**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**

**ý****                                ****ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

**For thefiscal year ended December 31, 2004**

 

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934**

**For thetransition period                        to                        **

 

**Commission file number:  0-23150**

 

**IBIS TECHNOLOGY CORPORATION**

(Exact name of registrant as specified in its charter)

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

 
| Registrant’s telephone number, including area code: **(978) 777-4247** |
|-----------------------------------------------------------------------------|

 

Securities registeredpursuant to Section 12(b) of the Exchange Act:

**None.**

 

Securities registeredpursuant to Section 12(g) of the Exchange Act:

**CommonStock, $.008 Par Value Per Share**

**(Title ofclass)**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.     Yes ý   No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2).      Yes o   No ý*

 

*The company previously reported on its Form 10-Kfor the fiscal year ended December 31, 2003 and the Form 10Q for thefiscal quarter ended March 31, 2004 that is was an accelerated filer,however, please note that the Company is not and was not an accelerated filerprior to the date of this filing.

 

The aggregate market value of the registrant’s voting stock held bynon-affiliates of the registrant (without admitting that any person whoseshares are not included in such calculation is an affiliate) as of the lastbusiness day of the registrant’s most recently completed fourth fiscal quarter(based on the last reported sale price on the Nasdaq National Market of suchdate) was $ 30,658,744.

 

As of February 28, 2005, the registrant had10,719,595 shares of common stock outstanding.

 

 

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**DOCUMENTSINCORPORATED BY REFERENCE**

 

The following documents (or parts thereof) areincorporated by reference into the following parts of this Form 10-K:Certain information required in Part III of this Annual Report on Form 10-Kis incorporated from the Registrant’s Proxy Statement for the Annual Meeting ofStockholders to be held on May 12, 2005.

 

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**PART I**

 

**Item 1.  BUSINESS**

 

**BusinessOutlook**

 

This Form 10-K contains forward-looking statements within the meaningof the “safe harbor” provisions of the Private Securities Litigation Reform Actof 1995 that relate to future events or our future financial performance. Insome cases, you can identify forward-looking statements by terminology, such as“may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,”“estimate,” “project,” “predict,” “intend,” “potential” or “continue” or thenegative of such terms or other comparable terminology, although not allforward-looking statements contain such terms. In addition, theseforward-looking statements include, but are not limited to, statementsregarding, among other things, (i) customer interest in and market acceptance of,the Company’s SIMOX SOI technology, (ii) the Company’s belief that wafermanufacturers will become the primary suppliers of SIMOX-SOI, wafers to thechip making industry, (iii) the company’s ability to conduct its operations ina manner consistent with its current plan and existing capital resources orotherwise to obtain additional implanter orders or to secure financing tocontinue as a going concern, (iv) the timing and likelihood of revenuerecognition on orders for the Company’s implanters, (v) the timing and impactof the Company’s decision to discontinue its wafer manufacturing and salesoperation, (vi) the Company’s plan to focus on supplying implanters to wafermanufacturers, (vii) the Company’s expectations regarding future orders fori2000 implanters, and (viii) and the adoption rate of silicon-on-insulator, orSOI, technology. Such factors and uncertainties include, but are not limited tothose set forth below in “Business – Risk Factors” and elsewhere throughoutthis Form 10-K. All information set forth in this Form 10-K is as of the dateof this Form 10-K, and Ibis undertakes no duty to update this information,unless required by law.

 

**Introduction**

 

IbisTechnology Corporation (“Ibis”) develops, manufactures and markets SIMOX-SOIimplantation equipment for the worldwide semiconductor industry. SIMOX, whichstands for **S**eparation by **IM**plantationof **Ox**ygen, is a form ofsilicon-on-insulator, or SOI, technology that creates an insulating barrierbelow the top surface of a silicon wafer. Our proprietary oxygen implantersproduce SIMOX-SOI wafers by implanting oxygen atoms just below the surface of asilicon wafer to create a very thin layer of silicon dioxide between the thinoperating region of the transistor at the surface and the underlying siliconwafer itself. The buried layer of silicon dioxide acts as an insulator for thedevices fabricated on the surface of the silicon wafer and reduces theelectrical current leakage which otherwise slows integrated circuitperformance, increases the loss of power during circuit operation. The buriedlayer of silicon dioxide also helps to reduce the heat of the transistor.Through this process our customers can produce integrated circuits, which webelieve, offer significant advantages over circuits constructed on conventionalsilicon wafers. We believe that these advantages include:

 

•                  substantially improved speed formicroprocessors and other logic integrated circuits,

•                  reduced power consumption,

•                  reduced soft error rate, and

•                  higher temperature operation.

 

We believe these characteristics make SIMOX-SOIwafers, and the finished integrated circuits, well-suited for many commercialapplications, including:

 

•                  servers and workstations,

•                  portable and desktop computers,

•                  entertainment devices such as TVs andgame consoles.

•                  wireless communications and batterypowered feature rich hand held devices including cell phones,  and

•                  harsh-environment electronics.

 

When Ibis began operations in 1988, much of ourrevenue was derived from research and development contracts and sales of wafersfor military applications. Over the years, there was a shift in revenue tosales of SIMOX-SOI wafers for commercial applications and the nature of ourbusiness had

 

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evolved through stageswhere previously our revenue was at times primarily derived from selling wafersfor evaluation purposes, and at other times it was primarily derived fromequipment sales. This is a normal path to follow when developing and promotinga fundamental new technology, especially as it relates to the semiconductorindustry embracing any change that affects fabrication operations. In mid 2004we exited the wafer manufacturing business to concentrate our efforts onsupplying equipment and process technology to our equipment customers, themajor silicon manufacturers. We did this having advanced our primary goal ofestablishing SIMOX-SOI as a leading SOI technology with the potential to be thelow cost, high volume offering. We now intend to work with the major wafermanufacturers to support the market acceptance of 200 and 300mm SIMOXtechnology through continuing process research and development in conjunctionwith our customers. We believe this effort will directly support the wafermanufacturers decision to purchase our equipment.

 

Our fundamental SIMOX-SOI technology has beendeveloped, refined, and tested over the last dozen years. In 2002, Ibisintroduced the current-generation of SIMOX-SOI technology, which included oursecond generation oxygen implanter (i2000ä) andthe modified low dose (“MLD”) SIMOX wafer process which was licensed to us byIBM. The i2000’s flexibility, automation and operator-friendly controls allowthis tool to produce a wide range of SIMOX-SOI wafer products using a range ofmanufacturing processes, including Advantox® MLD and Advantox MLD-UTwafers. We believe the ability of the i2000 implanter to produce eight andtwelve-inch (or 200 and 300 mm) SIMOX-SOI wafers using different processes fromstandard to the latest MLD process positions us to capitalize on the growingSOI market. In early 2004 we received an order valued at approximately $7.0million for an i2000 oxygen implanter from a major silicon wafer manufacturer.During the third quarter of 2004 this tool was accepted by the customer. Inearly January 2005 we received an order for an i2000 oxygen implanter,from another major silicon wafer manufacturer, that we anticipate will ship inthe second quarter of this year. We believe we will achieve final acceptance atthe customer’s site in the third or fourth quarter of 2005.

 

Webelieve that strategic alliances with existing and potential customers willcontinue to play an important role in developing a worldwide commercial marketfor SIMOX-SOI wafers and implanters. We currently have agreements with IBM,Shin Etsu and SUMCO.

 

Over the past three years, we have sold SIMOX-SOIwafers to many of the world’s leading commercial semiconductor manufacturersand foundries, including Advanced Micro Devices, Honeywell, IBM, Intel,Motorola, Samsung, Texas Instruments, and TSMC. We have also shipped limitedquantities of SIMOX-SOI wafers to the world’s largest silicon wafermanufacturers, including Komatsu, MEMC Electronic Materials, Inc. (“MEMC”),Wacker-NSCE Corporation, Shin-Etsu Handotai Co., Ltd. (“SEH”) and SumitomoMitsubishi Silicon Corporation (“SUMCO”) which we believe will be our equipmentcustomers of the future. In addition, we have sold SIMOX implanters to IBM,Shin Etsu, SUMCO and Shanghai Simgui (“Simgui”).

