**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20569**

**Form 10-Q**

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

**For the Quarterly Period EndedSeptember 30, 2006**

**Or**

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

**For the transition period from                                      to                                      **

Commission filenumber      **0-23150**

**IbisTechnology 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’s telephone number, including area code)

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

Yes  x           No  o

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

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

 

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

Yes  o           No  x

10,873,139 sharesof Common Stock, par value $.008, were outstanding on November 13, 2006.

 

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**IBIS TECHNOLOGY CORPORATION**

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

 

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**IBISTECHNOLOGY CORPORATION**

**BALANCESHEETS**

**(Unaudited)**
|                                                                                                                                                          | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                               | ** ** | **2005**              | ** ** | **2006**               | ** ** |
| **Assets**                                                                                                                                               |       |                  |       |                   |       |
| **Current assets:**                                                                                                                                      |       |                  |       |                   |       |
| Cash and cash  equivalents                                                                                                                               |       | $                     | 6,856,874  |                   | $          | 5,772,099 |   |
| Accounts  receivable, trade, net                                                                                                                         |       | 90,878                |       | 381,395                |       |
| Inventories, net  (note 4)                                                                                                                               |       | 6,276,650             |       | 3,388,252              |       |
| Prepaid expenses  and other current assets                                                                                                               |       | 615,702               |       | 384,153                |       |
| Total current  assets                                                                                                                                    |       | 13,840,104            |       | 9,925,899              |       |
| Property and equipment                                                                                                                                   |       | 26,448,906            |       | 24,721,976             |       |
| Less:  Accumulated depreciation and amortization                                                                                                         |       | (21,352,154           | )          | (20,462,811            | )          |
| Net property and  equipment                                                                                                                              |       | 5,096,752             |       | 4,259,165              |       |
| Patents and other  assets, net                                                                                                                           |       | 1,055,532             |       | 860,049                |       |
| Total assets                                                                                                                                             |       | $                     | 19,992,388 |                   | $          | 15,045,113 |   |
|                                                                                                                                                     |       |                  |       |                   |       |
| **Liabilities and Stockholders’  Equity**                                                                                                           |       |                  |       |                   |       |
| **Current liabilities:**                                                                                                                                 |       |                  |       |                   |       |
| Accounts payable                                                                                                                                         |       | $                     | 230,871    |                   | $          | 797,292 |   |
| Accrued  liabilities (notes 5 and 6)                                                                                                                     |       | 1,201,695             |       | 1,149,478              |       |
| Deferred revenue                                                                                                                                         |       | 7,263,000             |       | —                 |       |
| Total current  liabilities                                                                                                                               |       | 8,695,566             |       | 1,946,770              |       |
|                                                                                                                                                     |       |                  |       |                   |       |
| **Stockholders’ equity:**                                                                                                                           |       |                  |       |                   |       |
| Undesignated  preferred stock, $.01 par value                                                                                                            |       |                  |       |                   |       |
| Authorized  2,000,000 shares; none issued                                                                                                                |       | —                |       | —                 |       |
| Common stock,  $.008 par value                                                                                                                           |       |                  |       |                   |       |
| Authorized  50,000,000 shares; issued and outstanding 10,816,029 shares and 10,873,139  shares at December 31, 2005 and September 30, 2006, respectively |       | 86,528                |       | 86,985                 |       |
| Additional  paid-in capital                                                                                                                              |       | 93,245,754            |       | 93,610,761             |       |
| Accumulated  deficit                                                                                                                                     |       | (82,035,460           | )          | (80,599,403            | )          |
| Total  stockholders’ equity                                                                                                                         |       | 11,296,822            |       | 13,098,343             |       |
| Total liabilities and  stockholders’ equity                                                                                                         |       | $                     | 19,992,388 |                   | $          | 15,045,113 |   |

 

See accompanyingnotes to unaudited interim financial statements.

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**IBIS TECHNOLOGY CORPORATION**

**STATEMENTS OF OPERATIONS**

**(Unaudited)**
|                                                                                                                                                                       | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                                                            | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Net Sales  and revenue:**                                                                                                                                           |       |                             |       |                            |       |   |   |   |   |
| License and other revenue                                                                                                                                             |       | $                                | 120,723    |                            | $          | 183,006 |   | $ | 284,818 |   | $ | 466,226 |   |
| Equipment revenue                                                                                                                                                     |       | 42,070                           |       | 7,040,857                       |       | 243,550 |   | 13,060,870 |   |
| Total net sales and revenue (notes 2 and 8)                                                                                                                           |       | 162,793                          |       | 7,223,863                       |       | 528,368 |   | 13,527,096 |   |
|                                                                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| **Cost of  sales and revenue:**                                                                                                                                       |       |                             |       |                            |       |   |   |   |   |
| Cost of license and other revenue                                                                                                                                     |       | —                           |       | —                          |       | — |   | — |   |
| Cost of equipment revenue (includes share-based  compensation expense of $5,530 and $12,027 for the three and nine months ended  September 30, 2006, respectively)    |       | 139,573                          |       | 2,957,249                       |       | 661,803 |   | 5,683,525 |   |
| Total cost of sales and revenue                                                                                                                                       |       | 139,573                          |       | 2,957,249                       |       | 661,803 |   | 5,683,525 |   |
| Gross profit (loss)                                                                                                                                                   |       | 23,220                           |       | 4,266,614                       |       | (133,435 | ) | 7,843,571 |   |
|                                                                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| **Operating  expenses:**                                                                                                                                              |       |                             |       |                            |       |   |   |   |   |
| General and administrative (includes share-based  compensation expense of $37,138 and $159,509 for the three and nine months  ended September 30, 2006, respectively) |       | 525,893                          |       | 560,240                         |       | 1,737,767 |   | 1,874,727 |   |
| Marketing and selling (includes share-based compensation  expense of $4,425 and $33,349 for the three and nine months ended September 30,  2006, respectively)        |       | 272,138                          |       | 219,470                         |       | 1,064,051 |   | 835,986 |   |
| Research and development (includes share-based  compensation expense of $18,206 and $82,900 for the three and nine months  ended September 30, 2006, respectively)    |       | 1,371,033                        |       | 1,342,981                       |       | 4,621,725 |   | 4,028,874 |   |
| Total operating expenses                                                                                                                                              |       | 2,169,064                        |       | 2,122,691                       |       | 7,423,543 |   | 6,739,587 |   |
| Income (loss) from operations                                                                                                                                         |       | (2,145,844                       | )          | 2,143,923                       |       | (7,556,978 | ) | 1,103,984 |   |
|                                                                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| **Other  income (expense):**                                                                                                                                          | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                                                                                                                                       |       | 59,671                           |       | 86,644                          |       | 146,740 |   | 240,291 |   |
| Interest expense                                                                                                                                                      |       | —                           |       | —                          |       | (536 | ) | — |   |
| Other                                                                                                                                                                 |       | 944                              |       | 6,666                           |       | 9,671 |   | 93,038 |   |
| Total other income                                                                                                                                                    |       | 60,615                           |       | 93,310                          |       | 155,875 |   | 333,329 |   |
|                                                                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| Income (loss) from continuing operations before  income taxes                                                                                                         |       | (2,085,229                       | )          | 2,237,233                       |       | (7,401,103 | ) | 1,437,313 |   |
|                                                                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| Income tax  expense                                                                                                                                                   |       | —                           |       | —                          |       | 1,256 |   | 1,256 |   |
| Income (loss)  from continuing operations                                                                                                                             |       | (2,085,229                       | )          | 2,237,233                       |       | (7,402,359 | ) | 1,436,057 |   |
|                                                                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| Discontinued  operations:                                                                                                                                             |       |                             |       |                            |       |   |   |   |   |
| Gain on disposal                                                                                                                                                      |       | 164,591                          |       | —                          |       | 149,876 |   | — |   |
| Income from  discontinued operations                                                                                                                                  |       | 164,591                          |       | —                          |       | 149,876 |   | — |   |
|                                                                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) (note 2 and 9)                                                                                                                                      |       | $                                | (1,920,638 | )                               | $          | 2,237,233 |   | $ | (7,252,483 | ) | $ | 1,436,057 |   |
|                                                                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| Earnings (loss)  per share:                                                                                                                                           |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                                                                                                                 |       |                             |       |                            |       |   |   |   |   |
| Continuing operations                                                                                                                                                 |       | $                                | (0.19      | )                               | $          | 0.21 |   | $ | (0.69 | ) | $ | 0.13 |   |
| Discontinued operations                                                                                                                                               |       | $                                | 0.01       |                            | $          | — |   | $ | 0.01 |   | $ | — |   |
| Net income (loss)                                                                                                                                                     |       | $                                | (0.18      | )                               | $          | 0.21 |   | $ | (0.68 | ) | $ | 0.13 |   |
| Diluted                                                                                                                                                               |       |                             |       |                            |       |   |   |   |   |
| Continuing operations                                                                                                                                                 |       | $                                | (0.19      | )                               | $          | 0.20 |   | $ | (0.69 | ) | $ | 0.13 |   |
| Discontinued operations                                                                                                                                               |       | $                                | 0.01       |                            | $          | — |   | $ | 0.01 |   | $ | — |   |
| Net income (loss)                                                                                                                                                     |       | $                                | (0.18      | )                               | $          | 0.20 |   | $ | (0.68 | ) | $ | 0.13 |   |
|                                                                                                                                                                  |       |                             |       |                            |       |   |   |   |   |
| Weighted average  common shares outstanding                                                                                                                           |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                                                                                                                 |       | 10,739,291                       |       | 10,872,928                      |       | 10,728,469 |   | 10,841,656 |   |
| Diluted (note 7)                                                                                                                                                      |       | 10,739,291                       |       | 10,991,264                      |       | 10,728,469 |   | 10,971,358 |   |

