $ | (3,060,327 | ) | $ | (6,839,439 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss) per common share:                   |       |                             |       |                           |       |   |   |   |   |
| Basic                                                  |       | $                                | 0.13       |                           | $          | (0.32 | ) | $ | (0.32 | ) | $ | (0.64 | ) |
| Diluted                                                |       | $                                | 0.13       |                           | $          | (0.32 | ) | $ | (0.32 | ) | $ | (0.64 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Weighted average  number of common shares outstanding: |       |                             |       |                           |       |   |   |   |   |
| Basic                                                  |       | 9,485,507                        |       | 10,657,780                     |       | 9,480,252 |   | 10,654,548 |   |
| Diluted (note4)                                        |       | 9,501,079                        |       | 10,657,780                     |       | 9,480,252 |   | 10,654,548 |   |

 

See accompanyingnotes to unaudited interim financial statements.

 

4

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**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                 | ** ** | **2003**                       | ** ** | **2004** | ** ** |
| ** **                                                                                 |       |                           |       |   |   |
| **Cash  flows from operating activities:**                                                 |       |                           |       |   |   |
| Net loss                                                                                   |       | $                              | (3,060,327 | ) | $ | (6,839,439 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                           |       |   |   |
| Depreciation and  amortization                                                             |       | 3,325,952                      |       | 2,019,762 |   |
| Changes in  operating assets and liabilities:                                              |       |                           |       |   |   |
| Accounts  receivable, trade                                                                |       | 421,839                        |       | 83,168 |   |
| Unbilled revenue                                                                           |       | (528,581                       | )          | 453,581 |   |
| Inventories                                                                                |       | (999,371                       | )          | (1,078,447 | ) |
| Prepaid expenses  and other current assets                                                 |       | 2,500,247                      |       | (134,435 | ) |
| Accounts payable                                                                           |       | 1,222,005                      |       | 1,297,257 |   |
| Accrued  liabilities and deferred revenue                                                  |       | (6,106,428                     | )          | 4,666,343 |   |
|                                                                                       |       |                           |       |   |   |
| Net cash  provided by (used in) operating activities                                       |       | (3,224,664                     | )          | 467,790 |   |
|                                                                                       |       |                           |       |   |   |
| **Cash  flows from investing activities:**                                                 |       |                           |       |   |   |
| Additions to  property and equipment, net                                                  |       | (1,412,304                     | )          | (22,680 | ) |
| Other assets                                                                               |       | (30,717                        | )          | (25,864 | ) |
|                                                                                       |       |                           |       |   |   |
| Net cash used in  investing activities                                                     |       | (1,443,021                     | )          | (48,544 | ) |
|                                                                                       |       |                           |       |   |   |
| **Cash  flows from financing activities:**                                                 |       |                           |       |   |   |
| Payments of  capital lease obligations                                                     |       | (752,840                       | )          | (748,541 | ) |
| Exercise of  stock options and warrants                                                    |       | 160,697                        |       | 109,715 |   |
|                                                                                       |       |                           |       |   |   |
| Net cash used by  financing activities                                                     |       | (592,143                       | )          | (638,826 | ) |
|                                                                                       |       |                           |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                      |       | (5,259,828                     | )          | (219,580 | ) |
|                                                                                       |       |                           |       |   |   |
| Cash and cash  equivalents, beginning of period                                            |       | 11,745,918                     |       | 14,174,716 |   |
|                                                                                       |       |                           |       |   |   |
| Cash and cash  equivalents, end of period                                                  |       | $                              | 6,486,090  |   | $ | 13,955,136 |   |
|                                                                                       |       |                           |       |   |   |
| **Supplemental  disclosure of cash flow information:**                                     |       |                           |       |   |   |
| Cash paid during  the period for interest                                                  |       | $                              | 12,975     |   | $ | 31,452 |   |
|                                                                                       |       |                           |       |   |   |
| **Supplemental  disclosure of non-cash investing activities:**                             |       |                           |       |   |   |
| Transfer of  internally constructed equipment from property and equipment to inventory     |       | $                              | —     |   | $ | 3,674,903 |   |

 

See accompanying notes tounaudited interim financial statements.

 

5

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS**

** **

**(1) Interim Financial Statements**

 

The accompanyingfinancial statements are unaudited and have been prepared by the Company inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and in accordance with theinstructions to Form 10-Q and Article 10 of Regulation 8-X. Accordingly, theydo not include all of the information and footnotes required by accountingPrinciples Generally Accepted in the United States of America for completefinancial statements.

 

In the opinion of management, the interim financialstatements include all adjustments, which consist only of normal and recurringadjustments, necessary for a fair presentation of the Company’s financialposition and results of operations. Results of operations for the interimperiods are not necessarily indicative of the results to be expected for thefull year. These financial statements should be read in conjunction with thefinancial statements of the Company as of and for the year ended December 31,2003, which are included in the Company’s Annual Report on Form 10-K as filedon March 2, 2004.

 

**(2) Summary of Significant Accounting Policies**

 

***(a)Revenue Recognition***

 

The Company recognizesrevenue from wafer product sales, equipment sales and the sales of spare partswhen all of the following criteria have been met:  (1) evidence exists that the customer isbound to the transaction; (2) the product has been delivered to the customerand, when applicable, the product has been installed and accepted by thecustomer; (3) the sales price to the customer has been fixed or isdeterminable; and (4) collectibility of the sales price is reasonably assured.The Company has typically recognized revenue from wafer sales upon shipment(and will continue to do so until it has completely discontinued its wafermanufacturing business as previously announced) and recognizes revenue fromimplanter sales upon acceptance at the customer’s site. Provisions forestimated sales returns and allowances for wafers and parts are made at thetime the products are sold. Revenue derived from contracts and services isrecognized upon performance. Significant management judgments and estimatesmust be made and used in connection with revenue recognized in any period.Management analyzes various factors including a review of specifictransactions, historical experience, credit worthiness of customers and currentmarket and economic conditions. Changes in judgments based upon these factorscould impact the timing and amount of revenue and cost recognized.

