**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20569**

 

**Form 10-Q**

 

 

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

 

**For the Quarterly Period EndedSeptember 30, 2005**

 

**Or**

 

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

 

**For the transition period from                         to                         **

 

**Commissionfile number   0-23150**

 

**IbisTechnology Corporation**

(Exact name ofregistrant as specified in its charter)

 

| **Massachusetts**                         | ** ** | **04-2987600**       |
|-------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of          |       | (I.R.S. Employer     |
| incorporation or  organization)           |       | Identification  No.) |
|                                      |       |                 |
| **32  Cherry Hill Drive, Danvers, MA**    | ** ** | **01923**            |
| (Address of  principal executive offices) |       | (Zip Code)           |

 

**(978) 777-4247**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes  ý  No  o

 

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

 

Yes  o  No  ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). o Yes   ý No

 

10,739,291 shares ofCommon Stock, par value $.008, were outstanding on November 11, 2005.

 

 

----

 

**IBISTECHNOLOGY CORPORATION**

 

**INDEX**

 
| PART 1 - FINANCIAL  INFORMATION                                                                                                           |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                      |   |
| Item  1 – Financial Statements:                                                                                                      |   |
|                                                                                                                                      |   |
| Balance Sheets  December 31, 2004 and September 30, 2005 (unaudited)                                                                      |   |
|                                                                                                                                      |   |
| Statements of  Operations  Three Months Ended September 30, 2004 and 2005 and  Nine Months Ended September 30, 2004 and 2005 (unaudited)) |   |
|                                                                                                                                      |   |
| Statements of  Cash Flows  Nine Months Ended September 30, 2004 and 2005 (unaudited)                                                      |   |
|                                                                                                                                      |   |
| Notes  to Unaudited Interim Financial Statements                                                                                          |   |
|                                                                                                                                      |   |
| Item 2 – Management’s  Discussion and Analysis of Financial  Condition and Results of Operations                                |   |
|                                                                                                                                      |   |
| Item 3 – Quantitative and  Qualitative Disclosure About Market Risk                                                                  |   |
|                                                                                                                                      |   |
| Item 4 – Controls and  Procedures                                                                                                    |   |
|                                                                                                                                      |   |
| PART II – OTHER INFORMATION                                                                                                          |   |
|                                                                                                                                      |   |
| Item 1 - Legal  Proceedings                                                                                                               |   |
|                                                                                                                                      |   |
| Item 2 –  Changes in Securities                                                                                                      |   |
|                                                                                                                                      |   |
| Item  3 - Defaults upon Senior Securities                                                                                                 |   |
|                                                                                                                                      |   |
| Item  4 – Submission of Matters to a Vote of Security Holders                                                                        |   |
|                                                                                                                                      |   |
| Item 5 - Other  Information                                                                                                               |   |
|                                                                                                                                      |   |
| Item 6 - Exhibits and  Reports on Form 8-K                                                                                                |   |
|                                                                                                                                      |   |
| Signatures                                                                                                                                |   |

 

2

----

 

**IBISTECHNOLOGY CORPORATION**

 

**BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                               | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-------------------|------------|
| ** **                                                                                                                                               | ** ** | **2004**         | ** ** | **2005**          | ** ** |
|                                                                                                                                                     |       |             |       |              |       |
| **Assets**                                                                                                                                               |       |             |       |              |       |
| **Current assets:**                                                                                                                                      |       |             |       |              |       |
| Cash  and cash equivalents                                                                                                                               |       | $                | 7,726,072  |              | $          | 6,264,084 |   |
| Accounts  receivable, trade, net                                                                                                                         |       | 34,458           |       | 245,417           |       |
| Inventories  (note 4)                                                                                                                                    |       | 5,625,167        |       | 5,957,351         |       |
| Prepaid  expenses and other current assets                                                                                                               |       | 760,721          |       | 650,985           |       |
| Assets  held for sale (note 9)                                                                                                                           |       | 131,416          |       | —            |       |
| Total  current assets                                                                                                                                    |       | 14,277,834       |       | 13,117,837        |       |
| Property and equipment                                                                                                                                   |       | 33,660,086       |       | 26,463,598        |       |
| Less:  Accumulated depreciation and amortization                                                                                                         |       | (27,335,477      | )          | (21,116,422       | )          |
| Net  property and equipment                                                                                                                              |       | 6,324,609        |       | 5,347,176         |       |
| Patents and other  assets, net                                                                                                                           |       | 1,680,197        |       | 1,272,686         |       |
| Total  assets                                                                                                                                            |       | $                | 22,282,640 |              | $          | 19,737,699 |   |
|                                                                                                                                                     |       |             |       |              |       |
| **Liabilities and Stockholders’  Equity**                                                                                                           | ** ** | ** **       | ** ** | ** **        | ** ** |
| **Current liabilities:**                                                                                                                                 |       |             |       |              |       |
| Accounts  payable                                                                                                                                        |       | $                | 392,875    |              | $          | 398,852 |   |
| Accrued  liabilities (notes 5 and 6)                                                                                                                     |       | 1,417,904        |       | 1,328,826         |       |
| Deferred  revenue                                                                                                                                        |       | 52,000           |       | 4,813,000         |       |
| Total  current liabilities                                                                                                                               |       | 1,862,779        |       | 6,540,678         |       |
| Total  liabilities                                                                                                                                       |       | 1,862,779        |       | 6,540,678         |       |
|                                                                                                                                                     |       |             |       |              |       |
| **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 10,719,595 shares and 10,739,291  shares at December 31, 2004 and September 30, 2005, respectively |       | 85,757           |       | 85,914            |       |
| Additional  paid-in capital                                                                                                                              |       | 93,124,259       |       | 93,153,745        |       |
| Accumulated  deficit                                                                                                                                     |       | (72,790,155      | )          | (80,042,638       | )          |
| Total  stockholders’ equity                                                                                                                         |       | 20,419,861       |       | 13,197,021        |       |
| Total  liabilities and stockholders’ equity                                                                                                         |       | $                | 22,282,640 |              | $          | 19,737,699 |   |

 

See accompanying notes tounaudited interim financial statements.

 

3

----

 

**IBISTECHNOLOGY CORPORATION**

 