 

See accompanyingnotes to unaudited interim financial statements.

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**IBISTECHNOLOGY CORPORATION**

**STATEMENTSOF CASH FLOWS**

**(Unaudited)**
|                                                                                       | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **September 30,**          | ** ** |
| ** **                                                                            | ** ** | **2005**                        | ** ** | **2006** | ** ** |
|                                                                                  |       |                            |       |   |   |
| **Cash flows from operating  activities:**                                            | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Net income (loss)                                                                     |       | $                               | (7,252,483 | ) | $ | 1,436,057 |   |
| Less: income from  discontinued operations                                            |       | 149,876                         |       | — |   |
| Income (loss) from  continuing operations                                             |       | (7,402,359                      | )          | 1,436,057 |   |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |       |                            |       |   |   |
| Share-based  compensation expense                                                     |       | —                          |       | 287,785 |   |
| Depreciation and  amortization                                                        |       | 1,360,899                       |       | 1,158,384 |   |
| Changes in  operating assets and liabilities:                                         |       |                            |       |   |   |
| Accounts  receivable, trade                                                           |       | (36,358                         | )          | (290,517 | ) |
| Inventories                                                                           |       | (332,184                        | )          | 2,892,221 |   |
| Prepaid expenses  and other current assets                                            |       | (77,585                         | )          | 231,549 |   |
| Accounts payable                                                                      |       | 5,977                           |       | 566,421 |   |
| Accrued  liabilities and deferred revenue                                             |       | 4,917,305                       |       | (7,315,217 | ) |
|                                                                                  |       |                            |       |   |   |
| Net cash used in  operating activities of continuing operations                       |       | (1,564,305                      | )          | (1,033,317 | ) |
|                                                                                  |       |                            |       |   |   |
| **Cash flows from investing  activities of continuing operations:**                   | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Additions to property  and equipment, net                                             |       | (106,023                        | )          | (34,956 | ) |
| Other assets                                                                          |       | 122,875                         |       | (90,358 | ) |
|                                                                                  |       |                            |       |   |   |
| Net cash  provided by (used in) investing activities of continuing operations         |       | 16,852                          |       | (125,314 | ) |
|                                                                                  |       |                            |       |   |   |
| **Cash flows from financing  activities of continuing operations:**                   | ** ** | ** **                      | ** ** | ** ** | ** ** |
|                                                                                  |       |                            |       |   |   |
| Exercise of stock  options and employee stock purchase plan                           |       | 29,643                          |       | 73,856 |   |
| Net cash  provided by financing activities of continuing operations                   |       | 29,643                          |       | 73,856 |   |
|                                                                                  |       |                            |       |   |   |
| **Cash flows of discontinued  operations:**                                           | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Operating cash flows                                                                  |       | 350,045                         |       | — |   |
| Investing cash flows                                                                  |       | (294,223                        | )          | — |   |
| Net cash  provided by discontinued operations                                         |       | 55,822                          |       | — |   |
|                                                                                  |       |                            |       |   |   |
| Net decrease in  cash and cash equivalents                                            |       | (1,461,988                      | )          | (1,084,775 | ) |
|                                                                                  |       |                            |       |   |   |
| Cash and cash  equivalents, beginning of period                                       |       | 7,726,072                       |       | 6,856,874 |   |
|                                                                                  |       |                            |       |   |   |
| Cash and cash  equivalents, end of period                                             |       | $                               | 6,264,084  |   | $ | 5,772,099 |   |
|                                                                                  |       |                            |       |   |   |
| **Supplemental disclosure of cash  flow information:**                                | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Cash paid during the period for interest                                              |       | $                               | 536        |   | $ | — |   |

 

See accompanyingnotes to unaudited interim financial statements.

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**IBIS TECHNOLOGY CORPORATION**

**NOTES TOUNAUDITED INTERIM FINANCIAL STATEMENTS**

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

The accompanyingfinancial statements are unaudited and have been prepared by Ibis TechnologyCorporation (the “Company” or “Ibis”) in accordance with U.S. generallyaccepted accounting principles for interim financial information and inaccordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby U.S. generally accepted accounting principles for complete financialstatements.

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

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

*(a) Revenue Recognition*

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

*(b)**Share-Based Compensation*

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

The Company’s financial statements as of and for the three and ninemonths ended September 30, 2006 reflect the impact of SFAS 123(R). Inaccordance with the modified prospective transition method, the Company’sfinancial statements for prior periods have not been restated to reflect, anddo not include, the impact of SFAS 123(R). Share-based compensation expenserecognized under SFAS 123(R) for the three and nine months ended September 30,2006 was $0.1 million and $0.3 million respectively or $0.01 and $0.03 pershare, which consisted of share-based compensation expense related to employeestock options and the employee stock purchase plan. Of this year-to-dateexpense, fifty eight  percent came fromoptions issued prior to December 31, 2005 and are valued using the accrualmethod, which is consistent with prior periods, while eighteen percent camefrom options issued in 2006 and are valued using the straight-line proratedmethod, which was adopted in 2006 under the new guidance, and twenty fourpercent came from the valuation of shares issued under the employee stockpurchase plan. There was no stock-based compensation expense related toemployee stock options or employee stock purchases recognized during the threeand nine months ended September 30, 2005 because the Company elected  not to adopt the recognition provisions, andinstead

6

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provided footnotedisclosure permissible under Statement of Financial Accounting StandardsNo. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).

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

Share-based compensation expense recognizedduring the period is based on the value of the portion of share-based paymentawards that is ultimately expected to vest during the period. Stock-basedcompensation expense recognized in the Company’s Statement of Operations forthe three and nine months ended September 30, 2006, included compensationexpenses for share-based payment awards granted prior to, but not yet vested asof December 31, 2005, based on the grant date fair value estimated inaccordance with the pro forma provisions of SFAS 123, and compensation expensefor the share-based payment awards granted subsequent to December 31, 2005based on the grant date fair value estimated in accordance with the provisionsof SFAS 123(R). As stock-based compensation expense recognized in the Statementof Operations for the three and nine months ended September 30, 2006 is basedon awards ultimately expected to vest, it has been reduced for estimatedforfeitures. SFAS 123(R) requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates.

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

(c)  New Accounting Pronouncements

In July 2006,the Financial Accounting Standards Board (FASB) issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109” (FIN 48), which clarifies the accounting anddisclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reducethe diversity in practice associated with certain aspects of the recognitionand measurement related to accounting for income taxes. This interpretation iseffective for fiscal years beginning after December 15, 2006. The Companyhas not yet determined the impact this interpretation will have on our resultsfrom operations or financial position.

