**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20569**

**Form 10-Q**

| **x** |   | **Quarterly Report Pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934** |
|-------|--------|----------------------------------------------------------------------------------------------|

 

**For theQuarterly Period Ended June 30, 2006**

**Or**

| **o** |   | **Transition Report Pursuant to Section 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 |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

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

 

**(978) 777-4247**

(Registrant’stelephone number, including area code)

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  x  No o

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

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

 

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

Yes  o  No x

10,872,514 sharesof Common Stock, par value $.008, were outstanding on August 14, 2006.

 

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**IBISTECHNOLOGY CORPORATION**

**INDEX**
| PART I - FINANCIAL INFORMATION                                                                                               |       |       |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                                                                                                                         |       |       |
| Item 1 – Financial Statements:                                                                                          |       |       |
| ** **                                                                                                                   | ** ** | ** ** |
| Balance  Sheets December 31, 2005 and June 30, 2006 (unaudited)                                                              |       |       |
|                                                                                                                         |       |       |
| Statements  of Operations  Three Months Ended June 30,2005 and 2006 and Six Months Ended June 30, 2005  and 2006(unaudited)) |       |       |
|                                                                                                                         |       |       |
| Statements  of Cash Flows Six Months Ended June 30, 2005 and 2006 (unaudited)                                                |       |       |
|                                                                                                                         |       |       |
| Notes to Unaudited Interim Financial Statements                                                                              |       |       |
|                                                                                                                         |       |       |
| Item 2 – Management’s Discussion and Analysis of  Financial Condition and Results of Operations                    |       |       |
|                                                                                                                         |       |       |
| Item 3 – Quantitative and Qualitative Disclosure About  Market Risk                                                     |       |       |
|                                                                                                                         |       |       |
| Item 4 – Controls and Procedures                                                                                        |       |       |
|                                                                                                                         |       |       |
| PART II – OTHER INFORMATION                                                                                             |       |       |   |
|                                                                                                                         |       |       |   |
| Item 1 – Legal Proceedings                                                                                              |       |       |   |
|                                                                                                                         |       |       |   |
| Item 1A – Risk Factors                                                                                                  |       |       |   |
|                                                                                                                         |       |       |   |
| Item 2 – Unregistered Sales of Equity Securities and  Use of Proceeds                                                   |       |       |   |
|                                                                                                                         |       |       |   |
| Item 3 – Defaults upon  Senior Securities                                                                               |       |       |   |
|                                                                                                                         |       |       |   |
| Item 4 – Submission of Matters to a Vote of Security  Holders                                                           |       |       |   |
|                                                                                                                         |       |       |   |
| Item 5 – Other Information                                                                                              |       |       |   |
|                                                                                                                         |       |       |   |
| Item 6 – Exhibits                                                                                                       |       |       |   |
|                                                                                                                         |       |       |   |
| Signatures                                                                                                                   |       |       |   |
|                                                                                                                              |            |            |  |  |

 

 

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**IBISTECHNOLOGY CORPORATION**

**BALANCE SHEETS**

**(Unaudited)**
| ** **                                                                                                                                          | ** ** | **December 31,** | ** ** | **June 30** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|
| ** **                                                                                                                                          | ** ** | **2005**              | ** ** | **2006**         | ** ** |
| **Assets**                                                                                                                                          |       |                  |       |             |       |
| **Current assets:**                                                                                                                                 |       |                  |       |             |       |
| Cash and cash  equivalents                                                                                                                          |       | $                     | 6,856,874  |             | $          | 7,557,482 |   |
| Accounts  receivable, trade, net                                                                                                                    |       | 90,878                |       | 64,767           |       |
| Inventories, net  (note 4)                                                                                                                          |       | 6,276,650             |       | 4,772,197        |       |
| Prepaid expenses  and other current assets                                                                                                          |       | 615,702               |       | 516,807          |       |
| Total current  assets                                                                                                                               |       | 13,840,104            |       | 12,911,253       |       |
| Property and equipment                                                                                                                              |       | 26,448,906            |       | 24,721,009       |       |
| Less:  Accumulated depreciation and amortization                                                                                                    |       | (21,352,154           | )          | (20,181,868      | )          |
| Net property and  equipment                                                                                                                         |       | 5,096,752             |       | 4,539,141        |       |
| Patents and other  assets, net                                                                                                                      |       | 1,055,532             |       | 934,481          |       |
| Total assets                                                                                                                                        |       | $                     | 19,992,388 |             | $          | 18,384,875 |   |
|                                                                                                                                                |       |                  |       |             |       |
| **Liabilities and Stockholders’  Equity**                                                                                                      |       |                  |       |             |       |
| **Current liabilities:**                                                                                                                            |       |                  |       |             |       |
| Accounts payable                                                                                                                                    |       | $                     | 230,871    |             | $          | 485,014 |   |
| Accrued  liabilities (notes 5 and 6)                                                                                                                |       | 1,201,695             |       | 1,141,217        |       |
| Deferred revenue                                                                                                                                    |       | 7,263,000             |       | 5,963,000        |       |
| Total current  liabilities                                                                                                                          |       | 8,695,566             |       | 7,589,231        |       |
| Total  liabilities                                                                                                                                  |       | 8,695,566             |       | 7,589,231        |       |
|                                                                                                                                                |       |                  |       |             |       |
| **Stockholders’ equity:**                                                                                                                      |       |                  |       |             |       |
| Undesignated  preferred stock, $.01 par value                                                                                                       |       |                  |       |             |       |
| Authorized  2,000,000 shares; none issued                                                                                                           |       | —                |       | —           |       |
| Common stock,  $.008 par value                                                                                                                      |       |                  |       |             |       |
| Authorized  50,000,000 shares; issued and outstanding 10,816,029 shares and 10,872,514  shares at December 31, 2005 and June 30, 2006, respectively |       | 86,528                |       | 86,980           |       |
| Additional  paid-in capital                                                                                                                         |       | 93,245,754            |       | 93,545,300       |       |
| Accumulated  deficit                                                                                                                                |       | (82,035,460           | )          | (82,836,636      | )          |
| Total  stockholders’ equity                                                                                                                    |       | 11,296,822            |       | 10,795,644       |       |
| Total liabilities and  stockholders’ equity                                                                                                    |       | $                     | 19,992,388 |             | $          | 18,384,875 |   |

 

See accompanyingnotes to unaudited interim financial statements.

3

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**IBIS TECHNOLOGY CORPORATION**

**STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                                                                                                                                      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                                                                      | ** ** | **2005**                         | ** ** | **2006**                       | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Net  Sales and revenue:**                                                                                                                                     |       |                             |       |                           |       |   |   |   |   |
| License and other revenue                                                                                                                                       |       | $                                | 95,861     |                           | $          | 28,120 |   | $ | 164,095 |   | $ | 283,220 |   |
| Equipment revenue                                                                                                                                               |       | 103,059                          |       | 14,291                         |       | 201,480 |   | 6,020,013 |   |
| Total net sales and revenue (notes 2 and 8)                                                                                                                     |       | 198,920                          |       | 42,411                         |       | 365,575 |   | 6,303,233 |   |
|                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| **Cost of  sales and revenue:**                                                                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Cost of license and other revenue                                                                                                                               |       | —                           |       | —                         |       | — |   | — |   |
| Cost of equipment revenue (includes share-based  compensation expense of $1,144 and $6,497 for the three and six months ended  June 30, 2006, respectively)     |       | 222,147                          |       | 53,484                         |       | 522,230 |   | 2,726,276 |   |
| Total cost of sales and revenue                                                                                                                                 |       | 222,147                          |       | 53,484                         |       | 522,230 |   | 2,276,276 |   |
| Gross profit (loss)                                                                                                                                             |       | (23,227                          | )          | (11,073                        | )          | (156,655 | ) | 3,576,957 |   |
|                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| **Operating  expenses:**                                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| General and administrative (includes share-based  compensation expense of $68,861 and $122,371 for the three and six months  ended June 30, 2006, respectively) |       | 650,261                          |       | 674,869                        |       | 1,211,874 |   | 1,314,487 |   |
| Marketing and selling (includes share-based compensation  expense of $10,353 and $28,924 for the three and six months ended June 30,  2006, respectively)       |       | 401,657                          |       | 300,055                        |       | 791,913 |   | 616,516 |   |
| Research and development (includes share-based  compensation expense of $16,782 and$64,693 for the three and six months ended  June 30, 2006, respectively)     |       | 1,568,029                        |       | 1,356,591                      |       | 3,250,692 |   | 2,685,893 |   |
| Total operating expenses                                                                                                                                        |       | 2,619,947                        |       | 2,331,515                      |       | 5,254,479 |   | 4,616,896 |   |
| Loss from operations                                                                                                                                            |       | (2,643,174                       | )          | (2,342,588                     | )          | (5,411,134 | ) | (1,039,939 | ) |
|                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| **Other  income (expense):**                                                                                                                                    | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                                                                                                                                 |       | 46,545                           |       | 89,259                         |       | 87,069 |   | 153,647 |   |
| Interest expense                                                                                                                                                |       | —                           |       | —                         |       | (536 | ) | — |   |
| Other                                                                                                                                                           |       | 8,726                            |       | 87,267                         |       | 8,727 |   | 86,372 |   |
| Total other income                                                                                                                                              |       | 55,271                           |       | 176,526                        |       | 95,260 |   | 240,019 |   |
|                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Loss from continuing operations before income taxes                                                                                                             |       | (2,587,903                       | )          | (2,166,062                     | )          | (5,315,874 | ) | (799,920 | ) |
|                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Income tax  expense                                                                                                                                             |       | —                           |       | —                         |       | 1,256 |   | 1,256 |   |
| Loss from  continuing operations                                                                                                                                |       | (2,587,903                       | )          | (2,166,062                     | )          | (5,317,130 | ) | (801,176 | ) |
|                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Discontinued  operations:                                                                                                                                       |       |                             |       |                           |       |   |   |   |   |
| Loss on disposal                                                                                                                                                |       | (57,000                          | )          | —                         |       | (14,715 | ) | — |   |
| Loss from  discontinued operations                                                                                                                              |       | (57,000                          | )          | —                         |       | (14,715 | ) | — |   |
|                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Net loss (note 2 and 9)                                                                                                                                         |       | $                                | (2,644,903 | )                              | $          | (2,166,062 | ) | $ | (5,331,845 | ) | $ | (801,176 | ) |
|                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Earnings (loss)  per share:                                                                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                                                           |       |                             |       |                           |       |   |   |   |   |
| Continuing operations                                                                                                                                           |       | $                                | (0.24      | )                              | $          | (0.20 | ) | $ | (0.50 | ) | $ | (0.07 | ) |
| Discontinued operations                                                                                                                                         |       | $                                | (0.01      | )                              | $          | — |   | $ | — |   | $ | — |   |
| Net loss                                                                                                                                                        |       | $                                | (0.25      | )                              | $          | (0.20 | ) | $ | (0.50 | ) | $ | (0.07 | ) |
| Diluted                                                                                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Continuing operations                                                                                                                                           |       | $                                | (0.24      | )                              | $          | (0.20 | ) | $ | (0.50 | ) | $ | (0.07 | ) |
| Discontinued operations                                                                                                                                         |       | $                                | (0.01      | )                              | $          | — |   | $ | — |   | $ | — |   |
| Net loss                                                                                                                                                        |       | $                                | (0.25      | )                              | $          | (0.20 | ) | $ | (0.50 | ) | $ | (0.07 | ) |
|                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Weighted average  common shares outstanding                                                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                                                           |       | 10,726,305                       |       | 10,835,385                     |       | 10,722,968 |   | 10,825,761 |   |
| Diluted (note 7)                                                                                                                                                |       | 10,726,305                       |       | 10,835,385                     |       | 10,722,968 |   | 10,825,761 |   |