 

***(b)******Stock-Based Compensation***

 

The Company accounts forits stock option plans under the recognition and measurement principles of APBOpinion No. 25, “Accounting for Stock Issued to Employees, and RelatedInterpretations” and complies with the disclosure provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation” (“SFAS No. 123”) and SFAS 148, “Accounting for Stock-BasedCompensation Transition and Disclosure”. No stock-based compensation cost isreflected in net income (loss) for these plans, as all options granted underthese plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. The following table illustrates the effecton net income (loss) and income (loss) per share if we had applied the fairvalue recognition provisions of SFAS No. 123 to stock-based compensation:

 
| ** **                                                                                                                                 | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2003**                                 | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                                                                                                       |       |                                     |       |                                   |       |   |   |   |   |
| Net income  (loss), as reported                                                                                                            |       | $                                        | 1,226,026  |                                   | $          | (3,358,284 | ) | $ | (3,060,327 | ) | $ | (6,839,439 | ) |
| Add:  Stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | (421,631                                 | )          | (339,404                               | )          | (793,979 | ) | (602,740 | ) |
| Pro-forma net income  (loss)                                                                                                               |       | $                                        | 804,395    |                                   | $          | (3,697,688 | ) | $ | (3,854,306 | ) | $ | (7,442,179 | ) |
| Net income  (loss) per share:                                                                                                              |       |                                     |       |                                   |       |   |   |   |   |
| Basic and  diluted – as reported                                                                                                      |       | $                                        | 0.13       |                                   | $          | (0.32 | ) | $ | (0.32 | ) | $ | (0.64 | ) |
| Basic and  diluted – pro-forma                                                                                                        |       | $                                        | 0.08       |                                   | $          | (0.35 | ) | $ | (0.41 | ) | $ | (0.70 | ) |

 

6

----

 

The fair value of eachstock option is estimated on the date of grant using the Black-Scholes optionvaluation model.

 

Pro-forma net lossreflects only options granted in 1995 through June 30, 2004. Therefore, thefull impact of calculating compensation costs for stock options under SFAS No.123 is not reflected because compensation costs for options granted prior toJanuary 1, 1995, are not considered.

 

**(3) Inventories**

 

Inventories consist of the following:

 
| ** **                | ** ** | **December 31,  2003** | ** ** | **June 30,  2004** | ** ** |
|---------------------------|------------|------------------------|------------|--------------------|------------|
| Raw materials             |       | $                      | 1,464,434  |               | $          | 753,622 |   |
| Work in process           |       | 177,715                |       | 351,007            |       |
| Finished goods            |       | 116,300                |       | 617,608            |       |
| Subtotal wafer  inventory |       | 1,758,449              |       | 1,722,237          |       |
| Equipment  inventory      |       | —                 |       | 4,789,562          |       |
| Total Inventories         |       | $                      | 1,758,449  |               | $          | 6,511,799 |   |

 

Equipment inventory atJune 30, 2004 consists of i2000 parts and/or implanters under construction forresale. At December 31, 2003 these costs were included in construction inprogress under property and equipment and were $3,674,903.

 

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

 

Net income (loss) pershare of common stock is computed based upon the weighted average number ofshares outstanding during each period and including the dilutive effect, ifany, of stock options and warrants. SFAS 128 requires the presentation of basicand diluted earnings (loss) per share for all periods presented. As the Companywas in a net loss position for the six months ended June 30, 2003 and the threeand six months ended June 30, 2004, common stock equivalents of 8,896, 71,853and 180,071, respectively, were excluded from the diluted loss per sharecalculation, as they would be antidilutive. As a result, diluted loss per shareis the same as basic loss per share for the six months ended June 30, 2003 andthe three and six months ended June 30, 2004.

 

**(5) Significant Customers and Concentration ofBusiness Risk**

 

The Company sells its products to a limited number ofsemiconductor and silicon wafer manufacturers primarily in the United Statesand the Pacific Rim.

 

Sales for significant customers are shown in dollaramounts and as a percentage of total revenue as follows:

 
| ** **                        | ** ** | **Significant  Customers** | ** ** | **Amount** | ** ** | **%**  | ** ** |
|-----------------------------------|------------|----------------------------|------------|------------|------------|--------|------------|
|                              |       |                       |       |       |       |   |       |
| Three Months  Ended June 30, 2003 |       | 1                          |       | $          | 11,561,638 |   | 99         | % |
| Three Months  Ended June 30, 2004 |       | 1                          |       | $          | 1,881,997  |   | 90         | % |
| Six Months Ended  June 30, 2003   |       | 1                          |       | $          | 12,139,784 |   | 92         | % |
| Six Months Ended  June 30, 2004   |       | 1                          |       | $          | 3,583,159  |   | 86         | % |

 

Accountsreceivable and unbilled revenue from significant customers at June 30, 2004 andDecember 31, 2003 amounted to $75,000 and $631,000, respectively.

 

7

----

 

**(6) Industry Segments**

 

The Company’s current reportable segments are SIMOXWafer Products, SIMOX Equipment and Other Products or Services. For purposes ofsegment reporting, equipment, equipment spares and field service revenue arecombined and reported as SIMOX Equipment. Government contracts, other servicesand license revenue are combined and reported as Other Products or Services.

 

The table below provides unaudited information for thethree and six months ended June 30, 2003 and 2004 pertaining to the Company’sthree industry segments.

** **
| ** **                                                   | ** ** | **SIMOX Wafer  Products** | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  or Services** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|---------------------------|------------|----------------------|------------|---------------------------------|------------|------------|------------|
| **Net  Sales and Revenue**                                   |       |                      |       |                 |       |                            |       |       |       |
| Three Months  Ended June 30, 2003                            |       | $                         | 3,532,200  |                 | $          | 8,162,188                       |       | $          | 27,601     |   | $ | 11,721,989 |   |
| Three Months  Ended June 30, 2004                            |       | $                         | 1,888,506  |                 | $          | 120,589                         |       | $          | 82,664     |   | $ | 2,091,759 |   |
| Six Months Ended  June 30, 2003                              |       | $                         | 4,207,900  |                 | $          | 8,396,175                       |       | $          | 526,065    |   | $ | 13,130,140 |   |
| Six Months Ended  June 30, 2004                              |       | $                         | 3,737,746  |                 | $          | 238,246                         |       | $          | 172,915    |   | $ | 4,148,907 |   |
|                                                         |       |                      |       |                 |       |                            |       |       |       |
| **Operating  Income (Loss)**                                 |       |                      |       |                 |       |                            |       |       |       |
| Three Months  Ended June 30, 2003                            |       | (1,301,999                | )          | 3,075,013            |       | 17,757                          |       | 1,790,771  |       |
| Three Months  Ended June 30, 2004                            |       | (1,776,497                | )          | (1,084,204           | )          | 77,455                          |       | (2,783,246 | )          |
| Six Months Ended  June 30, 2003                              |       | (4,205,152                | )          | 1,803,917            |       | 498,064                         |       | (1,903,171 | )          |
| Six Months Ended  June 30, 2004                              |       | (3,681,230                | )          | (2,121,775           | )          | 160,764                         |       | (5,642,241 | )          |
|                                                         |       |                      |       |                 |       |                            |       |       |       |
| **Assets**                                                   |       |                      |       |                 |       |                            |       |       |       |
| June 30, 2004                                                |       | 13,521,180                |       | 5,502,617            |       | 154,005                         |       | 19,177,802 |       |
|                                                         |       |                      |       |                 |       |                            |       |       |       |
| **Capital  Expenditures**                                    |       |                      |       |                 |       |                            |       |       |       |
| Three Months  Ended June 30, 2003                            |       | 586,934                   |       | —               |       | —                          |       | 586,934    |       |
| Three Months  Ended June 30, 2004                            |       | —                    |       | —               |       | —                          |       | —     |       |
| Six Months Ended  June 30, 2003                              |       | 1,391,061                 |       | —               |       | —                          |       | 1,391,061  |       |
| Six Months Ended  June 30, 2004                              |       | 11,282                    |       | 3,745                |       | —                          |       | 15,027     |       |
|                                                         |       |                      |       |                 |       |                            |       |       |       |
| **Depreciation  and Amortization of Property and Equipment** |       |                      |       |                 |       |                            |       |       |       |
| Three Months  Ended June 30, 2003                            |       | 1,286,730                 |       | 351,294              |       | —                          |       | 1,638,024  |       |
| Three Months  Ended June 30, 2004                            |       | 751,115                   |       | 225,651              |       | —                          |       | 976,766    |       |
| Six Months Ended  June 30, 2003                              |       | 2,548,253                 |       | 710,823              |       | —                          |       | 3,259,076  |       |
| Six Months Ended  June 30, 2004                              |       | 1,500,333                 |       | 472,329              |       | —                          |       | 1,972,662  |       |