InSeptember 2006, the SEC issued Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when quantifying Misstatements inCurrent Year Financial Statements” (“SAB 108”). SAB 108 requires companies toevaluate the materiality of identified unadjusted errors on each financialstatement and related financial statement disclosure using both the rolloverapproach and the iron curtain approach. The rollover approach quantifiesmisstatements based on the amount of the error in the current year financialstatement whereas the iron curtain approach quantifies misstatements based onthe effects of correcting the misstatement existing in the balance sheet at theend of the current year, irrespective of the misstatement’s year(s) of origin.Financial statements would require adjustment when either approach results inquantifying a misstatement that is material. Correcting prior year financialstatements for immaterial errors would not require previously filed reports tobe amended. SAB 108 is effective for interim periods of the first fiscal yearending after November 15, 2006. We do not expect the adoption of SAB 108to have a material impact on our financial statements.

7

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In August 2001,the FASB issued Statement No. 143, “Accounting for Conditional Asset RetirementObligations” which states “An entity shall recognize the fair value of aliability for an asset retirement obligation in the period in which it isincurred if a reasonable estimate of fair value can be made.”  FASB Interpretation No. 47 is an interpretation of FASB Statement No.143 which clarifies that the term *conditionalasset retirement obligation*  refers to a legal obligation to perform anasset retirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity. The obligation to perform the asset retirement activity isunconditional even though uncertainty exists about the timing and (or) methodof settlement. Thus, the timing and (or) method of settlement may beconditional on a future event. Accordingly, an entity is required to recognizea liability for the fair value of a conditional asset retirement obligation ifthe fair value of the liability can be reasonably estimated. The fair value ofa liability for the conditional asset retirement obligation should berecognized when incurred—generally upon acquisition, construction, ordevelopment and (or) through the normal operation of the asset. Uncertaintyabout the timing and (or) method of settlement of a conditional assetretirement obligation should be factored into the measurement of the liabilitywhen sufficient information exists. Statement No.143 acknowledges that in somecases, sufficient information may not be available to reasonably estimate thefair value of an asset retirement obligation. This Interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. Fin 47 iseffective for fiscal years beginning after December 15, 2005. The Company hasdetermined that there is no additional impact from the adoption of thisStatement.

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

Historically, theCompany has financed its operations and met its capital requirements throughfunds generated from operations, the issuance of common stock, equipment linesof credit, a working capital line of credit, a term loan, sales-leasebackarrangements and collaborative arrangements. In July 2004, the Companydiscontinued its wafer manufacturing business and focus exclusively on theequipment manufacturing business.  TheCompany will maintain a research and development effort focused on continuous improvementof the equipment capabilities and for supporting the Company’s equipmentcustomers’ needs.

As of September30, 2006, the Company had cash and cash equivalents of $5.8 million, includingthe final payment of $1.1 million received during the third quarter of 2006 forthe final customer acceptance of the i2000 implanter shipped to SUMCO in April2006. During the nine months ended September 30, 2006, Ibis used $1.0 millionof cash from operating activities of continuing operations as compared to $1.6million in the nine months ended September 30, 2005. The principal uses of cashduring the nine months ended September 30, 2006 were to fund operations andadditions to property and equipment which totaled approximately $35 thousand.At September 30, 2006, Ibis had commitments to purchase approximately $0.4million in material. Our headcount for the quarter ended September 30, 2006 was45 employees.

The Company’s management believes that it will have sufficient cashresources to support current operations through the second quarterof 2007. We expect to receive approximately $800,000 in the fourth quarter froma customer in respect of the expiration of an option to place an order for anadditional implanter prior to the end of 2006. With the addition of the nextimplanter order from SUMCO, which the Company believes will occur during thefirst half of 2007, and its subsequent payment, the Company believes it couldsupport operations atcurrent levels through at least the next twelve months. This expectationhowever, is based on the Company’s current operating plan and general salesoutlook, each of which may change rapidly. The Company intends to continue toinvest in research, development and manufacturing capabilities. Changes intechnology or sales growth beyond currently established capabilities mayrequire further investment. Further adoption of the technology and the timingof future equipment orders are dependent on the continuing qualification ofimplanters and improvement programs at the device manufacturers, among otherfactors. At present time the Company has only one of the four major wafermanufacturers as its current customer. We currently do not have an orderbacklog for implanters. Thetiming of future orders is important and difficult to predict because customerscan delay orders and/or request early shipment, either of which could cause theneed for additional cash requirements. Forecasting future revenue, on aquarter-by-quarter basis, remains exceedingly difficult and significantvariations quarter to quarter, are likely.

8

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Further, because some ofthe materials and components the Company uses to build its implanter have longlead times, the Company may purchase some or all of these long lead time itemsprior to receipt of an order by its customers. When this is the case, those partsand materials bear the risk of being subject to excess and obsolescence. TheCompany expects to continue to explore equity offerings and other forms offinancing and anticipates that we may be required to raise additional capitalin the near future in order to finance future growth and our research anddevelopment programs. There can be no assurance, however, that our actual needswill not exceed expectations or that we will be able to fund our operations ona long-term basis in the absence of other sources. There also can be noassurance that any additional required longer term financing will be availablethrough additional bank borrowings, debt or equity offerings or otherwise, orthat if such financing is available, that it will be available on terms acceptableto us.

9

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(4)**Inventories**

Inventories consist of the following:
|                            | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                 | ** ** | **2005**              | ** ** | **2006**               | ** ** |
| Raw materials              |       | $                     | 1,790,923  |                   | $          | 2,315,755 |   |
| Work in process            |       | 1,980,513             |       | 1,072,497              |       |
| Finished goods             |       | 2,505,214             |       | —                 |       |
| Total equipment  inventory |       | $                     | 6,276,650  |                   | $          | 3,388,252 |   |

 

(5) **Accrued Liabilities**

Current accruedliabilities were as follows at December 31, 2005 and September 30, 2006.
|                            | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                 | ** ** | **2005**              | ** ** | **2006**               | ** ** |
| Accrued Vacation           |       | $                     | 125,468    |                   | $          | 149,932 |   |
| Accrued Warranty           |       | 653,133               |       | 511,246                |       |
| Accrued Payroll            |       | 76,195                |       | 151,051                |       |
| Accrued Expenses           |       | 346,899               |       | 337,249                |       |
| Total accrued  liabilities |       | $                     | 1,201,695  |                   | $          | 1,149,478 |   |

 

(6) **Accrued Warranty**

At the time that revenueis recognized for the sale of an implanter a liability for warranty is alsoestablished. An estimate of the warranty cost is made based on the number ofyears involved and the Company’s prior experience. As material and labor isused during the warranty period the liability is reduced based on thesecharges. At the end of the warranty term the balance in the liability iseliminated and adjusted through cost of sales, the account charged atinception. A reconciliation of warranty liability for the period ended December31, 2005 and September 30, 2006 is as follows:
| Warranty balance December  31, 2004  |   | $        | 708,830 |   |
|--------------------------------------|--------|----------|---------|--------|
| Expense incurred  – 2005        |   | (31,061  | )       |
| Initiated – 2005                |   | —   |    |
| Expired – 2005                  |   | (24,636  | )       |
| Warranty balance  December 31, 2005  |   | 653,133  |    |
| Expense incurred  –2006         |   | (85,673  | )       |
| Initiated – 2006                |   | 608,220  |    |
| Expired – 2006                  |   | (664,434 | )       |
| Warranty balance  September 30, 2006 |   | $        | 511,246 |   |

 

10

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

Net income for the quarter ended September 30, 2006of $2.2 million included stock-based compensation expense under Statement ofFinancial Accounting Standards No. 123R, “Share-Based Payment,” (SFAS 123R) of$0.1 million related to employee stock options, and employee stock purchases.Net income for the nine month period ended September 30, 2006 of $1.4 millionincluded stock-based compensation expense under (SFAS 123R) of $0.3 millionrelated to employee stock options and employee stock purchases. Net loss forthe quarter ending September 30, 2005 was $1.9 million or $0.18 loss per share,excluding the effects of stock-based compensation expense (SFAS 123R) asdisclosed in the footnotes to the financial statements of $0.2 million, or$0.02 per share. Net loss for the nine months ending September 30, 2005 was aloss of $7.3 million or $0.68 loss per share, excluding the effects ofstock-based compensation expense (SFAS 123R) as disclosed in the footnotes tothe financial statements of $0.5 million or $0.04 per share. There was nostock-based compensation expense related to employee stock options, or employeestock purchases under Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (SFAS 123”) in the quarter and nine months endedSeptember 30, 2005 because the Company elected not to adopt the recognitionprovisions of SFAS 123 at that time.