 

See accompanyingnotes to unaudited interim financial statements.

4

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**IBISTECHNOLOGY CORPORATION**

**STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                            | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | **June 30,**              | ** ** |
| ** **                                                                            | ** ** | **2005**                       | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                            | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net loss                                                                              |       | $                              | (5,331,845 | ) | $ | (801,176 | ) |
| Less: income  (loss) from discontinued operations                                     |       | (14,715                        | )          | — |   |
| Loss from  continuing operations                                                      |       | (5,317,130                     | )          | (801,176 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |       |                           |       |   |   |
| Share-based compensation expense                                                      |       | —                         |       | 222,485 |   |
| Depreciation and amortization                                                         |       | 944,353                        |       | 775,777 |   |
| Changes in operating assets and liabilities:                                          |       |                           |       |   |   |
| Accounts receivable, trade                                                            |       | 56,329                         |       | 26,111 |   |
| Inventories                                                                           |       | (165,881                       | )          | 1,508,960 |   |
| Prepaid expenses and other current assets                                             |       | (105,567                       | )          | 98,895 |   |
| Accounts payable                                                                      |       | (23,159                        | )          | 254,143 |   |
| Accrued liabilities and deferred revenue                                              |       | 4,960,301                      |       | (1,360,478 | ) |
|                                                                                  |       |                           |       |   |   |
| Net cash provided by operating activities of  continuing operations                   |       | 349,246                        |       | 724,717 |   |
|                                                                                  |       |                           |       |   |   |
| **Cash  flows from investing activities of continuing operations:**                   |       |                           |       |   |   |
| Additions to  property and equipment, net                                             |       | (87,563                        | )          | (27,837 | ) |
| Other assets                                                                          |       | 44,066                         |       | (69,278 | ) |
|                                                                                  |       |                           |       |   |   |
| Net cash used in investing activities of continuing  operations                       |       | (43,497                        | )          | (97,115 | ) |
|                                                                                  |       |                           |       |   |   |
| **Cash  flows from financing activities of continuing operations:**                   |       |                           |       |   |   |
| ** **                                                                            |       |                           |       |   |   |
| Exercise of  stock options and employee stock purchase plan                           |       | 21,093                         |       | 73,006 |   |
| Net cash provided by financing activities of continuing  operations                   |       | 21,093                         |       | 73,006 |   |
|                                                                                  |       |                           |       |   |   |
| **Cash  flows of discontinued operations:**                                           |       |                           |       |   |   |
| Operating cash  flows                                                                 |       | (61,388                        | )          | — |   |
| Investing cash  flows                                                                 |       | 47,800                         |       | — |   |
| Net cash used by discontinued operations                                              |       | (13,588                        | )          | — |   |
|                                                                                  |       |                           |       |   |   |
| Net increase in cash and cash equivalents                                             |       | 313,254                        |       | 700,608 |   |
|                                                                                  |       |                           |       |   |   |
| Cash and cash  equivalents, beginning of period                                       |       | 7,726,072                      |       | 6,856,874 |   |
|                                                                                  |       |                           |       |   |   |
| Cash and cash  equivalents, end of period                                             |       | $                              | 8,039,326  |   | $ | 7,557,482 |   |
|                                                                                  |       |                           |       |   |   |
| **Supplemental  disclosure of cash flow information:**                                |       |                           |       |   |   |
| Cash paid during the  period for interest                                             |       | $                              | 536        |   | $ | — |   |

 

See accompanyingnotes to unaudited interim financial statements.

5

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**IBIS TECHNOLOGY CORPORATION**

**NOTES TOUNAUDITED INTERIM FINANCIAL STATEMENTS**

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

The accompanyingfinancial statements are unaudited and have been prepared by Ibis TechnologyCorporation (the “Company” or “Ibis”) in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and in accordance with the instructions to Form 10-Q and Article 10of Regulation S-X. Accordingly, they do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements.

In the opinion ofmanagement, the interim financial statements include all adjustments, whichconsist only of normal and recurring adjustments, necessary for a fairpresentation of the Company’s financial position and results of operations.Results of operations for the interim periods are not necessarily indicative ofthe results to be expected for the full year. These financial statements shouldbe read in conjunction with the financial statements of the Company as of andfor the year ended December 31, 2005, which are included in the Company’sAnnual Report on Form 10-K as filed on March 29, 2006.

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

*(a) Revenue Recognition*

The Companyrecognizes revenue from equipment sales and the sales of spare parts when allof the following criteria have been met: (1) evidence exists that the customer is bound to the transaction; (2)the product (or service) has been delivered to the customer and, whenapplicable, the product (or service) has been installed (and completed) andaccepted by the customer; (3) the sales price to the customer has been fixed oris determinable; and (4) collectibility of the sales price is reasonablyassured. The Company recognizes revenue from implanter sales upon acceptance atthe customer’s site. Revenue derived from contracts and services is recognizedupon performance. Significant management judgments and estimates must be madeand used in connection with revenue recognized in any period. Managementanalyzes various factors including a review of specific transactions,historical experience, credit worthiness of customers and current market andeconomic conditions. Changes in judgment based upon these factors could impactthe timing and amount of revenue and cost recognized.

*(b)**Share-Based Compensation*

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

The Company adopted SFAS 123(R) using the modified prospectivetransition method, which requires the application of the accounting standard asof January 1, 2006, the first day of the Company’s fiscal year 2006. TheCompany’s financial statements as of and for the three and six months endedJune 30, 2006 reflect the impact of SFAS 123(R). In accordance with themodified prospective transition method, the Company’s financial statements forprior periods have not been restated to reflect, and do not include, the impactof SFAS 123(R). Share-based compensation expense recognized under SFAS 123(R)for the three and six months ended June 30, 2006 was $0.1 million and $0.2million respectively or $0.01 and $0.02 per share, which consisted ofshare-based compensation expense related to employee stock options and theemployee stock purchase plan. Of this year-to-date expense, sixty nine percentcame from options issued prior to December 31, 2005 and are valued using theaccrual method, which is consistent with prior periods, while twelve percentcame from options issued in 2006 and are valued using the straight-lineprorated method, which was adopted in 2006 under the new guidance, and nineteenpercent came from the valuation of shares issued under the employee stockpurchase plan. There was no stock-based compensation expense related toemployee stock options or employee stock purchases recognized during the threeand six months ended June 30, 2005 because the Company elected  not to adopt the recognition provisions, andinstead provided footnote disclosure permissable

6

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under Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”).