**STATEMENTSOF OPERATIONS**

**(Unaudited)**

 
| ** **                                   | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                                   | ** ** | **2004**               | ** ** | **2005**              | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                         |       |                   |       |                  |       |   |   |   |   |
| **Net Sales and revenue:**                   |       |                   |       |                  |       |   |   |   |   |
| Contract  and other revenue                  |       | 124,566                |       | 120,723               |       | 297,481 |   | 284,818 |   |
| Equipment  sales and revenue                 |       | 7,116,204              |       | 42,070                |       | 7,354,450 |   | 243,550 |   |
| Total  net sales and revenue (notes 2 and 8) |       | 7,240,770              |       | 162,793               |       | 7,651,931 |   | 528,368 |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| **Cost of sales and revenue:**               |       |                   |       |                  |       |   |   |   |   |
| Cost  of contract and other revenue          |       | 3,219                  |       | —                |       | 15,730 |   | — |   |
| Cost  of equipment sales and revenue         |       | 3,663,606              |       | 139,573               |       | 4,362,687 |   | 661,803 |   |
| Total  cost of sales and revenue             |       | 3,666,825              |       | 139,573               |       | 4,378,057 |   | 661,803 |   |
| Gross  profit (loss)                         |       | 3,573,945              |       | 23,220                |       | 3,273,874 |   | (133,435 | ) |
|                                         |       |                   |       |                  |       |   |   |   |   |
| **Operating expenses:**                      |       |                   |       |                  |       |   |   |   |   |
| General  and administrative                  |       | 549,975                |       | 525,893               |       | 1,753,500 |   | 1,737,767 |   |
| Marketing  and selling                       |       | 375,846                |       | 272,138               |       | 1,141,813 |   | 1,064,051 |   |
| Research  and development                    |       | 1,726,926              |       | 1,371,033             |       | 3,599,099 |   | 4,621,725 |   |
| Total  operating expenses                    |       | 2,652,747              |       | 2,169,064             |       | 6,494,412 |   | 7,423,543 |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Profit  (loss) from operations               |       | 921,198                |       | (2,145,844            | )          | (3,220,538 | ) | (7,556,978 | ) |
|                                         |       |                   |       |                  |       |   |   |   |   |
| **Other income (expense):**                  | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  income                             |       | 12,533                 |       | 59,671                |       | 50,319 |   | 146,740 |   |
| Interest  expense                            |       | (2,116                 | )          | —                |       | (33,568 | ) | (536 | ) |
| Other                                        |       | 165,169                |       | 944                   |       | 166,418 |   | 9,671 |   |
| Total  other income                          |       | 175,586                |       | 60,615                |       | 183,169 |   | 155,875 |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Profit  (loss) before income taxes           |       | 1,096,784              |       | (2,085,229            | )          | (3,037,369 | ) | (7,401,103 | ) |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Income tax expense                           |       | —                 |       | —                |       | 1,256 |   | 1,256 |   |
| Income (loss) from  continuing operations    |       | 1,096,784              |       | (2,085,229            | )          | (3,038,625 | ) | (7,402,359 | ) |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Discontinued  operations: (note 9)           |       |                   |       |                  |       |   |   |   |   |
| Gain (loss) from  discontinued operations    |       | (474,499               | )          | —                |       | (3,178,529 | ) | — |   |
| Gain (loss) on disposal                      |       | (2,300,246             | )          | 164,591               |       | (2,300,246 | ) | 149,876 |   |
| Gain (loss) from  discontinued operations    |       | (2,774,745             | )          | 164,591               |       | (5,478,775 | ) | 149,876 |   |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Net  loss (note 2)                           |       | $                      | (1,677,961 | )                     | $          | (1,920,638 | ) | $ | (8,517,400 | ) | $ | (7,252,483 | ) |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Earnings (loss) per  share:                  |       |                   |       |                  |       |   |   |   |   |
| Basic                                        |       |                   |       |                  |       |   |   |   |   |
| Continuing  operations                       |       | $                      | 0.10       |                  | $          | (0.19 | ) | $ | (0.28 | ) | $ | (0.69 | ) |
| Discontinued  operations                     |       | $                      | (0.26      | )                     | $          | 0.01 |   | $ | (0.52 | ) | $ | 0.01 |   |
| Net  loss                                    |       | $                      | (0.16      | )                     | $          | (0.18 | ) | $ | (0.80 | ) | $ | (0.68 | ) |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Diluted                                      |       |                   |       |                  |       |   |   |   |   |
| Continuing  operations                       |       | $                      | 0.10       |                  | $          | (0.19 | ) | $ | (0.28 | ) | $ | (0.69 | ) |
| Discontinued  operations                     |       | $                      | (0.26      | )                     | $          | 0.01 |   | $ | (0.52 | ) | $ | 0.01 |   |
| Net  loss                                    |       | $                      | (0.16      | )                     | $          | (0.18 | ) | $ | (0.80 | ) | $ | (0.68 | ) |
|                                         |       |                   |       |                  |       |   |   |   |   |
| Weighted average common  shares outstanding: |       |                   |       |                  |       |   |   |   |   |
| Basic                                        |       | 10,668,023             |       | 10,739,291            |       | 10,659,072 |   | 10,728,469 |   |
| Diluted (note 4)                             |       | 10,708,513             |       | 10,739,291            |       | 10,659,072 |   | 10,728,469 |   |

 

See accompanyingnotes to unaudited interim financial statements.

 

4

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**IBISTECHNOLOGY CORPORATION**

 

**STATEMENTSOF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                             | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | **September 30,**     | ** ** |
| ** **                                                                             | ** ** | **2004**              | ** ** | **2005** | ** ** |
|                                                                                   |       |                  |       |   |   |
| **Cash flows from operating  activities:**                                             | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net loss                                                                               |       | $                     | (8,517,400 | ) | $ | (7,252,483 | ) |
| Gain (loss) from  discontinued operations                                              |       | (5,478,775            | )          | 149,876 |   |
| Loss from continuing  operations                                                       |       | (3,038,625            | )          | (7,402,359 | ) |
| Adjustments to  reconcile net loss to net cash used in continuing operations:          |       |                  |       |   |   |
| Depreciation  and amortization                                                         |       | 1,385,136             |       | 1,360,899 |   |
| Changes  in operating assets and liabilities:                                          |       |                  |       |   |   |
| Accounts  receivable, trade                                                            |       | (2,171,326            | )          | (223,679 | ) |
| Unbilled  revenue                                                                      |       | 453,581               |       | — |   |
| Inventories                                                                            |       | 1,086,448             |       | (332,184 | ) |
| Prepaid  expenses and other current assets                                             |       | (319,512              | )          | 109,736 |   |
| Accounts  payable                                                                      |       | 705,015               |       | 5,977 |   |
| Accrued  liabilities and deferred revenue                                              |       | (443,327              | )          | 4,917,305 |   |
|                                                                                   |       |                  |       |   |   |
| Net  cash used in operating activities of continuing operations                        |       | (2,342,610            | )          | (1,564,305 | ) |
|                                                                                   |       |                  |       |   |   |
| **Cash flows from investing  activities of continuing operations:**                    |       |                  |       |   |   |
| Additions to property  and equipment, net                                              |       | (858,760              | )          | (106,023 | ) |
| Other assets                                                                           |       | 185,686               |       | 122,875 |   |
|                                                                                   |       |                  |       |   |   |
| Net  cash provided by (used in) investing activities of continuing operations          |       | (673,074              | )          | 16,852 |   |
|                                                                                   |       |                  |       |   |   |
| **Cash flows from financing  activities of continuing operations:**                    |       |                  |       |   |   |
| Exercise of stock  options and warrants                                                |       | 109,715               |       | 29,643 |   |
|                                                                                   |       |                  |       |   |   |
| Net  cash provided by financing activities of continuing operations                    |       | 109,715               |       | 29,643 |   |
|                                                                                   |       |                  |       |   |   |
| Net  cash provided by (used in) discontinued operations                                |       | (2,935,589            | )          | 55,822 |   |
|                                                                                   |       |                  |       |   |   |
| Net  decrease in cash and cash equivalents                                             |       | (5,841,558            | )          | (1,461,988 | ) |
|                                                                                   |       |                  |       |   |   |
| Cash and cash  equivalents, beginning of period                                        |       | 14,174,716            |       | 7,726,072 |   |
|                                                                                   |       |                  |       |   |   |
| Cash and cash  equivalents, end of period                                              |       | $                     | 8,333,158  |   | $ | 6,264,084 |   |
|                                                                                   |       |                  |       |   |   |
| **Supplemental disclosure of cash  flow information:**                                 |       |                  |       |   |   |
| Cash paid during the  period for interest                                              |       | $                     | 33,568     |   | $ | 536 |   |
|                                                                                   |       |                  |       |   |   |
| **Supplemental disclosure of  non-cash investing activities:**                         |       |                  |       |   |   |
| Transfer of internally  constructed equipment from property and equipment to inventory |       | $                     | 5,620,239  |   | $ | — |   |

 

See accompanying notes tounaudited interim financial statements.

 

5

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**IBIS TECHNOLOGY CORPORATION**

 

NOTES TO UNAUDITEDINTERIM FINANCIAL STATEMENTS

 

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

 

The accompanying financial statements are unauditedand have been prepared by Ibis Technology Corporation (the “Company” or “Ibis”)in accordance with accounting principles generally accepted in the UnitedStates of America for interim financial information and in accordance with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.

 

In the opinion of management, the interim financialstatements include all adjustments, which consist only of normal and recurringadjustments, necessary for a fair presentation of the Company’s financialposition and results of operations. Results of operations for the interimperiods are not necessarily indicative of the results to be expected for thefull year. These financial statements should be read in conjunction with thefinancial statements of the Company as of and for the year ended December 31,2004, which are included in the Company’s Annual Report on Form 10-K as filedon March 31, 2005.

 

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

 

*(a)Revenue Recognition*

 

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

 

*(b)**Stock-Based Compensation*

 

The Company accounts for its stock option plans underthe recognition and measurement principles of APB Opinion No. 25, “Accountingfor Stock Issued to Employees, and Related Interpretations” and complies withthe disclosure provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and SFAS148, “Accounting for Stock-Based Compensation Transition and Disclosure”. Nostock-based compensation cost is reflected in net income (loss) for theseplans, as all options granted under these plans had an exercise price equal tothe market value of the underlying common stock on the date of grant. Thefollowing table illustrates the effect on net income (loss) and income (loss)per share if we had applied the fair value recognition provisions of SFAS No.123  to stock-based compensation:

 
| ** **                                                                                                                           | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2004**                                      | ** ** | **2005**                                     | ** ** | **2004** | ** ** | **2005** | ** ** |
|                                                                                                                                 |       |                                          |       |                                         |       |   |   |   |   |
| Net loss, as reported                                                                                                                |       | $                                             | (1,677,961 | )                                            | $          | (1,920,638 | ) | $ | (8,517,400 | ) | $ | (7,252,483 | ) |
| Add:  Stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (327,603                                      | )          | (192,978                                     | )          | (930,343 | ) | (524,474 | ) |
| Pro-forma net loss                                                                                                                   |       | $                                             | (2,005,564 | )                                            | $          | (2,113,616 | ) | $ | (9,447,743 | ) | $ | (7,776,957 | ) |
| Net income (loss) per  share:                                                                                                        |       |                                          |       |                                         |       |   |   |   |   |
| Basic  and diluted – as reported                                                                                                |       | $                                             | (0.16      | )                                            | $          | (0.18 | ) | $ | (0.80 | ) | $ | (0.68 | ) |
| Basic  and diluted – pro-forma                                                                                                  |       | $                                             | (0.19      | )                                            | $          | (0.20 | ) | $ | (0.89 | ) | $ | (0.72 | ) |