Net income (loss)per share of common stock is computed based upon the weighted average number ofshares outstanding during each period and including the dilutive effect, ifany, of stock options and warrants. SFAS 128 requires the presentation of basicand diluted earnings (loss) per share for all periods presented. For the threeand nine months ended September 30, 2006 the company did report both basic anddiluted earnings per share because it reported net income in those quarters. Asthe Company was in a net loss position for the three and nine months endedSeptember 30, 2005, common stock equivalents of 80,557 and 94,793,respectively, were excluded from the diluted loss per share calculation, asthey would be antidilutive. As a result, diluted loss per share is the same asbasic loss per share for these periods presented.

**(8)Industry Segments**

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

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The table belowprovides unaudited information for the three and nine months ended September30, 2005 and 2006 pertaining to the Company’s two industry segments.
| ** **                                                   | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  Or Services** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|-------------------------------------------|------------|------------|------------|
| **Net  Revenue**                                             |       |                 |       |                                      |       |       |       |
| Three Months  Ended September 30, 2005                       |       | $                    | 42,070     |                                      | $          | 120,723    |       | $ | 162,793 |   |
| Three Months  Ended September 30, 2006                       |       | $                    | 7,040,857  |                                      | $          | 183,006    |       | $ | 7,223,863 |   |
| Nine Months  Ended September 30, 2005                        |       | $                    | 243,550    |                                      | $          | 284,818    |       | $ | 528,368 |   |
| Nine Months  Ended September 30, 2006                        |       | $                    | 13,060,870 |                                      | $          | 466,226    |       | $ | 13,527,096 |   |
|                                                         |       |                 |       |                                      |       |       |       |
| **Operating  Income (Loss)**                                 |       |                 |       |                                      |       |       |       |
| Three Months  Ended September 30, 2005                       |       | (1,740,674           | )          | 120,723                                   |       | (1,619,951 | )          |
| Three Months  Ended September 30, 2006                       |       | 2,521,157            |       | 183,006                                   |       | 2,704,163  |       |
| Nine Months  Ended September 30, 2005                        |       | (6,104,029           | )          | 284,818                                   |       | (5,819,211 | )          |
| Nine Months  Ended September 30, 2006                        |       | 2,512,485            |       | 466,226                                   |       | 2,978,711  |       |
| ** **                                                   |       |                 |       |                                      |       |       |       |
| **Assets**                                                   |       |                 |       |                                      |       |       |       |
| September 30,  2006                                          |       | 8,769,953            |       | 340,014                                   |       | 9,109,967  |       |
|                                                         |       |                 |       |                                      |       |       |       |
| **Capital  Expenditures**                                    |       |                 |       |                                      |       |       |       |
| Three Months  Ended September 30, 2005                       |       | 18,460               |       | —                                    |       | 18,460     |       |
| Three Months  Ended September 30, 2006                       |       | 7,119                |       | —                                    |       | 7,119      |       |
| Nine Months  Ended September 30, 2005                        |       | 106,023              |       | —                                    |       | 106,023    |       |
| Nine Months  Ended September 30, 2006                        |       | 34,956               |       | —                                    |       | 34,956     |       |
| ** **                                                   | ** ** | ** **           | ** ** | ** **                                | ** ** | ** ** | ** ** |
| **Depreciation  and Amortization of Property and Equipment** | ** ** | ** **           | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Three Months  Ended September 30, 2005                       |       | 376,390              | ** ** | **—**                                |       | 376,390    |       |
| Three Months  Ended September 30, 2006                       |       | 367,620              |       | —                                    |       | 367,620    |       |
| Nine Months  Ended September 30, 2005                        |       | 1,294,072            |       | —                                    |       | 1,294,072  |       |
| Nine Months Ended  September 30, 2006                        |       | 1,112,605            |       | —                                    |       | 1,112,605  |       |

 

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The table below providesthe reconciliation of reportable segment operating loss and assets to Ibis’totals.
| ** **                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **Segment Reconciliation**                              | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Net Income  (-Loss):                                         |       |                             |       |                            |       |   |   |   |   |
| Total operating income (loss) for reportable Segments        |       | $                                | (1,619,951 | )                               | $          | 2,704,163 |   | $ | (5,819,211 | ) | $ | 2,978,711 |   |
| Corporate general & administrative expenses              |       | (525,893                         | )          | (560,240                        | )          | (1,737,767 | ) | (1,874,727 | ) |
| Net other income                                             |       | 60,615                           |       | 93,310                          |       | 155,875 |   | 333,329 |   |
| Income tax expense                                           |       | —                           |       | —                          |       | (1,256 | ) | (1,256 | ) |
| Gain from discontinued operations                            |       | 164,591                          |       | —                          |       | 149,876 |   | — |   |
| Net income (loss)                                            |       | $                                | (1,920,638 | )                               | $          | 2,237,233 |   | $ | (7,252,483 | ) | $ | 1,436,057 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Capital  Expenditures:                                       |       |                             |       |                            |       |   |   |   |   |
| Total capital expenditures for reportable segments           |       | $                                | 18,460     |                            | $          | 7,119 |   | $ | 106,023 |   | $ | 34,956 |   |
| Corporate capital expenditures                               |       | —                           |       | —                          |       | — |   | — |   |
| Total capital expenditures                                   |       | $                                | 18,460     |                            | $          | 7,119 |   | $ | 106,023 |   | $ | 34,956 |   |
|                                                         |       |                             |       |                            |       |   |   |   |   |
| Depreciation and  Amortization:                              |       |                             |       |                            |       |   |   |   |   |
| Total depreciation and amortization for reportable  segments |       | $                                | 376,390    |                            | $          | 367,620 |   | $ | 1,294,072 |   | $ | 1,112,605 |   |
| Corporate depreciation and amortization                      |       | 40,156                           |       | 14,987                          |       | 66,827 |   | 45,779 |   |
| Total depreciation and amortization                          |       | $                                | 416,546    |                            | $          | 382,607 |   | $ | 1,360,899 |   | $ | 1,158,384 |   |

 
|                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Balance as of** | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | **9/30/06**                 | ** ** |
| Assets:                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                  | ** ** |
| Total assets for reportable segments                   |       |       |       |       |       | $                           | 9,109,967  |   |
| Cash & cash equivalents not allocated to  segments |       |       |       |       |       | 5,772,099                   |       |
| Other unallocated assets                               |       |       |       |       |       | 163,047                     |       |
| Total assets                                           |       |       |       |       |       | $                           | 15,045,113 |   |

 

**(9) Employee Stock Benefit Plans**

Net income for thequarter ended September 30, 2006 included stock-based compensation expenseunder SFAS 123 ( R ) of $ 0.1 million. Of this expense,twenty percent came from options issued prior to December 31, 2005 and arevalued using the accrual method, which is consistent with prior periods, whilethirty eight percent came from options issued in 2006 and are valued using thestraight-line prorated method, which was adopted in 2006 under the newguidance, and forty two percent came from the employee stock purchase planvaluation. Net income for the nine months ended September 30, 2006 includedstock-based compensation expense under SFAS 123 (R) of $0.3 million. Of thisexpense, fifty eight percent came from options issued prior to December 31,2005 and are valued using the accrual method, which is consistent with priorperiods, while eighteen percent came from options issued in 2006 and are valuedusing the straight-line prorated method which was adopted in 2006 under the newguidance, and twenty four percent came from the employee stock purchase planvaluation. Net income for the quarter and nine months ended September 30, 2005did not include any stock-based compensation expense because the Company didnot adopt the recognition provisions of SFAS 123.

 

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*Employee Stock Purchase Plans*

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

*Employee Stock Option Plan*

The Company hasstock-based compensation plans under which employees and directors may begranted options to purchase common stock. Options are generally granted withexercise prices at not less than the fair market value on the grant date,generally vest over 4 years and expire in 10 years after the grant date. As ofSeptember 30, 2006, a total of 3.2 million shares are authorized for grantunder the Company’s stock-based compensation plans. The number of common sharesreserved for granting of future awards to employees and directors under theseplans was 0.5 million at September 30, 2006. The remaining unrecognizedcompensation expense on stock options at September 30, 2006 was $0.5 million.The weighted average period over which the cost is expected to be recognized isapproximately 2 years.