SFAS 123(R) requires companies to estimatethe fair value of share-based payment awards on the date of grant using anoption-pricing model. The value of the portion of the award that is ultimatelyexpected to vest is recognized as expense over the requisite service periods inthe Company’s Statement of Operations. Prior to the adoption of SFAS 123(R) theCompany accounted for stock-based awards to employees and directors using theintrinsic value method in accordance with Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”) as allowed underSFAS 123. Under the intrinsic value method, stock-based compensation expensehad not been recognized in the Company’s statement of operations, when theexercise price of the Company’s stock options granted to employees anddirectors equaled or exceeded the fair market value of the underlying stock atthe date of grant.

 Share-based compensation expense recognizedduring the period is based on the value of the portion of share-based paymentawards that is ultimately expected to vest during the period. Stock-basedcompensation expense recognized in the Company’s Statement of Operations forthe three and six months ended June 30, 2006, included compensation expensesfor share-based payment awards granted prior to, but not yet vested as ofDecember 31, 2005, based on the grant date fair value estimated in accordancewith the pro forma provisions of SFAS 123, and compensation expense for theshare-based payment awards granted subsequent to December 31, 2005 based on thegrant date fair value estimated in accordance with the provisions of SFAS 123(R).As stock-based compensation expense recognized in the Statement of Operationsfor the three and six months ended June 30, 2006 is based on awards ultimatelyexpected to vest, it has been reduced for estimated forfeitures. SFAS 123(R)requires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates.

Upon adoption of SFAS 123(R), the Companyelected to retain its method of valuation for share-based awards granted beginningin 2006 using the Black-Scholes option—pricing model (“Black—Scholes model”)which was also previously used for the Company’s pro forma information requiredunder SFAS 123. The Company’s determination of fair value of share-basedpayment awards on the date of grant using an option-pricing model is affectedby the Company’s stock price as well as assumptions regarding a number ofhighly complex and subjective variables. These variables include, but are notlimited to the Company’s expected stock price volatility over the term of theawards, and actual and projected employee stock option exercise behaviors.

 (c)  NewAccounting Pronouncements

The Company adopted FASBStatement No. 123(R) in the first quarter of 2006 resulting in stock-basedcompensation expense being recognized of $0.1 million or $0 .01 per share inthe second quarter of 2006 and year to date of $0.2 million or $0.02 per share.Of this year to date expense, sixty nine percent came from options issued priorto December 31, 2005 and are valued using the accrual method, which isconsistent with prior periods, while twelve percent came from options issued in2006 and are valued using the straight-line prorated method, which was adoptedin 2006 under the new guidance, and nineteen percent came from the employeestock purchase plan valuation.

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

7

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torecognize a liability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonably estimated. Thefair value of a liability for the conditional asset retirement obligationshould be recognized when incurred—generally upon acquisition, construction, ordevelopment and (or) through the normal operation of the asset. Uncertaintyabout the timing and (or) method of settlement of a conditional assetretirement obligation should be factored into the measurement of the liabilitywhen sufficient information exists. Statement No.143 acknowledges that in somecases, sufficient information may not be available to reasonably estimate thefair value of an asset retirement obligation. This Interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. Fin 47 is effectivefor fiscal years beginning after December 15, 2005. The Company has determinedthat there is no additional impact from the adoption of this Statement.

In November 2004, the FASB issued Statement No. 151, *“Inventory Costs”*, to amend the guidancein Chapter 4, *“Inventory Pricing”*,of FASB Accounting Research Bulletin No. 43, *“Restatementand Revision of Accounting Research Bulletins.”*Statement No. 151clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). The Statement requiresthat those items be recognized as current-period charges. Additionally,Statement 151 requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities. Statement No. 151 is effective for fiscal years beginning afterJune 15, 2005. The Company has determined that there is no additional impactfrom the adoption of this Statement.

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

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

As of June 30,2006, the Company had cash and cash equivalents of $7.6 million, includingprogress payments of $3.5 million received during the 2nd quarterassociated with the factory acceptance and shipment of the second i2000 SIMOXimplanter order received from SUMCO in the fall of 2005. During the six monthsended June 30, 2006, Ibis provided $0.7 million of cash from operatingactivities of continuing operations as compared to $0.3 million in the sixmonths ended June 30, 2005. The principal uses of cash during the six monthsended June 30, 2006 were to fund operations, and additions to property andequipment which totaled approximately $28 thousand. At June 30, 2006, Ibis hadcommitments to purchase approximately $1.5 million in material. Our headcountfor the quarter ended June 30, 2006 was 45 employees.

The Company’s management believes that it will have sufficient cashresources including the cash on hand and the final payment of $1.1 million uponcustomer acceptance of the second SUMCO unit at its plant in Japan, to supportoperations through the second quarter of 2007. With the addition of the nextimplanter order from SUMCO, which the Company believes will occur before theend of 2006, and its subsequent payment, the Company believes it can supportoperations at currentlevels through at least the next twelve months. This expectation however, isbased on the Company’s current operating plan and general sales outlook, eachof which may change rapidly. The Company intends to continue to invest inresearch, development and manufacturing capabilities. Changes in technology orsales growth beyond currently established capabilities may require furtherinvestment. Moreover, although Ibis is encouraged by the receipt

8

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of a second orderfrom SUMCO for an i2000 implanter and the opportunity to work with leadingwafer manufacturers like SUMCO to develop further both the i2000 implanter andto improve the SIMOX process, SOI technology is still in an early stage.Further adoption of the technology and the timing of future equipment ordersare dependent on the continuing qualification of implanters and improvementprograms at the device manufacturers, among other factors. Revenue recognitionand receipt of the final 15% of the purchase price of the second SUMCOimplanter will be based on final customer acceptance at the customer’sfacility, which is expected to occur in the third quarter of this year. Thetiming of final acceptance and revenue recognition may vary depending on anumber of factors, which include among other things tool performance at thecustomer site, and no guarantees can be given with respect to whether or whenthe Company will recognize revenue on this transaction. The timing of futureorders is important and difficult to predict because customers can delay ordersand/or request early shipment, either of which could cause the need foradditional cash requirements. Forecasting future revenue, on aquarter-by-quarter basis, remains exceedingly difficult and significantvariations quarter to quarter, are likely. Further, because some of thematerials and components the Company uses to build its implanter have long leadtimes, the Company may purchase some or all of these long lead time items priorto receipt of an order by its customers. When this is the case, those parts andmaterials bear the risk of being subject to excess and obsolescence. TheCompany expects to continue to explore equity offerings and other forms offinancing and anticipates that we may be required to raise additional capitalin the future in order to finance future growth and our research anddevelopment programs. There can be no assurance, however, that our actual needswill not exceed expectations or that we will be able to fund our operations ona long-term basis in the absence of other sources. There also can be noassurance that any additional required longer term financing will be availablethrough additional bank borrowings, debt or equity offerings or otherwise, orthat if such financing is available, that it will be available on termsacceptable to us.

9

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

Inventories consist of the following:
|                            | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|----------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                 | ** ** | **2005**              | ** ** | **2006**          | ** ** |
| Raw materials              |       | $                     | 1,790,923  |              | $          | 2,064,361 |   |
| Work in process            |       | 1,980,513             |       | 17,941            |       |
| Finished goods             |       | 2,505,214             |       | 2,689,895         |       |
| Total equipment  inventory |       | $                     | 6,276,650  |              | $          | 4,772,197 |   |

 

**(5) Accrued Liabilities**

Current accruedliabilities were as follows at December 31, 2005 and June 30, 2006.
|                            | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|----------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                 | ** ** | **2005**              | ** ** | **2006**          | ** ** |
| Accrued Vacation           |       | $                     | 125,468    |              | $          | 176,371 |   |
| Accrued Warranty           |       | 653,133               |       | 587,554           |       |
| Accrued Payroll            |       | 76,195                |       | 77,459            |       |
| Accrued Expenses           |       | 346,899               |       | 299,833           |       |
| Total accrued  liabilities |       | $                     | 1,201,695  |              | $          | 1,141,217 |   |

**(6) Accrued Warranty**

At the time that revenueis recognized for the sale of an implanter a liability for warranty is alsoestablished. An estimate of the warranty cost is made based on the number ofyears involved and the Company’s prior experience. As material and labor isused during the warranty period the liability is reduced based on thesecharges. At the end of the warranty term the balance in the liability iseliminated and adjusted through cost of sales, the account charged atinception. A reconciliation of warranty liability for the period ended December31, 2005 and June 30, 2006 is as follows:
| Warranty balance  December 31, 2004 |   | $        | 708,830 |   |
|-------------------------------------|--------|----------|---------|--------|
| Expense incurred  – 2005       |   | (31,061  | )       |
| Initiated – 2005               |   | —   |    |
| Expired – 2005                 |   | (24,636  | )       |
| Warranty balance  December 31, 2005 |   | 653,133  |    |
| Expense incurred  –2006        |   | (8,638   | )       |
| Initiated –  2006.             |   | 268,000  |    |
| Expired – 2006                 |   | (324,941 | )       |
| Warranty balance June  30 2006      |   | $        | 587,554 |   |

 

10

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

Net loss for the quarter ended June 30, 2006 of $2.2million included stock-based compensation expense under Statement of FinancialAccounting Standards No. 123R, “Share-Based Payment,” (SFAS 123R) of $0.1million related to employee stock options, and employee stock purchases. Netloss for the six month period ended June 30, 2006 of $0.8 million includedstock-based compensation expense under (SFAS 123R) of $0.2 million related toemployee stock options and employee stock purchases. Net loss for the quarterending June 30, 2005 was $2.6 million or $0.25 loss per share, excluding theeffects of stock-based compensation expense (SFAS 123R) as disclosed in thefootnotes to the financial statements of $0.2 million, or $0.01 per share. Netloss for the six months ending June 30, 2005 was a loss of $5.3 million or$0.50 loss per share, excluding the effects of stock based compensation expense(SFAS 123R) as disclosed in the footnotes to the financial statements of$0.3 million or $0.03 per share. There was no stock-based compensationexpense related to employee stock options, or employee stock purchases underStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (SFAS 123”) in the quarter and six months ended June30, 2005 because the Company elected not to adopt the recognition provisions ofSFAS 123 at that time.