 

The fair value ofeach stock option is estimated on the date of grant using the Black-Scholesoption valuation model

 

6

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(c)  New Accounting Pronouncements

 

In December 2004, the FASB issued FASB Statement No.123 (revised 2004), “Shared-BasedPayment.” Statement 123(R) addresses the accounting for share-basedpayment transactions in which an enterprise receives employee services inexchange for (a) equity instruments of the enterprise or (b) liabilities thatare based on the fair value of the enterprise’s equity instruments or that maybe settled by the issuance of such equity instruments. Statement 123(R)requires an entity to recognize the grant-date fair-value of stock options andother equity-based compensation issued to employees in the income statement.The revised Statement generally requires that an entity account for thosetransactions using the fair-value-based method, and eliminates the intrinsicvalue method of accounting in APB Opinion No. 25, “Accounting for Stock Issued to Employees”, which was permittedunder Statement 123, as originally issued.

 

The revised Statement requires entities to discloseinformation about the nature of the share-based payment transactions and theeffects of those transactions on the financial statements.

 

Statement 123(R) is effective for public companiesthat do not file as small business issuers as of the beginning of the firstinterim or annual reporting period that begins after December 15, 2005 (i.e.,first quarter 2006 for the Company). All public companies must use either themodified prospective or the modified retrospective transition method. Earlyadoption of this Statement for interim or annual periods for which financialstatements or interim reports have not been issued is encouraged. The Companyis currently evaluating the impact of the adoption of this Statement.

 

In November 2004, the FASB issued Statement No. 151, “Inventory Costs”, to amend theguidance in Chapter 4, “InventoryPricing”, of FASB Accounting Research Bulletin No. 43, “Restatement and Revision of AccountingResearch Bulletins.” Statement No. 151 clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial (spoilage). The Statement requires that those items be recognized ascurrent-period charges. Additionally, Statement 151 requires that allocation offixed production overheads to the costs of conversion be based on the normalcapacity of the production facilities. Statement No. 151 is effective forfiscal years beginning after June 15, 2005. The Company has determined thatthere is no additional impact from the adoption of this Statement.

 

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

 

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

 

7

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The Company believes it has reduced its monthly cashburn rate and believes it will generate sufficient cash from operations, withthe final customer acceptance and payment for the remaining balance of $1.2million from the SUMCO order shipped in June 2005 to meet its obligationsthrough at least the second quarter of 2006. In October 2005 Ibis received anew order for an implanter from SUMCO valued at approximately $7.0 million.With the receipt of the new SUMCO order, and presuming full payment occurs forthat order during calendar 2006, the Company believes it will have sufficientcash to meet its obligations at its current level of operation to last throughat least the fourth quarter of 2006. During the nine months ended September 30,2005, Ibis used net $1.6 million of cash from continuing operations as comparedto net cash used of $2.3 million for the same period in 2004. To date, Ibis’working capital requirements have been funded primarily through debt (capitalleases) and equity financings. The principal uses of cash for the nine monthsended September 30, 2005 were to fund operations and additions to property andequipment which totaled $106 thousand. At September 30, 2005, Ibis hadcommitments to purchase $0.3 million in material to be used for the i2000implanter currently planned for construction and general operating expenses.

 

As part of our cash management plan the Companyannounced that it was discontinuing the wafer-manufacturing portion of thebusiness in the third quarter of 2004. In addition to eliminating future lossesexpected from this segment of the business the discontinuance of the wafermanufacturing operation resulted in the layoff of seventeen employees withexpected and realized cost savings of approximately $0.3 million per quarter.Our headcount as of September 30, 2005 was 47 employees.

 

In September 2001, Ibis entered into a $4.5 millionequipment lease line with Heller Financial’s Commercial Equipment FinanceGroup. The lease line was used to finance the purchase of process equipment forwafer production, primarily 300 mm wafers. This line was fully drawn down intwo sale-leaseback transactions, bearing interest at approximately 8% with aterm of three years, and a monthly net payment of approximately $0.1 million.Ibis had a fair market value purchase option at the end of the lease term. Thelease-line ended in the third quarter of 2004 and the Company exercised the fairmarket value purchase option at the negotiated buyout price of $0.9 million.The Company intends to use the majority of the equipment to support its ongoingprocess development efforts. The Company has sold $0.2 million of the excessequipment purchased in the lease buyout and anticipates that it will be able tosell most of the remaining excess equipment for approximately $0.5 million.

 

The Company ended the third quarter of 2005 withapproximately $6.3 million in cash and cash equivalents and believes it willhave sufficient cash on hand, including the expected payment for the remainingbalance of $1.2 million from the SUMCO order shipped in June 2005, to supportoperations at current levels through the second quarter of 2006. Revenuerecognition and receipt of the final payment will be based on final customeracceptance at the customer’s facility in Japan and is expected by the end ofthe fourth quarter or early next year. The timing of final acceptance, receiptof the final $1.2 million and revenue recognition may vary depending on anumber of factors, which include among other things tool performance at thecustomer site.

 

The Company’s expectations regarding liquidity andcapital resources are based on current operating plans and the Company’sgeneral sales outlook, each of which may change rapidly. The Company intends tocontinue to invest in research, development and manufacturing capabilities.Changes in technology or sales growth beyond currently established capabilitiesmight require further investment. Moreover, although Ibis is encouraged by thereceipt of the second order from SUMCO for an i2000 implanter along with theopportunity to work with leading wafer manufacturers like SUMCO to developfurther both the i2000 implanter and to improve the SIMOX process, SOItechnology is still at an early stage. Further adoption of the technology andtiming of future equipment orders are dependent on the continuing qualificationof implanters and improvement programs at the device manufacturers, among otherfactors. The timing of future orders is important and difficult to predictbecause customers can delay orders and/or request early shipment, either ofwhich could cause the need for additional cash requirements. Forecasting futurerevenue, on a quarter-by-quarter basis, remains exceedingly difficult andsignificant variations quarter to quarter are likely. We expect to continue toexplore equity offerings and other forms of financing and anticipate that wewill be required to raise additional capital in the future in order to financefuture growth and our research and development programs. There can be noassurance however, that our actual needs will not exceed expectations or thatwe will be able to fund our operations on a long-term basis in the absence of othersources. There

 

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also can be noassurance that any additional required financing will be available through bankborrowings, debt or equity offerings or otherwise, or that if such financing isavailable, that it will be available on terms acceptable to us.

 

(4)**Inventories**

 

Inventoriesconsist of the following:

 
| ** **                 | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
|----------------------------|------------|------------------|------------|-------------------|------------|
| ** **                 | ** ** | **2004**         | ** ** | **2005**          | ** ** |
| ** **                 | ** ** | ** **       | ** ** | ** **        | ** ** |
| Raw materials              |       | $                | 3,622,501  |              | $          | 2,445,319 |   |
| Work in process            |       | 57,330           |       | 1,227,854         |       |
| Finished goods             |       | 1,945,336        |       | 2,284,178         |       |
| Total equipment  inventory |       | $                | 5,625,167  |              | $          | 5,957,351 |   |

 

(5) **Accrued Liabilities**

 

Current accrued liabilities were as follows atDecember 31, 2004 and September 30, 2005.

 
| ** **                 | ** ** | **December 31,  2004** | ** ** | **September 30,  2005** | ** ** |
|----------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                 | ** ** | ** **             | ** ** | ** **              | ** ** |
| Accrued Vacation           |       | $                      | 107,177    |                    | $          | 154,678 |   |
| Accrued Warranty           |       | 708,830                |       | 668,467                 |       |
| Accrued Payroll            |       | 92,762                 |       | 156,741                 |       |
| Accrued Expenses           |       | $                      | 509,135    |                    | $          | 348,940 |   |
| Total accrued  liabilities |       | $                      | 1,417,904  |                    | $          | 1,328,826 |   |

 

(6) **Accrued Warranty**

 

At the time thatrevenue is recognized for the sale of an implanter a liability for warranty isalso established. An estimate of the warranty cost is made based on the numberof years 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, 2004 and September 30, 2005 is as follows:

 
| Warranty balance  December 31, 2003  |   | $         | 593,969 |   |
|--------------------------------------|--------|-----------|---------|--------|
| Expense incurred – 2004         |   | (125,080) |    |
| Initiated – 2004                |   | 400,000   |    |
| Expired – 2004                  |   | (160,059) |    |
| Warranty balance  December 31, 2004  |   | $         | 708,830 |   |
| Expense incurred –2005          |   | (15,727   | )       |
| Initiated – 2005                |   | —    |    |
| Expired – 2005                  |   | (24,636)  |    |
| Warranty balance  September 30, 2005 |   | $         | 668,467 |   |

 

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

 

Net income (loss)per share of common stock is computed based upon the weighted average number ofshares outstanding during each period and including the dilutive effect, ifany, of stock options and warrants. SFAS 128 requires the presentation of basicand diluted earnings (loss) per share for all periods presented. As the Companywas in a net loss position for the three and nine months ended September 30,2004 and September 30, 2005, common stock equivalents of 40,490, 188,575,80,557 and 94,793, respectively, were excluded from the diluted loss per sharecalculation, as they would be antidilutive. As a result, diluted loss per shareis the same as basic loss per share for all periods presented.