As of September 30,2006 the Company had three equity compensation plans under which our equitysecurities have been authorized for issuance to our employees and/or directors:the 2000 Employee Stock Purchase Plan, as amended (described above), the 1993Employee, Director and Consultant Stock Option Plan, as amended, (the 1993Plan);and the 1997 Employee, Directors and Consultant Stock Option Plan, asamended. The 1993 Plan has expired and there are no options available forissuance; however, the 1993 Plan continues to govern all options, awards andother grants granted and outstanding under the 1993 Plan.

*Distribution and Dilutive Effectof Options*

Thefollowing table illustrates the grant dilution and exercise dilution**:**
|                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **September 30,**           | ** ** | **September 30**           | ** ** |
| ** **                          | ** ** | **2005**                         | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2006** | ** ** |
| Shares of common  stock outstanding |       | 10,739,291                       |       | 10,873,139                      |       | 10,739,291 |   | 10,873,139 |   |
|                                |       |                             |       |                            |       |   |   |   |   |
| Granted                             |       | 90,000                           |       | —                          |       | 304,500 |   | 140,500 |   |
| Canceled/forfeited                  |       | (132,119                         | )          | (13,642                         | )          | (272,261 | ) | (165,156 | ) |
| Expired                             |       | —                           |       | —                          |       | — |   | — |   |
| Net options  granted                |       | (42,119                          | )          | (13,642                         | )          | 32,239 |   | (24,656 | ) |
|                                |       |                             |       |                            |       |   |   |   |   |
| Grant dilution  (1)                 |       | (0.4                             | )%         | 0.0                             | %          | 0.3 | % | 0.0 | % |
|                                |       |                             |       |                            |       |   |   |   |   |
| Exercised                           |       | —                           |       | 625                             |       | — |   | 1,025 |   |
| Exercised dilution (2)              |       | —                           |       | 0.0                             | %          | — |   | 0.0 | % |

 

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

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

Basic and diluted sharesoutstanding for the three and nine months ended September 30, 2006 were10,872,928 10,991,264, 10,841,656 and 10,971,358 shares respectively. Duringthe three and nine months ending September 30,

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2006, the dilutive effectof in-the-money employee stock options was 118,385 and 129,702 shares or 1.1%and 1.2% of the basic shares outstanding based on the Company’s average shareprice of $1.48.

A summary of stock optiontransactions follows:
|                                            | ** ** | **Options Outstanding** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | **Options Available**   | ** ** | ** ** | ** ** | **Weighted average** | ** ** |
| ** **                                 | ** ** | **for**                      | ** ** | ** ** | ** ** | **exercise price of** | ** ** |
| ** **                                 | ** ** | **Grant**                    | ** ** | **Shares** | ** ** | **shares under plan** | ** ** |
| Balance  outstanding at December 31, 2004  |       | 158,218                      |       | 1,348,235 |   | $ | 14.06 |   |
| Granted                                    |       | (304,500                     | )          | 304,500 |   | 1.46 |   |
| Exercised                                  |       | —                       |       | — |   | — |   |
| Cancelled/forfeited                        |       | 331,473                      |       | (331,473 | ) | 12.95 |   |
| Expired                                    |       | —                       |       | — |   | — |   |
| Balance  outstanding at December 31, 2005  |       | 185,191                      |       | 1,321,262 |   | $ | 11.43 |   |
| Granted                                    |       | (140,500                     | )          | 140,500 |   | 3.42 |   |
| Exercised                                  |       | —                       |       | (1,025 | ) | 1.36 |   |
| Cancelled/forfeited                        |       | 165,156                      |       | (165,156 | ) | 16.56 |   |
| Expired                                    |       | (7,700                       | )          | — |   | — |   |
| Additional  shares reserved                |       | 300,000                      |       | — |   | — |   |
| Balance outstanding at  September 30, 2006 |       | 502,147                      |       | 1,295,581 |   | $ | 9.92 |   |

 

The followingtable summarizes information concerning outstanding and exercisable options asof September 30, 2006:
| **Options Outstanding**              | ** ** | **Options Exercisable** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | ** **                   | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | ** **                   | ** ** | **Average** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                | ** ** | ** **                   | ** ** | **remaining** | ** ** | **average** | ** ** | ** ** | ** ** | ** ** | ** ** | **average** | ** ** |
| **Range of**                         | ** ** | **Number**                   | ** ** | **contractual** | ** ** | **exercise price** | ** ** | **Aggregate** | ** ** | **Options** | ** ** | **exercise price** | ** ** |
| **exercise prices**                  | ** ** | **outstanding**              | ** ** | **life (years)** | ** ** | **per share** | ** ** | **Intrinsic Value** | ** ** | **Exercisable** | ** ** | **per share** | ** ** |
| $       .01 |  -    | 6.00                         |       | 665,000 |   | 8.1 |   | $ | 3.12 |   | $ | 160,820 |   | 263,311 |   | $ | 3.95 |   |
| $     6.01            |  -    | 9.00                         |       | 152,971 |   | 5.7 |   | $ | 7.89 |   |   |   | 127,721 |   | $ | 7.90 |   |
| $     9.01            |  -    | 13.50                        |       | 306,035 |   | 3.3 |   | $ | 10.19 |   |   |   | 298,660 |   | $ | 10.16 |   |
| $   13.51                       |  -    | 20.26                        |       | 42,575 |   | 4.0 |   | $ | 18.29 |   |   |   | 42,575 |   | $ | 18.29 |   |
| $   20.27                       |  -    | 30.37                        |       | 10,250 |   | 3.0 |   | $ | 24.10 |   |   |   | 10,250 |   | $ | 24.10 |   |
| $   30.38                       |  -    | 45.55                        |       | 13,250 |   | 3.5 |   | $ | 37.27 |   |   |   | 13,250 |   | $ | 37.27 |   |
| $   45.56                       |  -    | 68.32                        |       | 104,500 |   | 3.3 |   | $ | 46.33 |   |   |   | 104,500 |   | $ | 46.33 |   |
| $   68.33                       |  -    | 98.71                        |       | 1,000 |   | 3.5 |   | $ | 89.94 |   |   |   | 1,000 |   | $ | 89.94 |   |
|                                      |       |                         | 1,295,581  |   | 6.1 |   | $ | 9.92 |   | $ | 160,820 |   | 861,267 |   | $ | 13.39 |   |

 

The aggregate intrinsicvalue in the preceding table represents the total pretax intrinsic value, basedon the Company’s closing stock price of $3.57 as of September 30, 2006, whichwould have been received by the option holders had all option holders exercisedtheir options as of that date. The fair value of stock options vested atSeptember 30, 2006 and September 30, 2005 was $4.9 million and $5.4 million,respectively. The total number of in-the-money options exercisable as ofSeptember 30, 2006 was 101,200. As of December 31, 2005, 863,221 outstandingoptions were exercisable, and the weighted average exercise price was $15.85.

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*Valuation and Expense Informationunder SFAS 123(R)*

The followingtable summarizes stock-based compensation expense related to employee stockoptions and employee stock purchases under SFAS123 (R) for the three and ninemonths ended September 30, 2006 which was allocated as follows:
|                                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                       | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
| ** **                                                       | ** ** | **(in thousands)**          | ** ** | **(in thousands)**          | ** ** |
| Cost of sales                                                    |       | $                                | 6          |                             | $          | 12 |   |
| Research and  development                                        |       | 18                               |       | 83                               |       |
| Marketing and  selling                                           |       | 4                                |       | 33                               |       |
| General and  administration                                      |       | 38                               |       | 160                              |       |
| Stock-based  compensation expense included in operating expenses |       | $                                | 66         |                             | $          | 288 |   |

 

As of September 30, 2006 the Company capitalized $ 4 thousand ofstock-based compensation in inventory. The Company did not recognize any taxbenefits on the stock-based compensation recorded in the periods based on thecurrent tax status of the Company.