Net income (loss)per share of common stock is computed based upon the weighted average number ofshares outstanding during each period and including the dilutive effect, ifany, of stock options and warrants. SFAS 128 requires the presentation of basicand diluted earnings (loss) per share for all periods presented. As the Companywas in a net loss position for the three and six months ended June 30, 2005 andJune 30, 2006, common stock equivalents of 27,631, 82,914, 125,526 and 135,073,respectively, were excluded from the diluted loss per share calculation, as theywould be antidilutive. As a result, diluted loss per share is the same as basicloss per share for all periods presented.

**(8)Industry Segments**

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

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The table belowprovides unaudited information for the three and six months ended June 30, 2005and 2006 pertaining to the Company’s two industry segments.
| ** **                                                   | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  Or Services** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|-------------------------------------------|------------|------------|------------|
| **Net Revenue**                                              |       |                 |       |                                      |       |       |       |
| Three Months Ended June  30, 2005                            |       | $                    | 103,059    |                                      | $          | 95,861     |       | $ | 198,920 |   |
| Three Months Ended June  30, 2006                            |       | $                    | 14,291     |                                      | $          | 28,120     |       | $ | 42,411 |   |
| Six Months Ended June  30, 2005                              |       | $                    | 201,480    |                                      | $          | 164,095    |       | $ | 365,575 |   |
| Six Months Ended June  30, 2006                              |       | $                    | 6,020,013  |                                      | $          | 283,220    |       | $ | 6,303,233 |   |
|                                                         |       |                 |       |                                      |       |       |       |
| **Operating Income (Loss)**                                  |       |                 |       |                                      |       |       |       |
| Three Months Ended June  30, 2005                            |       | (2,088,775           | )          | 95,861                                    |       | (1,992,914 | )          |
| Three Months Ended June  30, 2006                            |       | (1,695,840           | )          | 28,120                                    |       | (1,667,720 | )          |
| Six Months Ended June  30, 2005                              |       | (4,363,355           | )          | 164,095                                   |       | (4,199,260 | )          |
| Six Months Ended June  30, 2006                              |       | (8,672               | )          | 283,220                                   |       | 274,548    |       |
| ** **                                                   |       |                 |       |                                      |       |       |       |
| **Assets**                                                   |       |                 |       |                                      |       |       |       |
| June 30, 2006                                                |       | 10,627,366           |       | 39,232                                    |       | 10,666,598 |       |
|                                                         |       |                 |       |                                      |       |       |       |
|                                                         |       |                 |       |                                      |       |       |       |
| **Capital Expenditures**                                     |       |                 |       |                                      |       |       |       |
| Three Months Ended June  30, 2005                            |       | 41,272               |       | —                                    |       | 41,272     |       |
| Three Months Ended June  30, 2006                            |       | 4,156                |       | —                                    |       | 4,156      |       |
| Six Months Ended June  30, 2005                              |       | 87,563               |       | —                                    |       | 87,563     |       |
| Six Months Ended June  30, 2006                              |       | 27,837               |       |                                      |       | 27,837     |       |
| ** **                                                   | ** ** | ** **           | ** ** | ** **                                | ** ** | ** ** | ** ** |
| **Depreciation and Amortization  of Property and Equipment** | ** ** | ** **           | ** ** |                                      | ** ** | ** ** | ** ** |
| Three Months Ended June  30, 2005                            |       | 444,131              | ** ** | —                                    |       | 444,131    |       |
| Three Months Ended June  30, 2006                            |       | 372,531              |       | —                                    |       | 372,531    |       |
| Six Months Ended June  30, 2005                              |       | 917,682              |       | —                                    |       | 917,682    |       |
| Six Months Ended June 30, 2006                               |       | 744,985              |       |                                      |       | 744,985    |       |

 

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The table below providesthe reconciliation of reportable segment operating loss and assets to Ibis’totals.
| ** **                                                   | ** ** | **Three Months Ended** | ** **  | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|-------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30,**                | ** **  | **June 30, **        | ** ** |
| **Segment Reconciliation**                              | ** ** | **2005**                         | ** **  | **2006**                       | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                   | ** ** | ** **                       |        |                           |       |   |   |   |   |
| Net Income  (Loss):                                          |       |                             |        |                           |       |   |   |   |   |
|                                                         |       |                             |        |                           |       |   |   |   |   |
| Total operating income (loss) for reportable Segments        |       | $                                | (1,992,914) |                           | $          | (1,667,720) |   | $ | (4,199,260) |   | $ | 274,548 |   |
| Corporate general & administrative expenses              |       | (650,260                         | )           | (674,868                       | )          | (1,211,874 | ) | (1,314,487 | ) |
| Net other income                                             |       | 55,271                           |        | 176,526                        |       | 95,260 |   | 240,019 |   |
| Income tax expense                                           |       | —                           |        | —                         |       | (1,256 | ) | (1,256 | ) |
| Loss from discontinued operations                            |       | (57,000                          | )           | —                         |       | (14,715) |   | — |   |
| Net loss                                                     |       | $                                | (2,644,903  | )                              | $          | (2,166,062 | ) | $ | (5,331,845 | ) | $ | (801,176 | ) |
|                                                         |       |                             |        |                           |       |   |   |   |   |
| Capital  Expenditures:                                       |       |                             |        |                           |       |   |   |   |   |
| Total capital expenditures for reportable segments           |       | $                                | 41,272      |                           | $          | 4,156 |   | $ | 87,563 |   | $ | 27,837 |   |
| Corporate capital expenditures                               |       | —                           |        | —                         |       | — |   | — |   |
| Total capital expenditures                                   |       | $                                | 41,272      |                           | $          | 4,156 |   | $ | 87,563 |   | $ | 27,837 |   |
|                                                         |       |                             |        |                           |       |   |   |   |   |
| Depreciation and  Amortization:                              |       |                             |        |                           |       |   |   |   |   |
| Total depreciation and amortization for reportable  segments |       | $                                | 444,131     |                           | $          | 372,531 |   | $ | 917,682 |   | $ | 744,985 |   |
| Corporate depreciation and amortization                      |       | 12,384                           |        | 15,648                         |       | 26,671 |   | 30,792 |   |
| Total  depreciation and amortization                         |       | $                                | 456,515     |                           | $          | 388,179 |   | $ | 944,353 |   | $ | 775,777 |   |

 
| ** **                                             | ** ** | Balance as of | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **6/30/06**             | ** ** |
| Assets:                                                | ** ** | ** **              | ** ** |
| Total assets for reportable segments                   |       | $                       | 10,666,598 |   |
| Cash & cash equivalents not allocated to  segments |       | 7,557,482               |       |
| Other unallocated assets                               |       | 160,795                 |       |
| Total assets                                           |       | $                       | 18,384,875 |   |

 

**(9) Employee Stock Benefit Plans**

Net income for thequarter ended June 30, 2006 included stock-based compensation expense underSFAS 123 ( R ) of $ 0.1 million. Of this expense, sixty three percent came fromoptions issued prior to December 31, 2005 and are valued using the accrualmethod, which is consistent with prior periods, while twenty percent came fromoptions issued in 2006 and are valued using the straight-line prorated method,which was adopted in 2006 under the new guidance, and seventeen percent camefrom the employee stock purchase plan valuation. Net income for the six monthsended June 30, 2006 included stock-based compensation expense under SFAS 123(R) of $0.2 million. Of this expense, sixty nine percent came from optionsissued prior to December 31, 2005 and are valued using the accrual method,which is consistent with prior periods, while twelve percent came from optionsissued in 2006 and are valued using the straight-line prorated method which wasadopted in 2006 under the new guidance, and nineteen percent came from theemployee stock purchase plan valuation. Net income for the quarter and sixmonths ended June 30, 2005 did not include any stock-based compensation expensebecause the Company did not adopt the recognition provisions of SFAS 123.

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*Employee Stock Purchase Plans*

The Companymaintains an employee stock purchase plan where eligible employees may purchasecommon stock through payroll deduction of up to 15% of compensation with alimit of $21,250. The price per share is the lower of 85% of the market priceat the beginning or end of each offering period (generally 6 months). The planprovides for purchases by employees of up to an aggregate of 600,000 sharesthrough May 31, 2010. During the six months ended June 30, 2005 and June 30,2006 the Company issued 19,696 and 56,085 shares respectively under thePurchase Plan. At June, 2006, 212,006 shares were available for purchase underthe Purchase Plan.