 

We were incorporated in Massachusetts in October 1987and commenced operations in January 1988. Our executive offices are located at32 Cherry Hill Drive, Danvers, Massachusetts 01923 and our telephone number is(978) 777-4247. Our web site is located at www.ibis.com.. We make our periodicreports on Form 10-K, Form 10-Q and Form 8-K (and any amendments to thosereports) available on the web site, free of charge, as soon as reasonablypracticable after these reports are filed with or furnished to the Securitiesand Exchange Commission. We have not incorporated by reference into thisdocument the information on our web site and you should not consider it to be apart of this document. Our web site address is included in the document as aninactive textual reference only. The public can also obtain access to suchreports at the Securities and Exchange Commission’s Public Reference Room at450 Fifth Street, NW, Washington, DC 20549, by calling the SEC at1-800-SEC-0330 or by accessing the SEC’s website, which is www.sec.gov. Unlessthe context otherwise requires, the terms “Ibis”, “we”, “us”, and “our” referto Ibis Technology Corporation.

 

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#### **Our Strategies**

#### ** **

Ibis’primary objective is to be the dominant supplier of oxygen implantationequipment to the world’s silicon wafer manufacturers so they can, in turn,efficiently and cost-effectively supply SOI wafers to the global semiconductorindustry. Our primary emphasis is on implanter sales and support. We also planon continuing process development for SIMOX-SOI wafers in partnership with ourequipment customers to hasten the adoption and broaden the market acceptance ofSIMOX-SOI. Key elements of our strategies for achieving this objective include:

 

•                  *Capitalizingon Fundamental Trends in Semiconductor Manufacturing.* We believethat semiconductor manufacturers face an increasing demand for fasterintegrated circuit speed, reduced power consumption, smaller feature size andimmunity to soft errors, which are changes in logic state due to exposure toradiation. In addition, heat generation caused by current leakage has become amajor problem at the 90 nm feature size and will continue to increase inimportance at the 65 and 45 nm technology nodes as production comes on streamover the next 2-5 years. In our experience, these manufacturers prefer tosatisfy the demand with minimal additions or modifications to their existingequipment base. We believe that SIMOX-SOI technology is a leading alternativein addressing these requirements and that there will be a continuous migrationof SOI wafer manufacturing into the major silicon wafer suppliers. We reachthis conclusion for a number of reasons. First, we believe that tremendousprice pressure exists on commodity type products, such as silicon wafers.Because the starting wafer represents a significant component of the SOI wafercost, silicon wafer manufacturers should have a natural cost structureadvantage leading to a higher gross margin, and therefore can manage suchpricing pressures better than stand-alone SOI producers that do not alsoproduce the silicon wafer itself. Second, we expect that the pricing pressureswill encourage silicon wafer manufacturers to seek out higher margin products,like SOI wafers, to increase their margins. Third, we believe that siliconwafer manufacturers have traditionally developed proprietary intellectualproperty in silicon materials science, which can be applied to designingoptimal starting wafers for SOI production. This should give them an advantagein both minimizing wafer cost and maximizing SOI wafer quality and yield.  Fourth, our experience suggests that siliconwafer manufacturers already have a well-developed infrastructure for themanufacture, 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 re-package, 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 drawnprincipally from these silicon wafer manufacturers and we plan to focus amajority of our technical and marketing resources on the leading silicon wafermanufacturers and our major key customers in the semiconductor industry who arethe leaders in the adoption of SOI technology. We expect that implanter salesto *chipmakers* should be minimal, andfocused on SOI processes, which the chipmaker wishes to keep proprietary, suchas selective (or patterned) SIMOX, or other specialty substrates.

 

•                  *PursuingStrategic Marketing, Manufacturing and Development Alliances.* Weintend to continue to pursue relationships through which third parties willprovide assistance with joint research and development opportunities on bothprocess and equipment. In January 2003, we entered into an agreement withIBM to develop an enhanced, modified low-dose (“MLD”) process for themanufacture of SIMOX-SOI wafers.

 

•                  *Enhancingand Extending Current Product Offerings.* We intend to continue touse our resources and our strategic partners’ technical expertise to improveour existing equipment products, expand our core product functionality, addproducts to our existing product line and further advance our processtechnology. Our implanter research and development programs are aimed atimproving quality, and increasing throughput which results in reducing the costof SIMOX-SOI wafers.

 

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•                  *Increasingour SIMOX-SOI Equipment Manufacturing Capacity.* Going forward weintend to gauge SIMOX-SOI equipment demand from the silicon wafer manufacturersand adjust our equipment manufacturing capacity accordingly. We currently have capacityto build approximately 10 implanters per year in our existing manufacturingspace.

 

**Marketing,Sales and Customers**

 

Overthe last several years, Ibis had focused on integrating SIMOX-SOI wafers intocommercial applications. We believe that commercial shipments of our wafers hadbeen used principally for evaluation purposes or pilot production in products,including microprocessors, gate arrays, ASICs (application specific integratedcircuits), and memories (DRAMs, SRAMs, etc.). We believe that one of ourcustomers is providing SIMOX-SOI wafers for commercial production and that anumber of our potential customers are sampling SIMOX wafers or are developingprototype products.

 

Our primary focus today is on getting the siliconwafer manufacturers to embrace SIMOX-SOI technology. To date, where we havesucceeded, we have accomplished this through joint research and developmentprograms, sales representative agreements, and providing SIMOX-SOI waferfoundry services to them. We intend to assist the wafer manufacturers inbecoming the producers of SIMOX-SOI wafers by selling and servicing oxygenimplanters along with continuing to improve SIMOX wafer processing technologyvia our SIMOX process engineering group.

 

In August 2004 upon exiting the wafer manufacturingbusiness Ibis cancelled its Sales Representative Agreement with MEMC for SIMOXSOI wafers. We believe that by canceling this agreement we have opened newmarket opportunities with the other silicon wafer manufacturers for the sale ofour i2000 oxygen implanters. We also believe this has allowed Ibis to workclosely as an independent, non-competitive resource with several of the leadingwafer manufacturers regarding SIMOX-SOI process improvements.

 

The following table sets forth, in thousands of dollars,the amount of revenue derived from our significant customers during the fiscalyears ended December 31, 2002, 2003 and 2004, as well as the percent ofour revenue represented by these customers’ purchases (in thousands):

 
| ** **   | ** ** | **2002**    | ** ** | **2003**    | ** ** | **2004**    | ** ** |
|--------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Customer** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| IBM          |       | $           | 381        |        | 6          | %           | $          | 8,564 |   | 91 | % | $ | 384 |   | 5 | % |
| Simgui       |       | $           | 5,555      |        | 87         | %           | $          | 526 |   | 6 | % | $ | 5 |   | — |   |
| SEH          |       | —      |       | —      |       | —      |       | — |   | $ | 7,000 |   | 88 | % |

 

The revenue from SEH in 2004 is for the sale of ani2000 oxygen implanter for approximately $7.0 million. The revenue from IBM in2003 resulted primarily from the sale of an i2000 oxygen implanter at a saleprice of approximately $8.0 million. Revenues from Simgui in 2002 represent thesale of an Ibis i1000 oxygen implanter and certain parts.

 

Sales to overseas customers in 2002, 2003 and 2004were 91%, 9%, and 95% of total revenue, respectively. In 2002 and 2003 sales toChina were 87% and 6%**,**respectively, of total revenue, which was primarily attributable to Simgui. In2004, sales to Japan were 95% of total revenue, which was primarilyattributable to Shin Etsu Handotai (“SEH”).

 

#### **Strategic Alliances**

#### ** **

Ibishas entered into a number of strategic alliances that we believe enable us tobetter address our target market, to advance our technology more effectively,and to match our technical developments and expansion to the needs of our keycustomers. We believe that strategic alliances with existing and potentialcustomers will continue to play an important role in developing a worldwidecommercial market for our SIMOX-SOI implanters.

 

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We have a long-standing relationship with SUMCO whichbegan as a sales distribution arrangement, progressed to a joint research anddevelopment effort, and ultimately evolved into SUMCO’s  purchase of an Ibis 1000 oxygen implanter inorder to establish a Japanese-based manufacturing facility for SIMOX-SOIwafers. This implanter was installed in SUMCO’s wafer manufacturing facility inChiba, Japan in July 2001. In 1999, we completed an agreement to licenseour standard and Advantox SIMOX-SOI wafer fabrication process to SUMCO.  Under this agreement we received an initialroyalty fee and are entitled to future royalties based on a percentage of SUMCO’ssales of Advantox SIMOX-SOI wafers that are manufactured using the licensedprocess. More recently SUMCO has ordered an i2000 oxygen implanter which webelieve will be delivered during the second quarter of 2005.