The table below reflects net income per share, basic and diluted forthe three and nine months ended September 30, 2006 compared with the pro formainformation for the three and nine months ended September 30, 2005.
|                                                                                                        | ** ** | **Three Months Ended September 30,** | ** ** | **Nine months Ended September30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2005**                                                 | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net loss as  reported for prior periods (1)                                                            |       | $                                                        | (1,920,638 | )                                                 | N/A        |   | $ | (7,252,483 | ) | N/A |   |
| Stock-based  compensations expense related to employee stock options and employee stock purchases  (2) |       | (192,978                                                 | )          | (65,300                                           | )          | (524,474 | ) | (287,785 | ) |
| Net income  (loss) including the effect of stock-based compensation expense (3)                        |       | $                                                        | (2,113,616 | )                                                 | $          | 2,237,233 |   | $ | (7,776,957 | ) | $ | 1,436,057 |   |
| Per share  information, basic and diluted:                                                             |       |                                                     |       |                                              |       |   |   |   |   |
|                                                                                                   |       |                                                     |       |                                              |       |   |   |   |   |
| Net loss as reported  for the prior period (1)                                                         |       | $                                                        | (0.18      | )                                                 | N/A        |   | $ | (0.68 | ) | N/A |   |
| Net income (loss)  including the effect of stock-based compensation expense (3)                        |       | $                                                        | (0.20      | )                                                 | $          | .21 |   | $ | (0.72 | ) | $ | 0.13 |   |

 

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

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

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

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

 

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

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

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

As stock-basedcompensation expense recognized in the Statement of Operations for the ninemonths ended September 30, 2006 is actually based on awards ultimately expectedto vest, it has been reduced for annualized estimated forfeitures of 16.36%.SFAS 123 (R ) requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Forfeitures were estimated based on historical experience.

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

The weightedaverage estimated fair value of employee stock options granted during the ninemonths ended September 30, 2005 was $1.05 using the Black Scholesoption-pricing model with the following weighted average assumptions:
|                                                          | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **September 30, 2005** | ** ** |
| Expected  volatility                                     |       | 97.62                            | %          |
| Risk free  interest rate                                 |       | 2.91                             | %          |
| Dividend yield                                           |       | 0.00                             |       |
| Expected option life  (10 year contractual life options) |       | 4.00                             |       |

 

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

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**(10)Legal Proceedings**

On October 2,2006, the Company announced that it had reached an agreement in principle tosettle the five class action securities lawsuits filed in the United StatesDistrict Court in the District of Massachusetts against Ibis and its Presidentand CEO: Martin Smolowitz v. Ibis Technology Corporation., et al., Civ. No.03-12613 (RCL) (D. Mass.); Fred Den v. Ibis Technology Corporation., et al.,Civ. No. 04-10060 (RCL) (D. Mass.); Weinstein v. Ibis Technology Corporation.,et al., Civ. No. 04-10088 (RCL) (D. Mass.); George Harrison v. Ibis TechnologyCorporation., et al., Civ. No. 04-10286 (RCL) (D. Mass.); and Eleanor Pitzer v.Ibis Technology Corporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). Thesettlement in principle announced on October 2, 2006 is subject to andcontingent on, the negotiation and execution of a formal settlement agreementand final Court approval. The proposed settlement, which provides for a paymentto the plaintiffs of $1.9 million and is to be funded entirely by the Company’sinsurance carrier, will not have a material adverse effect on our business,results of operations and financial condition.

Ibis remains anominal defendant in a shareholder derivative action filed in February 2004against certain of its directors and officers: Louis F. Matheson, Jr. v. MartinJ. Reid et al., Civ. Act. No. 04-10341 (RCL). The complaint alleges, amongother things, that the alleged conduct challenged in the securities casespending against Ibis in Massachusetts (described above) constitutes a breach ofthe defendants’ fiduciary duties to Ibis. The complaint seeks unspecified moneydamages and other relief ostensibly on behalf of Ibis. On June 4, 2004, theCourt entered an order staying this matter pending the entry of a final orderon any motion filed by the Company to dismiss the consolidated class actioncomplaint referenced above. This continuing litigation may be time-consuming,expensive and disruptive to normal business operations, and the outcome oflitigation is difficult to predict.

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**IBIS TECHNOLOGY CORPORATION**

**PART I -ITEM 2**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**OVERVIEW**

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

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

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

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Our fundamentalSIMOX-SOI technology has been developed, refined, and tested over the lastdozen years. In 2002, we introduced the current generation of SIMOX-SOItechnology, that included our second-generation oxygen implanter (i2000ä),and the MLD wafer process which was licensed to us by IBM. We believe that thei2000’s flexibility, automation and operator-friendly controls allow this toolto produce a wide range of SIMOX-SOI wafer products using a range ofmanufacturing processes, including Advantox® MLD and AdvantoxMLD-UT wafers. We also believe the ability of the i2000 implanter to producetwelve-inch (or 300 mm) SIMOX-SOI wafers coupled with the MLD process positionsus to capitalize on the growing SOI market. In 1999, we commenced a program todesign and develop the i2000, introduced it in March 2002 and began shipping300 mm wafers implanted from this machine shortly thereafter. Customers whopurchase the i2000 can utilize more than one SIMOX wafer manufacturingprocesses on the implanter including the IBM MLD process, when licensed, aswell as other SIMOX-SOI wafer manufacturing processes that do not require theIBM license.

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

In January 2005, weannounced the booking (i.e. receipt) of an order for one Ibis i2000 SIMOXimplanter from SUMCO, a leading international silicon wafer manufacturer. Thissystem was factory accepted and shipped in the second quarter of 2005 and wereceived final customer acceptance of the tool at the customer’s site in March 2006.In October of 2005, we received a second order for an i2000 SIMOX implanterfrom SUMCO and negotiated a master purchase agreement that will govern thegeneral commercial terms of future orders from SUMCO. This implanter wasfactory accepted by SUMCO at Ibis’ facility in the first quarter of 2006. Theimplanter was shipped in April 2006 and final customer acceptance at thecustomer’s facility occurred in August, 2006, with the revenue recognized inthe quarter ended September 30, 2006.

**CriticalAccounting Policies**

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

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***Revenue Recognition****. *We recognizerevenue from equipment sales and the sales of spare parts when all of thefollowing criteria have been met: (1) evidence exists that the customer isbound to the transaction; (2) the product has been delivered to the customerand, when applicable, the product has been installed and accepted by thecustomer; (3) the sales price to the customer has been fixed or isdeterminable; and (4) collectibility of the sales price is reasonably assured.We recognize revenue from implanter sales upon final customer acceptance at thecustomer’s site. Revenue derived from contracts and services is recognized uponperformance. Significant management judgments and estimates must be made andused in connection with revenue recognized in any period. Management analyzesvarious factors, including a review of specific transactions, historicalexperience, credit worthiness of customers and current market and economicconditions. Changes in judgment based upon these factors could impact thetiming and amount of revenue and cost recognized.

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

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

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

·                  Significant underperformance relative to expectedhistorical or projected future operating results,

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

·                  Significant negative industry or economic trends,

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

·                  Our market capitalization relative tobook value.

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

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**Results of Operations**

***Third Quarter Ended September 30, 2006 Compared to Third Quarter EndedSeptember 30, 2005***

***License and Other Revenue***.  License and other revenue includes revenuederived from license agreements, characterization and other services. Licenseand other revenue increased for the third quarter ended September 30, 2006 to$0.2 million from $0.1 million for the third quarter ended September 30, 2005,an increase of $62 thousand or 52%. This increase is attributable to increasedlicense revenue from royalty fees related to equipment technology.

***EquipmentRevenue. ***Equipment revenue represents revenuerecognized from sales of implanters, spare parts and field service revenue.Equipment revenue increased to $7.0 million for the third quarter endedSeptember 30, 2006 from $0.1 million for the third quarter ended September 30,2005, an increase of $6.9 million as a result of final customer acceptance ofthe implanter the Company shipped to SUMCO in April of this year. Sales ofspare parts accounted for $41 thousand of equipment revenue for the thirdquarter ended September 30, 2006 as compared to $42 thousand of equipmentrevenue for the third quarter ended September 30, 2005. Sales of spare partsfluctuate depending on customer demand and when warranties expire on individualpieces of equipment. Warranty expense is calculated on our anticipatedreplacement costs for equipment accepted by our customers over a one or twoyear contract period.