 

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

 
| ** **                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **Segment  Reconciliation**                                  | ** ** | **2003**                         | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Income (Loss)  Before Income Taxes:                          |       |                             |       |                           |       |   |   |   |   |
| Total operating  income (loss)for reportable segments        |       | $                                | 1,790,771  |                           | $          | (2,783,246 | ) | $ | (1,903,171 | ) | $ | (5,642,241 | ) |
| Corporate  general & administrative expenses             |       | (567,794                         | )          | (572,034                       | )          | (1,186,548 | ) | (1,203,525 | ) |
| Net other income                                             |       | 3,049                            |       | (3,004                         | )          | 30,648 |   | 7,583 |   |
| Income (loss)  before income taxes                           |       | $                                | 1,226,026  |                           | $          | (3,358,284 | ) | $ | (3,059,071 | ) | $ | (6,838,183 | ) |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Capital  Expenditures:                                       |       |                             |       |                           |       |   |   |   |   |
| Total capital  expenditures for reportable segments          |       | $                                | 586,934    |                           | $          | — |   | $ | 1,391,061 |   | $ | 15,027 |   |
| Corporate  capital expenditures                              |       | 21,243                           |       | 5,203                          |       | 21,243 |   | 7,653 |   |
| Total capital  expenditures                                  |       | $                                | 608,177    |                           | $          | 5,203 |   | $ | 1,412,304 |   | $ | 22,680 |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Depreciation and  Amortization:                              |       |                             |       |                           |       |   |   |   |   |
| Total  depreciation and amortization for reportable segments |       | $                                | 1,638,024  |                           | $          | 976,766 |   | $ | 3,259,076 |   | $ | 1,972,662 |   |
| Corporate  depreciation and amortization                     |       | 34,149                           |       | 25,776                         |       | 66,876 |   | 47,100 |   |
| Total  depreciation and amortization                         |       | $                                | 1,672,173  |                           | $          | 1,002,542 |   | $ | 3,325,952 |   | $ | 2,019,762 |   |

 
| ** **                                             | ** ** | **Balance as of  6/30/04** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|
| Assets:                                                |       |                       |       |
| Total assets for  reportable segments                  |       | $                          | 19,177,802 |   |
| Cash & cash  equivalents not allocated to segments |       | 13,955,136                 |       |
| Other  unallocated assets                              |       | 695,436                    |       |
| Total assets                                           |       | $                          | 33,828,374 |   |

 

**(7) Subsequent Event**

 

On July 21, 2004 the Company announced its intentionto discontinue the wafer manufacturing business. This wafer business has beenhighly concentrated on providing wafers for the Company’s largest customer, andwas characterized by very volatile production volumes and costs associated withperiodic changes and continuing improvements to the process. The wafer demandfrom our largest customer had been, and continues to be, subject to repeatedstarts and stops. The result is a wafer business that is not predictable or profitable.Principally for these reasons, and because it also is likely that additionalcapital investment would have to be made to keep our wafer manufacturingprocess up to date, the Company decided to exit the wafer manufacturingbusiness and focus exclusively on the equipment business. The Company willmaintain a research and development effort relating to wafers for our equipmentimprovement programs. In the meantime, the Company intends to record the waferbusiness as a discontinued operation on the books during the third quarter of2004.

 

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**IBISTECHNOLOGY CORPORATION**

 

**PART I - ITEM 2**

 

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF****FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

Ibis Technology Corporation(“Ibis”) was formed in October 1987 and commenced operations in January 1988.Ibis’ initial activities consisted of producing and selling SIMOX-SOI wafersand conducting research and development activities. This effort led to thedevelopment of proprietary oxygen implanters, the Ibis 1000, which we beganselling in 1996, the next generation implanter, the i2000ä,which we began selling in 2002, and also to other proprietary processtechnology.

 

Initially, much of ourrevenue was derived from research and development contracts and sales of wafersfor military applications. Over the years, the Company decided to focus itsbusiness operations and sales strategy on the manufacture and sale of ourimplanter equipment products and de-emphasized the sale of wafers given that,among other things, we believed that the wafer manufacturing companies were inthe best position to manufacture SIMOX-SOI wafers using our implanter equipmentin light of their expertise and operating efficiencies. Recently, as weannounced on July 21, 2004, we have decided to exit the wafer manufacturingbusiness. Our wafer business has been highly concentrated on providing wafersfor the Company’s largest customer, and was characterized by very volatileproduction volumes and costs associated with periodic changes and continuingimprovements to the process. Our major wafer customer has tended to orderfluctuating quantities of wafers on an irregular basis. This customer alsocould revise or cancel orders at any time prior to delivery. This meant thatthis customer, who has accounted for a significant portion of our net revenuein the past, could reduce or decide not to place any orders in the succeedingquarter or quarters. Furthermore, most of our other wafer customers weresampling SIMOX wafers or are in the process of developing prototype productsand have also tended to order small quantities of wafers on an irregularbasis.  These customers could also reviseor cancel orders at any time prior to delivery. As previously announced, because of this unpredictability, and becauseit also is likely that additional Capital Investments would have to be made tokeep our wafer manufacturing process up to date (among other factors), we havedecided to discontinue the wafer manufacturing portion of the business in 2004and to focus exclusively on our equipment business.  We anticipate that we will maintain aresearch and development effort relating to wafers for our equipmentimprovement programs. In the meantime, we intend to record the wafer businessas a discontinued operation on our books during the third quarter of 2004. TheCompany intends to honor current order backlog and related customer contractcommitments through a transition period anticipated to be no longer than theclose of fiscal year 2004. Ibis has experienced quarterly and annualfluctuations in revenue and results of operations due to various factors,including (i) the fluctuating quantities of wafer orders that we haveexperienced in the past as described above, (ii) the timing of receipt ofequipment orders, and (iii) dependence on a limited number of customers.