 

**(8) Industry Segments**

 

The Company’scurrent reportable segments are SIMOX Equipment and Other Products or Services.The Company discontinued its wafer manufacturing operations during 2004. Forpurposes of segment reporting, equipment, equipment spares and field servicerevenue are combined and reported as SIMOX Equipment. Government contracts,other services and license revenue are combined and reported as Other Productsor Services.

 

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The table belowprovides unaudited information for the three and nine months ended September30, 2004 and 2005 pertaining to the Company’s two industry segments.

 
| ** **                                                   | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  Or Services** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|---------------------------------|------------|------------|------------|
| **Net Revenue**                                              |       |                 |       |                            |       |       |       |
| Three Months Ended September 30, 2004                        |       | $                    | 7,116,204  |                            | $          | 124,566    |       | $ | 7,240,770 |   |
| Three Months Ended September 30, 2005                        |       | $                    | 42,070     |                            | $          | 120,723    |       | $ | 162,793 |   |
| Nine Months Ended September 30, 2004                         |       | $                    | 7,354,450  |                            | $          | 297,481    |       | $ | 7,651,931 |   |
| Nine Months Ended September 30, 2005                         |       | $                    | 243,550    |                            | $          | 284,818    |       | $ | 528,368 |   |
|                                                         |       |                 |       |                            |       |       |       |
| **Operating Income (Loss)**                                  |       |                 |       |                            |       |       |       |
| Three Months Ended September 30, 2004                        |       | 1,349,826            |       | 121,347                         |       | 1,471,173  |       |
| Three Months Ended September 30, 2005                        |       | (1,740,674           | )          | 120,723                         |       | (1,619,951 | )          |
| Nine Months Ended September 30, 2004                         |       | (1,749,149           | )          | 282,111                         |       | (1,467,038 | )          |
| Nine Months Ended September 30, 2005                         |       | (6,104,029           | )          | 284,818                         |       | (5,819,211 | )          |
|                                                         |       |                 |       |                            |       |       |       |
| **Assets**                                                   |       |                 |       |                            |       |       |       |
| September 30, 2005                                           |       | 13,145,559           |       | 206,419                         |       | 13,351,978 |       |
|                                                         |       |                 |       |                            |       |       |       |
| **Capital Expenditures**                                     |       |                 |       |                            |       |       |       |
| Three Months Ended September 30, 2004                        |       | 847,362              |       | —                          |       | 847,362    |       |
| Three Months Ended September 30, 2005                        |       | 18,460               |       | —                          |       | 18,460     |       |
| Nine Months Ended September 30, 2004                         |       | 851,107              |       | —                          |       | 851,107    |       |
| Nine Months Ended September 30, 2005                         |       | 106,023              |       | —                          |       | 106,023    |       |
|                                                         |       |                 |       |                            |       |       |       |
| **Depreciation and Amortization of Property and  Equipment** | ** ** | ** **           | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Three Months Ended September 30, 2004                        |       | 850,631              | ** ** | **—**                      |       | 850,631    |       |
| Three Months Ended September 30, 2005                        |       | 376,390              |       | —                          |       | 376,390    |       |
| Nine Months Ended September 30, 2004                         |       | 1,322,960            |       | —                          |       | 1,322,960  |       |
| Nine Months Ended September 30, 2005                         |       | 1,294,072            |       | —                          |       | 1,294,072  |       |

 

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

 
|                                                         |       | **Three Months Ended  September 30,** |       | **Nine Months Ended  September 30,** |       |
|--------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                              | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2005** | ** ** |
| **Segment Reconciliation**                                   |       |                                  |       |                                 |       |   |   |   |   |
| ** **                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Net Loss:                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Total operating  income (loss) for reportable Segments       |       | $                                     | 1,471,173  |                                 | $          | (1,619,951 | ) | $ | (1,467,038 | ) | $ | (5,819,211 | ) |
| Corporate  general & administrative expenses             |       | (549,975                              | )          | (525,893                             | )          | (1,753,500 | ) | (1,737,767 | ) |
| Net other income                                             |       | 175,586                               |       | 60,615                               |       | 183,169 |   | 155,875 |   |
| Income tax  expense                                          |       | —                                |       | —                               |       | 1,256 |   | 1,256 |   |
| Gain (loss) from  discontinued operations                    |       | (2,774,745                            | )          | 164,591                              |       | (5,478,775 | ) | 149,876 |   |
| Net loss                                                     |       | $                                     | (1,677,861 | )                                    | $          | (1,920,638 | ) | $ | (8,517,400 | ) | $ | (7,252,483 | ) |
|                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Capital Expenditures:                                        |       |                                  |       |                                 |       |   |   |   |   |
| Total capital  expenditures for reportable segments          |       | $                                     | 847,362    |                                 | $          | 18,460 |   | $ | 851,107 |   | $ | 106,023 |   |
| Corporate  capital expenditures                              |       | —                                |       | —                               |       | 7,653 |   | — |   |
| Total capital  expenditures                                  |       | $                                     | 847,362    |                                 | $          | 18,460 |   | $ | 858,760 |   | $ | 106,023 |   |
|                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Depreciation and Amortization:                               |       |                                  |       |                                 |       |   |   |   |   |
| Total  depreciation and amortization for reportable segments |       | $                                     | 850,631    |                                 | $          | 376,390 |   | $ | 1,322,960 |   | $ | 1,294,072 |   |
| Corporate  depreciation and amortization                     |       | 15,076                                |       | 40,156                               |       | 62,176 |   | 66,827 |   |
| Total  depreciation and amortization                         |       | $                                     | 865,707    |                                 | $          | 416,546 |   | $ | 1,385,136 |   | $ | 1,360,899 |   |
|                                                         |       |                                  |       |                                 |       |   |   |   |   |
| ** **                                                   | ** ** | ** **                            | ** ** | ** **                           | ** ** | **Balance as of  9/30/05** | ** ** | ** ** | ** ** |
| Assets:                                                      |       |                                  |       |                                 |       |   |   |   |   |
| Total assets for  reportable segments                        |       |                                  |       |                                 |       | $ | 13,351,978 |   |   |   |
| Cash & cash  equivalents not allocated to segments       |       |                                  |       |                                 |       | 6,264,084 |   |   |   |
| Other  unallocated assets                                    |       |                                  |       |                                 |       | 121,637 |   |   |   |
| Total assets                                                 |       |                                  |       |                                 |       | $ | 19,737,699 |   |   |   |

 

**(9) LossFrom Discontinued Operations**

 

On July 21, 2004the Company announced its intention to discontinue its wafer manufacturingbusiness. This wafer business had been highly concentrated on providing wafersfor the Company’s largest customer, and was characterized by very volatileproduction volumes and costs associated with periodic changes and continuingimprovements to the manufacturing process. The wafer demand from our largestcustomer had been highly volatile. The result was a wafer business that wasneither predictable nor profitable. Principally for these reasons, and becauseit also was likely that additional capital investment would have had to havebeen made to keep our wafer manufacturing process up to date, the Companydecided to exit the wafer manufacturing business and focus exclusively on theequipment business. The Company will maintain a research and development effortrelating to wafers for our equipment improvement programs. In the first ninemonths of 2005, the Company recognized a net gain on disposal of assets fromthe discontinued operations of approximately $150 thousand.