***TotalNet Sales and Revenue***.  Total sales and revenue forthe third quarter ended September 30, 2006 was $7.2 million, an increase of$7.0 million, from total net revenue of $0.2 million for the third quarterended September 30, 2005. This increase is due to revenue recognitionassociated with final customer acceptance of the implanter the Company shippedto SUMCO in April of this year of $7.0 million.

***TotalCost of Sales and Revenue***.  Cost ofequipment revenue represents the cost of equipment, the cost for spare parts,and the costs of labor incurred for field service. Cost of equipment revenuefor the third quarter ended September 30, 2006 was $2.9 million, as compared to$0.1 million for the third quarter ended September 30, 2005. This increase of$2.8 million was primarily due to the costs associated with the recognition ofrevenue for the i2000 implanter in the third quarter ended September 30, 2006.

Total cost ofsales and revenue including contract and other revenue as well as equipmentrevenue mentioned above for the third quarter ended September 30, 2006 was $2.9million as compared to $0.1 million for the third quarter ended September 30,2005, an increase of $2.8 million. The gross margin for all sales was apositive 59% for the third quarter ended September 30, 2006 as compared to apositive gross margin of 14% for the third quarter ended September 30, 2005.The increase in the gross margin for all sales is attributable to theapproximate gross margin of 55% for the i2000 implanter sale recognized in thethird quarter ended September 30, 2006 as compared to no implanter gross marginfor the quarter ended September 30, 2005 as well as the $0.3 million inreduction in cost from the expiration of customer warranty coverage associatedwith the i2000 implanter revenue recognized in the third quarter ended September30, 2004.

***Generaland Administrative Expenses***.  General andadministrative expenses for the third quarter ended September 30, 2006 were$0.6 million as compared to $0.5 million for the third quarter ended September30, 2005. This includes $0.1 million of stock-based compensation expense, whichimpacted the financial statements in compliance with the new accounting rule,in the quarter ended September 30, 2006.

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***Marketingand Selling Expenses***. Marketing and selling expenses for the third quarter ended September 30,2006 were $0.2 million as compared to $0.3 million for the third quarter endedSeptember 30, 2005. This was due to decreased payroll expenses of $0.1 milliondue to labor being charged to cost of sales and warranties in the quarter endedSeptember 30, 2006 as compared to operating expenses in the quarter endedSeptember 30, 2005.

***Researchand Development Expenses.***  Internallyfunded research and development expenses decreased by $0.1 million or 2% to$1.3 million for the third quarter ended September 30, 2006, as compared to$1.4 million for the third quarter ended September 30, 2005. This was due to areduction in payroll and payroll related expenses of $0.1 million fromheadcount reductions.

***Other Income (Expense)*****.**  Totalother income for the third quarter ended September 30, 2006 was $0.1 million ascompared to $0.2 million for the third quarter ended September 30, 2005. OtherIncome during the quarter is principally composed of interest income.

***NineMonths Ended September 30, 2006 Compared to Nine Months Ended September 30,2005***

***Licenseand Other Revenue***.  License and other revenueincludes revenue derived from license agreements, characterization and otherservices.  License and other revenue was$0.5 million for the nine months ended September 30, 2006 as compared to $0.3million for the nine months ended September 30, 2005. The increase isattributable to a new sublicense agreement related to equipment technologyvalued at $0.2 million.

***EquipmentRevenue. ***Equipment revenue represents revenue recognizedfrom the sale of implanters, spare parts and field service revenue. Equipmentrevenue was $13.1 million for the nine months ended September 30, 2006 ascompared to $0.2 million for the nine months ended September 30, 2005, anincrease of $12.8 million. During the nine months ended September 30, 2006revenue was recognized for two i2000 implanters for $13.0 million as comparedto no implanter revenue recognition in the first nine months of 2005. Fieldservice revenue accounted for $0 dollars of equipment revenue for the ninemonths ended September 30, 2006 as compared to $0.1 million of equipmentrevenue for the same period last year. Sales of spare parts accounted for$0.1million of equipment revenue for the nine months ended September 30, 2006 ascompared to $0.1 million of equipment revenue for the nine months endedSeptember 30, 2005. Sales of spare parts fluctuate depending on customer demandand when warranties expire on individual pieces of equipment. Warranty expenseis calculated on our anticipated replacement costs for equipment accepted byour customers over a one or two year contract period.

***Total Net Sales and Revenue***.  Total sales and revenue for the nine monthsended September 30, 2006 was $13.5 million, an increase of $13.0 million, fromtotal net revenue of $0.5 million for the nine months ended September 30, 2005.The increase is due to revenue recognition for two i2000 implanters of $13.0million during the nine months ended September 30, 2006 along with increasedlicense revenue of $0.2 million which was offset by a decrease in servicerevenue of $0.1 million and spare parts revenue of $0.1 million.

***TotalCost of Sales and Revenue***.  Cost ofequipment revenue represents the cost of equipment and spare parts, along withlabor incurred for field service. Cost of equipment revenue for the nine monthsended September 30, 2006 was $5.7 million, compared to $0.7 million for thenine months ended September 30, 2005. The increase of $5.0 million wasprimarily due to the costs associated with the recognition of revenue for thetwo i2000 implanters in the nine months ended September 30, 2006.

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Total cost of sales and revenue for the nine months ended September 30,2006 was $5.7 million compared to $0.7 million for the nine months endedSeptember 30, 2005, an increase of $5.0 million. The gross margin for all saleswas positive 58% for the nine months ended September 30, 2006 as compared to anegative gross margin of 25% for the nine months ended September 30, 2005. Thisincrease in the gross margin for all sales is attributable to the approximategross margin of 55% for the two i2000 implanter sales recognized in the ninemonths ended September 30, 2006 and $0.6 million reduction in cost from theexpiration of warranties on two i2000 implanters.

***General and Administrative Expenses***.  General and administrative expenses for thenine months ended September 30, 2006 were $1.9 million compared to $1.7 millionfor the nine months ended September 30, 2005. This was primarily due to $0.2million of stock-based compensation expense which impacted the financialstatements in compliance with the new accounting rule in the nine months endedSeptember 30, 2006.

***Marketing and Selling Expenses***.  Marketing and selling expenses were $0.8million for the nine months ended September 30, 2006 as compared to $1.1million for the nine months ended September 30, 2005. This decrease was due todecreased payroll and payroll related expenses of $0.3 million from headcountreductions.

***Research and Development Expenses.***  Internally funded research and developmentexpenses decreased by $0.6 million or 13%, to $4.0 million for the nine monthsended September 30, 2006, as compared to $4.6 million for the nine months endedSeptember 30, 2005. This was due to a reduction in wafer research anddevelopment costs of $0.2 million that are now supporting equipmentdevelopment. In addition, reduced payroll and payroll related expenses of $0.3million and the reduction of repair and maintenance costs of $0.1 millioncontributed to these results.

***Other Income (Expense)*.**  Total other income for the nine months endedSeptember 30, 2006 was $0.3 million as compared to $0.3 million for the ninemonths ended September 30, 2005. Other income is principally composed of  interest income.

#### **Liquidityand Capital Resources**

As of September30, 2006, the Company had cash and cash equivalents of $5.8 million, includingthe final payment of $1.1 million received during the third quarter for finalcustomer acceptance of the i2000 SIMOX implanter shipped to SUMCO. During thenine months ended September 30, 2006, Ibis used $1.0 million of cash fromoperating activities of continuing operations as compared to $1.6 million inthe nine months ended September 30, 2005. The principal uses of cash during thenine months ended September 30, 2006 were to fund operations, and additions toproperty and equipment which totaled approximately $35 thousand. At September30, 2006, Ibis had commitments to purchase approximately $0.4 million inmaterial. Our headcount for the quarter ended September 30, 2006 was 45employees.