 

In January 2003, we announced the signing of aJoint Development Agreement with IBM. The objective of the agreement was todevelop an enhanced, MLD process for the manufacture of SIMOX-SOI wafers, whichare used as the starting material in the manufacture of advanced integratedcircuits (“ICs”). Aimed at producing lower-cost, higher quality SIMOX-SOIwafers with thinner top silicon layers, the joint development work was beingconducted at both Ibis and IBM. We believe that both companies broughtextensive expertise and experience regarding SIMOX-SOI technology to the jointeffort. IBM, a pioneer in the development and adoption of SOI technology,developed the original MLD process for high quality, low cost SIMOX-SOI wafers.IBM then licensed Ibis to manufacture SIMOX-SOI wafers using the production-provenMLD process for sale to IBM and all other Ibis customers. Our implanters canoperate using both the MLD process and other processes as well, includingnon-proprietary processes.

 

In February 2004, we announced the signing of aservice agreement with Tokyo Iovenus based in Tokyo, Japan. This agreementprovides for local training of Japanese service engineers for our oxygenimplanter customers in Japan.

 

**Researchand Development**

 

Ibis has active research and development programs inboth equipment and wafer process technology. For the past two years a primaryfocus has been developing capacity to produce 300 mm SIMOX wafers. Thisrequired the development of a new generation oxygen implanter, the i2000, andthe procurement and qualification of annealing, cleaning, and metrology toolsfor balance of process at 300 mm.

 

Theproprietary i2000 was designed to support the volume production of high qualitySIMOX-SOI 200 and 300 mm wafers for the global semiconductor industry. We beganshipping 300 mm SIMOX qualification wafers in early 2002. The i2000 duplicatesthe process environment of the Ibis 1000. To minimize process risks; however,it incorporates a number of features designed to improve throughput and reducecosts. These include increased beam current, faster wafer handling, off-hubwafer cooling, and modular construction, which we believe will enable improvedserviceability and diagnostics, while simplifying the assembly and shipping ofthe machine. We also believe that the simpler beam line design of the i2000also offers extensive capabilities, facilitating the manufacture of theAdvantox product portfolio. We believe that taken together, these featuressignificantly increase productivity of the i2000 over the Ibis 1000.  Finally, the i2000 is designed to be far morefab friendly than the Ibis 1000. It is designed to be bulkhead or ballroommounted in the clean room, offers front-opening unified pod (FOUP) capabilityand meets SEMI safety and ergonomic guidelines. We also believe that the i2000’simproved automation and operator-friendly controls will improve product yieldand afford ease-of-use. Our plans are to improve the i2000 in terms of bothquality (reduced particles) and quantity (increased throughput) to providecontinuous improvement to the cost of ownership for our customers.

 

Our wafer technology R&D has concentrated onenhancing the range of potential commercial applications for Ibis’ SIMOX-SOIwafers by:

 

•                  Refining techniques to produce SIMOX-SOI wafers of higher quality. Inthe fall of 2004 we announced a 3x to 4x improvement in the silicon roughnessof the SIMOX MLD;

 

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•                  Jointly developing a technology for manufacturing high resistivitySIMOX-SOI wafers for mixed signal and radio frequency (“RF”) applications witha major silicon wafer manufacturer. With this alliance, we developedadvancements in SIMOX wafer manufacturing, including reduced wafer cost,scalability to 300 mm and stability of the material’s high resistivitycharacteristic through thermal cycling common in integrated circuitmanufacturing. We filed a joint patent application with SEH entitled *Method of Producing a High Resistivity SIMOX SiliconSubstrate* in May 2003. At this writing this patent is stillpending;

•                  Processing strained silicon (another emerging wafer-materialstechnology) for use in SOI (“SSOI” wafers), an innovation enabling a furthersignificant boost of device speed for complementary metal oxide semiconductor (“CMOS”)products. Improved electron mobility in strained silicon leads to an increaseddrive current in MOS devices and is complemented by benefits provided by SOI,such as reduction of parasitic capacitances in CMOS devices. We assist ourcustomers in their development of SSOI SIMOX wafers and

•                  Responding to specific customer requirements and emerging industrytrends, such as the development of our Advantox MLD-UT (ultra thin) productline to address requirements for fully depleted devices. The term “fullydepleted” describes a MOS transistor structure in which the depletion regionunder normal operation extends as far as a buried insulator layer. We believethat ultra-thin SOI wafers provide superior results, especially in terms ofincreased power efficiency and heat reduction in the manufacture of fully depletedsubstrate transistors for next generation semiconductor devices.

 

Duringthe fiscal years ended December 31, 2002, 2003 and 2004, Ibis’ internallyfunded research and development expenses were approximately $6.2 million, $5.4million and $5.3 million or 98%, 57% and 67% of our revenues, respectively.

 

**Competition**

 

Webelieve we face three general sources of competition: (1) direct SIMOX-SOIcompetition, (2) competing SOI technologies, and (3) competingnon-SOI technologies.

 

Amongdirect SIMOX-SOI competitors, we believe we are presently the only manufacturerof SIMOX-SOI implanters. To our knowledge, Hitachi, Ltd. of Japan had been theonly other company manufacturing SIMOX implanters and has sold a limited numberof tools in prior years. We believe that in early 2004, Hitachi exited thisbusiness. We are not aware of plans by any of the major ion implantmanufacturers including Hitachi to design and develop oxygen ion implanters,but they may already have such plans, or may develop them in the future. Webelieve that it would take one to three years to develop such an implanter.

 

Wealso believe that SUMCO, Wacker (Siltronic), Komatsu and Simgui aremanufacturing or marketing SIMOX wafers. We expect that the availability ofSIMOX-SOI wafers from silicon wafer manufacturers will help address customerconcerns about adequate sources of supply and their desire to purchase all oftheir silicon wafer requirements (e.g., bulk silicon, epitaxial, strainedsilicon and SOI wafers) from the same company. Our objective is to be thedominant supplier of SIMOX implanters to the world’s silicon wafermanufacturers so they can, in turn, efficiently and cost-effectively supply SOIwafers to the global semiconductor industry. In addition, we believe that thesewafer manufacturers would be potential equipment customers of ours.

 

The second source of competition for us is thedevelopment of alternative SOI materials. The approach that most directlycompetes with SIMOX is thin-film bonded SOI wafers. The majority of SOI wafersare produced with this technology. SOITEC, a French-based company that spun offfrom LETI, a French government research lab, uses a bonded method. Thethin-film bonded approach uses two silicon wafers, one or both having athermally-grown oxide layer, which are first bonded together to form thesilicon/silicon dioxide/silicon structure. A majority of one of the wafers isremoved or separated from the double-wafer structure, and the remaining portionserves as the device layer of the SOI wafer. The most popular method is totransfer the thin layer using wafer splitting techniques, allowing the rest ofthe wafer to be

 

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reclaimed and reused.Regions of stress are first created using implantation and/or epitaxial growth.The wafer is split along the stress interface by the application of heat(SOITEC’s Smartcut® process), a gas jet (Silicon Genesis’ process), or a waterjet (Canon’s ELTRAN® process).  SEH alsooffers a thin SOI Unibond® wafer manufactured with the SmartCut® process, whichis licensed from SOITEC. Our evidence to date suggests that both SIMOX andbonded wafers perform equally well. We believe, however, that the SIMOX processcan result in an inherently lower manufacturing cost in higher volumerequirements. We also believe that, at this stage in the market’s development,multiple SOI suppliers will help accelerate the adoption of SOI technology.

 

Thethird source of competition is derived from alternative non-SOI technologiesdesigned to obtain benefits similar to those of SOI, including improvements toexisting technologies. Significant resources are continually expended toimprove epitaxial and conventional silicon wafers.

 

Thesemiconductor industry has demonstrated its resourcefulness in improvingmaterials through creative circuit design and manufacturing techniques, therebyextending the useful life of conventional substrates, and we cannot be surethat it will not continue to do so. The relatively lower cost of thesesubstrates provides an incentive to the semiconductor industry to  improve existing material without moving tonew, more advanced substrates. In addition, complex variations of moreconventional approaches, such as elaborate circuit structures built onconventional silicon substrates, and compound materials (such assilicon-germanium, gallium-arsenide, indium phosphide, etc.), are otheralternative substrate choices. Strained silicon is a technology that can beused to increase the operating speed of computer chips, such as microprocessors.The spacing between silicon atoms is stretched – or strained - farther apart,allowing electrons to flow with less resistance, leading to chips that arefaster, as reported by IBM. The emergence of strained silicon inwafer-materials technology will lead to comparisons with SOI, among otheremerging wafer-materials technologies. Although both strained silicon and SOIcan be wafer-material technologies that can increase chip speed, they work indifferent – and complementary – ways and if combined can provide additionalbenefits.