 

We believe that amigration of SOI wafer manufacturing into the major silicon wafer suppliers istaking place. We reach this conclusion for a number of reasons. First, we believethat tremendous price pressure exists on commodity type products, such assilicon wafers, and this pressure is already eroding the price of SOI wafers.Because the starting wafer represents a significant component of the SOI wafercost, we believe that silicon wafer manufacturers should have a natural coststructure advantage leading to a higher gross margin, and therefore should beable to manage such price pressure better than stand-alone SOI producers thatdo not also produce the silicon wafer itself. Second, we expect that the pricepressure will encourage silicon wafer manufacturers to seek out higher marginproducts, like SOI wafers, to increase their margins. Third, we believe thatsilicon wafer manufacturers have traditionally developed proprietaryintellectual property in silicon materials science, which can be applied todesigning optimal starting wafers for SOI production. We believe that thisshould give them an advantage in both minimizing wafer cost and maximizing SOIwafer quality and yield. Fourth, our experience suggests that silicon wafermanufacturers already have a well-developed infrastructure for manufacturing,sales and marketing large volumes of substrates. Lastly, we believe that thereis greater efficiency in producing the SOI wafer as part of the wafermanufacturers existing product flow, specifically avoiding the need torepackage, reclean, reinspect and reship substrates twice, once as startingsilicon wafers, and a second time as SOI wafers. Therefore, as a result ofthese trends, we expect our ultimate customers will be drawn from these siliconwafer manufacturers and we plan to focus a majority of our technical andmarketing resources on the sale of implanters to the leading silicon wafermanufacturers and our major key customers in the semiconductor industry who webelieve are the leaders in the adoption of SOI technology. We expect thatimplanter

 

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sales tochipmakers should be minimal, and that these sales will be focused on SOIprocesses that the chipmaker wishes to keep proprietary, such as selective (orpatterned) SIMOX, or other specialty substrates.

 

Our fundamentalSIMOX-SOI technology has been developed, refined, and tested over the lastdozen years. In 2002, we introduced the current generation of SIMOX-SOItechnology, that included our second-generation oxygen implanter (i2000ä),and the MLD wafer process which was licensed to us by IBM. We believe that thei2000’s flexibility, automation and operator-friendly controls allow this toolto produce a wide range of SIMOX-SOI wafer products, including Advantox®MLD and Advantox MLD-UT wafers. We also believe the ability of the i2000implanter to produce eight and twelve-inch (or 200 and 300 mm) SIMOX-SOI waferscoupled with the MLD process positions us to capitalize on the growing SOImarket. In 1999, we commenced a program to design and develop the i2000,introduced it in March 2002 and began shipping 300 mm wafers implanted fromthis machine shortly thereafter. A majority of the wafers shipped during thequarter ended June 30, 2004 were 300 mm, affirming our commitment to our focuson the i2000. Customers who purchase the i2000 can utilize SIMOX wafermanufacturing processes on the implanter other than the IBM MLD process.

 

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

 

During February 2004, we announced the booking of anorder for one Ibis i2000 SIMOX implanter, with an option to purchase a secondi2000, from a leading international silicon wafer manufacturer. We subsequentlyachieved customer acceptance of this implanter at our facility and this systemwas later shipped to the customer’s facility in the second quarter of 2004.Revenue recognition for this implanter order will be based on final customeracceptance at their facility, the timing of which may vary depending on anumber of factors, which include the customer’s site being properly facilitized( e.g. power, water, air) and performance of the implanter. As a result, wecannot guarantee when we will recognize revenue on this transaction.

 

During the fourth quarterended December 31, 2003, a number of unexpected events occurred that impactedour 200 mm and smaller wafer size production line including the line’sprojected cash flow generation and our projected utilization of the assetswithin our revised plans. Based on these events and their impact on current andfuture projected cash flows, and our subsequent impairment analysis under theprovisions of SFAS No. 144, Accounting for Impairment or Disposal of Long-LivedAssets resulted in an impairment charge of $11,051,324 for our 200 mm andsmaller SIMOX wafer production line, which is principally comprised of Ibis1000 implanters and associated machinery and equipment not expected to beutilized or sold. The remaining carrying amount of assets for this line at June30, 2004 is approximately $865,000.

 

Wewill continue to review our assumptions about our long-lived assets on aperiodic basis for potential impairment in future quarters. We cannot be surethat our implanters or other long-lived assets will not become impaired in thefuture. In addition, the impairment factors evaluated by Management may changein subsequent periods. Further, depending on the Company’s final disposal plansrelative to sale or closure of the wafer operation, the company may be requiredto take cash related charges in the range of $500,000 to $1.0 million, and takenon-cash charges for inventory and certain production assets associated withthe wafer manufacturing business in the range of $1.0 million to $1.5 million bythe end of the fiscal year, for a total of approximately $1.5 – $2.5 million.

 

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**Critical Accounting Policies**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that have a significantimpact on the results we report in our financial statements. Some of ouraccounting policies require us to make difficult and subjective judgments,often as a result of the need to make estimates on matters that are inherentlyuncertain. Our most critical accounting policies include: revenue recognition,inventory valuation and reserves, accounts receivable 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.

 

***RevenueRecognition. ***We recognize revenue from wafer productsales, equipment sales and the sales of spare parts when all of the followingcriteria have been met: (1) evidence exists that the customer is bound to thetransaction; (2) the product has been delivered to the customer and, whenapplicable, the product has been installed and accepted by the customer; (3)the sales price to the customer has been fixed or is determinable; and (4)collectibility of the sale price is reasonably assured. We typically haverecognized revenue from wafer sales upon shipment (and will continue to do sountil the Company has completely discontinued its wafer manufacturing businessas previously announced) and recognize revenue from implanter sales uponacceptance at the customer’s site. Provisions for estimated sales returns andallowances are made at the time the products are sold. 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 judgmentsbased upon these factors could impact the timing and amount of revenue and costrecognized.

