Table of Contents

 

 

 

# **UNITEDSTATES**

# **SECURITIESAND EXCHANGE COMMISSION**

# **Washington, D.C.  20549**

#  

# **Form 10-Q**

#  

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

 

**For theQuarterly Period Ended June 30, 2008**

 

**Or**

 

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

 

**For the transition period from                              to                    **

 

**Commissionfile number 0-23150**

 

**Ibis Technology Corporation**

(Exact name of registrant 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)

 

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

 

Yes   x        No   o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer and “smaller reporting company”  in Rule 12b-2of the Exchange Act.

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

 

Indicate by check mark whether the registrantis a shell Company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   o        No   x

 

14,317,482 shares of Common Stock, par value$.008, were outstanding on August 14, 2008.

 

 

 

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**IBIS TECHNOLOGY CORPORATION**

 

# **INDEX**

#  

| ** **                                                                                                    | **Page  Number** |
|---------------------------------------------------------------------------------------------------------------|------------------|
| PART I  - FINANCIAL INFORMATION                                                                          |             |
|                                                                                                          |             |
| Item 1 – Financial  Statements:                                                                          |             |
|                                                                                                          |             |
| Balance Sheets                                                                                                |             |
| December 31,  2007 and June 30, 2008 (unaudited)                                                    | 3                |
|                                                                                                          |             |
| Statements of Operations                                                                                      |             |
| Three Months  Ended June 30, 2007 and 2008 and Six Months Ended June 30, 2007 and  2008 (unaudited) | 4                |
|                                                                                                          |             |
| Statements of Cash Flows                                                                                      |             |
| Six Months  Ended June 30, 2007 and 2008 (unaudited)                                                     | 5                |
|                                                                                                          |             |
| Notes  to Unaudited Interim Financial Statements                                                              | 6                |
|                                                                                                          |             |
| Item 2 – Management’s Discussion  and Analysis of Financial Condition and Results of Operations     | 17               |
|                                                                                                          |             |
| Item 3 – Quantitative and  Qualitative Disclosure About Market Risk                                      | 24               |
|                                                                                                          |             |
| Item 4 – Controls and Procedures                                                                         | 25               |
|                                                                                                          |             |
| PART II – OTHER INFORMATION                                                                         |             |
|                                                                                                          |             |
| Item  1 – Legal Proceedings                                                                              | 26               |
|                                                                                                          |             |
| Item  1A – Risk Factors                                                                                  | 26               |
|                                                                                                          |             |
| Item 2 – Unregistered Sales of Equity Securities and  Use of Proceeds                                    | 26               |
|                                                                                                          |             |
| Item 3 – Defaults upon Senior Securities                                                                 | 26               |
|                                                                                                          |             |
| Item 4 – Submission of Matters to a Vote of Security  Holders                                            | 27               |
|                                                                                                          |             |
| Item  5 – Other Information                                                                              | 27               |
|                                                                                                          |             |
| Item 6 –  Exhibits                                                                                       | 27               |
|                                                                                                          |             |
| Signatures                                                                                                    | 27               |

 

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**IBIS TECHNOLOGY CORPORATION**

 

# **BALANCE SHEETS**

# **(Unaudited)**

 
| ** **                                                                                                                                                            | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2007**              | ** ** | **2008**          | ** ** |
|                                                                                                                                                                  |       |                  |       |              |       |
| **Assets**                                                                                                                                                            |       |                  |       |              |       |
| **Current  Assets:**                                                                                                                                                  |       |                  |       |              |       |
| Cash and cash equivalents                                                                                                                                             |       | $                     | 5,770,072  |              | $          | 4,201,411 |   |
| Accounts receivable, trade,  net                                                                                                                                      |       | 308,768               |       | 101,860           |       |
| Inventories, net (note 4)                                                                                                                                             |       | 1,790,394             |       | 1,793,777         |       |
| Prepaid expenses and other  current assets                                                                                                                            |       | 165,925               |       | 160,170           |       |
| Total current assets                                                                                                                                                  |       | 8,035,159             |       | 6,257,218         |       |
| Property and equipment                                                                                                                                                |       | 19,598,897            |       | 19,598,897        |       |
| Less: Accumulated depreciation  and amortization                                                                                                                      |       | (18,026,667           | )          | (18,334,374       | )          |
| Net property and equipment                                                                                                                                            |       | 1,572,230             |       | 1,264,523         |       |
| Patents and other assets, net                                                                                                                                         |       | 155,444               |       | 139,887           |       |
| Total assets                                                                                                                                                          |       | $                     | 9,762,833  |              | $          | 7,661,628 |   |
|                                                                                                                                                                  |       |                  |       |              |       |
| **Liabilities  and Stockholders’ Equity:**                                                                                                                       |       |                  |       |              |       |
| **Current  Liabilities:**                                                                                                                                             |       |                  |       |              |       |
| Accounts payable                                                                                                                                                      |       | $                     | 260,372    |              | $          | 298,018 |   |
| Accrued liabilities (note 5)                                                                                                                                          |       | 471,219               |       | 398,144           |       |
| Total current liabilities                                                                                                                                             |       | 731,591               |       | 696,162           |       |
|                                                                                                                                                                  |       |                  |       |              |       |
| **Stockholders’  Equity:**                                                                                                                                       |       |                  |       |              |       |
| Undesignated preferred stock,  $.01 par value  Authorized 2,000,000 shares; none issued                                                                               |       | —                |       | —            |       |
| Common stock, $.008 par value  Authorized 50,000,000 shares; issued and outstanding 14,317,482 shares at  December 31, 2007 and June 30, 2008, respectively |       | 114,540               |       | 114,540           |       |
| Additional paid-in capital                                                                                                                                            |       | 99,087,089            |       | 99,257,732        |       |
| Accumulated deficit                                                                                                                                                   |       | (90,170,387           | )          | (92,406,806       | )          |
| Total stockholders’ equity                                                                                                                                       |       | 9,031,242             |       | 6,965,466         |       |
| Total liabilities and  stockholders’ equity                                                                                                                      |       | $                     | 9,762,833  |              | $          | 7,661,628 |   |

 

See accompanying notes to unaudited interimfinancial statements.

 

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**IBIS TECHNOLOGY CORPORATION**

 

# **STATEMENTS OF OPERATIONS**

# **(Unaudited)**

#  

| ** **                                                                                                                                                                                                                                      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                                                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                                                                                                                                                      | ** ** | **2007**                         | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** |
| **Net  Sales and revenue:**                                                                                                                                                                                                                     |       |                             |       |                           |       |   |   |   |   |
| License and other revenue                                                                                                                                                                                                                       |       | $                                | 137,078    |                           | $          | 71,346 |   | $ | 221,222 |   | $ | 134,254 |   |
| Equipment revenue                                                                                                                                                                                                                               |       | 128,052                          |       | 23,147                         |       | 373,971 |   | 291,253 |   |
| Total net sales and revenue                                                                                                                                                                                                                     |       | 265,130                          |       | 94,493                         |       | 595,193 |   | 425,507 |   |
|                                                                                                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| **Cost of  sales and revenue:**                                                                                                                                                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Cost of license and other  revenue                                                                                                                                                                                                              |       | —                           |       | —                         |       | — |   | — |   |
| Cost of equipment revenue  (includes share-based compensation expense of $5,661 and $5,139 for the three  months ended June 30, 2007 and 2008, and $13,105 and $10,364 for the six  months ended June 30, 2007 and 2008, respectively)     |       | 204,379                          |       | 129,843                        |       | 320,217 |   | 427,900 |   |
| Total cost of sales and  revenue                                                                                                                                                                                                                |       | 204,379                          |       | 129,843                        |       | 320,217 |   | 427,900 |   |
| Gross profit (loss)                                                                                                                                                                                                                             |       | 60,751                           |       | (35,350                        | )          | 274,976 |   | (2,393 | ) |
|                                                                                                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| **Operating  expenses:**                                                                                                                                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| General and administrative  (includes share-based compensation expense of $59,333 and $36,492 for the  three months ended June 30, 2007 and 2008, and $121,627 and $75,637 for the  six months ended June 30, 2007 and 2008, respectively) |       | 566,878                          |       | 487,892                        |       | 1,128,614 |   | 1,017,165 |   |
| Marketing and selling  (includes share-based compensation expense of $15,820 and $10,144 for the  three months ended June 30, 2007 and 2008, and $31,681 and $20,706 for the  six months ended June 30, 2007 and 2008, respectively)       |       | 139,434                          |       | 98,367                         |       | 359,921 |   | 186,616 |   |
| Research and development  (includes share-based compensation expense of $37,103 and $32,218 for the  three months ended June 30, 2007 and 2008, and $80,758 and $63,936 for the  six months ended June 30, 2007 and 2008, respectively)    |       | 963,518                          |       | 742,794                        |       | 2,027,880 |   | 1,390,835 |   |
| Total operating expenses                                                                                                                                                                                                                        |       | 1,669,830                        |       | 1,329,053                      |       | 3,516,415 |   | 2,594,616 |   |
|                                                                                                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Loss from operations                                                                                                                                                                                                                            |       | (1,609,079                       | )          | (1,364,403                     | )          | (3,241,439 | ) | (2,597,009 | ) |
|                                                                                                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| **Other  income:**                                                                                                                                                                                                                              |       |                             |       |                           |       |   |   |   |   |
| Interest income                                                                                                                                                                                                                                 |       | 65,947                           |       | 29,982                         |       | 122,837 |   | 85,067 |   |
| Other income                                                                                                                                                                                                                                    |       | 96,392                           |       | 50,411                         |       | 202,104 |   | 275,523 |   |
| Total other income                                                                                                                                                                                                                              |       | 162,339                          |       | 80,393                         |       | 324,941 |   | 360,590 |   |
|                                                                                                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Net loss                                                                                                                                                                                                                                        |       | $                                | (1,446,740 | )                              | $          | (1,284,010 | ) | $ | (2,916,498 | ) | $ | (2,236,419 | ) |
|                                                                                                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Earnings (loss) per share:                                                                                                                                                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                           |       | $                                | (0.11      | )                              | $          | (0.09 | ) | $ | (0.23 | ) | $ | (0.16 | ) |
| Diluted                                                                                                                                                                                                                                         |       | $                                | (0.11      | )                              | $          | (0.09 | ) | $ | (0.23 | ) | $ | (0.16 | ) |
|                                                                                                                                                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| Weighted average common shares  outstanding                                                                                                                                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                                                                                                                                           |       | 13,431,999                       |       | 14,317,482                     |       | 12,490,084 |   | 14,317,482 |   |
| Diluted (note 6)                                                                                                                                                                                                                                |       | 13,431,999                       |       | 14,317,482                     |       | 12,490,084 |   | 14,317,482 |   |