 

Strained silicon increases transistor speed byincreasing the mobility of electrons traveling through the top silicon. On theother hand, SOI increases transistor speed by reducing parasitic capacitancesassociated with source and drain junctions. Therefore, we believe strainedsilicon and SOI are complementary and mutually enhancing - not competing –technologies, although one technology may be adopted without the other. Webelieve the real wave of the future will be combining these two complementarytechnologies, much like the way copper interconnects, low k dielectricmaterials and SOI substrates have been combined.

 

**Backlog**

 

Ibis’backlog consists of equipment revenue expected to be recognized during 2005,spare parts and other contracts expected to be performed during 2005. Thebacklog is as follows:

 
| ** **               | ** ** | **As of February 28,** | ** ** |
|--------------------------|------------|-----------------------------|------------|
|                     |       | **2004**                    | ** ** | **2005** |   |
|                     |       |                        |       |   |   |
| Equipment related orders |       | $                           | 7,000,000  |   | $ | 6,042,000 |   |
| Contracts/service        |       | 271,000                     |       | 9,000 |   |
| Total                    |       | $                           | 7,271,000  |   | $ | 6,051,000 |   |

 

Allcustomer orders are subject to modification or cancellation by the customers.Backlog can, and often does fluctuate significantly based upon, among othermatters, the timing and receipt of orders. Therefore, variations in backlog maynot represent a fair indication of future business trends.

 

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**Patentsand Proprietary Rights**

 

Ibis’s success isdependent in part upon certain proprietary technologies and core intellectualproperty. Ibis has been awarded a number of patents and has a number of pendingpatent applications. For example, we added three patents to our intellectualproperty portfolio during 2003 and 2004 and we have more than two-dozen patentspending relating to our proprietary i2000 oxygen implanter or the SIMOXfabrication process. Additionally, we diligently monitor our research anddevelopment process to identify inventions that warrant pursuing patentprotection.

 

Notwithstanding ourpatent portfolio strategy, we rely largely upon trade secret protection andconfidentiality and proprietary information agreements to safeguard ourproprietary technology. Towards this end, all of our employees currently arerequired to execute confidentiality agreements pursuant to which they agree to assignto us all patent rights and technical or other information developed by themduring their employment with us and also agree not to disclose any trade secretor confidential information without our prior written consent.

 

Despite the efforts wetake to protect our proprietary technologies and core intellectual property,the use of contractual, statutory and common law protections offer only limitedprotections. We cannot ensure that patents will issue from our pendingapplications or from any future applications or that, if issued, any claimsallowed will be sufficiently broad to protect our technology. In addition, wecannot ensure that any patents that have been or may be issued will not bechallenged, invalidated or circumvented or that any rights granted by thosepatents would protect our proprietary rights. Failure of any patents to protectour technology may make it easier for our competitors to offer equivalent orsuperior technology. In addition, unauthorized parties may attempt to copy orotherwise misappropriate aspects of our products or services, or to obtain oruse information that we regard as proprietary. Even if a competitor’s productswere to infringe patents owned or licensed by us, it would be very costly forus to enforce our rights in an enforcement action, which would also divertfunds and resources which otherwise could be used in our operations.Furthermore, third parties may also independently develop similar technologywithout breach of our proprietary rights.

 

In addition to our effortsto develop proprietary technology, historically we have also supplemented andcommercialized our intellectual property through the grant and receipt oflicenses. For example, Ibis has an exclusive worldwide sublicense to theproprietary beam scanning system developed and patented by a consultant to usduring the development of the Ibis 1000. Our beam scanning system sublicenseagreement also grants us certain rights to further sublicense the beam scanningsystem for certain applications other than oxygen implantation. Pursuant tothese rights, we have entered into four non-exclusive sublicense agreementsthat permit the respective sub-licensees to manufacture, use and sellimplantation machines incorporating the beam scanning system so long as such machinesare not designed for the production of oxygen implanted wafers. Eachsub-licensee has paid us a non-refundable option fee upon signing an agreementand an initial license fee when it exercised its option to use the licensedtechnology. In addition, each sub-licensee will pay a royalty fee with respectto each implantation machine manufactured, used or sold after its option feeand initial license fee has been applied. License fees received by us fromsub-licenses are to be shared on a substantially equal basis with the licensorof the beam scanning system. As of December 31, 2004, Ibis had receivedapproximately $2.0 million in net license fees, after deducting amounts paid tothe licensor.

 

Ibis also obtained in1994 an exclusive license to technology that facilitates the presentation ofwafers to ion beams developed by Superion Limited, a United Kingdomcorporation. Through December 31, 2004, Ibis has paid $0.6 million for licensefees for implantation machines that have been manufactured by us. Under theterms of this agreement, Superion Limited has retained the right to utilize thetechnology for uses not involving oxygen implantation of silicon or othersemiconductor materials.  During 2001,this agreement was modified to incorporate i2000 implantation machines. Ibisalso entered into a Sublicense Agreement during 2001 which gives our customer aroyalty-bearing, non-exclusive license to utilize this technology for ionimplantation machines, excluding oxygen implanters.

 

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During1999, we completed an agreement to license our standard and Advantox SIMOX-SOIwafer fabrication process to SUMCO. The agreement consisted of an initialroyalty fee. Future royalties shall be payable based on a percentage of SUMCO’sSIMOX-SOI wafers sold which are manufactured using the licensed process.

 

Furthermore, in 2000, we licensed from IBM the rightto manufacture and sell SIMOX-SOI wafers, using IBM’s proprietary MLD SIMOXprocess, to IBM and to all our other customers. Under the royalty-bearinglicense agreement, we were able to use IBM’s process to produce  MLD SIMOX-SOI wafers which we marketed asAdvantox MLD. Advantox MLD wafers were broadly marketed to integrated circuitmanufacturers looking to accelerate their SOI adoption process. Under theagreement we granted IBM rights to our patents utilized in the modified lowdose, or MLD process. Although we believe that other SIMOX-SOI wafer processingmethods exist and are being used today, our existing or potential equipmentcustomers that intend to use the MLD process to manufacture SIMOX-SOI waferswould be required to license this technology directly from IBM. Two majorsilicon wafer manufacturers have already licensed this technology from IBM andothers have developed their own SIMOX processes. No assurances can be giventhat the remaining equipment customers that intend to use the MLD process andIBM would come to terms acceptable to both parties in a timely manner, or atall. These MLD process license issues may effect the timing of placement ofcustomer orders in the future if customers plan to license this technology.

 

Finally,during 2001 we licensed our Advantox 50 and 150 SIMOX wafer fabricationprocesses to Simgui. Ibis received the initial license fee from Simgui in January 2003,and the technology transfer took place in the first quarter ending March 31,2003. License revenue of approximately $0.5 million was recognized in thatquarter.

 

**GovernmentRegulation**

 

Ibisis subject to a variety of federal, state and local environmental regulationsrelated to the storage, treatment, discharge or disposal of chemicals used inits operations and exposure of our personnel to occupational hazards. Althoughwe believe that we have all permits necessary to conduct our business, thefailure to comply with present or future regulations could result in finesbeing imposed on us, suspension of production, or a cessation of operations.Our future activities may result in our being subject to additionalregulations. Such regulations could require us to acquire significant equipmentor to incur other substantial expenses to comply with regulations. Any failureby us to control the use of, or to restrict adequately the discharge of,hazardous substances or to properly control other occupational hazards couldsubject us to substantial financial liabilities.

 

Certain technologies associated with Ibis’ implantersare subject to export regulations administered by the U.S. Department ofCommerce.  Accordingly, Ibis may berequired to secure U.S. export licenses with respect to sales of implanters ortransfers of technologies to end users in certain foreign countries. There canbe no assurance that if necessary, Ibis will be able to secure such licenses ina timely manner, or at all.