 

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**(10)Legal Proceedings**

 

Five class action securities lawsuits have been filedin the United States District Court in the District of Massachusetts againstIbis and its President and CEO: Martin Smolowitz v. Ibis TechnologyCorporation., et al., Civ. No. 03-12613 (RCL) (D. Mass.); Fred Den v. IbisTechnology Corporation., et al., Civ. No. 04-10060 (RCL) (D. Mass.); Weinsteinv. Ibis Technology Corporation., et al., Civ. No. 04-10088 (RCL) (D. Mass.);George Harrison v. Ibis Technology Corporation., et al., Civ. No. 04-10286(RCL) (D. Mass.); and Eleanor Pitzer v. Ibis Technology Corporation., et al,Civ. No. 04-10446 (RCL) (D. Mass.). On June 4, 2004, the Court entered an orderconsolidating these actions under the caption In re Ibis Technology SecuritiesLitigation, C.A. 04-10446 RCL. In July, 2004, a consolidated amended classaction complaint was filed which alleges, among other things, that the Companyviolated federal securities laws by allegedly making misstatements to theinvesting public relating to demand for certain Ibis products and intellectualproperty issues relating to the sale of the i2000 oxygen implanter. Theplaintiffs are seeking unspecified damages. On August 5, 2004, we filed amotion to dismiss the consolidated amended complaint on the grounds, amongothers, that it failed to state a claim on which the relief could be granted.On September 22, 2005, the Magistrate Judge issued a report and recommendationrecommending that our motion be granted in part and denied in part.  We and the plaintiffs have both filed partialobjections to the report and recommendation with Court, and after briefing ofthese objections is complete the Court will determine whether to adopt thereport and recommendation in whole or in part. While we believe that theplaintiffs’ allegations are without merit, and we intend to vigorously defendagainst the suits, there can be no guarantee as to how they ultimately will beresolved.

 

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

 

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

 

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**PART I - ITEM 2**

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

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

 

Initially, much of our revenue was derived fromresearch and development contracts and sales of wafers for military applications.Over the years, the Company decided to focus its business operations and salesstrategy on the manufacture and sale of our implanter equipment products andde-emphasized the sale of wafers given that, among other things, we believedthat the wafer manufacturing companies were in the best position to manufactureSIMOX-SOI wafers using our implanter equipment in light of their expertise andoperating efficiencies. As we announced on July 21, 2004, we exited the wafermanufacturing business. Wafer product sales, as well as wafer revenue reportedin subsequent quarters, are reported net of associated costs, as loss fromdiscontinued operations on our income statement. The Company believes that itsdecision to discontinue the wafer business permits broader strategiccollaboration efforts between Ibis and the wafer manufacturers. The Companyalso believes elimination of wafer manufacturing and associated sales at Ibispotentially allows our primary customers the opportunity to supply additionalwafer volume with better quality and at lower cost to their end customers. Webelieve this has the potential to lead to the placement of additional SIMOX SOIequipment orders, and to accelerate customer acceptance of our technology.

 

The Company’sfinal disposal plans relative to the closure of the wafer manufacturingoperation resulted in a loss from disposal of inventory and certain productionassets from discontinued operations of approximately $2.1 million. This losscombined with the negative margin incurred by the wafer manufacturing businessin 2004 of approximately $3.2 million resulted in the total loss fromdiscontinued operations of approximately $5.3 million. Our wafer business hadbeen highly concentrated on providing wafers for the Company’s largest customer,and was characterized by volatile production volumes and costs associated withperiodic changes and continuing improvements to the process. Our major wafercustomer had tended to order fluctuating quantities of wafers on an irregularbasis. This customer also could revise or cancel orders at any time prior todelivery. This meant that this customer, who had accounted for a significantportion of our net revenue in the past, could have reduced or decided not toplace any orders in the succeeding quarter or quarters. Furthermore, most ofour other wafer customers at the time were sampling SIMOX wafers or are in theprocess of developing prototype products and had also tended to order smallquantities of wafers on an irregular basis. These customers could also reviseor cancel orders at any time prior to delivery. Because of thisunpredictability, and because it was also likely that additional capitalinvestments would have to be made to keep our wafer manufacturing process up todate (among other factors), we decided to discontinue the wafer manufacturingportion of the business in July 2004 and to focus exclusively on our equipmentbusiness. We will maintain a research and development effort relating to wafersfor our equipment improvement programs. Ibis has experienced quarterly andannual fluctuations in revenue and results of operations due to variousfactors, including (i) the timing of receipt of equipment orders, and (ii)dependence on a limited number of customers.

 

We believe that amigration of SOI wafer manufacturing into the major silicon wafer suppliers istaking place. We reach this conclusion for a number of reasons. First, 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 grossmargin, and therefore should be able to manage such price pressure better thanstand-alone SOI producers that do not also produce the silicon wafer itself.Second, we expect that the price pressure will encourage silicon wafermanufacturers to seek out higher margin products, like SOI wafers, to increasetheir margins. Third, we believe that silicon wafer manufacturers havetraditionally developed proprietary intellectual property in silicon materialsscience, which can be applied to designing optimal starting wafers for SOIproduction. We believe that this should give them an advantage in bothminimizing

 

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wafer cost andmaximizing SOI wafer quality and yield. Fourth, our experience suggests thatsilicon wafer manufacturers already have a well-developed infrastructure formanufacturing, sale and marketing of large volumes of substrates. Lastly, webelieve that there is greater efficiency in producing the SOI wafer as part ofthe wafer manufacturers existing product flow, specifically avoiding the needto repackage, re-clean, re-inspect and re-ship substrates twice, once asstarting silicon wafers, and a second time as SOI wafers. Therefore, as aresult of these trends, we expect our ultimate customers will be drawn fromthese silicon wafer manufacturers and we plan to focus a majority of ourtechnical and marketing resources on the sale of implanters to the leadingsilicon wafer manufacturers and our key customers in the semiconductor industrywho we believe are the leaders in the adoption of SOI technology. We expectthat implanter sales to chipmakers should be minimal, and that these sales willbe focused on SOI processes that the chipmaker wishes to keep proprietary, suchas selective (or patterned) SIMOX, or other specialty substrates.

 

Our fundamental SIMOX-SOI technology has beendeveloped, refined, and tested over the last dozen years. In 2002, weintroduced the current generation of SIMOX-SOI technology, that included oursecond-generation oxygen implanter (i2000ä),and the MLD wafer process which was licensed to us by IBM. We believe that thei2000’s flexibility, automation and operator-friendly controls allow this toolto produce a wide range of SIMOX-SOI wafer products using a range ofmanufacturing processes, including Advantox® MLD and Advantox MLD-UTwafers. We also believe the ability of the i2000 implanter to produce eight andtwelve-inch (or 200 and 300 mm) SIMOX-SOI wafers coupled with the MLD processpositions us to capitalize on the growing SOI market. In 1999, we commenced aprogram to design and develop the i2000, introduced it in March 2002 and beganshipping 300 mm wafers implanted from this machine shortly thereafter.Customers who purchase 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 have sold only a limited number ofimplanters to date on an irregular basis, the recognition of revenue from thesale of even one implanter is likely to result in a significant increase in therevenue during that quarter. We recognize implanter revenue in accordance withSAB 104, which includes, among other criteria, the shipment and final customeracceptance of the implanter at the customer’s location. As a result, deferralof implanter revenue will be recorded on our balance sheet until the Company isable to meet these criteria.

 

InJanuary 2005, we announced the booking (i.e. receipt) of an order for one Ibisi2000 SIMOX implanter from SUMCO, a leading international silicon wafermanufacturer. This system was shipped in the second quarter of 2005 afterfactory acceptance of the tool in April 2005 at our facility by the customer.Revenue recognition for this implanter will be based on final customeracceptance at their facility, the timing of which may vary depending on anumber of factors, including performance of the tool. In October of 2005 wereceived a second order for an i2000 SIMOX implanter from Sumco and negotiateda master purchase agreement that will govern the general commercial terms offuture orders   from SUMCO.

 

**Critical Accounting Policies**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that have a significant impact on the results we report in ourfinancial statements. Some of our accounting policies require us to makedifficult and subjective judgments, often as a result of the need to makeestimates on matters that are inherently uncertain. Our most criticalaccounting policies include: revenue recognition, inventory valuation andreserves, accounts receivable reserves and the assessment of long-lived assetimpairment. Actual results may differ from these estimates under differentassumptions or conditions. Below, we discuss these policies further, as well asthe estimates and judgments involved.

 

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***Revenue Recognition****. *We recognize revenue from equipment salesand the sales of spare parts when all of the following criteria have been met:(1) evidence exists that the customer is bound to the transaction; (2) the producthas been delivered to the customer and, when applicable, the product has beeninstalled and accepted by the customer; (3) the sales price to the customer hasbeen fixed or is determinable; and (4) collectibility of the sale price isreasonably assured. We recognize revenue from implanter sales upon finalcustomer acceptance at the customer’s site. Revenue derived from contracts andservices is recognized upon performance. Significant management judgments andestimates must be made and used in connection with revenue recognized in anyperiod. Management analyzes various factors, including a review of specifictransactions, historical experience, credit worthiness of customers and currentmarket and economic conditions. Changes in judgment based upon these factorscould impact the timing and amount of revenue and cost recognized.