 

See accompanying notes to unaudited interimfinancial statements.

 

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**IBIS TECHNOLOGY CORPORATION**

 

# **STATEMENTS OF CASH FLOWS**

# **(Unaudited)**

#  

| ** **                                                                  | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                  | ** ** | **June 30,**              | ** ** |
| ** **                                                                  | ** ** | **2007**                       | ** ** | **2008** | ** ** |
|                                                                        |       |                           |       |   |   |
| **Cash flows  from operating activities:**                                  |       |                           |       |   |   |
| Net loss                                                                    |       | $                              | (2,916,498 | ) | $ | (2,236,419 | ) |
| Adjustment to reconcile net  loss to net cash used in operating activities: |       |                           |       |   |   |
| Share-based compensation  expense                                           |       | 247,171                        |       | 170,643 |   |
| Depreciation and amortization                                               |       | 773,934                        |       | 343,503 |   |
| Changes in operating assets  and liabilities:                               |       |                           |       |   |   |
| Accounts receivable, trade                                                  |       | (46,643                        | )          | 206,908 |   |
| Inventories                                                                 |       | 10,750                         |       | (3,383 | ) |
| Prepaid expenses and other  current assets                                  |       | (32,789                        | )          | 5,755 |   |
| Accounts payable                                                            |       | (52,326                        | )          | 37,646 |   |
| Accrued liabilities                                                         |       | (448,801                       | )          | (73,075 | ) |
|                                                                        |       |                           |       |   |   |
| Net cash used in operating  activities                                      |       | (2,465,202                     | )          | (1,548,422 | ) |
|                                                                        |       |                           |       |   |   |
| **Cash  flows from investing activities:**                                  |       |                           |       |   |   |
| Additions to property and  equipment, net                                   |       | (6,254                         | )          | — |   |
| Other assets                                                                |       | (24,802                        | )          | (20,239 | ) |
|                                                                        |       |                           |       |   |   |
| Net cash used in investing  activities                                      |       | (31,056                        | )          | (20,239 | ) |
|                                                                        |       |                           |       |   |   |
| **Cash  flows from financing activities:**                                  |       |                           |       |   |   |
| Exercise of stock options and  employee stock purchase plan                 |       | 27,690                         |       | — |   |
| Proceeds from sales of common  stock, net of issuance cost                  |       | 4,884,381                      |       | — |   |
|                                                                        |       |                           |       |   |   |
| Net cash provided by financing  activities                                  |       | 4,912,071                      |       | — |   |
|                                                                        |       |                           |       |   |   |
| Net increase (decrease) in  cash and cash equivalents                       |       | 2,415,813                      |       | (1,568,661 | ) |
|                                                                        |       |                           |       |   |   |
| Cash and cash equivalents,  beginning of period                             |       | 4,812,477                      |       | 5,770,072 |   |
|                                                                        |       |                           |       |   |   |
| Cash and cash equivalents, end  of period                                   |       | $                              | 7,228,290  |   | $ | 4,201,411 |   |

 

See accompanying notes to unaudited interimfinancial statements.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTES TO UNAUDITED INTERIM FINANCIALSTATEMENTS**

 

## **(1) Interim Financial Statements**

 

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

 

In the opinion of management, the interim financial statements includeall adjustments, which consist only of normal and recurring adjustments,necessary for a fair presentation of the Company’s financial position andresults of operations. Results of operations for the interim periods are notnecessarily indicative of the results to be expected for the full year. Thesefinancial statements should be read in conjunction with the financialstatements of the Company as of and for the year ended December 31, 2007,which are included in the Company’s Annual Report on Form 10-K as filed onMay 28, 2008 and, as amended, on June 2, 2008.

 

## **(2) Summary of Significant AccountingPolicies**

 

### *(a) Revenue Recognition*

### * *

The Company recognizes revenue from equipment sales and the sales ofspare parts when all of the following criteria have been met: (1) evidenceexists that the customer is bound to the transaction; (2) the product hasbeen delivered to the customer and, when applicable, the product has beeninstalled and accepted by the customer; (3) the sales price to thecustomer has been fixed or is determinable; and (4) collectibility of thesales price is reasonably assured. The Company recognizes revenue fromimplanter sales upon acceptance at the customer’s site. Revenue derived fromcontracts and services is recognized upon performance. Provisions foranticipated losses are made in the period in which such losses becomedeterminable.

 

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

### * *

The Company policy for the valuation of inventory, including thedetermination of obsolete or excess inventory, requires the Company to forecastthe future demand for products within specific time horizons, generally twelvemonths or less. If the Company forecasted demand for specific products isgreater than actual demand and the Company fails to reduce manufacturing outputaccordingly, the Company could be required to record additional inventoryreserves, which would have a negative impact on the gross margin. The Companyhas reserved for obsolescence when engineering changes or other technologicaladvances indicate that obsolescence has occurred.

 

### *(c) Share-Based Compensation*

### * *

The Company adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment,”(“SFAS 123(R)”) which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to employees and directors including employee stock options,employee stock purchases related to the 2000 Employee Stock Purchase Plan (“theESPP”), restricted stock and other special equity awards based on grant dateestimated fair values. SFAS 123(R) supersedes the Company’s previousaccounting under Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) for periods beginning in 2006. In March 2005,the Securities and Exchange Commission issued SAB 107 relating to SFAS 123(R).The Company has applied the provisions of SAB 107 in its adoption of SFAS123(R). In December 2007, the Securities and Exchange Commission releasedSAB 110, which modifies SAB 107 to extend the use of the “simplified method”regarding the calculation and use of the expected term of share optionsutilized in SFAS 123(R) share based payments. The Company currentlyutilizes the simplified method in these calculations.

 

### *(d) Valuation of Long-Lived Assets*

### * *

The Company reviews the valuation of long-lived assets, including propertyand equipment and licenses, under the provisions of SFAS No. 144, “Accountingfor 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

 

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTESTO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

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

 

### *(e) Accounting for Uncertainty in IncomeTaxes*

### * *

In July 2006, the Financial Accounting Standards Board (FASB)issued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes – an interpretation of FASB Statement No. 109” (“FIN 48”), whichclarifies the accounting and disclosure for uncertainty in tax positions, asdefined.  FIN 48 seeks to reduce thediversity in practice associated with certain aspects of the recognition andmeasurement related to accounting for income taxes.  This interpretation is effective for fiscalyears beginning after December 15, 2006 and prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken, or expected to be taken, in a tax return,and provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosures and transition. As a result of theimplementation of FIN 48, the Company recorded no adjustment for unrecognizedincome tax benefits. At June 30, 2008, the Company had no unrecognized taxbenefits.  The Company classifies anyinterest and penalties related to income taxes as components of income taxexpense.

 

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

 

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

 

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

 

### *(f) New Accounting Pronouncements*

### * *

In September 2006, the Financial Accounting Standards Board (FASB)issued SFAS No. 157*, Fair Value Measurement*.SFAS No. 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles and establishes ahierarchy that categorizes and prioritizes the sources to be used to estimatefair 

 

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTESTO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

value. SFAS No. 157 also expandsfinancial statement disclosures about fair value measurements. On February 6,2008, the FASB issued FASB Staff Position (FSP) 157-b, which delayed theeffective date of SFAS No. 157 for one year for all nonfinancial assetsand nonfinancial liabilities, except those that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually). SFAS No. 157 and FSP 157-b are effective for financialstatements issued for fiscal years beginning after November 15, 2007. TheCompany has elected a partial deferral of SFAS No. 157 under theprovisions of FSP 157-b related to the measurement of fair value used whenevaluating goodwill, other intangible assets and other long-lived assets forimpairment and valuing asset retirement obligations and liabilities for exit ordisposal activities. At this time, we have adopted the FAS 157 as it relates tothe Company’s financial assets and liabilities only. The impact of partiallyadopting SFAS No. 157 effective January 1, 2008 was not material toour financial statements.