 

**Manufacturingand Supplies**

 

Ibismanufactures its oxygen implanters from standard components and from componentsmanufactured in-house or by other vendors according to our designspecifications. Most raw materials and components not produced by us areavailable from more than one supplier. However, certain raw materials,components and subassemblies are obtained from a limited group of suppliers.Semiconductor equipment is a growth industry and is very cyclical in nature, soif our suppliers experience an increase in demand from other semiconductorequipment manufacturers with much higher volumes than us, the lead-time and/orprice for some of our components may increase. Although we have sought toreduce our dependence on these limited source suppliers and we have notexperienced significant production delays due to unavailability or delay inprocurement of component parts or raw materials to date, increased marketdemand for the materials supplied by, or disruption or termination of, certainof these sources could occur and such increased demand, disruptions, ortermination could have a material adverse effect on our business and results ofoperations.

 

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**Employees**

 

As of December 31,2004, we employed 59 persons on a full-time basis. None of our employees arerepresented by a labor union and we believe our relations with our employeesare good.

 

**RiskFactors**

 

***The Commercial Market for SIMOX-SOITechnology is Still Developing and May Never Fully Develop.***

 

Thesources of our revenue have shifted from primarily research and developmentcontracts and sales of SIMOX-SOI wafers for commercial applications to salesand support of oxygen implantation equipment. We are aware of only a fewcommercial manufacturers that are using SIMOX-SOI wafers in low volumeproduction for a limited number of products. The performance advantages ofSIMOX-SOI wafers may never be realized commercially and a commercial market forSIMOX-SOI wafers may never fully develop which in turn would adversely affectthe sales of our oxygen implanters. The failure of major semiconductormanufacturers and /or major silicon wafer manufacturers to adopt SIMOX-SOItechnology would adversely affect, and may prevent, the adoption of thistechnology by others.

 

***We Have Significant Losses and May NeverBe Able to Sustain Profitability.***

 

Weexperienced net losses of $14.1 million, $21.4 million and $10.9 million in2002, 2003 and 2004, respectively. As of December 31, 2004, we had anaccumulated deficit of $72.8 million. Net losses may continue for theforeseeable future. Although we have had profitable quarterly operating resultsfrom time to time, we may not be able to achieve sustained profitability.

 

***We May Need Substantial AdditionalCapital to Continue Operations in the Future.***

 

Weanticipate that our current available cash together with the anticipated saleof an implanter will enable us to maintain currently planned operations for atleast the next twelve months from the date of this filing.  However, this expectation is based on ourcurrent operating plan and general sales outlook, each of which may changerapidly. We intend to continue to invest in our research, development andmanufacturing capabilities. The Company expects to continue to explore equity offeringsand other forms of financing and anticipate that we may be required to raiseadditional capital in the future in order to finance future growth and ourresearch and development programs. Changes in technology or sales growth beyondcurrently established capabilities may require further investment. As a result,we may need to raise substantial additional capital in the future. We havepreviously financed our working capital requirements through:

 

•                  equity financings, including warrantand option exercises,

•                  equipment lines of credit,

•                  a working capital line of credit,

•                  a term loan,

•                  sale-leaseback arrangements,

•                  collaborative relationships,

•                  wafer product and equipment sales,and

•                  government contracts.

 

There can be no assurance, however, that our actualneeds will not exceed expectations or that we will be able to fund ouroperations on a long-term basis in the absence of other sources. There also canbe no assurance that any additional required longer term financing will beavailable through additional bank borrowings, debt or equity offerings orotherwise, or that if such financing is available, that it will be available onterms acceptable to us. If

 

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future financing is not available or is not availableon a timely basis or on acceptable terms, we may not be able to fund our futureneeds, which would seriously harm our business and results of operations andour ability to continue as a going concern. In addition, if we raise additionalfunds through the sale of equity or convertible debt securities, the value ofour common stock outstanding may be diluted. We may also have to issuesecurities that have rights, preferences and privileges senior to our commonstock.

 

***Currently, we rely on sales to a limited number of customers.***

 

Ibisexpects that we will continue to rely on a relatively small number of customersas sources of revenue in the foreseeable future.  The loss of one or more of these majorcustomers and our failure to obtain other sources of offsetting revenue wouldhave a material adverse impact on our business and hinder our ability tocontinue as a going concern. In addition, any downturn in these customers’business or the industry in which these customers operate could result in a significantdecrease in any sales of our implanters to these customers, which would have anadverse effect on our business.

 

***We Rely Heavily on Sales toCertain Significant Customers, Which May Vary Significantly From Quarterto Quarter Causing Our Operating Results to Fluctuate.***

 

We derive a large portion of our sales of wafermanufacturing equipment from certain significant customers. The following tablesets forth, in thousands of dollars, the amount of revenue derived from oursignificant customers during the fiscal years ended December 31, 2002,2003 and 2004, as well as the percent of our revenue represented by thesecustomers’ purchases (in thousands):

 
| ** **   | ** ** | **2002**    | ** ** | **2003**    | ** ** | **2004**    | ** ** |
|--------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Customer** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| IBM          |       | $           | 381        |        | 6          | %           | $          | 8,564 |   | 91 | % | $ | 384 |   | 5 | % |
| Simgui       |       | $           | 5,555      |        | 87         | %           | $          | 526 |   | 6 | % | $ | 5 |   | — |   |
| SEH          |       | —      |       | —      |       | —      |       | — |   | $ | 7,000 |   | 88 | % |

 

Revenue from SEH in 2004 is for the sale of an i2000oxygen implanter for approximately $7.0 million. Revenue from IBM in 2003resulted primarily from the sale of an i2000 oxygen implanter at a sale priceof approximately $8.0 million. Revenues from Simgui in 2002 represent the saleof an Ibis i1000 oxygen implanter and certain parts.

 

***We Expect Our Quarterly Revenue andOperating Results to Fluctuate Significantly.***

 

Weanticipate that our revenue and operating results are likely to varysignificantly from quarter to quarter in the foreseeable future, and it islikely that in future quarters our operating results may from time to time bebelow the expectations of public market analysts or investors. Our stock pricehas been volatile and if we fail to meet expectations of public market analystsor investors, the price of our common stock would likely decrease. Further,customers may cancel or revise orders at any time prior to delivery. Theseordering patterns most likely will result in significant quarterly fluctuationsin our revenue and operating results, and accordingly in our share price. Inaddition, because we have only sold a limited number of implanters to date onan irregular basis, the recognition of revenue from the sale of even oneimplanter is likely to result in a significant increase in the revenue for thatquarter. A number of other factors, many of which are discussed in more detailin other risk factors, may also cause variations in our results of operationsand share price, including:

 

•                                          lackof orders;

•                                          cancellationsof orders and shipment delays and rescheduling;

•                                          newproduct introductions, which often result in a mismatching of research anddevelopment expenses and recognition of revenue; and

•                                          economicconditions and capital spending in the semiconductor industry and in otherindustries in which our customers operate.

 

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A highpercentage of our expenses are essentially fixed in the short term. As aresult, if we experience delays in generating and recognizing revenue, ourquarterly operating results are likely to be seriously harmed. Due to these andother factors, we believe that quarter-to-quarter comparisons of our operatingresults will not be meaningful. You should not rely on our results for onequarter as any indication of our future performance.

 

***Competitors and Competing Technologies May RenderSome or All of Our Products or Future Products Noncompetitive or Obsolete;Potential Write-down for Impaired or Obsolete Assets.***

 

The semiconductor industry is highly competitive andhas been characterized by rapid and significant technological advances. Anumber of established semiconductor and materials manufacturers, includingcertain of our customers, have expended significant resources in developingimproved wafer substrates. Our competitors or others, many of which havesubstantially greater financial, technical and other resources than we do, maysucceed in developing technologies and products that are equal to or moreeffective than any which we are developing, which could render our technologyobsolete or noncompetitive. In addition to competition from other manufacturersof SOI wafers, we face competition from manufacturers using bulk silicon andepitaxial wafer technology, and compound materials technology such assilicon-germanium, gallium-arsenide and indium phosphide and SOI technology.Although we believe that SIMOX-SOI wafers offer integrated circuit performanceadvantages, semiconductor manufacturers may develop improvements to existingbulk silicon, epitaxial or strained silicon wafer technology, and competingcompound materials or SOI technologies may be more successfully developed,which would eliminate or diminish the performance advantages of SIMOX-SOIwafers which in turn would diminish the demand for our oxygen implanters.