*Employee Stock Option Plan*

The Company hasstock-based compensation plans under which employees and directors may begranted options to purchase common stock. Options are generally granted withexercise prices at not less than the fair market value on the grant date,generally vest over 4 years and expire in 10 years after the grant date. As ofJune 30, 2006, a total of 3.2 million shares are authorized for grant under theCompany’s stock-based compensation plans. The number of common shares reservedfor granting of future awards to employees and directors under these plans was0.5 million at June 30, 2006. The remaining unrecognized compensation expenseon stock options at June 30, 2006 was $0.6 million. The weighted average periodover which the cost is expected to be recognized is approximately 2 years.

As of June 30,2006 the Company had three equity compensation plans under which our equitysecurities have benn authorized for issuance to our employees and/or directors:the 1993 Employee, Director and Consultant Stock Option Plan, as amended, (the1993 Plan); the 1997 Employee, Directors and Consultant Stock Option Plan, asamended; and the 2000 Employee Stock Purchase Plan, as amended. The 1993 Plan hasexpired and there are no options available for issuance; however, the 1993 Plancontinues to govern all options, awards and other grants granted andoutstanding under the 1993 Plan.

*Distribution and Dilutive Effectof Options*

Thefollowing table illustrates the grant dilution and exercise dilution**:**

|                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** | **June 30**               | ** ** |
| ** **                          | ** ** | **2005**                         | ** ** | **2006**                       | ** ** | **2005** | ** ** | **2006** | ** ** |
| Shares of common  stock outstanding |       | 10,739,291                       |       | 10,872,514                     |       | 10,739,291 |   | 10,872,514 |   |
| Granted                             |       | 214,500                          |       | 7,500                          |       | 214,500 |   | 140,500 |   |
| Canceled/forfeited                  |       | (22,574                          | )          | (10,984                        | )          | (140,142 | ) | (151,514 | ) |
| Expired                             |       | —                           |       | —                         |       | — |   | — |   |
| Net options  granted                |       | 191,926                          |       | (3,484                         | )          | 74,358 |   | (11,014 | ) |
| Grant dilution  (1)                 |       | (1.8                             | %)         | 0.0                            | %          | 0.7 | % | 0.0 | % |
| Exercised                           |       | —                           |       | 400                            |       | — |   | 400 |   |
| Exercised dilution (2)              |       | —                           |       | 0.0                            | %          | — |   | 0.0 | % |

----

(1)  The percentage for grant dilution is computedbased on net options granted as a percentage of shares of common stockoutstanding.

(2)  The percentage for exercise dilution iscomputed based on options exercised as a percentage of shares of common stockoutstanding.

Basic and dilutedshares outstanding for the three and six months ended June 30, 2006 were10,835,385, 10,960,911, 10,825,761 and 10,960,834 shares respectively. Duringthe three and six months ending June 30, 2006, the

14

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dilutive effect ofin-the-money employee stock options was 125,526 and 135,073 shares or 1.2% and1.2% of the basic shares outstanding based on the Company’s average share priceof $1.48.

A summary of stock optiontransactions follows:
| ** **                                | ** ** | **Options Outstanding** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **Options Available**   | ** ** | ** ** | ** ** | **Weighted average** | ** ** |
| ** **                                | ** ** | **for**                      | ** ** | ** ** | ** ** | **exercise price of** | ** ** |
| ** **                                | ** ** | **Grant**                    | ** ** | **Shares** | ** ** | **shares under plan** | ** ** |
| Balance  outstanding at December 31, 2004 |       | 158,218                      |       | 1,348,235 |   | $ | 14.06 |   |
| Granted                                   |       | (304,500                     | )          | 304,500 |   | 1.46 |   |
| Exercised                                 |       | —                       |       | — |   | — |   |
| Cancelled/forfeited                       |       | 331,473                      |       | (331,473 | ) | 12.95 |   |
| Expired                                   |       | —                       |       | — |   | — |   |
| Balance  outstanding at December 31, 2005 |       | 185,191                      |       | 1,321,262 |   | $ | 11.43 |   |
| Granted                                   |       | (140,500                     | )          | 140,500 |   | 3.42 |   |
| Exercised                                 |       | —                       |       | (400 | ) | 1.36 |   |
| Cancelled/forfeited                       |       | 151,514                      |       | (151,514 | ) | 15.90 |   |
| Expired                                   |       | (2,500                       | )          | — |   | — |   |
| Additional  shares reserved               |       | 300,000                      |       | — |   | — |   |
| Balance outstanding at  June 30, 2006     |       | 493,705                      |       | 1,309,848 |   | $ | 10.06 |   |

 

The followingtable summarizes information concerning outstanding and exercisable options asof June 30, 2006:
| ** **               | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **remaining**                | ** ** | **average** | ** ** | ** ** | ** ** | ** ** | ** ** | **average** | ** ** |
| **Range of**        | ** ** | **Number**                   | ** ** | **contractual**              | ** ** | **exercise price** | ** ** | **Aggregate** | ** ** | **Options** | ** ** | **exercise price** | ** ** |
| **exercise prices** | ** ** | **outstanding**              | ** ** | **life (years)**        | ** ** | **per share** | ** ** | **Intrinsic Value** | ** ** | **Exercisable** | ** ** | **per share** | ** ** |
| $.01 - 6.00              |       | 667,000                      |       | 8.3                          |       | $ | 3.12 |   | $ | 96,848 |   | 211,496 |   | $ | 4.25 |   |
| $6.01 - 9.00             |       | 160,171                      |       | 5.7                          |       | $ | 7.85 |   |   |   | 134,921 |   | $ | 7.85 |   |
| $9.01 - 13.50            |       | 306,752                      |       | 3.5                          |       | $ | 10.19 |   |   |   | 297,502 |   | $ | 10.16 |   |
| $13.51 - 20.26           |       | 43,325                       |       | 4.2                          |       | $ | 18.25 |   |   |   | 43,325 |   | $ | 18.25 |   |
| $20.27 - 30.37           |       | 10,250                       |       | 3.2                          |       | $ | 24.10 |   |   |   | 10,250 |   | $ | 24.10 |   |
| $30.38 - 45.55           |       | 13,250                       |       | 3.8                          |       | $ | 37.27 |   |   |   | 13,250 |   | $ | 37.27 |   |
| $45.56 - 68.32           |       | 106,100                      |       | 3.5                          |       | $ | 46.48 |   |   |   | 106,100 |   | $ | 46.48 |   |
| $68.33 - 98.71           |       | 3,000                        |       | 1.3                          |       | $ | 83.06 |   |   |   | 3,000 |   | $ | 83.06 |   |
|                     |       | 1,309,848                    |       | 6.3                          |       | $ | 10.06 |   | $ | 96,848 |   | 819,844 |   | $ | 14.26 |   |

 

The aggregate intrinsicvalue in the preceding table represents the total pretax intrinsic value, basedon the Company’s closing stock price of $3.25 as of June 30, 2006, which wouldhave been received by the option holders had all option holders exercised theiroptions as of that date. The fair value of stock options vested at June 30,2006 and June 30, 2005 was $4.9 million and $5.6 million, respectively. Thetotal number of in-the-money options exercisable as of June 30, 2006 was50,700. As of December 31, 2005, 863,221 outstanding options were exercisable,and the weighted average exercise price was $15.85.

15

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*Valuation and Expense Informationunder SFAS 123( R )*

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

|                                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                       | ** ** | **June 30, 2006**      | ** ** | **June 30, 2006**    | ** ** |
| ** **                                                       | ** ** | **(in thousands)**          | ** ** | **(in thousands)**        | ** ** |
| Cost of sales                                                    |       | $                                | 1          |                           | $          | 6 |   |
| Research and  development                                        |       | 17                               |       | 65                             |       |
| Marketing and  selling                                           |       | 10                               |       | 29                             |       |
| General and  administration                                      |       | 69                               |       | 122                            |       |
| Stock-based  compensation expense included in operating expenses |       | $                                | 97         |                           | $          | 222 |   |

 

The Company capitalized $ 4 thousand and $ 5 thousand of stock-basedcompensation in inventory for the three and six months ended June 30, 2006 anddid not recognize any tax benefits on the stock-based compensation recorded inthe periods based on the current tax status of the Company.

The table below reflects net income per share, basic and diluted forthe three and six months ended June 30, 2006 compared with the pro formainformation for the three and six months ended June 30, 2005.
| ** **                                                                                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2005**                                            | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net loss as  reported for prior periods (1)                                                            |       | $                                                   | (2,644,903 | )                                                 | N/A        |   | $ | (5,331,845 | ) | N/A |   |
| Stock-based  compensations expense related to employee stock options and employee stock purchases  (2) |       | (196,165                                            | )          | (97,141                                           | )          | (331,496 | ) | (222,485 | ) |
|                                                                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Net loss  including the effect of stock-based compensation expense (3)                                 |       | $                                                   | (2,841,068 | )                                                 | $          | (2,166,062 | ) | $ | (5,663,341 | ) | $ | (801,176 | ) |
| Per share  information, basic and diluted:                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Net loss as  reported for the prior period (1)                                                         |       | $                                                   | (0.25      | )                                                 | N/A        |   | $ | (0.50 | ) | N/A |   |
| Net loss,  including the effect of stock-based                                                         |       |                                                |       |                                              |       |   |   |   |   |
| compensation expense  (3)                                                                              |       | $                                                   | (0.26      | )                                                 | $          | (0.20 | ) | $ | (0.53 | ) | $ | (0.07 | ) |

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(1)  Net income (loss) and net income (loss) pershare prior to 2006 did not include stock-based compensation expense related toemployee stock options and employee stock purchases under SFAS123 because wedid not adopt the recognition provisions of SFAS123.