 

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets and FinancialLiabilities—Including an Amendment of SFAS 115*, which permits companiesto choose to measure many financial instruments and certain other items at fairvalue.  The objective of SFAS No. 159is to improve financial reporting by providing companies with the opportunityto mitigate volatility in reported earnings caused by measuring related assetsand liabilities differently without having to apply complex hedge accountingprovisions.  Unrealized gains and losseson items for which the fair value option has been elected are reported inearnings. This statement is effective for financial statements issued forfiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159on January 1, 2008 and did not elect the fair value option for anyfinancial instruments under the provisions of SFAS No. 159.

 

## **(3) Liquidity**

## ** **

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

 

As of June 30, 2008, the Company had cash and cash equivalents of$4.2 million, including the gross proceeds from the financing of $5.3 millionfrom the sale of 3.4 million shares of common stock and 2.5 million commonstock warrants in the year ended December 31, 2007.

 

During the six months ended June 30, 2008, the Company used $1.5million of cash for operating activities compared to $2.5 million in the sixmonths ended June 30, 2007. To date, the Company’s working capitalrequirements have been funded primarily through debt (capital leases) andequity financings, including the 2007 financing discussed below. The principaluses of cash during the six months ended June 30, 2008, were to fundoperations. At June 30, 2008, the Company had commitments to purchaseapproximately $0.1 million in material. Headcount for the quarter ended June 30,2008 was 20 employees.

 

Cash flow projections developed by management indicate the Companybelieves it will have sufficient cash resources to support current operationsthrough July 2009. However, since the Company began selling implanters in1996, the Company has only sold a total of eight Ibis 1000 oxygen implanters atan average sale price of approximately $4.0 million each and four i2000 oxygenimplanters at a selling price between $6.0 and $8.0 million.  The most recent order received was in October 2005,for which the Company recognized revenue in the quarter ended September 30,2006. The Company did not record implanter revenue during 2007 and, as of June 2008,does not have an order for an implanter. At present time, only one of the fourmajor wafer manufacturers are counted as a current prospective customer. TheCompany currently does not have a backlog for implanters, nor does it havevisibility to the timing of the next order from any customer. The Company’sfailure to obtain any orders for implanters in the foreseeable future,notwithstanding management’s belief that the Company has sufficient cash forthe 2008 fiscal year, or to obtain other sources of offsetting revenue, willhave a material adverse impact on the Company’s business and hinder its abilityto continue as a going concern. The Company’s continuing inability to generaterevenue likely will result in the inability to continue to invest in researchdevelopment and manufacturing capabilities, hinder the  ability to pursue and maintain relationships,partnerships and alliances with third parties, result in a loss of keypersonnel by way of workforce

 

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

reduction or by voluntary termination of employment, limit its abilityto secure financing on acceptable terms, if at all, and create greatervolatility in the trading of the Company’s common stock.

 

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

 

In February 2008, the Company announced the engagement of theinvestment bank, BlueLake Partners, LLC, for the purpose of assessing strategicalternatives for Ibis, including a potential sale of the Company and/or itsassets. The Company can give no assurance that it will identify an alternativethat allows stockholders to realize an increase in the value of the Company’sstock. There can also be no assurance that a transaction or other strategicalternative, once identified, evaluated and consummated, will provide greatervalue to the stockholders than that reflected in the current stock price. In fact,if the Company is unable to recognize revenue through the sale of its productspursuant to the current operating plan, and if a viable strategic alternativeis not identified, the Company may be unable to continue as a going concern.Further, in pursuit of the highest value for shareholders, the Board ofDirectors may also consider alternatives that include a liquidation of assetsand the resulting cash distribution per share after payment of outstandingliabilities. In such case, any per-share cash liquidation distribution could beless than the purchase price per share that stockholders may have paid for theCompany’s securities.

 

On August 11,2008, the Company announced that it received a letter from The Nasdaq StockMarket stating that a Nasdaq Hearing Panel had determined to delist the CommonStock of the Company from the Nasdaq Global Market and will suspend trading ofthe Company’s shares effective on the opening of business on August 13, 2008.The decision of the Panel followed a hearing on June 5, 2008 during which theCompany addressed the delayed filing of the Company’s Form 10-K for the yearended December 31, 2007 (which the Company filed on May 28, 2008 and amended onJune 2, 2008) and the Form 10-Q for the quarter ended March 31, 2008 (which theCompany filed on July 11, 2008), as well as additional Nasdaq compliancedeficiencies relating to the maintenance of the minimum bid price, stockholdersequity and market value of publicly-held shares.

 

The Companydoes not plan to request a review from the Nasdaq Listing and Hearing ReviewCouncil. The Company now expects to be quoted on the Pink Sheets, an electronicquotation service maintained by Pink Sheets LLC. The Pink Sheets allowcontinued trading of securities of delisted companies. The Company expects itsCommon Stock to be traded on the Pink Sheets under the symbol “IBIS” or“IBIS.PK”. The Company’s Common Stock may also be quoted on the OTC BulletinBoard ®, a regulated quotation service for over-the-counter securities,provided one or more market makers apply to quote the Company’s securities.

 

As a result ofthe delisting of the Company’s Common Stock from the Nasdaq Global Market,investors may have difficulty converting their investment into cashefficiently.  The price of the Company’sCommon Stock and the levels of liquidity available to stockholders may bereduced. In addition, the trading of the Company’s Common Stock in the PinkSheets may materially adversely affect access to the capital markets, and thelimited liquidity and potentially reduced price of the Company’s Common Stockcould materially adversely affect the ability of Ibis to raise capital throughalternative financing sources on acceptable terms or at all. Stocks that tradein the Pink Sheets are no longer eligible for margin loans, and a companytrading in the Pink Sheets cannot avail itself of federal preemption of statesecurities or "blue sky" laws, which adds substantial compliancecosts to securities issuances, including pursuant to employee option plans,stock purchase plans and private or public offerings of securities. 

 

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**IBIS TECHNOLOGY CORPORATION**

** **

**NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

## **(4) Inventories**

 

Inventories consist of thefollowing:

 
| ** **                | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|---------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                | ** ** | **2007**              | ** ** | **2008**          | ** ** |
| ** **                | ** ** | ** **            | ** ** | ** **        | ** ** |
| Raw materials             |       | $                     | 328,802    |              | $          | 332,185 |   |
| Work in process           |       | 1,461,592             |       | 1,461,592         |       |
| Total equipment inventory |       | $                     | 1,790,394  |              | $          | 1,793,777 |   |

 

## **(5) Accrued Liabilities**

## ** **

Current accrued liabilities were as follows:

 
| ** **                | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|---------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                | ** ** | **2007**              | ** ** | **2008**          | ** ** |
|                      |       |                  |       |              |       |
| Accrued vacation          |       | $                     | 129,903    |              | $          | 174,631 |   |
| Accrued payroll           |       | 39,401                |       | 39,401            |       |
| Accrued expenses          |       | 301,915               |       | 184,112           |       |
| Total accrued liabilities |       | $                     | 471,219    |              | $          | 398,144 |   |

 

## **(6) Net Loss Per Share**

 

Net loss for the quarter ended June 30, 2008 of $1.3 million or aloss of $0.09 per share, included share-based compensation expense under SFAS123(R), of $0.1 million or $0.01 per share related to employee stock options,and employee stock purchases. Net loss for the six months ended June 30,2008 of $2.2 million or $0.16 per share included share-based compensationexpense under SFAS 123(R) of $0.2 million or $0.01 per share. Net loss forthe quarter ended June 30, 2007 of $1.4 million or $0.11 per share,included share-based compensation expense under SFAS 123(R) of $0.1million or $0.01 per share, related to employee stock options, and employeestock purchases. Net loss for the six months ended June 30, 2007 of $2.9million or $0.23 per share included share-based compensation expense under SFAS123(R) of $0.2 million or $0.02 per share.

 

Net income (loss) per share of common stock is computed based upon theweighted average number of shares outstanding during each period and includingthe dilutive effect, if any, of stock options and warrants. Statement of Financial Accounting Standards No. 128,“Earnings per Share,” (“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 30,2007 and 2008, common stock equivalents of 10,380 and common stock warrants of2,713,400, 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.