 

***Inventory Valuation and Reserves****. *Our policyfor the valuation of inventory, including the determination of obsolete orexcess inventory, requires us to forecast the future demand for our productswithin specific time horizons, generally twelve months or less. If ourforecasted demand for specific products is greater than actual demand and wefail to reduce manufacturing output accordingly, we could be required to recordadditional inventory reserves, which would have a negative impact on our grossmargin. We have reserved for obsolescence when engineering changes or othertechnological advances indicate that obsolescence has occurred. With thediscontinuance of the wafer manufacturing business and the write-off of allwafer inventory, the focus is now on the reserves required for equipment partinventory.

 

***Accounts Receivable Reserves****. *Accountsreceivable are reduced by an allowance for amounts that may becomeuncollectible in the future. The estimated allowance for uncollectible amountsis based primarily on a specific analysis of accounts in the receivableportfolio and a general reserve based on the aging of receivables andhistorical write-off experience. While management believes the allowance to beadequate, if the financial condition of our customers were to deteriorate,resulting in impairment of their ability to make payments, additionalallowances may be required and could materially impact our financial positionand results of operations.

 

***Valuation of Long-Lived Assets****. *Ibisreviews the valuation of long-lived assets, including property and equipmentand licenses, under the provisions of SFAS No. 144, Accounting for Impairmentor Disposal of Long-Lived Assets. Management is required to assess the recoverability of its long-livedassets whenever events and circumstances indicate that the carrying value maynot be recoverable. Based on current conditions, factors we consider importantand that could trigger an impairment review include the following:

 

•                  Significant underperformance relative to expectedhistorical or projected future operating results;

•                  Significant changes in the manner of our use of theacquired assets or the strategy of our overall business;

•                  Significant negative industry or economic trends;

•                  Significant decline in our stock price for a sustainedperiod; and

•                  Our market capitalization relative to book value.

 

In accordance withSFAS No. 144, when we determine that the carrying value of 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. If such a circumstance exists,we would measure an impairment loss to the extent the carrying amount of theparticular long-lived asset or group exceeds its fair value. We would determinethe fair value based on a projected discounted cash flow method using adiscount rate determined by our management to be commensurate with the riskinherent in our current business model. We adopted SFAS No. 144 during thefirst quarter of 2002 and during the fourth quarter of 2003 we recognized animpairment charge of $11.1 million for our 200 mm and smaller SIMOX waferproduction line. We determined the fair market value of the assets as describedabove. The remaining value of this line, along with other assets associatedwith wafer manufacturing were charged to the loss from

 

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discontinuedoperations in 2004 that resulted in a charge of $5.3 million. The impairmentcharge of $11.1 million was composed of $10.9 million for Property and Equipmentand $.2 million for Inventory related to the Company’s smaller size wafermanufacturing business. The Property and Equipment had an acquired value of$22.2 million, accumulated depreciation of $10.7 million, and net book value of$11.5 million. An impairment charge of $10.9 reduced this to a carrying valueof $.6 million. We have physically scrapped the majority of the equipmentincluded in the assets upon which the impairment charge was based, ondiscontinuance of the wafer operation where this equipment was used. Any suchitems that were sold prior to, or that we sell after the the period we recorddiscontinued operations ,were or will be recorded as miscellaneous income andexpense and classified as Other Income on our Statement of Operations in the periodthat they were/are sold. Such items that were sold or scrapped during the timewe recorded discontinued operations on our Statement of Operations were/will berecorded net of their cost as miscellaneous income or expense and areclassified as discontinued operations on our Statement of Operations in theperiod the event took place. We are continuing to attempt to sell at nominalvalues several remaining pieces of equipment that third parties have indicatedinterest in.

 

**Results of Operations**

 

***Third Quarterended September 30, 2005 compared to third quarter ended September 30, 2004***

 

***Contractand Other Revenue***. Contract and other revenue includes revenue derived from licenseagreements, characterization and other services. Contract and other revenuedecreased for the third quarter ended September 30, 2005 to $121 thousand from$125 thousand for the third quarter ended September 30, 2004, a decrease of $4thousand or 3%. This decrease is attributable to decreased license revenue fromroyalty fees related to equipment technology.

 

***EquipmentRevenue. ***Equipment revenue represents revenuerecognized from sales of implanters, spare parts and field service revenue.Equipment revenue decreased to $42 thousand for the third quarter endedSeptember 30, 2005 from $7.1 million for the third quarter ended September 30,2004, a decrease of $7.1 million or 99%. During the third quarter of 2004,revenue was recognized of an i2000 implanter of $7.0 million as compared to noimplanter revenue recognition in the third quarter of 2005. Field servicerevenue accounted for $0 dollars of equipment revenue for the third quarterended September 30, 2005 as compared to $76 thousand of equipment revenue forthe same period last year. Sales of spare parts accounted for $42 thousand ofequipment revenue for the third quarter ended September 30, 2005 as compared to$40 thousand of equipment revenue for the third quarter ended September 30,2004. Sales of spare parts fluctuate depending on customer demand and customerwarranty expiration dates.

 

***Total Net Sales and Revenue***. Total net revenue for the third quarter ended September 30, 2005 was$163 thousand, a decrease of $7.1 million, or 98%, from total net revenue of$7.2 million for the third quarter ended September 30, 2004. This decrease isdue to revenue recognition of an i2000 implanter of $7.0 million during thethird quarter of 2004 and a decrease in service revenue of $76 thousand.

 

***Total Cost of Sales and Revenue***. Cost of equipment revenue represents the cost of equipment and spareparts, along with labor incurred for field service. Cost of equipment revenuefor the third quarter ended September 30, 2005 was $140 thousand, as comparedto $3.7 million for the third quarter ended September 30, 2004. This decreaseof $3.5 million or 96% was primarily due to the costs associated with therecognition of revenue for the i2000 implanter in the third quarter endedSeptember 30, 2004.

 

Total cost of sales and revenue including contract andother revenue as well as equipment revenue mentioned above for the thirdquarter ended September 30, 2005 was $140 thousand as compared to $3.7 millionfor the third quarter ended September 30, 2004, a decrease of $3.5 million or96%. The gross margin for all sales was a positive 14% for the third quarter endedSeptember 30, 2005 as compared to a positive gross margin of 49% for the thirdquarter ended

 

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September 30,2004. This decrease in the gross margin for all sales is attributable to theabsence of implanter revenue recognized in the third quarter ended September30, 2005.

 

***General and AdministrativeExpenses***.  General and administrative expenses for thethird quarter ended September 30, 2005 were $0.5 million as compared to $0.5million for the third quarter ended September 30, 2004, a decrease of $24thousand, or 4%. This is due to decreased D&O insurance of $32 thousand.Additionally, decreased professional services of $15 thousand were comprised ofa decrease in legal expenses of $35 thousand and reduced security complianceexpenses of $18 thousand and were offset by an increase in consulting feesprimarily for Sarbanes Oxley compliance of $38 thousand. These were partiallyoffset by an increase in patent amortization of $23 thousand and occupancy expensesof $11 thousand, along with the reduction of other various expenses.

 

***Marketing and Selling Expenses***. Marketing and selling expenses for the third quarter ended September 30,2005 were $0.3 million as compared to $0.4 million for the third quarter endedSeptember 30, 2004. This was due to decreased payroll and payroll relatedexpenses of $63 thousand from headcount reductions, decreased occupancy expenseof $12 thousand from consolidation of space, decreased travel and entertainmentof $9 thousand along with the reduction of other various expenses.

 

***Research and DevelopmentExpenses.***  Internally funded research and developmentexpenses decreased by $0.4 million or 21% to $1.4 million for the third quarterended September 30, 2005, as compared to $1.7 million for the third quarterended September 30, 2004. This was due to a reduction in wafer research anddevelopment costs of $0.3 million that are now supporting equipmentdevelopment. In addition, reduced depreciation of 93 thousand, reduced occupancyexpense of $25 thousand and reduced payroll and payroll related expenses of $23thousand and the reduction of other miscellaneous research and developmentspending were offset by increases in wafer material for test of $31 thousandand increased repair costs of $28 thousand.

 

***Other Income (Expense)*****.**  Totalother income for the third quarter ended September 30, 2005 was $61 thousand ascompared to $176 thousand for the third quarter ended September 30, 2004, adecrease of $115 thousand. The decrease in total other income is attributableto the expiration in the quarter ended September 30, 2004 of a wafer volumeoption of $200 thousand that was associated with an asset obtained by the wafermanufacturing group from a wafer customer and increased miscellaneous expenses.This volume option was to be used on orders received over a one year period.Since the time expired and no orders were received, the Company reduced itsliability and recognized the amount in income, as no further obligationexisted. This was offset by the interest income increase of $47 thousand due toincreased interest rates on investments.