(2)  Stock-based compensation expense prior to2006 is calculated on the pro forma application of SFAS123 as previouslydisclosed in the notes to the Financial Statements.

(3)  Net income (loss) and net income (loss) pershare prior to 2006 represents pro forma information based on SFAS123 aspreviously disclosed in the notes to the Financial Statements.

 

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Theweighted-average estimated fair value of employee stock options granted duringthe six months ended June 30, 2006 was $2.39 per share using the Black Scholesoption-pricing model with the following weighted-average assumptions:
| ** **                                               | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **June 30, 2006**    | ** ** |
| Expected  volatility                                     |       | 103.64                         | %          |
| Risk free  interest rate                                 |       | 4.91                           | %          |
| Dividend yield                                           |       | 0.00                           |       |
| Expected option life  (10 year contractual life options) |       | 6.25                           |       |

 

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

The Companydetermined the expected volatility of the stock price by using a period equalto the expected life of the stock options, 6.25 years. Volatility was measuredas the standard deviation of the difference in the natural logarithms of thestock over the expected life of the options using the daily closing stockprice. This resulted in the volatility of 103.64 percent.

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

As stock-basedcompensation expense recognized in the Statement of Operations for the firstand second quarter of 2006 is actually based on awards ultimately expected tovest, it has been reduced for annualized estimated forfeitures of 16.2% and16.36% respectively. SFAS 123 (R ) requires forfeitures to be estimated at thetime of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Forfeitures were estimated based onhistorical experience.

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

The weightedaverage estimated fair value of employee stock options granted during the threeand six months ended June 30, 2005 was $0.90 using the Black Scholesoption-pricing model with the following weighted average assumptions:
| ** **                                               | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                               | ** ** | **June 30, 2006**    | ** ** |
| Expected  volatility                                     |       | 98.19                          | %          |
| Risk free  interest rate                                 |       | 2.90                           | %          |
| Dividend yield                                           |       | 0.00                           |       |
| Expected option life  (10 year contractual life options) |       | 4.00                           |       |

 

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

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**(10)Legal Proceedings**

Five class actionsecurities lawsuits have been filed in the United States District Court in theDistrict of Massachusetts against Ibis and its President and CEO: MartinSmolowitz v. Ibis Technology Corporation., et al., Civ. No. 03-12613 (RCL) (D.Mass.); Fred Den v. Ibis Technology Corporation., et al., Civ. No. 04-10060(RCL) (D. Mass.); Weinstein v. Ibis Technology Corporation., et al., Civ. No.04-10088 (RCL) (D. Mass.); George Harrison v. Ibis Technology Corporation., etal., Civ. No. 04-10286 (RCL) (D. Mass.); and Eleanor Pitzer v. Ibis TechnologyCorporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). On June 4, 2004, theCourt entered an order consolidating these actions under the caption In re IbisTechnology Securities Litigation, C.A. 04-10446 RCL. On July 6, 2004, aconsolidated amended class action complaint was filed which alleges, amongother things, that the Company violated federal securities laws by allegedlymaking misstatements to the investing public relating to demand for certainIbis products and intellectual property issues relating to the sale of thei2000 oxygen implanter. The plaintiffs are seeking unspecified damages. OnAugust 5, 2004, we filed a motion to dismiss the consolidated amended complainton the grounds, among others, that it failed to state a claim on which therelief could be granted. On September 25, 2005, the Magistrate Judge issued areport and recommendation that our motion be granted in part and denied inpart.  We and the plaintiffs both filedpartial objections to the report and recommendation with the Court.  On March 31, 2006, the court adopted theMagistrate Judge’s report and recommendation, and thus granted in part anddenied in part our motion to dismiss the plaintiffs’ claims. While we believethat the plaintiffs’ allegations are without merit, and we intend to vigorouslydefend against the suits, there can be no guarantee as to how they ultimatelywill be resolved.

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

Litigation may be time-consuming, expensive and disruptive to normalbusiness operations, and the outcome of litigation is difficult to predict. Anunfavorable resolution of these litigation matters could have a materialadverse effect on our business, results of operations and financial condition.

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**PART I - ITEM 2**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**OVERVIEW**

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

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

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

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Our fundamentalSIMOX-SOI technology has been developed, refined, and tested over the lastdozen years. In 2002, we introduced the current generation of SIMOX-SOItechnology, that included our second-generation oxygen implanter (i2000ä),and the MLD wafer process which was licensed to us by IBM. We believe that thei2000’s flexibility, automation and operator-friendly controls allow this toolto produce a wide range of SIMOX-SOI wafer products using a range ofmanufacturing processes, including Advantox® MLD and Advantox MLD-UT wafers. We alsobelieve the ability of the i2000 implanter to produce twelve-inch (or 300 mm)SIMOX-SOI wafers coupled with the MLD process positions us to capitalize on thegrowing SOI market. In 1999, we commenced a program to design and develop thei2000, introduced it in March 2002 and began shipping 300 mm wafers implantedfrom this machine shortly thereafter. Customers who purchase the i2000 canutilize more than one SIMOX wafer manufacturing processes on the implanterincluding the IBM MLD process, when licensed, as well as other SIMOX-SOI wafermanufacturing processes that do not require the IBM license.

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

In January 2005, weannounced the booking (i.e. receipt) of an order for one Ibis i2000 SIMOXimplanter from SUMCO, a leading international silicon wafer manufacturer. Thissystem was factory accepted and shipped in the second quarter of 2005 and wereceived final customer acceptance of the tool at the customer’s site in March2006. In October of 2005, we received a second order for an i2000 SIMOXimplanter from SUMCO and negotiated a master purchase agreement that willgovern the general commercial terms of future orders from SUMCO. This implanterwas factory accepted by SUMCO at Ibis’ facility in the first quarter of 2006.The implanter was shipped in April 2006 and the Company believes it will beaccepted by the end of the third quarter of 2006. Revenue recognition for thisimplanter will be based on final customer acceptance at the customer’sfacility, the timing of which may vary depending on a number of factors,including performance of the tool.

**CriticalAccounting Policies**

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

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

***InventoryValuation and Reserves****. *Our policy for the valuation of inventory,including the determination of obsolete or excess inventory, requires us toforecast the future demand for our products within specific time horizons,generally twelve months or less. If our forecasted demand for specific productsis greater than actual demand and we fail to reduce manufacturing outputaccordingly, we could be required to record additional inventory reserves,which would have a negative impact on our gross margin. We have reserved forobsolescence when engineering changes or other technological advances indicatethat obsolescence has occurred.

***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.

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

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

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

·                  Significant negative industry or economictrends,

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

·                  Our market capitalization relative to book value.

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

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**Results of Operations**

***Second Quarter Ended June 30, 2006 Compared to Second Quarter EndedJune 30, 2005***

***License and Other Revenue***.  License and other revenue includes revenuederived from license agreements, characterization and other services. Licenseand other revenue decreased for the second quarter ended June 30, 2006 to $28thousand from $96 thousand for the second quarter ended June 30, 2005, adecrease of $68 thousand or 71%. This decrease is attributable to decreasedlicense revenue from royalty fees related to equipment technology.

***EquipmentRevenue. ***Equipment revenue represents revenuerecognized from sales of implanters, spare parts and field service revenue.Equipment revenue decreased to $14 thousand for the second quarter ended June30, 2006 from $103 thousand for the second quarter ended June 30, 2005, adecrease of $89 thousand. Field service revenue accounted for $0 dollars ofequipment revenue for the second quarter ended June 30, 2006 as compared to $36thousand of equipment revenue for the same period last year. Sales of spareparts accounted for $14 thousand of equipment revenue for the second quarterended June 30, 2006 as compared to $67 thousand of equipment revenue for thesecond quarter ended June 30, 2005. Sales of spare parts fluctuate depending oncustomer demand and when warranties expire on individual pieces of equipment.Warranty expense is calculated on our anticipated replacement costs forequipment accepted by our customers over a one or two year contract period.

***TotalNet Sales and Revenue***.  Total sales and revenue forthe second quarter ended June 30, 2006 was $42 thousand, a decrease of $157thousand, from total net revenue of $199 thousand for the second quarter endedJune 30, 2005. This decrease is due to a decrease in license revenue of $68thousand, a decrease in service revenue of $36 thousand and a decrease in spareparts revenue of $53 thousand.

***TotalCost of Sales and Revenue***.  Cost ofequipment revenue represents the cost of equipment, the cost for spare parts,and the costs of labor incurred for field service. Cost of equipment revenuefor the second quarter ended June 30, 2006 was $53 thousand, as compared to$222 thousand for the second quarter ended June 30, 2005. This decrease of $169thousand was primarily due to the reduced volume of sales along with theincrease in manufacturing overhead being absorbed from production in the secondquarter ended June 30, 2006.