 

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**IBIS TECHNOLOGY CORPORATION**

** **

**NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

## **(7) Industry Segments**

 

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

 

The table below provides unaudited information for the three and sixmonths ended June 30, 2007 and 2008 pertaining to the Company’s twoindustry segments.

 
| ** **                                                   | ** ** | **SIMOX**     | ** ** | **Other Products** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|---------------|------------|-------------------------|------------|------------|------------|
| ** **                                                   | ** ** | **Equipment** | ** ** | **Or Services**    | ** ** | **Total**  | ** ** |
| **Net  Revenue**                                             |       |          |       |                    |       |       |       |
| Three Months Ended  June 30, 2007                       |       | $             | 128,052    |                    | $          | 137,078    |       | $ | 265,130 |   |
| Three Months Ended  June 30, 2008                       |       | $             | 23,147     |                    | $          | 71,346     |       | $ | 94,493 |   |
| Six Months Ended June 30,  2007                         |       | $             | 373,971    |                    | $          | 221,222    |       | $ | 595,193 |   |
| Six Months Ended June 30,  2008                         |       | $             | 291,253    |                    | $          | 134,254    |       | $ | 425,507 |   |
|                                                         |       |          |       |                    |       |       |       |
| **Operating  Income (Loss)**                                 |       |          |       |                    |       |       |       |
| Three Months Ended  June 30, 2007                       |       | (1,179,279    | )          | 137,078                 |       | (1,042,201 | )          |
| Three Months Ended  June 30, 2008                       |       | (947,857      | )          | 71,346                  |       | (876,511   | )          |
| Six Months Ended June 30,  2007                         |       | (2,334,047    | )          | 221,222                 |       | (2,112,825 | )          |
| Six Months Ended June 30,  2008                         |       | (1,714,098    | )          | 134,254                 |       | (1,579,844 | )          |
|                                                         |       |          |       |                    |       |       |       |
| **Assets**                                                   |       |          |       |                    |       |       |       |
| June 30, 2008                                           |       | 3,253,306     |       | 83,878                  |       | 3,337,184  |       |
|                                                         |       |          |       |                    |       |       |       |
| **Depreciation  and Amortization of Property and Equipment** | ** ** | ** **    | ** ** | ** **              | ** ** | ** ** | ** ** |
| Three Months Ended  June 30, 2007                       |       | 368,693       |       | —                  |       | 368,693    |       |
| Three Months Ended  June 30, 2008                       |       | 153,148       |       | —                  |       | 153,148    |       |
| Six Months Ended June 30,  2007                         |       | 737,448       |       | —                  |       | 737,448    |       |
| Six Months Ended June 30,  2008                         |       | 306,734       |       | —                  |       | 306,734    |       |

 

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**IBIS TECHNOLOGY CORPORATION**

** **

**NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

The table below provides the reconciliation of reportable segmentoperating loss and assets to Ibis’ totals.

 
| ** **                                                   | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **Segment Reconciliation**                              | ** ** | **2007**                         | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Net Income (Loss):                                           |       |                             |       |                           |       |   |   |   |   |
| Total operating loss for  reportable segments                |       | $                                | (1,042,201 | )                              | $          | (876,511 | ) | $ | (2,112,825 | ) | $ | (1,579,844 | ) |
| Corporate general and  administrative expenses               |       | (566,878                         | )          | (487,892                       | )          | (1,128,614 | ) | (1,017,165 | ) |
| Net other income                                             |       | 162,339                          |       | 80,393                         |       | 324,941 |   | 360,590 |   |
| Income tax expense                                           |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | — |   |
| Net loss                                                     |       | $                                | (1,446,740 | )                              | $          | (1,284,010 | ) | $ | (2,916,498 | ) | $ | (2,236,419 | ) |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Capital Expenditures:                                        |       |                             |       |                           |       |   |   |   |   |
| Total capital expenditures for  reportable segments          |       | $                                | —     |                           | $          | — |   | $ | — |   | $ | — |   |
| Corporate capital expenditures                               |       | 6,254                            |       | —                         |       | $ | 6,254 |   | — |   |
| Total capital expenditures for  reportable segments          |       | $                                | 6,254      |                           | $          | — |   | $ | 6,254 |   | $ | — |   |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Depreciation and Amortization:                               |       |                             |       |                           |       |   |   |   |   |
| Total depreciation and  amortization for reportable segments |       | $                                | 368,693    |                           | $          | 153,148 |   | $ | 737,448 |   | $ | 306,734 |   |
| Corporation depreciation and  amortization                   |       | 16,532                           |       | 17,278                         |       | 36,486 |   | 36,769 |   |
| Total depreciation and  amortization                         |       | $                                | 385,225    |                           | $          | 170,426 |   | $ | 773,934 |   | $ | 343,503 |   |

 
| ** **                                                  | ** ** | ** ** | ** ** | **Balance as of  June 30, 2008** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|------------|------------|------------|------------|------------|
| Assets                                                      |       |       |       |                                  |       |       |       |       |       |       |
| Total assets for reportable  segments                       |       |       |       | $                                     | 3,337,184  |       |       |       |       |       |   |
| Cash & cash equivalents  not allocated to segments |       |       |       | 4,201,411                             |       |       |       |       |       |       |
| Other unallocated assets                                    |       |       |       | 123,033                               |       |       |       |       |       |       |
| Total assets                                                |       |       |       | $                                     | 7,661,628  |       |       |       |       |       |   |

 

## **(8) Employee Stock Benefit Plans**

 

Net loss for the six months ended June 30, 2008 includedshare-based compensation expense under SFAS 123(R) of $0.2 million. Of thisexpense, twelve percent came from options issued prior to December 31,2005 and are valued using the accrual method, which is consistent with priorperiods, while seventy nine percent came from options issued after January 1,2006 and are valued using the straight-line prorated method, which was adoptedin 2006 under the new guidance, and nine percent came from the employee stockpurchase plan valuation. Net loss for the six months ended June 30, 2007included share-based compensation expense under SFAS 123(R) of $0.2million. Of this expense, twenty six percent came from options issued prior to December 31,2005 and are valued using the accrual method, which is consistent with priorperiods, while sixty seven percent came from options issued after January 1,2006 and are valued using the straight-line prorated method which was adoptedin 2006 under the new guidance, and seven percent came from the employee stockpurchase plan valuation.

 

### *Employee Stock Purchase Plan*

### * *

The Company maintains an employee stock purchase plan where eligibleemployees may purchase common stock through payroll deduction of up to 15% ofcompensation with a limit of $21,250. The price per share is the lower of 85%of the market price at the beginning or end of each offering period (generally6 months). The 2000 Employee 

 

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**IBIS TECHNOLOGY CORPORATION**

** **

**NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

Stock Purchase Plan, as amended, provides for purchases by employees ofup to an aggregate of 600,000 shares through May 31, 2010. During the sixmonths ended June 30, 2007 and June 30, 2008, the Company issued22,771 and zero shares under the Purchase Plan. At June 30, 2008, 146,038shares were available for purchase under the Purchase Plan.

 

### *Employee Stock Option Plan*

### * *

The Company has share-based compensation plans under which employeesand directors may be granted options to purchase common stock. Options aregenerally granted with exercise prices at not less than the fair market valueon the grant date, generally vest over 4 years and expire in 10 years after thegrant date. As of June 30, 2008, a total of 4.7 million shares areauthorized for grant under the Company’s share-based compensation plans. Thenumber of common shares reserved for granting of future awards to employees anddirectors under these plans was 1.5 million at June 30, 2008. The remainingunrecognized compensation expense on stock options at June 30, 2008 was$0.4 million. The weighted average period over which the cost is expected to berecognized is approximately 1 year.

 

As of June 30, 2008, the Company had four equity compensation plansunder which our equity securities have been authorized for issuance to ouremployees and/or directors: the 2000 Employee Stock Purchase Plan, as amended(described above), the 1993 Employee, Director and Consultant Stock OptionPlan, as amended, (the 1993 Plan); the 1997 Employee, Directors and ConsultantStock Option Plan, as amended; and the 2007 Employee, Director and ConsultantEquity Plan, (the 2007 Plan). The 1993 Plan has expired and there are nooptions available for issuance; however, the 1993 Plan continues to govern alloptions, awards and other grants granted and outstanding under the 1993 Plan.

 

### *Distribution and Dilutive Effect of Options*

### * *

The following table illustrates the grant dilution and exercisedilution:

 
| ** **                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** |
|                                |       |                             |       |                           |       |   |   |   |   |
| Shares of common stock  outstanding |       | 14,316,629                       |       | 14,317,482                     |       | 14,316,629 |   | 14,317,482 |   |
|                                |       |                             |       |                           |       |   |   |   |   |
| Granted                             |       | 312,500                          |       | —                         |       | 597,500 |   | — |   |
| Canceled/forfeited                  |       | (124,547                         | )          | —                         |       | (175,067 | ) | — |   |
| Expired                             |       | —                           |       | (2,500                         | )          | — |   | (96,207 | ) |
| Net options granted                 |       | 187,953                          |       | (2,500                         | )          | 422,433 |   | (96,207 | ) |
|                                |       |                             |       |                           |       |   |   |   |   |
| Grant dilution (1)                  |       | 1.3                              | %          | 0.0                            | %          | 3.0 | % | (0.7 | )% |
|                                |       |                             |       |                           |       |   |   |   |   |
| Exercised                           |       | —                           |       | —                         |       | — |   | — |   |
| Exercised dilution (2)              |       | 0.0                              | %          | 0.0                            | %          | 0.0 | % | 0.0 | % |

 

----

(1)  The percentage for grant dilution is computed based on netoptions granted as a percentage of shares of common stock outstanding.