The Company’s management believes that it will have sufficient cashresources to support operations through the second quarter of 2007. We expectto receive approximately $800,000 in the fourth quarter from a customer inrespect of the expiration of an option to place an order for an additionalimplanter prior to the end of 2006.****With theaddition of the next implanter order from SUMCO, which the Company believeswill occur during the first half of 2007, and its subsequent payment, theCompany believes it could support operations at current levels through at leastthe next twelve months. This expectation however, is based on the Company’scurrent operating plan and general sales outlook, each of which may change rapidly.The Company intends to continue to invest in research and development and itsmanufacturing capabilities. Changes in technology or sales growth beyondcurrently established capabilities may require further investment. Furtheradoption of the technology and timing of future equipment orders are dependenton the continuing qualification of implanters and improvement programs at thedevice manufacturers, among other factors.

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At present time theCompany has only one of the four major wafer manufacturers as its currentcustomer. We currently do not have an order backlog for implanters. The timingof future orders is important and difficult to predict because customers candelay orders and/or request early shipment, either of which could cause theneed for additional cash requirements. Forecasting future revenue, on aquarter-by-quarter basis remains exceedingly difficult and significantvariations quarter to quarter, are likely. Further, because some of thematerials and components the Company uses to build its implanter have long leadtimes, the Company may purchase some or all of these long lead time items priorto receipt of an order by its customers. When this is the case, those parts andmaterials bear the risk of being subject to excess and obsolescence. TheCompany expects to continue to explore equity offerings and other forms offinancing and anticipates that we may be required to raise additional capitalin the near future in order to finance future growth and our research anddevelopment programs. There can be no assurance however, that our actual needswill not exceed expectations or that we will be able to fund our operations ona long-term basis in the absence of other sources. There also can be noassurance that any additional required longer term financing will be availablethrough additional bank borrowings, debt or equity offerings or otherwise, orthat if such financing is available, that it will be available on termsacceptable to us.

**Business Risk Factors**

This Form 10-Qcontains express or implied forward-looking statements within the meaning ofthe “safe harbor” provisions of the Private Securities Litigation Reform Act of1995 that relate to future events or our future financial performance. In somecases, you can identify forward-looking statements by terminology, such as “may,”“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”“project,” “predict,” “intend,” “potential” or “continue” or the negative ofsuch terms or other comparable terminology, although not all forward-lookingstatements contain such terms. In addition, these forward-looking statementsinclude, but are not limited to, statements regarding, among other things: (i) the Company’s expectations regardingfuture orders for i2000 implanters, (ii) attaining implanterimprovements to the degree and in the timeframe necessary to meet SUMCO’sexpectations, (iii) the timing of SUMCO’s ramping to production quantities onthe i2000 implanter and the sustained production worthiness of the i2000implanter, (iv) the reliance on a single or small number of large customers, interest in and demand for, and marketacceptance of, the Company’s SIMOX-SOI technology including the Company’simplanters, (v) the involvement generally of the silicon wafer manufacturingindustry in the SOI wafer market and the ability of the wafer manufacturer’s toproduce sufficiently low cost SIMOX-SOI wafers utilizing both our SIMOXequipment and technology, as well as other equipment manufacturer’s tools, (vi) the Company’sability to conduct its operations in a manner consistent with its current planand existing capital resources or otherwise to obtain additional implanterorders or to secure financing to continue as a going concern, (vii) thecontinued employment of key management and technical personnel, (viii) thetiming and likelihood of revenue recognition on orders for the Company’simplanters, (ix) theCompany’s belief that wafer manufacturers will become the primary suppliers ofSIMOX-SOI wafers to the chipmaking industry, (x) the throughput and productioncapacity of the i2000 implanter for manufacturing 300-mm SIMOX-SOI wafers,attaining implanter improvements to the degree and in the timeframe necessaryto meet customer expectations, and the ability of the i2000 implanter toachieve acceptable production yields, (xi) the Company’s plan to focus onsupplying implanters to wafer manufacturers, and (xii) 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;the Company’s ability to pursue and maintain further strategic relationships,partnerships and alliances with third parties; the Company’s ability to protectits proprietary 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 competitive products,technologies and pricing; the impact of rapidly changing technology; thepossibility of further asset impairment and resulting charges; equipmentcapacity and supply constraints or difficulties; the Company’s limited historyin selling implanters; general economic conditions; and

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**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

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 for theyear ended December 31, 2005. All information set forth in this Form 10-Q is asof the date of this Form 10-Q, and Ibis undertakes no duty to update thisinformation, unless required by law.

**Effects of Inflation**

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

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**IBISTECHNOLOGY CORPORATION**

**PART I –ITEM 3**

**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

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**IBIS TECHNOLOGY CORPORATION**

**PART I – ITEM 4**

**CONTROLSAND PROCEDURES**

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

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

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**IBIS TECHNOLOGY CORPORATION**

**PART II**

**OTHER INFORMATION**

Item 1 - LegalProceedings

On October 2,2006, the company announced that it had reached an agreement in principle tosettle the five class action securities lawsuits filed in the United StatesDistrict Court in the District of Massachusetts against Ibis and its Presidentand CEO: Martin Smolowitz v. Ibis Technology Corporation., et al., Civ. No.03-12613 (RCL) (D. Mass.); Fred Den v. Ibis Technology Corporation., et al.,Civ. No. 04-10060 (RCL) (D. Mass.); Weinstein v. Ibis Technology Corporation.,et al., Civ. No. 04-10088 (RCL) (D. Mass.); George Harrison v. Ibis TechnologyCorporation., et al., Civ. No. 04-10286 (RCL) (D. Mass.); and Eleanor Pitzer v.Ibis Technology Corporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). Thesettlement in principle announced on October 2, 2006 is subject to, andcontingent upon the negotiation and execution of a formal settlement agreementand final court approval after notice to the class. The proposed settlement,which provides for a payment to the plaintiffs of $1.9 million and is to befunded entirely by the company’s insurance carrier, will not have a materialadverse effect on our business, results of operations and financial condition.

Ibis remains anominal defendant in a shareholder derivative action filed in February 2004against certain of its directors and officers: Louis F. Matheson, Jr. v. MartinJ. Reid et al., Civ. Act. No. 04-10341 (RCL). The complaint alleges, amongother things, that the alleged conduct challenged in the securities casespending against Ibis in Massachusetts (described above) constitutes a breach ofthe defendants’ fiduciary duties to Ibis. The complaint seeks unspecified moneydamages and other relief ostensibly on behalf of Ibis. On June 4, 2004, theCourt entered an order staying this matter pending the entry of a final orderon any motion filed by the Company to dismiss the consolidated class actioncomplaint referenced above.  Thiscontinuing litigation may be time-consuming, expensive and disruptive to normalbusiness operations, and the outcome of litigation is difficult to predict.

Item 1A.     RiskFactors

Giventhe settlement described in Item No. 1 above, the “Risk Factor”**in the Company’s  Annual Reporton Form 10-K for the year ended December 31, 2005.**under the heading “***Securities Litigation Could Resultin Substantial Cost and Divert the Attention of Key Personnel, Which CouldSeriously Harm Our Business”*** should be understood to include only: (i) therisks described therein if the parties are unable to negotiate a mutuallyacceptable settlement and/or such settlement is not approved by the court orotherwise effected in a timely manner, and (ii) those risks attendant to theongoing derivative litigation.

**Except as described in this Item 1A, for information regarding riskfactors, please refer to Item 1A in the Company’s  Annual Report on Form 10-K for the year endedDecember 31, 2005.**

Item 2 – UnregisteredSales ofEquity Securities and Use of Proceeds

None

Item 3 - Defaults uponSenior Securities

None

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Item 4 - Submissionof Matters to a Vote of Security Holders

None

Item 5 - OtherInformation

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                       |       |       |

 

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** **

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                          |   | Ibis Technology Corporation |                                         |   |
|--------------------------|--------|-----------------------------|----------------------------------------------|--------|
|                     |   |                        |                                         |   |
|                     |   |                        |                                         |   |
| Date: November  13, 2006 |   | By:                         | /s/William J.  Schmidt                       |   |   |
|                     |   |                        | William J. Schmidt                           |
|                     |   |                        | Chief Financial Officer, Treasurer and Clerk |
|                     |   |                        | (principal financial and accounting officer) |
|                     |   |                        |                                         |   |
|                     |   |                        |                                         |   |
| Date: November  13, 2006 |   | By:                         | /s/Martin J.  Reid                           |   |   |
|                     |   |                        | Martin J. Reid                               |
|                     |   |                        | President and Chief Executive Officer        |

 

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