 

***InventoryValuation and Reserves. ***Our policy for the valuation ofinventory, including the determination of obsolete or excess inventory,requires us to estimate the future demand for our products within specific timehorizons, generally twelve months or less. If our estimated demand for specificproducts is greater than actual demand and we fail to reduce manufacturingoutput accordingly, we could be required to record additional inventoryreserves, which would have a negative impact on our gross margin. We havereserved for a possible over-supply of wafers utilizing inventory aging recordsand for obsolescence when engineering changes or other technological advancesindicate that obsolescence has occurred. We also adjust the valuation ofinventory when estimated actual cost is significantly different than standardcost and value inventory at the lower of cost or market. Once established, anywrite-downs of inventory are considered permanent adjustments to the cost basisof the inventory.

 

***AccountsReceivable Reserves. ***Accounts receivable are reduced by anallowance for amounts that may become uncollectible in the future. Theestimated allowance for uncollectible amounts is based primarily on a specificanalysis of accounts in the receivable portfolio and a general reserve based onthe aging of receivables and historical write-off experience. While managementbelieves the allowance to be adequate, if the financial condition of ourcustomers were to deteriorate, resulting in impairment of their ability to makepayments, additional allowances may be required and could materially impact ourfinancial position and results of operations.

 

***Valuationof Long-Lived Assets. ***Ibis reviews the valuation of long-livedassets, including property and equipment and licenses, under the provisions ofSFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.  Management is required to assess therecoverability of its long-lived assets whenever events and circumstances indicatethat the carrying value may not be recoverable. Based on current conditions,factors we consider important and that could trigger an impairment reviewinclude the following:

 

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•      Significantunderperformance relative to expected historical or projected future operatingresults;

•      Significantchanges in the manner of our use of the acquired assets or the strategy of ouroverall business;

•      Significantnegative industry or economic trends;

•      Significantdecline in our stock price for a sustained period; and

•      Ourmarket capitalization relative to book value.

 

Inaccordance with SFAS No. 144, when we determine that the carrying value ofapplicable long-lived assets may not be recoverable based upon the existence ofone or more of the above indicators of impairment, we evaluate whether thecarrying amount of the asset exceeds the sum of the undiscounted cash flowsexpected to result from the use and eventual disposition of that asset. If sucha circumstance 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. We adoptedSFAS No. 144 during the first quarter of 2002 and during the fourth quarter of2003 we recognized an impairment charge of $11,051,324 for our 200 mm andsmaller SIMOX wafer production line.

 

**Results of Operations**

 

***Second Quarter Ended June 30, 2004 Compared to Second Quarter EndedJune 30, 2003***

 

***WaferProduct Sales***. Wafer product sales decreased $1,643,694or 47%, to $1,888,506 for the second quarter ended June 30, 2004 from$3,532,200 for the second quarter ended June 30, 2003. Wafer product sales thisquarter were 30% lower due to decreased production requirements for 300 mmSIMOX wafers from one significant customer and from reduced average sellingprices. Management expects this volatility in sales would continue and for thisand other reasons has announced the discontinuance of this portion of itsbusiness.

 

***Contractand Other Revenue***. Contract and other revenue includes revenue derived from licenseagreements, characterization and other services. Contract and other revenueincreased for the second quarter ended June 30, 2004 to $82,664 from $27,601for the second quarter ended June 30, 2003, an increase of $55,063 or 200%.This is attributable to license revenue recognized from royalty fees related toequipment technology.

 

***EquipmentRevenue. ***Equipment revenue represents revenuerecognized from sales of implanters, spare parts and field service. Equipmentrevenue decreased to $120,589 for the second quarter ended June 30, 2004 from$8,162,188 for the second quarter ended June 30, 2003, a decrease of $8,041,599or 99%. During the quarter ended June 30, 2004, we continued to defer revenueassociated with the shipment of the implanter ordered during the first quarterof 2004, while in the quarter ended June 30, 2003 we received final customeracceptance on, and recognized revenue for the i2000 implanter we shipped to ourlargest customer in 2002. Field service revenue accounted for $79,287 for the secondquarter ended June 30, 2004 as compared to $69,300 for the same period lastyear. Sales of spare parts accounted for $41,302 of equipment revenue for thequarter ended June 30, 2004 as compared to $99,982 of equipment revenue for thesecond quarter ended June 30, 2003. Sales of spare parts fluctuate depending oncustomer demand and customer warranty expiration dates.

 

***TotalNet Sales and Revenue***. Total net sales and revenue for the second quarter ended June 30, 2004was $2,091,759, a decrease of $9,630,230, or 82%, from total net revenue of$11,721,989 for the second quarter ended June 30, 2003. This decrease is aresult of a decrease in 300mm SIMOX wafer sales in the quarter ended June 30,2004 and implanter revenue recognized in the second quarter of 2003.

 

***TotalCost of Sales and Revenue***.  Cost of waferproduct sales for the second quarter ended June 30, 2004 was $3,185,153,compared to $4,631,928 for the quarter ended June 30, 2003, a decrease of$1,446,775, or 31%. This is attributable to the decreased volume of 300 mmwafers sold. Of this amount, $897,781 was from material and $14,922

 

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labor. This is alsoattributed to a decrease in fixed costs, mainly depreciation, which was lowerdue to the write down of our 200 mm and smaller wafer size production equipmentin the fourth quarter of 2003, as a result of our impairment analysis thatreduced depreciation and amortization by $534,072 in the quarter.

 

Cost of contractand other revenue consists of labor and materials expended during the quarter.Cost of contract and other revenue for the second quarter ended June 30, 2004was $5,209, as compared to $9,845 for the second quarter ended June 30, 2003, adecrease of $4,636, or 47%. This is attributable to a decrease in materialcosts from lower volumes of smaller size wafers sold that are associated withother revenue. 

 

Cost of equipmentrevenue represents the cost of equipment and spare parts, along with laborincurred for field service. Cost of equipment revenue for the second quarterended June 30, 2004 was $372,476, as compared to $3,685,849 for the secondquarter ended June 30, 2003. Costs in the second quarter ended June 30, 2003included the cost of the i2000 implanter, which was recognized as revenue inthe quarter in accordance with SAB101. Costs in the second quarter ended June30, 2004 included an under absorption of overhead in equipment manufacturing ofapproximately $139,000 and equipment material scrapped due to obsolescence ofapproximately $148,000.

 

Total cost ofsales and revenue for the second quarter ended June 30, 2004 was $3,562,788 ascompared to $8,327,622 for the second quarter ended June 30, 2003, a decreaseof $4,764,834 or 57%. The gross margin for all sales was a negative 70% for thesecond quarter ended June 30, 2004 as compared to a positive gross margin of29% for the second quarter ended June 30, 2003. This decrease in the grossmargin for all sales is attributable to the 55% gross margin achieved on thei2000 implanter sale in the quarter ended June 30, 2003 and lower margins onwafer sales due to lower volume in the quarter ended June 30, 2004.