 

(2)  The percentage for exercise dilution is computed based onoptions exercised as a percentage of shares of common stock outstanding.

 

Basic and diluted shares outstanding for the three and six months endedJune 30, 2008 were 14,317,482 shares. During the three and six monthsending June 30, 2008, the dilutive effect of in-the-money employee stockoptions were zero shares based on the Company’s average share price of $0.23and $0.30 respectively.

 

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**IBIS TECHNOLOGY CORPORATION**

** **

**NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

A summary of stock option transactions follows:

 
| ** **                               | ** ** | **Options Outstanding** | ** ** |
|------------------------------------------|------------|------------------------------|------------|
| ** **                               | ** ** | **Options Available**   | ** ** | ** ** | ** ** | **Weighted average** | ** ** |
| ** **                               | ** ** | **for**                      | ** ** | ** ** | ** ** | **exercise price of** | ** ** |
| ** **                               | ** ** | **Grant**                    | ** ** | **Shares** | ** ** | **shares under plan** | ** ** |
|                                     |       |                         |       |   |   |   |   |
| Balance outstanding as December 31, 2006 |       | 440,926                      |       | 1,354,385 |   | $ | 9.59 |   |
| Granted                                  |       | (612,500                     | )          | 612,500 |   | 1.47 |   |
| Exercised                                |       | —                       |       | — |   | — |   |
| Cancelled/forfeited                      |       | 614,985                      |       | (614,985 | ) | 6.43 |   |
| Expired                                  |       | (443,411                     | )          | — |   | — |   |
| Additional shares reserved               |       | 1,500,000                    |       | — |   | — |   |
| Balance outstanding as December 31, 2007 |       | 1,500,000                    |       | 1,351,900 |   | $ | 7.35 |   |
| Granted                                  |       | —                       |       | — |   | — |   |
| Exercised                                |       | —                       |       | — |   | — |   |
| Cancelled/forfeited                      |       | 96,207                       |       | (96,207 | ) | 7.80 |   |
| Expired                                  |       | (96,207                      | )          | — |   | — |   |
| Additional shares reserved               |       | —                       |       | — |   | — |   |
| Balance outstanding as June 30, 2008     |       | 1,500,000                    |       | 1,255,693 |   | $ | 7.32 |   |

 

The following table summarizes information concerning outstanding andexercisable options as of June 30, 2008:

 
| **Options Outstanding**                          | ** ** | **Options Exercisable** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | ** **                   | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **                   | ** ** | **Average** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                            | ** ** | ** **                   | ** ** | **remaining** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **Range of**                                     | ** ** | **Number**                   | ** ** | **contractural** | ** ** | **exercise price** | ** ** | **Aggregate** | ** ** | **Options** | ** ** | **exercise price** | ** ** |
| **exercise prices**                              | ** ** | **outstanding**              | ** ** | **life (years)** | ** ** | **per shares** | ** ** | **Intrinsic Value** | ** ** | **Exercisable** | ** ** | **per shares** | ** ** |
| $     .01 -   6.00 |       | 871,534                      |       | 6.7 |   | $ | 2.52 |   | $ | 0 |   | 568,459 |   | $ | 2.79 |   |
| $   6.01 -    9.00           |       | 122,886                      |       | 4.3 |   | $ | 7.90 |   |   |   | 122,886 |   | $ | 7.90 |   |
| $   9.01 - 13.50                       |       | 140,173                      |       | 2.3 |   | $ | 10.58 |   |   |   | 140,173 |   | $ | 10.58 |   |
| $ 13.51 - 20.26                                  |       | 27,700                       |       | 2.3 |   | $ | 18.34 |   |   |   | 27,700 |   | $ | 18.34 |   |
| $ 20.27 - 30.37                                  |       | 8,250                        |       | 1.3 |   | $ | 23.35 |   |   |   | 8,250 |   | $ | 23.35 |   |
| $ 30.38 - 45.55                                  |       | 11,250                       |       | 1.8 |   | $ | 37.24 |   |   |   | 11,250 |   | $ | 37.24 |   |
| $ 45.56 - 68.32                                  |       | 73,900                       |       | 1.5 |   | $ | 46.25 |   |   |   | 73,900 |   | $ | 46.25 |   |
|                                                  |       | 1,255,693                    |       | 5.5 |   | $ | 7.32 |   | $ | 0 |   | 952,618 |   | $ | 9.00 |   |

 

The aggregate intrinsic value in the preceding table represents thetotal pretax intrinsic value, based on the Company’s closing stock price of$0.11 as of June 30, 2008, which would have been received by the optionholders had all option holders exercised their options as of that date. Sinceall options that were exercisable were at a price higher than this closingprice the intrinsic value is $0. The fair value of stock options exercisable atJune 30, 2007 and June 30, 2008 was $4.0 million and $3.5 million,respectively. The total number of in-the-money options exercisable as of June 30,2008 was zero.

 

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**IBIS TECHNOLOGY CORPORATION**

** **

**NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

### *Valuation and Expense Information under SFAS123(R)*

### * *

The following table summarizes share-based compensation expense relatedto employee stock options and employee stock purchases under SFAS123 (R) forthe three and six months ended June 30, 2007 and 2008 which was allocatedas follows:

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                      | ** ** | **2007**                         | ** ** | **2008**                       | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **                                                      | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of sales                                                   |       | $                                | 5,661      |                           | $          | 5,139 |   | $ | 13,105 |   | $ | 10,364 |   |
| General and administration                                      |       | 59,333                           |       | 36,492                         |       | 121,627 |   | 75,637 |   |
| Marketing and selling                                           |       | 15,820                           |       | 10,144                         |       | 31,681 |   | 20,706 |   |
| Research and development                                        |       | 37,103                           |       | 32,218                         |       | 80,758 |   | 63,936 |   |
| Share based compensation  expense included in operation expense |       | $                                | 117,917    |                           | $          | 83,993 |   | $ | 247,171 |   | $ | 170,643 |   |

 

The Company did not recognize any tax benefits on the share-basedcompensation recorded in the periods based on the current tax status of theCompany.

 

The Company did not grant any stock options during the three and sixmonths ended June 30, 2008.

 

The weighted-average estimated fair value of employee stock optionsgranted during the three and six months ended June 30, 2007 were $1.52 and$1.37 per share, using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions:

 
| ** **                                              | ** ** | **Six**                     | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **Months Ended**       | ** ** |
| ** **                                              | ** ** | **June 30, 2007** | ** ** |
|                                                    |       |                        |       |
| Expected Volatility                                     |       | 97.96                       | %          |
| Risk Free Interest Rate                                 |       | 4.87                        | %          |
| Dividend yield                                          |       | 0.00                        |       |
| Expected option life (10 year  contractual life option) |       | 6.25                        |       |

 

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

 

The Company determined the expected volatility of the stock price byusing a period equal to the expected life of the stock options, 6.25 years.Volatility was measured as the standard deviation of the difference in thenatural logarithms of the stock over the expected life of the options using thedaily closing stock price. This resulted in the volatility of 97.96%, for thethree and six months ended June 30, 2007.

 

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

 

As share-based compensation expense recognized in the Statement ofOperations for the three and six months ended June 30, 2007 and 2008 isactually based on awards ultimately expected to vest, it has been reduced forannualized estimated forfeitures of 14.18% and 33.26%, respectively. SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.Forfeitures were estimated based on historical experience.

 

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** **

**NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS**

 

## **(9) Legal Proceedings**

## ** **

On April 26, 2007, the United Stares District Court in theDistrict of Massachusetts approved a settlement agreement in the consolidatedsecurities class action captioned *In re Ibis TechnologySecurities Litigation*, Civil Action No. 04-10446 RCL (D.Mass.). The Company and its Chairman of the Board, Martin J. Reid, and theplaintiffs reached an agreement in principle to settle the securities classaction, which the Company announced on October 2, 2006. Thereafter, theparties executed a formal settlement agreement and submitted it for Courtapproval. The settlement provides for a payment to the plaintiffs of $1.9million. The Court’s April 26, 2007 Order, certified the proposed classfor settlement purposes only, approved the parties’ settlement agreement, anddismissed the securities class action with prejudice and in its entirety. Thesettlement was funded entirely by the Company’s insurance carrier and did nothave a material adverse affect on our business, results of operations andfinancial condition.

 

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

 

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**PART I- ITEM 2**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

# **OVERVIEW**

#  

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

 

Initially, much of our revenue was derived from research anddevelopment contracts and sales of wafers for military applications. Over theyears, the Company decided to focus its business operations and sales strategyon the manufacture and sale of our implanter equipment products andde-emphasized the sale of wafers given that, among other things, we believedthat the wafer manufacturing companies were in the best position to manufactureSIMOX-SOI wafers using our implanter equipment in light of their expertise andoperating efficiencies. As we announced on July 21, 2004, we exited thewafer manufacturing business. Wafer product sales, as well as wafer revenuereported in subsequent periods, are reported net of associated costs, as lossfrom discontinued operations or other income after 2005 on our income statement.The Company believes that its decision to discontinue the wafer businesspermits broader strategic collaboration efforts between Ibis and the wafermanufacturers. 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,  not withstanding our current lack of orders,we expect our ultimate customers will be drawn from these silicon wafermanufacturers and we have focused the majority of our technical and marketingresources on the sale of implanters to the leading silicon wafer manufacturersand our key customers in the semiconductor industry, who we believe are theleaders in the adoption of SOI technology.