 

Duringthe fiscal year ended December 31, 2004, we discontinued our wafermanufacturing business and incurred charges for severance and equipmentdisposition of $2.1 million, contributing to the loss from discontinuedoperations of $5.3 million. During the fiscal year ended December 31,2003, we recognized an impairment loss of $11.1 million for our 200 mm andsmaller SIMOX wafer production line which has subsequently been recorded aspart of the loss from discontinued operations in 2003 of $17.6 million. (SeeItem 7  Managements Discussion andAnalysis of Financial Condition and Results of Operations). In addition, ifsemiconductor manufacturers fail to adopt SIMOX technology during the currentor subsequent process cycle (such cycles typically last two to three years),widespread adoption of SIMOX technology may never materialize, our technologymay become obsolete and we may be required to recognize an additional materialimpairment loss in the future.

 

Inaddition, although we are aware of no other company manufacturing oxygenimplant equipment, other major semiconductor implant equipment manufacturerscould develop a less expensive oxygen implanter with superior technology. Ourability to compete with other manufacturers of semiconductor implanters,manufacturers of competing SOI wafers, as well as with bulk silicon, epitaxial,strained silicon and compound materials wafer manufacturers, will depend onnumerous factors within and outside our control, including:

 

•                  the success and timing of our productintroductions and those of our competitors;

•                  product distribution;

•                  customer support;

•                  sufficiency of funding available tous; and

•                  the price, quality and performance ofcompeting products and technologies.

 

***We Must Continually Improve ExistingProducts, Design and Sell New Products and Manage the Costs of Research andDevelopment in Order to Compete Effectively.***

 

Thesemiconductor industry is characterized by rapid technological change, evolvingindustry standards and continuous improvements in products and requiredcustomer specifications. Due to the constant changes in our markets, our futuresuccess depends on our ability to improve our manufacturing processes, improveexisting products and develop new products. For example, our oxygen implantersmust remain

 

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competitive on the basisof cost of ownership, process performance and evolving customer needs. Toremain competitive we must continually introduce oxygen implanters with highercapacity, better production yields and the ability to process larger wafersizes.

 

Thecommercialization of new products involves, among other requirements,substantial expenditures in research and development, production and marketing.We may be unable to successfully design or manufacture these new products andmay have difficulty penetrating new markets. Because it is generally notpossible to predict the amount of time required and the costs involved inachieving certain research, development and engineering objectives, actualdevelopment costs may exceed budgeted amounts and estimated product developmentschedules may be extended. Our business may be materially and adverselyaffected if:

 

•                  we are unable to improve our existingproducts on a timely basis;

•                  our new products are not introducedon a timely basis;

•                  we incur budget overruns or delays inour research and development efforts; or

•                  our new products experiencereliability or quality problems.

 

***The Sales Cycle for Our Oxygen ImplanterEquipment is Lengthy and Complex and We Have Only Received Limited Orders forOur Oxygen Implanter Equipment.***

 

Our customers expend significant efforts in evaluatingand qualifying our implanters before they place orders with us.  Since we began selling implanters in 1996, wehave only sold a total of eight Ibis 1000 oxygen implanters at an average saleprice of approximately $4.0 million each and two i2000 oxygen implanters(excluding the order received in January 2005) at a selling price between$7.0 and $8.0 million. The sales cycle typically goes from equipmentdemonstration, equipment specification negotiations, formal quotation, contractnegotiations and receipt of order and could take up to one year or longer. Inaddition, our potential equipment customers that would like to use the MLDprocess, owned by IBM, to manufacture SIMOX-SOI wafers using our implanterswould be required to license this technology directly from IBM. We believe twosilicon wafer manufacturers have already licensed this technology from IBM andothers have developed their own SIMOX processes. Our potential equipmentcustomers may wish to secure this license prior to giving us an order forequipment and these negotiations between IBM and our customer are beyond ourcontrol and no assurances are given that our customers and IBM would come toterms acceptable to both parties in a timely manner, or at all. These MLDprocess license issues may effect the timing of placement of customer orders inthe future if customers plan to license this technology. We do not expect tosell more than a limited number of implanters in the near future. The sale ofone implanter would generally represent a substantial portion of our annualrevenue. Accordingly, the delay in the receipt of orders, manufacture ordelivery of even one unit or the modification, change or cancellation of anysuch order would have a material adverse effect on our quarterly and annualresults of operations.

 

***The Manufacturing and CustomerQualification Process for Our Implanters is Complex, Lengthy and Costly.***

 

In the semiconductor industry customers regularlyrequire equipment manufacturers to qualify the equipment at the customer’ssite. The time required to customer-qualify an implanter at a customer’s siteis very difficult to predict because the qualification process for each of ourimplanters is complex, lengthy and costly and varies depending on our customer’svarying specifications. The manufacturing and qualification process for eachimplanter requires us to construct and customer qualify the machine at ourpremises, disassemble the machine for transportation, and reassemble andre-qualify it at the customer’s premises. During this qualification period, weinvest significant resources and dedicate substantial production and technicalpersonnel to achieve acceptance of the implanter. A customer will not acceptthe implanter until it has successfully produced wafers to exact specificationsat the customer’s premises. Even very small differences in the customer’senvironment or initially imperceptible changes that may occur to the implanterduring the transportation to and reassembly of the implanter at the customer’ssite can cause a large percentage of wafers

 

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produced by the implanterto be rejected, which would delay the acceptance of the implanter by thecustomer. Historically, we have experienced delays in achieving customeracceptance. Delays or difficulties in our manufacturing and qualificationprocess could increase manufacturing and warranty costs and adversely affectour relationships with our customers. In addition, because we do not recognizerevenue on the sale of an implanter until it is delivered and qualified by thecustomer, any delay in qualification would result in a delay in our ability torecognize revenue from the sale and receipt of final payment. Historically ithas taken approximately nine to eighteen months to build, ship and obtaincustomer acceptance of our implanters.

 

***Our Implanters and Associated Technologyare Subject to Export Regulations, Which Could Prevent or Delay the Sale ofSuch Products in Foreign Countries.***

 

Certaintechnologies associated with our implanters are subject to export regulationsadministered by the U.S. Department of Commerce. Accordingly, we may berequired to secure U.S. export licenses with respect to sales of implanters ortransfers of technologies to end users in certain foreign countries. Thisrequirement could result in significant delays in, or the prevention of, salesof implanters or transfers of technology or other such technical data tocustomers in certain foreign countries. For example, the sale of an Ibis 1000implanter and the corresponding transfer of technology to Simgui required anexport license which took approximately one year to secure. There can be noassurance that if necessary, we will be able to secure such licenses in thefuture in a timely manner, or at all.

 

***The Loss of Key Members of Our Scientificand Management Staff Could Delay and May Prevent the Achievement of OurResearch, Development and Business Objectives.***

 

OurChief Executive Officer, Martin J. Reid, and other current officers and keymembers of our scientific staff are responsible for areas such as productdevelopment and improvements, and process improvements research, which areimportant to our specialized scientific business. The loss of, and failure topromptly replace, any member of this group could significantly delay and mayprevent the achievement of our research, development and business objectives.While we have entered into an employment agreement with our Chief ExecutiveOfficer, under certain circumstances he may be able to terminate his employmentwith us. Furthermore, although our employees are subject to certainconfidentiality and non-competition obligations, our key personnel mayterminate their employment at any time and may become employed by a competitor.The current composition of Ibis management and of its board of directors issubject to change and should not be unduly relied upon.

 

***We May Not Be Able to SuccessfullyProduce Our Products on a Large-Scale.***

 

Wehave limited manufacturing experience and have only manufactured limitedquantities of oxygen implanters. To be successful, our products must bemanufactured in commercial quantities, at acceptable costs. We may not be ableto make the transition to high volume commercial production successfully.Future production in commercial quantities may create technical and financialchallenges for us. Any difficulty or delay in constructing additionalimplanters, if needed, could have a material adverse effect on our business.

 

***We May Not Be Able to Use All of OurExisting or Future Manufacturing Capacity at a Profitable Level.***

 

Attimes we may have the capacity to produce more oxygen implantation machinesthan we have orders for at such times. During such idle time we would continueto be responsible for the fixed costs of our facility and maintainingpersonnel, which could have a material adverse effect on our business.

 

***We May Not Successfully Form orMaintain Desirable Strategic Alliances.***

 

Webelieve we will need to form or maintain alliances with strategic partners forthe manufacturing, marketing and distribution of our products. We may enterinto these strategic alliances to satisfy customer demand and to addresspossible customer concerns regarding our being a sole source supplier. The limitednumber of reliable sources of supply other than Ibis may adversely affect ordelay the integration of SIMOX-SOI wafers in mainstream commercialapplications. We may not be successful in maintaining alliances or in

 

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forming and maintainingother alliances, including satisfying our contractual obligations with ourstrategic partners, and our partners may not devote adequate resources tomanufacture, market and distribute these products successfully or may attemptto compete with us.