 

***Generaland Administrative Expenses***.  General and administrative expenses for thesecond quarter ended June 30, 2004 were $572,034 (or 27% of total revenue) ascompared to $567,794 (or 5% of total revenue) for the second quarter ended June30, 2003, an increase of $4,240, or 1%. This is due to increased professionalservices, which increased by $8,431 but were offset by decreased payroll andpayroll related expenses.

 

***Marketingand Selling Expenses***. Marketing and selling expenses for the second quarter ended June 30,2004 were $425,312 (or 20% of total revenue) as compared to $305,936 (or 3% oftotal revenue) for the second quarter ended June 30, 2003, an increase of$119,376, or 39%. This is primarily a result of payroll and payroll relatedexpenses, which increased by $30,769, along with increased subcontractor costs,which increased by $63,648. associated with our service group based in Japan.

 

***Researchand Development Expenses.*** Internally funded research and development expenses decreased by$410,755 or 32%, to $886,905 (or 42% of total revenue) for the second quarterended June 30, 2004, as compared to $1,297,660 (or 11% of total revenue) forthe second quarter ended June 30, 2003. This is primarily due to reducedpayroll, payroll related expenses, wafer development spending, depreciation andconsulting services relating to the i2000 implanters, which decreased by$81,369, $19,952, $108,915, $126,267 and $19,098 respectively.

 

***OtherIncome (Expense)*.** Total other expense for the second quarter ended June 30, 2004 was$3,004 as compared to income of $3,049 for the second quarter ended June 30,2003, a decrease of $6,053, or 199%. The decrease in total other income isattributable to increased interest expense due to a financing arrangemententered into during the second quarter of 2003.

 

***Six Months Ended June 30, 2004 Compared to Six Months Ended June 30,2003***

 

***WaferProduct Sales***.  Wafer product sales decreased $470,154 or 11%,to $3,737,746 for the six months ended June 30, 2004 from $4,207,900 for thesix months ended June 30, 2003. This is attributable to sales of smaller wafersizes decreasing along with 300 mm SIMOX wafers decreasing. Sales of 300mmwafers accounted for 94% and 87% of total product sales for the six monthsended June 30, 2004 and 2003, respectively. Management expects this

 

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volatility in sales would continue and for this and other reasons theCompany has announced the discontinuance of its wafer manufacturing business.

 

***Contractand Other Revenue***.  Contract and other revenueincludes revenue derived from license agreements, characterization and otherservices.  Contract and other revenuedecreased for the six months ended June 30, 2004 to $172,915 from $526,065 forthe six months ended June 30, 2003, a decrease of $353,150 or 67%. Thisdecrease is attributable to revenue recognized from the transfer of wafer technologyto a customer, pursuant to a license transfer agreement in the six months endedJune 30, 2003. This was offset by an increase in royalty fees related toequipment technology in the six months ended June 30, 2004.

 

***EquipmentRevenue. ***Equipmentrevenue represents revenue recognized from sales of implanters, spare parts andfield service revenue. Equipment revenue decreased to $238,246 for the sixmonths ended June 30, 2004 from $8,396,175 for the six months ended June 30,2003, a decrease of $8,157,929 or 97%. During the six months ended June 30, 2003, the i2000 implanter weshipped to our largest customer late in 2002 was accepted. As a result, werecognized revenue of approximately $8 million in the six months ended June 30,2003. There was no implanter revenue recognized in the six months ended June30, 2004. Field service revenue accounted for $155,785 of equipment revenue forthe six months ended June 30, 2004 as compared to $139,850 of equipment revenuefor the same period last year.  Sales ofspare parts accounted for $82,461 of equipment revenue for the six months endedJune 30, 2004 as compared to $263,419 of equipment revenue for the six monthsended June 30, 2003. Sales of spare parts fluctuate depending on customerdemand and when warranties expire.

 

***TotalNet Sales and Revenue***. Total net revenue for the six months ended June 30, 2004 was $4,148,907,a decrease of $8,981,233, or 68%, from total net revenue of $13,130,140 for thesix months ended June 30, 2003.

 

***TotalCost of Sales and Revenue***.  Cost of waferproduct sales for the six months ended June 30, 2004 was $6,441,776, comparedto $7,505,843 for the six months ended June 30, 2003, a decrease of $1,064,067,or 14%. This is attributable to decreased fixed costs, mainly depreciation whichis lower due to the write down of our 200mm and smaller wafer size productionequipment in the fourth quarter of 2003 as a result of our impairment analysis.

 

Contract and otherrevenue consists of labor and materials expended during the six month period.Cost of contract and other revenue for the six months ended June 30, 2004 was$12,151, as compared to $28,002 for the six months ended June 30, 2003, adecrease of $15,851, or 57%. This decrease is attributable to a reduction inlabor costs associated with license revenue compared to the prior year period.

 

Cost of equipmentrevenue represents the cost of equipment, the cost for spare parts, along withlabor incurred for field service. Cost of equipment revenue for the six monthsended June 30, 2004 was $699,081, as compared to $3,805,702 for the six monthsended June 30, 2003, a decrease of $3,106,621 or 82%. This decrease is due tothe costs recognized for the i2000 implanter sold during the six month endedJune 30, 2003 offset by under absorption of overhead in equipment manufacturingfor the six month ended June 30, 2004 of approximately $409,000 as the one toolunder construction was completed, along with equipment material scrapped due toobsolescence of approximately $149,000.

 

The total cost ofsales and revenue for the six months ended June 30, 2004 was $7,153,008 ascompared to $11,339,547 for the six months ended June 30, 2003, a decrease of$4,186,539 or 37%. The gross margin for all sales was a negative 72% for thesix months ended June 30, 2004 as compared to a positive gross margin of 14%for the six months ended June 30, 2003. This decrease in the gross margin forall sales is attributable to a 55% gross margin achieved on the i2000 implantersale, recognized in the six months ended June 30, 2003 and under absorption ofoverhead in equipment manufacturing in the six months ended June 30, 2004 whichwere offset by improved margins on wafer sales due to lower depreciation.

 

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***Generaland Administrative Expenses***.  General and administrative expenses for thesix months ended June 30, 2004 were $1,203,525 (or 29% of total revenue) ascompared to $1,186,547 (or 9% of total revenue) for the six months ended June30, 2003, an increase of $16,978, or 1%. This is due to increased professional services which were offset bydecreased payroll and payroll related expenses as a result of cost savingsinitiated by Ibis.

 

***Marketingand Selling Expenses***. Marketing and selling expenses for the six months ended June 30, 2004were $765,967 (or 18% of total revenue) as compared to $660,469 (or 5% of totalrevenue) for the six months ended June 30, 2003, an increase of $105,498, or16%.  The increase in marketing andselling expenses is a result of increased subcontractor costs associated withour service group in Japan, offset by decreased promotional expenses.