 

Our fundamental SIMOX-SOI technology has been developed, refined, andtested over the last dozen years.  In2002, we introduced the current generation of SIMOX-SOI technology thatincluded 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-UTwafers. We also believe the ability of the i2000 implanter to producetwelve-inch (or 300 mm) SIMOX-SOI wafers coupled with the MLD process shouldposition us to capitalize on the projected future growth in the SOImarketplace. In 1999, we commenced a program to design and develop the i2000,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 process on the implanterincluding the IBM MLD process, when licensed, as well as other SIMOX-SOI wafermanufacturing processes that do not require the IBM license.

 

The Company’s financial statements for the fiscal year ended December 31,2007 were prepared assuming the Company would continue as a going concern;however, the Company’s recurring losses and accumulated deficit raisesubstantial doubt about its ability to continue as a going concern. The Company’sability to continue as a going concern is an issue raised as a result ofrecurring losses from operations and net capital deficiency and is subject tothe 

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Company’s ability to secure additional orders of our implanterequipment or, in the alternative, identify and consummate a strategictransaction, including the potential a sale of the Company, or other strategicalternative.

 

## **Critical Accounting Policies**

## ** **

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that have a significant impact on the results we report in ourfinancial statements. Some of our accounting policies require us to makedifficult and subjective judgments, often as a result of the need to makeestimates on matters that are inherently uncertain. Our most criticalaccounting policies include: revenue recognition, inventory valuation andreserves, and the assessment of long-lived asset impairment. Actual results maydiffer from these estimates under different assumptions or conditions. Below,we discuss these policies further, as well as the estimates and judgmentsinvolved.

 

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

 

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

 

***Valuation of Long-Lived Assets***.  Wereview the valuation of long-lived assets, including property and equipment andlicenses, under the provisions of SFAS No. 144, “Accounting for Impairmentor Disposal of Long-Lived Assets.” We are required to assess the recoverabilityof its long-lived assets or asset groups whenever events and circumstancesindicate that the carrying value may not be recoverable. Based on currentconditions, factors we consider important and that could trigger an impairmentreview include the following:

 

·                  Significantunderperformance relative to expected historical or projected future operatingresults,

 

·                  Significantchanges in the manner of our use of the acquired assets or the strategy of ouroverall business,

 

·                  Significantnegative industry or economic trends,

 

·                  Significantdecline in our stock price for a sustained period, and

 

·                  Our marketcapitalization relative to book value.

 

In accordance with SFAS No. 144, when we determine that thecarrying value of applicable long-lived assets may not be recoverable basedupon the existence of one or more of the above indicators of impairment, weevaluate whether the carrying amount of the asset exceeds the sum of theundiscounted cash flows expected to result from the use and eventualdisposition of that asset or asset group. If such a circumstance exists, wewould measure an impairment loss to the extent the carrying amount of theparticular long-lived asset or group exceeds its fair value. We 

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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.

 

## **Financial Condition**

## ** **

During the fourth quarter of 2007, we conducted an impairment analysisof our assets and concluded that the carrying value of certain of those assetsexceeded their probable fair value. Accordingly, we recorded an impairment losson our fixed assets of $1.3 million, $0.3 million impairment loss on patentsand recorded a charge for an increase to inventory reserve of $1.8 million. Wewill continue to evaluate the value of its assets taking into considerationcurrent business conditions and potential strategic transactions.

 

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**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

## **Results of Operations**

## ** **

### ***SecondQuarter Ended June 30, 2008 Compared to Second Quarter Ended June 30,2007***

### * *

***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, 2008 to$71 thousand from $137 thousand for the second quarter ended June 30,2007, a decrease of $66 thousand or 48%. This decrease is attributable todecreased license revenue from royalty fees related to equipment technology,along with a non-refundable supplemental license option fee received in thesecond quarter ended June 30, 2007 which related to equipment technology.

 

***Equipment Revenue. ***Equipmentrevenue represents revenue recognized from sales of implanters, spare parts andfield service revenue. Equipment revenue decreased to $23 thousand for thesecond quarter ended June 30, 2008 from $128 thousand for the secondquarter ended June 30, 2007, representing a decrease of $105 thousand or82%. Sales of spare parts accounted for all of equipment revenue  for the second quarter ended June 30,2008 and June 30, 2007. Sales of spare parts fluctuate depending oncustomer demand and when warranties expire on individual pieces of equipment.

 

***Total Cost of Sales and Revenue***.  Cost of equipment revenue represents the costof equipment, the cost for spare parts, and the costs of labor incurred forfield service. Cost of equipment revenue for the second quarter ended June 30,2008 was $130 thousand, as compared to $204 thousand for the second quarter endedJune 30, 2007. This decrease of $74 thousand was primarily due to reducedsales of spare parts in the second quarter ended June 30, 2008.

 

The gross margin for all sales was a negative 37% for the secondquarter ended June 30, 2008 as compared to a gross margin of 23% for thesecond quarter ended June 30, 2007. The decrease in the gross margin forall sales is attributable to the reduced license revenue, along with reducedspare parts sold in the quarter ended June 30, 2008.

 

***General and Administrative Expenses***.  General and administrative expenses for thesecond quarter ended June 30, 2008 were $488 thousand as compared to $567thousand for the second quarter ended June 30, 2007. This decrease was dueto decreased payroll and payroll related expenses from reduced salaries andheadcount.

 

***Marketing and Selling Expenses***.  Marketing and selling expenses for the secondquarter ended June 30, 2008 were $98 thousand as compared to $139 thousandfor the second quarter ended June 30, 2007. This decrease was due toreduced payroll and payroll related expenses.

 

***Research and Development Expenses.***  Internally funded research and developmentexpenses decreased by $221 thousand or 23% to $743 thousand for the secondquarter ended June 30, 2008, as compared to $964 thousand for the secondquarter ended June 30, 2007. This was due to reduced depreciation andamortization.

 

***Other Income (Expense)***.  Total other income for the second quarterended June 30, 2008 was $80 thousand as compared to $162 thousand for thesecond quarter ended June 30, 2007. Other income decreased in the quarterended June 30, 2008, as a result of the termination in 2007 of outsideconsulting performed at a neighboring business under a staffing servicesagreement.

 

### ***Six MonthsEnded June 30, 2008 Compared to Six Months Ended June 30, 2007***

### * *

***License and Other Revenue***.  License and other revenue includes revenuederived from license agreements, characterization and other services. Licenseand other revenue decreased for the six months ended June 30, 2008 to $134thousand from $221 thousand for the six months ended June 30, 2007, adecrease of $87 thousand or 39%. This decrease is attributable to decreasedlicense revenue from royalty fees related to equipment technology, along with a

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

non-refundable supplemental license option fee received in the sixmonths ended June 30, 2007 which related to equipment technology.

 

***Equipment Revenue. ***Equipmentrevenue represents revenue recognized from sales of implanters, spare parts andfield service revenue. Equipment revenue decreased to $291 thousand for the sixmonths ended June 30, 2008 from $374 thousand for the six months ended June 30,2007, representing a decrease of $83 thousand or 22%. Sales of spare partsaccounted for all of equipment revenue for the six months ended June 30,2008. This compares to $224 thousand in sales of spare parts for the six monthsended June 30, 2007 and $150 thousand in service revenue for the sixmonths ended June 30, 2007. Sales of spare parts fluctuate depending oncustomer demand and when warranties expire on individual pieces of equipment.

 

***Total Cost of Sales and Revenue***.  Cost of equipment revenue represents the costof equipment, the cost for spare parts, and the costs of labor incurred forfield service. Cost of equipment revenue for the six months ended June 30,2008 was $428 thousand, as compared to $320 thousand for the six months ended June 30,2007. This decrease of $108 thousand was primarily due to the expiration of thewarranty on the implanter in the six months ended June 30, 2007.

 

The gross margin for all sales was a negative 1% for the six monthsended June 30, 2008 as compared to a gross margin of 46% for the sixmonths ended June 30, 2007. The decrease in the gross margin for all salesis attributable to the reduced cost in the six months ended June 30, 2007from the expiration of the warranty on the implanter, reduced license revenueand reduced spare parts sales.

 

***General and Administrative Expenses***.  General and administrative expenses for thesix months ended June 30, 2008 were $1,017 thousand as compared to $1,127thousand for the six months ended June 30, 2007. This was due to decreasedpayroll and payroll related expenses from reduced salaries and headcount.

 

***Marketing and Selling Expenses***.  Marketing and selling expenses for the sixmonths ended June 30, 2008 were $187 thousand as compared to $360 thousandfor the six months ended June 30, 2007. This was due to decreased payrolland payroll related expenses due to headcount reductions and labor cost chargedout for consulting at a neighboring business in the six months ended June 30,2007.