Total cost ofsales and revenue including contract and other revenue as well as equipmentrevenue mentioned above for the second quarter ended June 30, 2006 was $53thousand as compared to $222 thousand for the second quarter ended June 30,2005, a decrease of $169 thousand or 76%. The gross margin for all sales was anegative 26% for the second quarter ended June 30, 2006 as compared to anegative gross margin of 12% for the second quarter ended June 30, 2005. Theincrease in the gross margin for all sales is attributable to the increase inmanufacturing overhead being absorbed from production in the second quarterended June 30, 2006.

***Generaland Administrative Expenses***.  General andadministrative expenses for the second quarter ended June 30, 2006 were $0.7million as compared to $0.7 million for the second quarter ended June 30, 2005.This includes $0.1 million of stock-based compensation expense, which impactedthe financial statements in compliance with the new accounting rule, in the quarterended June 30, 2006 and was offset by the reduction of $0.1 million fromreduced professional services along with the reduction in bad debt expensesassociated with reduced requirements.

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***Marketingand Selling Expenses***.  Marketing and selling expensesfor the second quarter ended June 30, 2006 were $0.3 million as compared to$0.4 million for the second quarter ended June 30, 2005. This was due todecreased payroll and payroll related expenses of $0.1 million from headcountreductions.

***Researchand Development Expenses.***  Internallyfunded research and development expenses decreased by $0.2 million or 14% to$1.4 million for the second quarter ended June 30, 2006, as compared to $1.6million for the second quarter ended June 30, 2005. This was due in part to areduction in wafer research and development costs of $0.1 million that are nowsupporting equipment development. In addition, reduced payroll and payrollrelated expenses of $0.1 million and the reduction of repair and maintenancecosts of $0.1 million were partially offset by the increase of $0.1 million inR&D material expenses.

***Other Income (Expense)*****.**  Totalother income for the second quarter ended June 30, 2006 was $0.2 million ascompared to $0.1 million for the second quarter ended June 30, 2005 principallyas a result of  an increase in interestincome in the quarter ended June 30, 2006, which was due to an increase ininterest rates.

***SixMonths Ended June 30, 2006 Compared to Six Months Ended June 30, 2005***

***Licenseand Other Revenue***.  License and other revenueincludes revenue derived from license agreements, characterization and otherservices.  License and other revenue was$0.3 million for the six months ended June 30, 2006 as compared to $0.2 millionfor the six months ended June 30, 2005. The increase is attributable to a newsublicense agreement related to equipment technology valued at $0.2 million andwas offset by reduced license revenue from royalty fees related to equipmenttechnology.

***EquipmentRevenue. ***Equipment revenue represents revenuerecognized from the sale of implanters, spare parts and field service revenue.Equipment revenue was $6.0 million for the six months ended June 30, 2006 ascompared to $0.2 million for the six months ended June 30, 2005, an increase of$5.8 million. During the six months ended June 30, 2006 revenue was recognizedfor an i2000 implanter of $6.0 million as compared to no implanter revenuerecognition in the first six months of 2005. Field service revenue accountedfor $0 dollars of equipment revenue for the six months ended June 30, 2006 ascompared to $0.1 million of equipment revenue for the same period last year.Sales of spare parts accounted for $0 dollars of equipment revenue for the sixmonths ended June 30, 2006 as compared to $0.1 million of equipment revenue forthe six months ended June 30, 2005. Sales of spare parts fluctuate depending oncustomer demand and when warranties expire on individual pieces of equipment.Warranty expense is calculated on our anticipated replacement costs for equipmentaccepted by our customers over a one of two year contract period.

***Total Net Sales and Revenue***.  Total sales and revenue for the six monthsended June 30, 2006 was $6.3 million, an increase of $5.9 million, from totalnet revenue of $0.4 million for the six months ended June 30, 2005. Theincrease is due to revenue recognition of an i2000 implanter of $6.0 millionduring the six months ended June 30, 2006 along with increased license revenueof $0.1 million which was offset by a decrease in service revenue of $0.1million and spare parts revenue of $0.1 million.

***TotalCost of Sales and Revenue***.  Cost ofequipment revenue represents the cost of equipment and spare parts, along withlabor incurred for field service. Cost of equipment revenue for the six monthsended June 30, 2006 was $2.7 million, compared to $0.5 million for the sixmonths ended June 30, 2005. The increase of $2.2 million was primarily due tothe costs associated with the recognition of revenue for the i2000 implanter inthe six months ended June 30, 2006.

Total cost ofsales and revenue for the six months ended June 30, 2006 was $2.7 millioncompared to $0.5 million for the six months ended June 30, 2005, an increase of$2.2 million. The gross margin for all sales was

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positive 57% for the sixmonths ended June 30, 2006 as compared to a negative gross margin of 43% forthe six months ended June 30, 2005. This increase in the gross margin for allsales is attributable to the approximate gross margin of 54% for the i2000implanter sale recognized in the six months ended June 30, 2006.

***General and Administrative Expenses***.  General and administrative expenses for thesix months ended June 30, 2006 were $1.3 million compared to $1.2 million forthe six months ended June 30, 2005. This was due to $0.2 million of stock-basedcompensation expense which impacted the financial statements in compliance withthe new accounting rule in the six months ended June 30, 2006.

***Marketing and Selling Expenses***.  Marketing and selling expenses were $0.6million for the six months ended June 30, 2006 as compared to $0.8 million forthe six months ended June 30, 2005. This decrease was due to decreased payrolland payroll related expenses of $0.2 million from headcount reductions.

***Research and Development Expenses.***  Internally funded research and developmentexpenses decreased by $0.6 million or 17%, to $2.7 million for the six monthsended June 30, 2006, as compared to $3.3 million for the six months ended June30, 2005. This was due to a reduction in wafer research and development costsof $0.2 million that are now supporting equipment development. In addition,reduced payroll and payroll related expenses of $0.3 million and the reductionof repair and maintenance costs of $0.1 million contributed to these results.

***Other Income (Expense)*.**  Total other income for the six months endedJune 30, 2006 was $0.2 million as compared to $0.1 million for the six monthsended June 30, 2005, an increase of $0.1 million, principally as a result of  increased interest income which was due to anincrease in interest rates.

#### **Liquidityand Capital Resources**

As of June 30,2006, the Company had cash and cash equivalents of $7.6 million, includingprogress payments of $3.5 million received during the 2nd quarterassociated with the factory acceptance and shipment of the second i2000 SIMOXimplanter order received from SUMCO in the fall of 2005. During the six monthsended June 30, 2006, Ibis provided $0.7 million of cash from operatingactivities of continuing operations as compared to $0.3 million in the sixmonths ended June 30, 2005. The principal uses of cash during the six monthsended June 30, 2006 were to fund operations, and additions to property andequipment which totaled approximately $28 thousand. At June 30, 2006, Ibis hadcommitments to purchase approximately $1.5 million in material. Our headcountfor the quarter ended June 30, 2006 was 45 employees.

The Company’s management believes that it will have sufficient cashresources including the cash on hand and the final payment of $1.1 millionupon customer acceptance of thesecond SUMCO unit at its plant in Japan, to support operations through thesecond quarter of 2007. With the addition of the next implanter order fromSUMCO, which the Company believes will occur before the end of 2006, and itssubsequent payment, the Company believes it can support operations at currentlevels through at least the next twelve months. This expectation however, isbased on the Company’s current operating plan and general sales outlook, eachof which may change rapidly. The Company intends to continue to invest inresearch and development and it’s manufacturing capabilities. Changes intechnology or sales growth beyond currently established capabilities mayrequire further investment. Moreover, although Ibis is encouraged by thereceipt of a second order from SUMCO for an i2000 implanter and the opportunityto work with leading wafer manufacturers like SUMCO to develop further both thei2000 implanter and to improve the SIMOX process, SOI technology is still in anearly stage. Further adoption of the technology and timing of future equipmentorders are dependent on the continuing qualification of implanters andimprovement programs at the device manufacturers, among other factors.

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Revenuerecognition and receipt of the final 15% of the purchase price of the secondSUMCO implanter will be based on final customer acceptance at the customer’sfacility, which is expected to occur in the third quarter of this year. Thetiming of final acceptance and revenue recognition may vary depending on anumber of additional factors, which include among other things tool performanceat the customer site, and no guarantees can be given with respect to whether orwhen the Company will recognize revenue on this transaction. The timing offuture orders is important and difficult to predict because customerscan delay orders and/or request early shipment, either of which could cause theneed for additional cash requirements. Forecasting future revenue, on aquarter-by-quarter basis remains exceedingly difficult and significantvariations quarter to quarter, are likely. Further, because some of the materials and components the Company usesto build its implanter have long lead times, the Company may purchase some orall of these long lead time items prior to receipt of an order by itscustomers. When this is the case, those parts and materials bear the risk ofbeing subject to excess and obsolescence. The Company expects tocontinue to explore equity offerings and other forms of financing andanticipates that we may be required to raise additional capital in the futurein order to finance future growth and our research and development programs.There can be no assurance however, that our actual needs will not exceed expectationsor that we will be able to fund our operations on a long-term basis in theabsence of other sources. There also can be no assurance that any additionalrequired longer term financing will be available through additional bankborrowings, debt or equity offerings or otherwise, or that if such financing isavailable, that it will be available on terms acceptable to us.