 

***Gain(loss) From Discontinued Operations.***Discontinuedoperations generated a net gain of $165 thousand in the third quarter endedSeptember 30, 2005 as compared to a net loss for the third quarter endedSeptember 30, 2004 of $2.8 million. The net gain of $165 thousand is the resultof the reduction of $120 thousand for expenses associated with the closure ofthe wafer operation and by scrap recovery in the third quarter ended September30, 2005 as compared to the operating loss incurred of $0.5 million and theloss on disposal of wafer assets of $2.3 million by the discontinued wafermanufacturing portion of the business in the third quarter ended September 30,2004.

 

***NineMonths Ended September 30, 2005 Compared to Nine Months Ended September 30,2004***

 

***Contractand Other Revenue***.  Contract and other revenueincludes revenue derived from license agreements, characterization and otherservices. Contract and other revenue decreased to $285 thousand for the ninemonths ended September 30, 2005 from $297 thousand for the nine months endedSeptember 30, 2004. This decrease is attributable to a decrease in otherservices.

 

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***EquipmentRevenue*.**  Equipmentrevenue represents revenue recognized from sales of implanters, spare parts andfield service revenue. Equipment revenue was $0.3 million for the nine monthsended September 30, 2005 as compared to $7.4 million for the nine months endedSeptember 30, 2004, a decrease of $7.1 million. In the nine months endedSeptember 30, 2004 revenue was recognized of an i2000 implanter of $7.0 millionas compared to no implanter revenue recognized in the nine months endedSeptember 30, 2005. Field service revenue accounted for $94 thousand of equipmentrevenue for the nine months ended September 30, 2005 as compared to $232thousand of equipment revenue for the same period last year. Sales of spareparts accounted for $150 thousand of equipment revenue for the nine monthsended September 30, 2005 as compared to $123 thousand of equipment revenue forthe nine months ended September 30, 2004. Sales of spare parts fluctuatedepending on customer demand and customer warranty expiration dates.

 

***TotalNet Sales and Revenue***. Total net sales and revenue for the nine months ended September 30, 2005was $0.5 million compared to net sales and revenue of $7.7 million for the ninemonths ended September 30, 2004.

 

***Total Cost of Sales and Revenue***.  Costof equipment revenue represents the cost of equipment and spare parts, alongwith labor incurred for field service. Cost of equipment revenue for the ninemonths ended September 30, 2005 was $0.7 million, compared to $4.4 million forthe nine months ended September 30, 2004. The decrease of $3.7 million wasprimarily due to the costs associated with the recognition of revenue for thei2000 implanter along with equipment material scrapped due to obsolescence andthe increase in inventory reserves in the nine months ended September 30, 2004.

 

Total cost of sales and revenue for the nine monthsended September 30, 2005 was $0.7 million compared to $4.4 million for the ninemonths ended September 30, 2004, a decrease of $3.7 million or 85%. The grossmargin for all sales was a negative 25% for the nine months ended September 30,2005 as compared to a positive gross margin of 43% for the nine months endedSeptember 30, 2004. The decrease in the gross margin is attributable to theabsence of implanter revenue recognized in the nine months ended September 30,2005.

 

***Generaland Administrative Expenses***.  General and administrative expenses for thenine months ended September 30, 2005 were $1.7 million compared to $1.8 millionfor the nine months ended September 30, 2004. Decreased D&O insurance of$116 thousand, decreased securities compliance of $49 thousand, decreased taxesof $40 thousand, and other miscellaneous items of approximately $13 thousandwere partially offset by an increase of professional services of $147 thousandand payroll and payroll related expenses of $71 thousand.

 

***Marketingand Selling Expenses***. Marketing and selling expenses were consistent at $1.1million for thenine months ended September 30, 2005 and 2004. Increased payroll and payroll relatedexpenses of $76 thousand and subcontractor costs associated with our servicegroup in Japan, which increased by $35 thousand, were partially offset by areduction in promotional expenses of $49 thousand, occupancy expenses of $37thousand and travel expense of $27 thousand during the nine month period endedSeptember 30, 2004.

 

***Researchand Development Expenses.*** Internally funded research and development expenses increased by $1.0million or 28%, to $4.6 million for the nine months ended September 30, 2005,as compared to $3.6 million for the nine months ended September 30, 2004. Thisis due to wafer research and development costs of $1.2 million that werepreviously a part of wafer cost of sales but are now supporting equipmentdevelopment, and increased repair costs of $0.2 million. This was partiallyoffset by reduced wafer material of $0.2 million, reduced depreciation of $0.2million and other miscellaneous research and development spending.

 

***OtherIncome (Expense)*.** Total other income for the nine months ended September 30, 2005 was $156thousand as compared to $183 thousand for the nine months ended September 30,2004, a decrease of $27 thousand. The decrease in total other income isattributable to the expiration in the nine months ended September 30, 2004 of awafer volume option of $200 thousand that was associated with an asset obtainedby the wafer manufacturing group from a wafer customer and increasedmiscellaneous expenses. This volume option was to be used on orders receivedover a

 

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one year period. Sincethe time expired and no orders were received the Company reduced its liabilityand recognized the amount in income, as no further obligation existed. This wasoffset by the interest income increase of $96 thousand due to increasedinterest rates on investments and a decrease in interest expense by $30thousand due to the termination of a financing arrangement.

 

***Gain(loss) From Discontinued Operations.***Discontinued operations generated a net gain of $150thousand in the nine months ended September 30, 2005 as compared to a net lossfor the nine months ended September 30, 2004 of $5.5 million. The net gain of$150 thousand is the result of the reduction of $120 thousand of expenses associatedwith the closure of the wafer operation, and scrap recovery in the nine monthsended September 30, 2005 as compared to the operating loss incurred of $3.2million and the loss on disposal of wafer assets of $2.3 million by thediscontinued wafer manufacturing portion of the business in the nine monthsended September 30, 2004.

 

#### **Liquidityand Capital Resources**

 

As of September30, 2005, Ibis had cash and cash equivalents of approximately $6.3 million. TheCompany believes it has reduced its monthly cash burn rate and believes it willgenerate sufficient cash from operations to meet its obligations, with thefinal customer acceptance and payment for the remaining balance of $1.2 millionfrom the SUMCO order shipped in June 2005, through at least the second quarterof 2006. In October 2005 Ibis received a new order for an implanter from SUMCOvalued at approximately $7.0 million. With this receipt of the new SUMCO order,and presuming full payment occurs for that order during calendar 2006, theCompany believes it will have sufficient cash to meet its obligations at itscurrent level of operation to last through at least the fourth quarter of 2006.During the nine months ended September 30, 2005, Ibis used net $1.6 million ofcash from operating activities of continuing operations as compared to net cashused of $2.3 million for the same period in 2004. To date, Ibis’ workingcapital requirements have been funded primarily through debt (capital leases)and equity financings. The principal uses of cash for the nine months endedSeptember 30, 2005 were to fund operations and additions to property andequipment which totaled $106 thousand. At September 30, 2005, Ibis hadcommitments to purchase $0.3 million in material to be used for the i2000implanter currently planned for construction and general operating expenses.

 

As part of our cash management plan the Companyannounced that it was discontinuing the wafer manufacturing portion of thebusiness in the third quarter of 2004. In addition to eliminating future lossesexpected from this segment of the business the discontinuance of the wafermanufacturing operation resulted in the layoff of seventeen employees withexpected and realized cost savings of 0.3 million per quarter. Our headcount asof September 30, 2005 was 47 employees.

 

In September 2001, Ibis entered into a $4.5 millionequipment lease line with Heller Financial’s Commercial Equipment FinanceGroup. The lease line was used to finance the purchase of process equipment forwafer production of primarily 300 mm wafers. This line was fully drawn down intwo sale-leaseback transactions, bearing interest at approximately 8% with aterm of three years, and a monthly net payment of approximately $0.1 million.Ibis had a fair market value purchase option at the end of the lease term. Thelease-line ended in the third quarter of 2004 and the Company exercised thefair market value purchase option at the negotiated buyout price of $0.9million. The Company intends to use the majority of the equipment to support itsongoing process development efforts. The Company has sold $0.2 million of theexcess equipment purchased in the lease buyout and anticipates that it will beable to sell most of the remaining excess equipment for approximately $0.5million.