 

 ***Researchand Development Expenses.*** Internally funded research and development expenses decreased by $637thousand or 31% to $1,391 thousand for the six months ended June 30, 2008,as compared to $2,028 thousand for the six months ended June 30, 2007.This was due to a reduction in payroll and payroll related expenses of $130thousand from headcount reductions and labor costs charged out for consultingat a neighboring business in the six months ended June 30, 2007, alongwith reduced R&D material of $74 thousand and reduced depreciation andamortization of $433 thousand.

 

***Other Income (Expense)***.  Total other income for the six months ended June 30,2008 was $361 thousand as compared to $325 thousand for the six months ended June 30,2007. Other income increased in the six months ended June 30, 2008, as aresult of the sale of three Ibis 1000 implanters previously written off, whichwas partially offset by the termination in 2007 of outside consulting performedat a neighboring business under a staffing services agreement.

 

## **Liquidity and Capital Resources**

## ** **

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

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

As of June 30, 2008, the Company had cash and cash equivalents of$4.2 million, including the gross proceeds from the financing of $5.3 millionfrom the sale of 3.4 million shares of common stock and 2.5 million commonstock warrants in the year ended December 31, 2007.

 

During the six months ended June 30, 2008, the Company used $1.5million of cash for operating activities of continuing operations as comparedto $2.5 million in the six months ended June 30, 2007. To date, theCompany’s working capital requirements have been funded primarily through debt(capital leases) and equity financings, including the 2007 financing discussedbelow. The principal uses of cash during the six months ended June 30,2008, were to fund operations. At June 30, 2008, the Company hadcommitments to purchase approximately $0.1 million in material. Headcount forthe quarter ended June 30, 2008 was 20 employees.

 

Cash flow projections developed by management indicate the Companybelieves it will have sufficient cash resources to support current operationsthrough July 2009. However, since the Company began selling implanters in1996, the Company has only sold a total of eight Ibis 1000 oxygen implanters atan average sale price of approximately $4.0 million each and four i2000 oxygenimplanters at a selling price between $6.0 and $8.0 million.  The most recent order received was in October 2005,for which the Company recognized revenue in the quarter ended September 30,2006. The Company did not record implanter revenue during 2007 and as of June,2008, does not have an order for an implanter. At present time, only one of thefour major wafer manufacturers are counted as a current prospective customer.The Company currently does not have a backlog for implanters, nor does it havevisibility to the timing of the next order from any customer. The Company’sfailure to obtain any orders for implanters in the foreseeable future,notwithstanding the management’s belief that the Company has sufficient cashfor the 2008 fiscal year, or to obtain other sources of offsetting revenue,will have a material adverse impact on the Company’s business and hinder itsability to continue as a going concern. The Company’s continuing inability togenerate revenue likely will result in the inability to continue to invest inresearch development and manufacturing capabilities, hinder the  ability to pursue and maintain relationships,partnerships and alliances with third parties, result in a loss of keypersonnel by way of workforce reduction or by voluntary termination ofemployment, limit its ability to secure financing on acceptable terms, if atall, and create greater volatility in the trading of the Company’s commonstock.

 

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

 

In February 2008, the Company announced the engagement of theinvestment bank, BlueLake Partners, LLC, for the purpose of assessing strategicalternatives for Ibis, including a potential sale of the Company and/or itsassets. The Company can give no assurance that it will identify an alternativethat allows stockholders to realize an increase in the value of the Company’sstock. There can also be no assurance that a transaction or other strategicalternative, once identified, evaluated and consummated, will provide greatervalue to the stockholders than that reflected in the current stock price. Infact, if the Company is unable to recognize revenue through the sale of itsproducts pursuant to the 

 

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current operating plan, and if a viable strategic alternative is notidentified, the Company may be unable to continue as a going concern. Further,in pursuit of the highest value for shareholders, the Board of Directors mayalso consider alternatives that include a liquidation of assets and theresulting cash distribution per share after payment of outstanding liabilities.In such case, any per-share cash liquidation distribution could be less thanthe purchase price per share that stockholders may have paid for the Company’ssecurities.

 

On August 11, 2008, theCompany announced that it received a letter from The Nasdaq Stock Marketstating that a Nasdaq Hearing Panel had determined to delist the Common Stockof the Company from the Nasdaq Global Market and will suspend trading of theCompany’s shares effective on the opening of business on August 13, 2008. Thedecision of the Panel followed a hearing on June 5, 2008 during which theCompany addressed the delayed filing of the Company’s Form 10-K for the yearended December 31, 2007 (which the Company filed on May 28, 2008 and amended onJune 2, 2008) and the Form 10-Q for the quarter ended March 31, 2008 (which theCompany filed on July 11, 2008), as well as additional Nasdaq compliance deficienciesrelating to the maintenance of the minimum bid price, stockholders equity andmarket value of publicly-held shares.

 

The Company does not plan torequest a review from the Nasdaq Listing and Hearing Review Council. TheCompany now expects to be quoted on the Pink Sheets, an electronic quotationservice maintained by Pink Sheets LLC. The Pink Sheets allow continued tradingof securities of delisted companies. The Company expects its Common Stock to betraded on the Pink Sheets under the symbol “IBIS” or “IBIS.PK”. The Company’sCommon Stock may also be quoted on the OTC Bulletin Board ®, a regulatedquotation service for over-the-counter securities, provided one or more marketmakers apply to quote the Company’s securities. 

 

As a result of the delistingof the Company’s Common Stock from the Nasdaq Global Market, investors may havedifficulty converting their investment into cash efficiently.  The price of the Company’s Common Stock andthe levels of liquidity available to stockholders may be reduced. In addition,the trading of the Company’s Common Stock in the Pink Sheets may materiallyadversely affect access to the capital markets, and the limited liquidity andpotentially reduced price of the Company’s Common Stock could materiallyadversely affect the ability of Ibis to raise capital through alternativefinancing sources on acceptable terms or at all. Stocks that trade in the PinkSheets are no longer eligible for margin loans, and a company trading in thePink Sheets cannot avail itself of federal preemption of state securities or “bluesky” laws, which adds substantial compliance costs to securities issuances,including pursuant to employee option plans, stock purchase plans and privateor public offerings of securities. 

 

## **Business Risk Factors**

 

This Form 10-Q containsexpress or implied forward-looking statements within the meaning of the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995 thatrelate to future events or our future financial performance. In some cases, youcan 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 Company’s ability to conduct its operations in a mannerconsistent with its current plan and to obtain additional implanter orders tocontinue as a going concern, (ii) the expected quotation on the Pink Sheets andapplication by one or more market makers to quote the Company’s securities onthe OTC Bulletin Board ®, (iii) the ability of the Company to timely file allrequired reports under the Securities Exchange Act of 1934, as amended (iv) theCompany’s expectations regarding future orders for i2000 implanters, (v) theCompany’s expectations regarding it’s strategic alternatives, including thepotential sale of the Company, (vi) the continued employment of key managementand technical personnel, and attaining implanter improvements to the degree andin the timeframe necessary to meet our customer’s expectations, (vii) the timing of our major customer’s ramping to productionquantities on the i2000 implanter and the sustained production worthiness ofthe i2000 implanter, (viii) the reliance on a single or small number oflarge customers, interest in and demand for, and market acceptance of, theCompany’s SIMOX-SOI technology including the Company’s implanters, ix) 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, (x)the timing and likelihood of revenue recognition on orders for the Company’simplanters, (xi) the Company’s belief that wafer manufacturers will becomethe primary suppliers of SIMOX-SOI wafers to the chipmaking industry, (xii) thethroughput and production capacity of the i2000 implanter for manufacturing300-mm SIMOX-SOI wafers, attaining implanter improvements to the degree and inthe timeframe necessary to meet customer expectations, and the ability of thei2000 implanter to achieve acceptable production yields, (xiii) the Company’splan to focus on supplying implanters to wafer manufacturers, (xiv) the abilityto operate with existing capital resources or to secure financing and tocontinue as a going concern and (xv) 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 not limited to: future continued migration to SOI technologyand market acceptance of SIMOX; the level of demand for the Company’s products;limited customers and products; lack of order backlog andvisibility to the timing of new orders; the Company’s ability to pursue andmaintain further strategic relationships, partnerships and alliances with thirdparties; loss of key personnel; the Company’s ability to protect itsproprietary technology; the potential trends in the semiconductor industrygenerally; the ease with which the i2000 can be installed and qualified infabrication facilities; the likelihood that implanters, if ordered, will bequalified and accepted by customers without substantial delay, modification, orcancellation, in whole or in part; the likelihood and timing of revenuerecognition on such transactions; the impact of rapidly changing technology;the possibility of the impact of competitive products, technologies andpricing; the impact of rapidly changing technology; the possibility of furtherasset impairment and resulting charges; equipment capacity and supplyconstraints or difficulties; the Company’s limited history in sellingimplanters; general economic conditions; and other risks and uncertaintiesdescribed elsewhere in this Form 10-Q and in the Company’s Securities andExchange Commission filings from time to time, including but not limited tothose set forth in the Company’s annual report on Form 10-K for the year endedDecember 31, 2007. All information set forth in this Form 10-Q is as of thedate of this Form 10-Q, and Ibis undertakes no duty to update this information,unless required by law.