**Business Risk Factors**

This Form 10-Qcontains express or implied forward-looking statements within the meaning ofthe “safe harbor” provisions of the Private Securities Litigation Reform Act of1995 that relate to future events or our future financial performance. In somecases, you can identify forward-looking statements by terminology, such as “may,”“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”“project,” “predict,” “intend,” “potential” or “continue” or the negative ofsuch terms or other comparable terminology, although not all forward-lookingstatements contain such terms. In addition, these forward-looking statementsinclude, but are not limited to, statements regarding, among other things: (i)the on-site acceptance of the second i2000 implanter ordered by SUMCO, (ii)attaining implanter improvements to the degree and in the timeframe necessaryto meet SUMCO’s expectations, (iii)  thetiming and likelihood of revenue recognition on, and payment for SUMCO’s second order, (iv) thetiming of SUMCO’s ramping to production quantities on the i2000 implanter andthe sustained production worthiness of the i2000 implanter, (v) the reliance ona small number of large customers, interest in and demand for, and market acceptance of,the Company’s SIMOX-SOI technology including the Company’s implanters, (vi) theinvolvement generally of the silicon wafer manufacturing industry in the SOIwafer market and the ability of the wafer manufacturer’s to producesufficiently low cost SIMOX-SOI wafers utilizing both our SIMOX equipment andtechnology, as well as other equipment manufacturer’s tools, (vii) theCompany’s ability to conduct its operations in a manner consistent with itscurrent plan and existing capital resources or otherwise to obtain additionalimplanter orders or to secure financing to continue as a going concern, (viii)the continued employment of key management and technical personnel, (ix) thetiming and likelihood of revenue recognition on orders for the Company’simplanters, (x) theCompany’s belief that wafer manufacturers will become the primary suppliers ofSIMOX-SOI wafers to the chipmaking industry, (xi) the throughput and productioncapacity of the i2000 implanter for manufacturing 300-mm SIMOX-SOI wafers,attaining implanter improvements to the degree and in the timeframe necessaryto meet customer expectations, and the ability of the i2000 implanter toachieve acceptable production yields, (xii) the Company’s plan to focus onsupplying implanters to wafer manufacturers, (xiii) the Company’s expectationsregarding future orders for i2000 implanters, and (xiv) the Company’sexpectation of having sufficient cash for operations. Such statements areneither promises nor guarantees but rather are subject to risks anduncertainties, which could cause actual results to differ materially from thosedescribed in the forward-looking statements. Such risks and uncertaintiesinclude, but are

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not limited to: futurecontinued migration to SOI technology and market acceptance of SIMOX; the levelof demand for the Company’s products; the Company’s ability to pursue andmaintain further strategic relationships, partnerships and alliances with thirdparties; the Company’s ability to protect its proprietary technology; thepotential trends in the semiconductor industry generally; the ease with whichthe i2000 can be installed and qualified in fabrication facilities; thelikelihood that implanters, if ordered, will be qualified and accepted bycustomers without substantial delay, modification, or cancellation, in whole orin part; the likelihood and timing of revenue recognition on such transactions;the impact of competitive products, technologies and pricing; the impact ofrapidly changing technology; the possibility of further asset impairment andresulting charges; equipment capacity and supply constraints or difficulties;the Company’s limited history in selling implanters; general economicconditions; and other risks and uncertainties described elsewhere in this Form10-Q and in the Company’s Securities and Exchange Commission filings from timeto time, including but not limited to those set forth in the Company’s annualreport on Form 10-K for the year ended December 31, 2005. All information setforth in this Form 10-Q is as of the date of this Form 10-Q, and Ibisundertakes no duty to update this information, unless required by law.

**Effects of Inflation**

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

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**PART I — ITEM 3**

**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

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**PART I —ITEM 4**

**CONTROLSAND PROCEDURES**

(a)          Evaluation of DisclosureControls and Procedures.  As of June 30,2006, the Company’s management, with the participation of its principalexecutive officer and principal financial officer, evaluated the effectivenessof the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b)promulgated under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”).  Based upon that evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer concluded that,as of June 30, 2006,  the Company’sdisclosure controls and procedures were effective in ensuring that materialinformation required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, including ensuring that such material informationis accumulated and communicated to the Company’s management, including theCompany’s Chief Executive Officer and the Company’s Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.

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

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**PART II**

**OTHER INFORMATION**

Item 1 – LegalProceedings

Five class actionsecurities lawsuits have been filed in the United States District Court in theDistrict of Massachusetts against Ibis and its President and CEO: MartinSmolowitz v. Ibis Technology Corporation., et al., Civ. No. 03-12613 (RCL) (D.Mass.); Fred Den v. Ibis Technology Corporation., et al., Civ. No. 04-10060(RCL) (D. Mass.); Weinstein v. Ibis Technology Corporation., et al., Civ. No.04-10088 (RCL) (D. Mass.); George Harrison v. Ibis Technology Corporation., etal., Civ. No. 04-10286 (RCL) (D. Mass.); and Eleanor Pitzer v. Ibis TechnologyCorporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). On June 4, 2004, theCourt entered an order consolidating these actions under the caption In re IbisTechnology Securities Litigation, C.A. 04-10446 RCL. On July 6, 2004, aconsolidated amended class action complaint was filed which alleges, amongother things, that the Company violated federal securities laws by allegedlymaking misstatements to the investing public relating to demand for certainIbis products and intellectual property issues relating to the sale of thei2000 oxygen implanter. The plaintiffs are seeking unspecified damages. OnAugust 5, 2004, we filed a motion to dismiss the consolidated amended complainton the grounds, among others, that it failed to state a claim on which therelief could be granted. On September 25, 2005, the Magistrate Judge issued areport and recommendation that our motion be granted in part and denied in part. We and the plaintiffs have both filedpartial objections to the report and recommendation with Court. On March 31,2006, the court adopted the Magistrate Judge’s report and recommendation, andthus granted in part and denied in part our motion to dismiss the plaintiffs’claims. While we believe that the plaintiffs’ allegations are without merit,and we intend to vigorously defend against the suits, there can be no guaranteeas to how they ultimately will be resolved.

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

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

**Item 1A.  Risk Factors**

**Forinformation regarding risk factors, please refer to Item 1A in the Company’s  Annual Report on Form 10-K for the year endedDecember 31, 2005.**

Item 2 – UnregisteredSales ofEquity Securities and Use of Proceeds

None

Item 3 – Defaultsupon Senior Securities

None

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Item 4 – Submissionof Matters to a Vote of Security Holders

The annual meeting ofstockholders of Ibis was on May 11, 2006. The following matters were voted onat the meeting:

(1)          Two people were electedto the Board of Directors of the Company to serve for a term ending in 2009 anduntil their respective successors are duly elected and qualified. The followingis a table setting forth the number of votes cast for and withheld for eachnominee for Director.

| Name             | ** ** | **Vote For** | ** ** | **Vote Withheld** | ** ** |
|------------------|------------|-------------------|------------|------------------------|------------|
| ** **       | ** ** | ** **        | ** ** | ** **             | ** ** |
| Leslie B. Lewis  |       | 9,750,931         |       | 222,771                |       |
|             |       |              |       |                   |       |
| Cosmo S. Trapani |       | 9,752,171         |       | 221,531                |       |

 

(2)          The stockholders of theCompany voted to amend the Company’s 1997 Employee, Director, and ConsultantStock Option Plan to (a) increase by 300,000 shares the aggregate number ofshares of common stock reserved for issuance under this plan and (b) permit the issuance of restrictedstock, restricted stock units and other awards in addition to options. Stockholdersholding 1,410,535 shares voted in favor of the proposal, stockholders holding446,283 shares voted against the proposal, stockholders holding 50,953 sharesabstained from voting on this proposal and stockholders holding 8,065,931shares did not vote on this proposal.

(3)          The stockholders of theCompany ratified the appointment of KPMG LLP as the Company’s independentregistered public accountants for the fiscal year ending December 31, 2006.Stockholders holding 9,847,810 shares voted in favor of the proposal, stockholdersholding 113,790 shares voted against the proposal and stockholders holding12,102 shares abstained from voting on this proposal.

Item 5 – OtherInformation

None

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Item 6 – Exhibits

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

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                        |   | Ibis Technology Corporation |                                         |
|------------------------|--------|-----------------------------|----------------------------------------------|
|                   |   |                        |                                         |
|                   |   |                        |
| Date: August 14,  2006 |   | By:                         | /s/William J.  Schmidt                       |   |
|                   |   |                        | William J. Schmidt                           |
|                   |   |                        | Chief Financial Officer, Treasurer and Clerk |
|                   |   |                        | (principal financial and accounting officer) |
|                   |   |                        |                                         |
|                   |   |                        |                                         |
| Date: August 14,  2006 |   | By:                         | /s/Martin J.  Reid                           |   |
|                   |   |                        | Martin J. Reid                               |
|                   |   |                        | President and Chief Executive Officer        |
|                        |        |                             |                                              |  |  |

 

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