 

***Researchand Development Expenses.***  Internallyfunded research and development expenses decreased by $1,161,124 or 38%, to$1,872,172 (or 45% of total revenue) for the six months ended June 30, 2004, ascompared to $3,033,296 (or 23% of total revenue) for the six months ended June30, 2003. This decrease is due to reduced payroll, payroll related expenses,wafer development spending, consulting services related to the i2000 implanterand depreciation.

 

***OtherIncome (Expense)*.** Total other income for the six months ended June 30, 2004 was $7,583 ascompared to $30,648 for the six months ended June 30, 2003, a decrease of$23,065, or 75%.  The decrease in totalother income and expense is attributable to increased interest expense due to afinancing arrangement entered into during the second quarter of 2003. Ibisentered into this agreement with a financing agent to obtain payment forproducts from its largest customer on an expedited basis.

 

**Liquidity and Capital Resources**

 

As of June 30, 2004, Ibis had cash and cashequivalents of $13,955,136, including the receipt of net proceeds of the $12.6million received from a public offering of 1,000,000 shares of common stock at$13.25 per share in October 2003 and the downpayments of $4.7 million for thei2000 SIMOX implanter order received in February, 2004. The shares wereincluded in a shelf registration statement filed with the Securities andExchange Commission on September 2, 2003 and declared effective on October 3,2003. Net proceeds from the offering will be used primarily to fund researchand development, capital expenditures and working capital.

 

Depending on theCompany’s final disposal plans relative to sale or closure of the waferoperation, the company may be required to take cash related charges in therange of $500,000 to $1.0 million. The Company plans to maintain a waferresearch and development effort focused on continuous improvement of theequipment capabilities and for supporting the Company’s equipment customers’needs at what is expected to be at a significantly reduced cost to the businessgoing forward. As a result, the Company expects to reduce its monthly cash burnrate and anticipates it will have sufficient cash for operations through theforeseeable future or about the next eighteen months.

 

During the six monthsended June 30, 2004, Ibis generated $467,790 in cash for operating activitiescompared to cash used of $3,224,664 for the same period in 2003. Depreciationand amortization expense for the six months ended June 30, 2004 and 2003 was$2,019,762 and $3,325,952, respectively. This accounted for 49% and 25% oftotal revenue, respectively. Due to the capital intensive nature of Ibis’ waferbusiness, Management expects that depreciation and amortization will continueto be a significant portion of its expenses in the near term and for 2004 willapproximate $4 million. To date, Ibis’ working capital requirements have beenfunded primarily through debt, (capital leases), and equity financings. Ibisalso used $22,680 during the six months ended June 30, 2004 to fund additionsto property and equipment as compared to $1,412,304 during the six months endedJune, 2003. At June 30, 2004, Ibis had commitments to purchase approximately$391,892 of material to be used for manufacturing wafers, $3,067,404 for i2000implanter parts and $1,873 in capital equipment purchases.

 

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As part of our cash management plan, we initiatedadditional cost saving measures during 2003. This included the lay-off oftwenty-nine employees. Our headcount at the end of the second quarter 2004 wasapproximately 78 employees and one additional temporary employee.

 

In June 2003, Ibis entered into an agreement with afinancing agent to obtain payment for products from its largest customer on anexpedited basis. The discount rate associated with this agreement is based onthe prime rate and may fluctuate.

 

In September 2001, Ibis entered into a $4.5 millionequipment lease line with Heller Financial’s Commercial Equipment FinanceGroup. The lease line was used to finance the purchase of process equipment forwafer production, primarily for 300 mm wafers. This line was fully drawn down intwo sale-leaseback transactions, bearing interest at approximately 8% with aterm of three years, and a monthly net payment of $131,212. Ibis has a fairmarket value purchase option at the end of the lease term. The lease line issecured by the underlying assets and all other property and equipment of Ibis.

 

Our existing cashresources are believed to be sufficient to support our current operating planfor the next eighteen months. Forecasting future revenue, on aquarter-by-quarter basis, remains exceedingly difficult and significantvariations quarter to quarter, are likely. We expect to continue to exploreequity offerings and other forms of financing and anticipate that we may berequired to raise additional capital in the future in order to finance futuregrowth and our research and development programs.

 

**Business Risk Factors**

 

This Form 10-Qcontains express or implied forward-looking statements within the meaning ofthe “safe harbor” provisions of the Private Securities Litigation Reform Act of1995 that relate to future events or our future financial performance. In somecases, you can identify forward-looking statements by terminology, such as“may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,”“estimate,” “project,” “predict,” “intend,” “potential” or “continue” or thenegative of such terms or other comparable terminology, although not allforward-looking statements contain such terms. In addition, theseforward-looking statements include, but are not limited to, statementsregarding, among other things: (i) customer interest in and demand for, andmarket acceptance of, the Company’s SIMOX-SOI technology, and the involvementgenerally of the silicon wafer manufacturing industry in the SOI wafer market,(ii) the Company’s belief that wafer manufacturers will become the primarysuppliers of SIMOX-SOI wafers to the chipmaking industry, (iii) the throughputand production capacity of the i2000 implanter for manufacturing 200-mm and300-mm SIMOX-SOI wafers, (iv) the Company’s plan to focus on supplyingimplanters to wafer manufacturers, (v) the Company’s expectations regardingfuture orders for i2000 implanters, and the likelihood and timing of revenuerecognition on such sales, (vi) the Company’s expectation regarding future willingnessof wafer manufacturers to purchase equipment from the Company, (vii) theadoption rate of SOI technology, and (viii) the Company’s expectation of havingsufficient cash for operations. Such statements are neither promises norguarantees but rather are subject to risks and uncertainties, which could causeactual results to differ materially from those described in the forward-lookingstatements. Such risks and uncertainties include, but are not limited to:future continued migration to SOI technology and market acceptance of SIMOX;the level of demand for the Company’s products; the Company’s ability to pursueand maintain further strategic relationships, partnerships and alliances withthird parties; 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; the likelihood and timing of revenue recognition on suchtransactions; the impact of competitive products, technologies and pricing; theimpact of rapidly changing technology; the possibility of further assetimpairment and resulting charges; equipment capacity and supply constraints ordifficulties; the Company’s limited history in selling implanters; generaleconomic conditions; and other risks and uncertainties described elsewhere inthis Form 10-Q and in the Company’s Securities and Exchange Commission filingsfrom time to time, including but not limited to those set forth in theCompany’s annual report on

 

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Form 10-K for the yearended December 31, 2003. All information set forth in this Form 10-Q is as of thedate of this Form 10-Q, and Ibis undertakes no duty to update this information,unless required by law.