 

The Company endedthe third quarter of 2005 with approximately $6.3 million in cash and cashequivalents and believes it will have sufficient cash on hand, including theexpected payment for the remaining balance of $1.2 million from the SUMCO ordershipped in June 2005, to support operations at current levels through thesecond quarter of 2006. Revenue recognition and receipt of the final paymentwill be based on final customer acceptance at the customer’s facility in Japanand is expected by the  end of the fourthquarter or early next year. The timing of final acceptance, receipt of thefinal $1.2 million and revenue recognition may vary depending on a number offactors, which include among other things tool performance at the customersite.

 

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The Company’sexpectations regarding liquidity and capital resources are based on currentoperating plans and the Company’s general sales outlook, each of which maychange rapidly. The Company intends to continue to invest in research,development and manufacturing capabilities. Changes in technology or salesgrowth beyond currently established capabilities may require furtherinvestment. Moreover, although Ibis is encouraged by the receipt of the secondorder from SUMCO for an i2000 implanter along with the opportunity to work withleading wafer manufacturers like SUMCO to develop further both the i2000implanter and to improve the SIMOX process, SOI technology is still in an earlystage. Further adoption of the technology and timing of future equipment ordersare dependent on the continuing qualification of implanters and improvementprograms at the device manufacturers, among other factors. The timing of futureorders is important and difficult to predict because customers can delay ordersand/or request early shipment, either of which could cause the need foradditional cash requirements. Forecasting future revenue, on aquarter-by-quarter basis, remains exceedingly difficult and significantvariations quarter to quarter are likely. We expect to continue to exploreequity offerings and other forms of financing and anticipate that we will berequired to raise additional capital in the future in order to finance futuregrowth and our research and development programs. There can be no assurance,however, that our actual needs will not exceed expectations or that we will beable to fund our operations on a long-term basis in the absence of othersources. There also can be no assurance that any additional required longerterm financing will be available through additional bank

borrowings, debtor equity offerings or otherwise, or that if such financing is available, thatit will be available on terms acceptable to us.

 

**BusinessRisk Factors**

 

This Form 10-Q contains express or implied forward-lookingstatements within the meaning of the “safe harbor” provisions of the PrivateSecurities Litigation Reform Act of 1995 that relate to future events or ourfuture financial performance. In some cases, you can identify forward-lookingstatements by terminology, such as “may,” “will,” “should,” “could,” “expect,”“plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,”“potential” or “continue” or the negative of such terms or other comparableterminology, although not all forward-looking statements contain such terms. Inaddition, these forward-looking statements include, but are not limited to,statements regarding, among other things: (i) the on-site acceptance of thefirst i2000 implanter ordered by SUMCO, (ii) attaining implanter improvementsto the degree and in the timeframe necessary to meet SUMCO’s expectations,(iii)  the timing and likelihood ofrevenue recognition on that implanter, as well as the timing and likelihood ofrevenue recognition and payment for SUMCO’s second order, (iv) the timing ofSUMCO’s ramping to production quantities on the i2000 implanter, (v) Relianceon a small number of large customers, interest in and demand for, and marketacceptance of, the Company’s SIMOX-SOI technology including the Company’simplanters, and the involvement generally of the silicon wafer manufacturingindustry in the SOI wafer market, (vi) the Company’s ability to conduct itsoperations in a manner consistent with its current plan and existing capitalresources or otherwise to obtain additional implanter orders or to securefinancing to continue as a going concern, (vii) the timing and likelihood ofrevenue recognition on orders for the Company’s implanters, (viii) the timingand impact of the Company’s decision to discontinue its wafer manufacturing andsales operation, (ix) the Company’s belief that wafer manufacturers will becomethe primary suppliers of SIMOX-SOI wafers to the chipmaking industry, (x) thethroughput and production capacity of the i2000 implanter for manufacturing200-mm and 300-mm SIMOX-SOI wafers, attaining implanter improvements to thedegree and in the timeframe necessary to meet customer expectations, and theability of the i2000 implanter to achieve acceptable production yields, (xi)the Company’s plan to focus on supplying implanters to wafer manufacturers,(xii) the Company’s expectations regarding future orders for i2000 implanters,and the likelihood and timing of revenue recognition on such sales, (xiii) theCompany’s expectation regarding future willingness of wafer manufacturers topurchase equipment from the Company, (xiv) the technological advancements andthe adoption rate of SOI technology, and (xv) the Company’s expectation ofhaving sufficient cash for operations. Such statements are neither promises norguarantees but rather are subject to risks and uncertainties, which could causeactual results to differ materially from those described in the forward-lookingstatements. Such risks and uncertainties include, but are not limited to:future continued migration to SOI technology and market acceptance of SIMOX;the level of demand for the Company’s

 

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products; theCompany’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 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, 2004. 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**

 

Ibisbelieves that over the past three years inflation has not had a significantimpact on Ibis’ sales or operating results.

 

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**PART I – ITEM 3**

** **

**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The exposure of market risk associated withrisk-sensitive instruments is not material to the Company, as the Company doesnot transact its sales denominated in other than United States dollars, investsprimarily in money market funds and short-term commercial paper, holds itsinvestments until maturity and has not entered into hedging transactions.

 

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**PART I – ITEM 4**

** **

**CONTROLS AND PROCEDURES**

 

(a)          Evaluation of DisclosureControls and Procedures.  As of September30, 2005, the Company’s management, with the participation of its principalexecutive officer and principal financial officer, evaluated the effectivenessof the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b)promulgated under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”).  Based upon that evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer concluded that,as of September 30, 2005, the Company’s disclosure controls and procedures wereeffective in ensuring that material information required to be disclosed by theCompany in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms, including ensuringthat such material information is accumulated and communicated to the Company’smanagement, including the Company’s Chief Executive Officer and the Company’sChief Financial Officer, as appropriate to allow timely decisions regardingrequired 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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**PART II**

 

**OTHERINFORMATION**

 

Item 1 - Legal Proceedings

 

Five class action securities lawsuits have been filedin the United States District Court in the District of Massachusetts againstIbis and its President and CEO: Martin Smolowitz v. Ibis TechnologyCorporation., et al., Civ. No. 03-12613 (RCL) (D. Mass.); Fred Den v. IbisTechnology Corporation., et al., Civ. No. 04-10060 (RCL) (D. Mass.); Weinsteinv. Ibis Technology Corporation., et al., Civ. No. 04-10088 (RCL) (D. Mass.);George Harrison v. Ibis Technology Corporation., et al., Civ. No. 04-10286(RCL) (D. Mass.); and Eleanor Pitzer v. Ibis Technology Corporation., et al,Civ. No. 04-10446 (RCL) (D. Mass.). On June 4, 2004, the Court entered an orderconsolidating these actions under the caption In re Ibis Technology SecuritiesLitigation, C.A. 04-10446 RCL. In July 2004, a consolidated amended classaction complaint was filed which alleges, among other things, that the Companyviolated federal securities laws by allegedly making misstatements to theinvesting public relating to demand for certain Ibis products and intellectualproperty issues relating to the sale of the i2000 oxygen implanter. Theplaintiffs are seeking unspecified damages. On August 5, 2004, we filed amotion to dismiss the consolidated amended complaint on the grounds, amongothers, that it failed to state a claim on which the relief could be granted.On November 11, 2004, the Court issued an order referring our motion to dismissto a Magistrate Judge and instructing him to prepare a report and make arecommendation as to how our motion should be decided.  On September 22, 2005, the Magistrate Judgeissued a report and recommendation recommending that our motion be granted inpart and denied in part.  We and theplaintiffs have both filed partial objections to the report and recommendationwith Court, and after briefing of these objections is complete the Court willdetermine whether to adopt the report and recommendation in whole or in part.While we believe that the plaintiffs’ allegations are without merit, and weintend to vigorously defend against the suits, there can be no guarantee as tohow they ultimately will be resolved.

 

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

 

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

 

Item 2 - Changes in Securities

 

None

 

Item 3 - Defaults uponSenior Securities

 

None

 

Item 4 - Submission ofMatters to a Vote of Security Holders

 

None

 

Item 5 - Other Information

 

None

 

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Item 6 - Exhibits

 

(a)                                  Exhibits furnished as Exhibits hereto:

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

 

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**SIGNATURES**

 

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

 

 
|                    |   | Ibis Technology  Corporation |
|-------------------------|--------|------------------------------|
|                    |   |                         |
|                    |   |                         |
| Date: November 09, 2005 |   | By:                          | /s/William  J. Schmidt |
|                    |   |                         | William J. Schmidt |
|                    |   |                         | Chief Financial  Officer, Treasurer and Clerk |
|                    |   |                         | (principal financial  and accounting officer) |
|                    |   |                         |   |
|                    |   |                         |   |
| Date: November 09, 2005 |   | By:                          | /s/Martin  J. Reid |
|                    |   |                         | Martin J. Reid |
|                    |   |                         | President and Chief  Executive Officer |

 

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