 

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Tableof Contents

 

**IBIS TECHNOLOGY CORPORATION**

 

**PART I- ITEM 2**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

delay, modification, or cancellation, in whole or in part; thelikelihood and timing of revenue recognition on such transactions; the impactof rapidly changing technology; the possibility of the impact of competitiveproducts, technologies and pricing; the impact of rapidly changing technology;the possibility of further asset impairment and resulting charges; equipmentcapacity and supply constraints or difficulties; the Company’s limited historyin selling implanters; general economic conditions; and other risks anduncertainties described elsewhere in this Form 10-Q and in the Company’sSecurities and Exchange Commission filings from time to time, including but notlimited to those set forth in the Company’s annual report on Form 10-K forthe year ended December 31, 2007. All information set forth in this Form 10-Qis as of the date of this Form 10-Q, and Ibis undertakes no duty to updatethis information, unless required by law.

 

## **Off-Balance Sheet Arrangements**

## ** **

We do not have any off-balance sheet arrangements as defined inRegulation S-K Section 303(a)(4)(ii).

 

## **Contractual Obligations**

## ** **

We have no significant contractual obligations not fully recorded onour Balance Sheets or fully disclosed in the Notes to our FinancialStatements.  Information about futurepayments under certain of our contractual obligations is contained in Note 9 tothe Consolidated Financial Statements in our 2007 Annual Report on Form 10-K.

 

## **Effects of Inflation**

## ** **

Ibis believes that over the past three years inflation has not had asignificant impact on Ibis’ sales or operating results.

 

# **PART I – ITEM 3**

#  

# **QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET ANALYSIS**

#  

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

 

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**IBIS TECHNOLOGY CORPORATION**

 

# **PART I – ITEM 4**

 

**CONTROLSAND PROCEDURES**

 

## **Evaluation of Disclosure Controls andProcedures**

## ** **

As of the end of the period covered by this report, management of theCompany, with the participation of the Chief Executive Office and the ChiefFinancial Officer, evaluated the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”)) as of March 31, 2008.  Basedupon this evaluation, the Chief Executive Officer and the Chief FinancialOfficer have concluded that the Company’s disclosure controls and procedureswere effective as of June 30, 2008.

 

The Company previously reported a material weakness (as defined byPublic Company Accounting Oversight Board Auditing Standard No. 2) in itsinternal control over financial reporting (as defined in Rule 13a–15(f) underthe Exchange Act) as of December 31, 2007. As described in Item 9A, Controls and Procedures, in our Annual Reporton Form 10-K for the fiscal year ended December 31, 2007, theCompany determined that as of December 31, 2007, the Company did notmaintain effective policies and procedures to ensure a sufficiently detailedmanagement review of the preliminary financial statements includingconsideration of the impact of non-routine transactions on the financialstatements.  These deficiencies resultedin material adjustments to inventory reserves; property, plant and equipmentand patents, errors in the income tax disclosures, and omissions of requireddisclosures in the Company’s 2007 preliminary financial statements which werecorrected prior to issuance.  As notedbelow, the Company established a remediation plan to address the  material weakness and, as of June 30,2008, the Company believes the remedial steps have been completed.

 

## **Changes in Internal Control over FinancialReporting**

## ** **

Since December 31, 2007, we have made certain changes to ourinternal controls over financial reporting, which are likely to have a materialeffect on such controls.  For adiscussion of these changes, please refer to Item 9A, Controls and Procedures,in our Annual Report on Form 10-K for the year ended December 31,2007.  For the period covered by thisQuarterly Report on Form 10-Q, the Company has implemented a number ofadditional changes to our internal control over financial reporting relative tomanagement review of the preliminary financial statements includingconsideration of the impact of non-routine transactions on the financialstatements during fiscal year 2008.

 

Management recognizes that any enhancements to our internal controlsover financial reporting require continual monitoring and evaluation foreffectiveness. The development of these actions is an interactive process andhas evolved as the Company evaluates and improves our internal controls overfinancial reporting.  Managementcontinues to review progress on these activities on a consistent and ongoingbasis at the senior management level in conjunction with our Audit Committee.

 

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**IBIS TECHNOLOGY CORPORATION**

 

**PART II**

** **

**OTHERINFORMATION**

 

Item 1 - Legal Proceedings

 

On April 26, 2007, the United States District Court in theDistrict of Massachusetts approved a settlement agreement in the consolidatedsecurities class action captioned *In re Ibis TechnologySecurities Litigation*, Civil Action No. 04-10446 RCL (D.Mass.). The Company and its Chairman of the Board, Martin J. Reid, and theplaintiffs reached an agreement in principle to settle the securities classaction, which the Company announced on October 2, 2006.  Thereafter, the parties executed a formalsettlement agreement and submitted it for Court approval. The settlementprovides for a payment to the plaintiffs of $1.9 million. The Court’s April 26,2007 Order, certified the proposed class for settlement purposes only, approvedthe parties’ settlement agreement, and dismissed the securities class actionwith prejudice and in its entirety. The settlement was funded entirely by theCompany’s insurance carrier and did not have a material adverse affect on ourbusiness, results of operations and financial condition.

 

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

 

Item 1A.     RiskFactors

 

Except as described in this Item 1A, there are no material changes tothe risk factors described in the “Risk Factors” section in our Annual Reporton Form 10-K for the fiscal year ended December 31, 2007 and theQuarterly Report on Form 10-Q for the quarter ended March 31, 2008.

 

***The Company’s Common Stock Will No Longer Trade on the Nasdaq GlobalMarket, Effective August 13, 2008.***

 

On August 11, 2008, theCompany announced that it received a letter from The Nasdaq Stock Marketstating that a Nasdaq Hearing Panel had determined to delist the Common Stockof the Company from the Nasdaq Global Market and will suspend trading of theCompany’s shares effective on the opening of business on August 13, 2008. TheCompany does not plan to request a review from the Nasdaq Listing and HearingReview Council. The decision of the Panel followed a hearing on June 5, 2008during which the Company addressed the delayed filing of the Company’s Form10-K for the year ended December 31, 2007 (which the Company filed on May 28,2008 and amended on June 2, 2008) and the Form 10-Q for the quarter ended March31, 2008 (which the Company filed on July 11, 2008), as well as additionalNasdaq compliance deficiencies relating to the maintenance of the minimum bidprice, stockholders equity and market value of publicly-held shares.

 

The Company now expects tobe quoted on the Pink Sheets, an electronic quotation service maintained byPink Sheets LLC. The Pink Sheets allow continued trading of securities ofdelisted companies. The Company expects its Common Stock to be traded on thePink Sheets under the symbol “IBIS” or “IBIS.PK”. The Company’s Common Stockmay also be quoted on the OTC Bulletin Board ®, a regulated quotation servicefor over-the-counter securities, provided one or more market makers apply toquote the Company’s securities.

 

As a result of the delistingof the Company’s Common Stock from the Nasdaq Global Market, investors may havedifficulty converting their investment into cash efficiently.  The price of the Company’s Common Stock and thelevels of liquidity available to stockholders may be reduced. In addition, thetrading of the Company’s Common Stock in the Pink Sheets may materiallyadversely affect access to the capital markets, and the limited liquidity andpotentially reduced price of the Company’s Common Stock could materiallyadversely affect the ability of Ibis to raise capital through alternativefinancing sources on acceptable terms or at all. Stocks that trade in the PinkSheets are no longer eligible for margin loans, and a company trading in thePink Sheets cannot avail itself of federal preemption of state securities or “bluesky” laws, which adds substantial compliance costs to securities issuances,including pursuant to employee option plans, stock purchase plans and privateor public offerings of securities. There may also be other negativeimplications, including the potential loss of confidence by suppliers,customers and employees, the loss of institutional investor interest in theCompany.

 

Item 2 – Unregistered Sales ofEquity Securities and Use ofProceeds

 

None.

 

Item 3 – Defaults upon Senior Securities

 

None

 

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**IBIS TECHNOLOGY CORPORATION**

 

**PART II**

** **

**OTHERINFORMATION**

 

Item 4 – Submission of Matters to a Vote of Security Holders

 

None

 

Item 5 – Other Information

 

None

 

Item 6 – Exhibits

 

(a)                Exhibits furnished as Exhibits hereto:

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

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|                       | Ibis Technology Corporation |
|----------------------------|-----------------------------|
|                       |                        |   |
|                       |                        |   |
| Date: August 14, 2008 | By:                         |           /s/William  J. Schmidt |
|                       |                        |           William  J. Schmidt |
|                       |                        |           Chief  Financial Officer, Treasurer and Clerk |
|                       |                        |           (principal  financial and accounting officer) |
|                       |                        |   |
|                       |                        |   |
| Date: August 14, 2008 | By:                         |           /s/Martin  J. Reid |
|                       |                        |           Martin  J. Reid |
|                       |                        |           President  and Chief Executive Officer |

 

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