 

***We May Have Difficulty Obtaining theMaterials and Components Needed to Produce Our Products.***

 

Ibismanufactures its oxygen implanters from standard components and from componentsmanufactured in-house or by other vendors according to our designspecifications. Most raw materials and components not produced by us areavailable from more than one supplier. However, certain raw materials,components and subassemblies are obtained from a limited group of suppliers.Semiconductor equipment is a growth industry and is very cyclical in nature, soif our suppliers experience an increase in demand from other semiconductorequipment manufacturers with much higher volumes than us, the lead-time and/orprice for some of our components may increase. Although we have sought toreduce our dependence on these limited source suppliers and we have notexperienced significant production delays due to unavailability or delay inprocurement of component parts or raw materials to date, increased marketdemand for materials from, or disruption or termination of, certain of thesesources could occur and such increased demand, disruptions, or terminationcould have a material adverse effect on our business and results of operations.

 

***We May Not Be Able to Protect OurPatents and Proprietary Technology.***

 

Ourability to compete effectively with other companies will depend, in part, onour ability to maintain the proprietary nature of our technology. Although wehave been awarded or have filed applications for a number of patents in theU.S. and foreign countries, those patents may not provide meaningfulprotection, or pending patents may not be issued. Our competitors in both theU.S. and foreign countries, many of which have substantially greater resourcesand have made substantial investments in competing technologies, may have ormay obtain patents that will prevent, limit or interfere with our ability tomake and sell our products or intentionally infringe on our patents. Thedefense and prosecution of patent suits is both costly and time-consuming, evenif the outcome is favorable to us. In addition, there is an inherentunpredictability regarding obtaining and enforcing patents. An adverse outcomein the defense of a patent suit could:

 

•                  subject us to significant liabilitiesto third parties,

•                  require disputed rights to belicensed from third parties, or

•                  require us to cease selling ourproducts.

 

Wealso rely in large part on unpatented proprietary technology and others,including strategic partners, may independently develop the same or similartechnology or otherwise obtain access to our proprietary technology. To protectour rights in these areas, we currently require all of our employees to enterinto confidentiality agreements. However, these agreements may not providemeaningful protection for our trade secrets, know-how or other proprietaryinformation in the event of any unauthorized use, misappropriation ordisclosure of such trade secrets, know-how or other proprietary information.

 

Othersmay claim that our technology infringes on their proprietary rights. Anyinfringement claims, even if without merit, can be time consuming and expensiveto defend and may divert management’s attention and resources. If successful,they could also require us to enter into costly royalty or licensingagreements. A successful claim of product infringement against us and ourinability to license the infringed or similar technology could adversely affectour business.

 

***If We Do Not Comply With All Applicable EnvironmentalRegulations, We Could be Subject to Fines and Other Sanctions.***

 

We aresubject to a variety of federal, state and local environmental regulationsrelated to the storage, treatment, discharge or disposal of chemicals used inour operations and exposure of our personnel to occupational hazards. Althoughwe believe that we have all permits necessary to conduct our business, thefailure to comply with present or future regulations could result in finesbeing imposed on us, suspension of

 

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production or a cessationof operations. Our future activities may result in our being subject toadditional regulations. Such regulations could require us to acquiresignificant equipment or to incur other substantial expenses to comply withregulations. Our failure to control the use of, or to restrict adequately thedischarge of, hazardous substances or properly control other occupationalhazards could subject us to substantial financial liabilities.

 

***Our Stock Price is HighlyVolatile.***

 

Themarket prices for securities of high tech companies have been volatile. Thisvolatility has significantly affected the market prices for these securitiesfor reasons frequently unrelated to the operating performance of the specificcompanies. These broad market fluctuations may adversely affect the marketprice of our common stock. The market price for our common stock has fluctuatedsignificantly. Since January 1, 1999, our stock price has fluctuated froma high of $135.00 to a low of $2.12. It is likely that the market price of ourstock will continue to fluctuate in the future. Events or factors that may havea significant impact on our business and on the market price of our commonstock include the following:

 

•                  quarterly fluctuations in operatingresults,

•                  difficulty in forecasting futureresults,

•                  announcements by us or our present orpotential competitors,

•                  technological innovations or newcommercial products or services by us or our competitors,

•                  the timing of receipt of orders frommajor customers,

•                  product mix,

•                  product obsolescence,

•                  shifts in customer demand,

•                  our ability to manufacture and shipproducts on a cost-effective and timely basis,

•                  market acceptance of new and enhancedversions of our implanters,

•                  the evolving and unpredictable natureof the markets for the products incorporating SIMOX-SOI wafers,

•                  the amount of research anddevelopment expenses associated with new or enhanced products or implanters

•                  the cyclical nature of thesemiconductor industry, and

•                  general market conditions.

 

***Securities Litigation Could Result in Substantial Cost and Divert theAttention of Key Personnel, Which Could Seriously Harm Our Business.***

 

Fiveclass action securities lawsuits have been filed in the United States DistrictCourt in the District of Massachusetts against Ibis and its President and CEO:Martin Smolowitz v. Ibis Technology Corporation., et al., Civ. No. 03-12613(RCL) (D. Mass.); Fred Den v. Ibis Technology Corporation., et al., Civ. No. 04-10060(RCL) (D. Mass.); Weinstein v. Ibis Technology Corporation., et al., Civ. No. 04-10088(RCL) (D. Mass.); George Harrison v. Ibis Technology Corporation., et al., Civ.No. 04-10286 (RCL) (D. Mass.); and Eleanor Pitzer v. Ibis TechnologyCorporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). On June 4,2004, the Court entered an order consolidating these actions under the captionIn re Ibis Technology Securities Litigation, C.A. 04-10446 RCL. On July 6,2004, a consolidated amended class action complaint was filed which alleges,among other things, that the Company violated federal securities laws byallegedly making misstatements to the investing public relating to demand forcertain Ibis products and intellectual property issues relating to the sale ofthe i2000 oxygen implanter. The plaintiffs are seeking unspecified damages. On August 5,2004, we filed a motion to dismiss the consolidated amended complaint on thegrounds, among others, that it failed to state a claim on which the reliefcould be granted. That motion now has been fully briefed, and we are awaitingruling on it from the Court. While we believe that the allegations are withoutmerit, and we intend to vigorously defend against the suits, there can be noguarantee as to how they ultimately will be resolved.

 

Inaddition, Ibis has been named as a nominal defendant in a shareholderderivative action filed in February 2004 against certain of its directorsand officers: Louis F. Matheson, Jr. v. Martin J. Reid et

 

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al., Civ. Act. No. 04-10341(RCL). The complaint alleges, among other things, that the alleged conductchallenged in the securities cases pending against Ibis in Massachusetts(described above) constitutes a breach of the defendants’ fiduciary duties toIbis. The complaint seeks unspecified money damages and other relief ostensiblyon behalf of Ibis. On June 4, 2004, the Court entered an order stayingthis matter pending the entry of a final order on any motion filed by theCompany to dismiss the consolidated class action complaint referenced above.

 

Litigationmay be time-consuming, expensive and disruptive to normal business operations,and the outcome of litigation is difficult to predict. An unfavorableresolution of these litigation matters could have a material adverse effect onour business, results of operations and financial condition.

 

***Future Issuances of Preferred Stock May Diminish the Rights of OurCommon Stockholders.***

 

Our board of directorshas the authority to approve the issue of up to 2.0 million shares of preferredstock and to determine the price, rights, privileges and other terms of theseshares. The board of directors may exercise this authority without the approvalof the stockholders. The rights of the holders of common stock may be adverselyaffected by the rights of the holders of any preferred stock that may be issuedin the future.

 

***Anti-takeover provisions in our charter and bylaws and provisions ofMassachusetts law could make a third-party acquisition of us difficult.***

 

Ourrestated articles of organization, as amended, and restated bylaws and theMassachusetts Business Corporation Law contain certain provisions that may makea third-party acquisition of us difficult, including:

 

•                  a classified board of directors, withthree classes of directors each serving a staggered three-year term;

•                  the ability of the board of directorsto issue preferred stock; and

•                  a 75% super-majority shareholder voteto amend certain provisions of our articles of organization and bylaws.