 

**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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**IBISTECHNOLOGY CORPORATION**

**PART I – ITEM 3**

 

**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

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**IBIS TECHNOLOGY CORPORATION**

 

**PART I – ITEM 4**

 

**CONTROLSAND PROCEDURES**

 

(a)   Evaluation of DisclosureControls and Procedures. Our principal executive officer and principalfinancial officer, after evaluating the effectiveness of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e) as of the end of the period covered by this Quarterly Report on Form10-Q, have concluded that, based on such evaluation, our disclosure controlsand procedures were adequate and effective to ensure that material informationrelating to the Company was made known to them by others within the Company,particularly during the period in which this Quarterly Report on Form 10-Q wasprepared.

 

(b)   Changes in Internal Controls.There were no changes in our internal control over financial reporting,identified in connection with the evaluation of such internal control thatoccurred during our last fiscal quarter that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**IBISTECHNOLOGY CORPORATION**

 

**PART II****OTHER INFORMATION**

 

Item 1 - LegalProceedings

 

Five class action securities lawsuits have been filedin the United States District Court in the District of Massachusetts againstIbis and its President and CEO: Martin Smolowitz v. Ibis TechnologyCorporation., et al., Civ. No. 03-12613 (RCL) (D. Mass.); Fred Den v. IbisTechnology Corporation., et al., Civ. No. 04-10060 (RCL) (D. Mass.); Weinsteinv. Ibis Technology Corporation., et al., Civ. No. 04-10088 (RCL) (D. Mass.);George Harrison v. Ibis Technology Corporation., et al., Civ. No. 04-10286(RCL) (D. Mass.); and Eleanor Pitzer v. Ibis Technology Corporation., et al,Civ. No. 04-10446 (RCL) (D. Mass.). On June 4, 2004, the Court entered an orderconsolidating these actions under the caption In re Ibis Technology SecuritiesLitigation, C.A. 04-10446 RCL. On July, 2004, a consolidated amended classaction complaint was filed which alleges, among other things, that the Companyviolated federal securities laws by allegedly making misstatements to theinvesting public relating to demand for certain Ibis products and intellectual propertyissues relating to the sale of the i2000 oxygen implanter. The plaintiffs areseeking unspecified damages. On August 5, 2004, we filed a motion to dismissthe consolidated amended complaint on the grounds, among others, that it failedto state a claim on which the relief could be granted. While we believe thatthe allegations are without merit, and we intend to vigorously defend againstthe suits, there can be no guarantee as to how they ultimately will beresolved.

 

In addition, Ibis has been named as a nominaldefendant in a shareholder derivative action filed in February 2004 againstcertain of its directors and officers: Louis F. Matheson, Jr. v. Martin J. Reidet al., Civ. Act. No. 04-10341 (RCL). The complaint alleges, among otherthings, that the alleged conduct challenged in the securities cases pendingagainst Ibis in Massachusetts (described above) constitutes a breach of thedefendants’ fiduciary duties to Ibis. The complaint seeks unspecified moneydamages and other relief ostensibly on behalf of Ibis. On June 4, 2004, theCourt entered an order staying this matter pending the entry of a final orderon any motion filed by the Company to dismiss the consolidated class actioncomplaint referenced above.

 

Litigation may be time-consuming, expensive anddisruptive to normal business operations, and the outcome of litigation isdifficult to predict. An unfavorable resolution of these litigation matterscould have a material adverse effect on our business, results of operations andfinancial condition.

 

Item 2 - Changes in Securities

 

None

 

Item 3 - Defaults upon Senior Securities

 

None

 

Item 4 - Submission of Matters to a Vote ofSecurity Holders

 

The annual meeting of stockholders of Ibis was held onMay 13, 2004. The following matters were voted on at the meeting:

 

(1)   Three people were elected tothe Board of Directors of the company to serve for a term ending in 2007 anduntil their successors are duly elected and qualified. The following is a tablesetting forth the number of votes cast for and withheld for each nominee forDirector.

 
| **Name**            | ** ** | **Vote For** | ** ** | **Vote Withheld** | ** ** |
|---------------------|------------|--------------|------------|-------------------|------------|
|                |       |         |       |              |       |
| Dimitri  Antoniadis |       | 10,048,259   |       | 270,881           |       |
|                |       |         |       |              |       |
| Robert L. Gable     |       | 9,947,464    |       | 371,676           |       |
|                |       |         |       |              |       |
| Martin J. Reid      |       | 9,072,815    |       | 1,246,325         |       |

 

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(2)   The stockholders of the Companyvoted to amend the 1997 Employee, Director and Consultant Stock Option Plan toincrease by 300,000 shares the aggregate number of shares of common stock forwhich options may be granted under this plan. Stockholders holding 2,516,288shares voted in favor of the proposal, stockholders holding 785,263 sharesvoted against the proposal and stockholders holding 6,975,806 shares abstainedfrom voting on this proposal.

 

(3)   The stockholders of the Company ratified theappointment of KPMG LLP as the Company’s independent public accountants for thefiscal year ending December 31, 2004. Stockholders holding 10,262,704 sharesvoted in favor of the proposal, stockholders holding 30,212 shares votedagainst the proposal and stockholders holding 26,224 shares abstained fromvoting on this proposal.

 

Item 5 - OtherInformation

 

None

 

Item 6 - Exhibits and Reports on Form 8-K

 

(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                       |

 

(b)           Reportson Form 8-K:

 

On April 21, 2004 we furnished to the SEC a report onForm 8-K containing the April 21, 2004 press release reporting Ibis’ financialresults for the First Quarter ended March 31, 2004.

 

On May 6, 2004 we furnished to the SEC a report onForm 8-K containing the May 5, 2004 press release announcing the hiring ofWilliam J.Schmidt, Ibis’ new Chief Financial Officer, effective May 10, 2004.

 

On May 25, 2004 we furnished to the SEC a report onForm 8-K containing the May 25, 2004 press release announcing the shipment ofan i2000 implanter to a leading silicon wafer manufacturer.

 

On June 1, 2004 we furnished to the SEC a report onForm 8-K containing the June 1, 2004 press release announcing Ibis’participation in the CIBC World Markets Communication & Technology FoodChain Conference held in New York City on June 7 and June 8, 2004.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**SIGNATURES**

 

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

 

 
|                   | Ibis Technology Corporation |
|------------------------|-----------------------------|
|                   |                        |
|                   |                        |
| Date: August 12, 2004  | By:                         | /s/William J.  Schmidt |   |
|                   |                        | William J. Schmidt |
|                   |                        | Chief Financial Officer, Treasurer and Clerk  (principal financial and accounting officer) |
|                   |                        |
|                   |                        |
| Date:, August 12, 2004 | By:                         | /s/Martin J.  Reid |   |
|                   |                        | Martin J. Reid |
|                   |                        | President and Chief Executive Officer |
|                        |                             |  |  |  |

 

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