 

***Limitationson effectiveness of controls.***

 

The Company’s management, including the Chief Executive Officer andPresident and the Chief Financial Officer, does not expect that our disclosurecontrols or our internal controls will prevent all errors and intentionalmisrepresentations.  A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met.  Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs.  Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues, if any, within the Company have been detected.  These inherent limitations include therealities that judgments in decision-making can be faulty and that breakdownscan occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe control.  The design of any system ofcontrols also is based in part upon certain assumptions about the likelihood offuture events, and no assurance can be given that any design will succeed inachieving its stated goals under all potential future conditions; over time,controls may become inadequate because of changes in conditions, or the degreeof compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in acost-effective control system, misstatements due to error or intentionalconduct may occur and not be detected.

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**Item 2.  DESCRIPTIONOF PROPERTY**

 

Ibis’corporate office and manufacturing facilities are located at two leasedfacilities in Danvers, Massachusetts. Previously our business segments weredivided between these two facilities, with implantation equipment design andmanufacture conducted in one of the facilities and SIMOX wafer productionconducted in the other facility. In connection with our implantation equipmentdesign and manufacturing facility we leased approximately 40,000 square feetwhich includes 20,000 square feet for future expansion. Additionally inconnection with our SIMOX wafer research facility we leased approximately32,000 square feet which includes a modernized cleanroom that containimplanters, metrology equipment, cleaning equipment and an implantationequipment manufacturing and service area. The leases expire on May 31,2005 and December 31, 2006, respectively, and contain an option to renewfor five years. Due to our recent exit of the wafer manufacturing business inmid-2004 however, we plan to consolidate our operations into one facilityduring May 2005. Consequently, we will not be renewing the lease ended May 31,2005, which will effectively reduce our overall leased space by 40,000 squarefeet leaving 32,000 square feet.

 

**Item 3.  LEGALPROCEEDINGS**

 

Fiveclass action securities lawsuits have been filed in the United States DistrictCourt in the District of Massachusetts against Ibis and its President and CEO:Martin Smolowitz v. Ibis Technology Corporation., et al., Civ. No. 03-12613(RCL) (D. Mass.); Fred Den v. Ibis Technology Corporation., et al., Civ. No. 04-10060(RCL) (D. Mass.); Weinstein v. Ibis Technology Corporation., et al., Civ. No. 04-10088(RCL) (D. Mass.); George Harrison v. Ibis Technology Corporation., et al., Civ.No. 04-10286 (RCL) (D. Mass.); and Eleanor Pitzer v. Ibis TechnologyCorporation., et al, Civ. No. 04-10446 (RCL) (D. Mass.). On June 4,2004, the Court entered an order consolidating these actions under the captionIn re Ibis Technology Securities Litigation, C.A. 04-10446 RCL. On July 6,2004, a consolidated amended class action complaint was filed which alleges,among other things, that the Company violated federal securities laws byallegedly making misstatements to the investing public relating to demand forcertain Ibis products and intellectual property issues relating to the sale ofthe i2000 oxygen implanter. The plaintiffs are seeking unspecified damages. On August 5,2004, we filed a motion to dismiss the consolidated amended complaint on thegrounds, among others, that it failed to state a claim on which the reliefcould be granted. That motion now has been fully briefed and is awaiting adecision by the Court. While we believe that the allegations are without merit,and we intend to vigorously defend against the suits, there can be no guaranteeas to how they ultimately will be resolved.

 

Inaddition, Ibis has been named as a nominal defendant in a shareholderderivative action filed in February 2004 against certain of its directorsand officers: Louis F. Matheson, Jr. v. Martin J. Reid et al., Civ. Act. No. 04-10341(RCL). The complaint alleges, among other things, that the alleged conductchallenged in the securities cases pending against Ibis in Massachusetts(described above) constitutes a breach of the defendants’ fiduciary duties toIbis. The complaint seeks unspecified money damages and other relief ostensiblyon behalf of Ibis. On June 4, 2004, the Court entered an order stayingthis matter pending the entry of a final order on any motion filed by theCompany to dismiss the consolidated class action complaint referenced above.

 

Litigationmay be time-consuming, expensive and disruptive to normal business operations,and the outcome of litigation is difficult to predict. An unfavorableresolution of these litigation matters could have a material adverse effect onour business, results of operations and financial condition.

 

**Item 4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

# **No matters were submitted tostockholders during the fourth quarter of the year ended December 31,2004.**  

 

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**PART II**

 

**Item 5.  MARKETFOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

###### **Market Information**

###### ** **

Ibis’ Common Stock began trading on May 20, 1994 on the NasdaqSmallCap Market and on the Boston Stock Exchange. Prior to May 20, 1994,there was no public market for the Common Stock or any other securities ofIbis.  On April 4, 1996, Ibiscommenced trading on the Nasdaq National Market. Our Common Stock is tradedunder the symbol “IBIS.” The following table sets forth, for the periods soindicated the high and low sale prices for the Common Stock as reported by theNasdaq National Market.

 
| ** **     | ** ** | **Common Stock** | ** ** |
|----------------|------------|------------------|------------|
| ** **     | ** ** | **High**         | ** ** | **Low** | ** ** |
|           |       |             |       |   |   |
| 2003:          |       |             |       |   |   |
| First Quarter  |       | $                | 6.50       |   | $ | 3.92 |   |
| Second Quarter |       | $                | 8.68       |   | $ | 3.99 |   |
| Third Quarter  |       | $                | 13.17      |   | $ | 7.67 |   |
| Fourth Quarter |       | $                | 17.90      |   | $ | 9.90 |   |
| 2004:          |       |             |       |   |   |
| First Quarter  |       | $                | 16.15      |   | $ | 10.02 |   |
| Second Quarter |       | $                | 12.50      |   | $ | 5.12 |   |
| Third Quarter  |       | $                | 6.15       |   | $ | 3.11 |   |
| Fourth Quarter |       | $                | 5.60       |   | $ | 2.12 |   |

 

**Stockholders**

 

As of February 28, 2005, there were approximately142 stockholders of record of the 10,719,595 outstanding shares of Common Stockand approximately 6,700 beneficial owners of the Common Stock.

 

**Dividends**

 

Ibis has never declared or paid any dividends and does not anticipatepaying such dividends on its Common Stock in the foreseeable future.  Ibis currently intends to retain any futureearnings for use in its business. The payment of any future dividends will bedetermined by the Board of Directors in light of conditions then existing,including our financial condition and requirements, future prospects,restrictions in financing agreements, business conditions and other factorsdeemed relevant by the Board of Directors.

 

**Item 6.  SELECTED FINANCIAL DATA**

 

The selected financial data presented below under the captions “Statementof Operations Data” and “Balance Sheet Data” for, and as of the end of each ofthe years in the five-year period ended December 31, 2004, are derivedfrom the financial statements of Ibis, which have been audited by KPMG LLP,independent registered public accounting firm. The audited balance sheets at December 31**,**2004 and 2003 and the related statements of operations,stockholders equity and cash flows for each of the years in the three-yearperiod ended December 31, 2004 and the independent registered publicaccounting firm’s report thereon, are included elsewhere in this Annual Reporton Form 10-K. The data set forth below should be read in conjunction withIbis’ financial statements, the related notes thereto and “Management’s Discussionand Analysis of Financial Condition and Results of Operations” includedelsewhere in this Annual Report on Form 10-K. The historical results arenot necessarily indicative of the operating results to be expected in thefuture.

 

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| ** **                                             | ** ** | **Years Ended December 31,**             | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | **2000**                                      | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                             | ** ** | **(In thousands, except for per share data)** | ** ** |
| **Statement of Operations Data:**                      |       |                                          |       |   |   |   |   |   |   |   |   |
|                                                   |       |                                          |       |   |   |   |   |   |   |   |   |
| Contract and other revenue                             |       | $                                             | 533        |   | $ | 518 |   | $ | 283 |   | $ | 660 |   | $ | 391 |   |
| Equipment revenue                                      |       | 5,769                                         |       | 1,525 |   | 6,103 |   | 8,782 |   | 7,535 |   |
| Total revenue (2)                                      |       | 6,302                                         |       | 2,043 |   | 6,386 |   | 9,442 |   | 7,926 |   |
| Cost of contract and other revenue                     |       | 388                                           |       | 376 |   | 115 |   | 45 |   | 15 |   |
| Cost of equipment revenue                              |       | 3,482                                         |       | 1,502 |   | 3,868 |   | 4,331 |   | 4,722 |   |
| Total cost of revenue                                  |       | 3,870                                         |       | 1,878 |   | 3,983 |   | 4,376 |   | 4,737 |   |
| Gross profit                                           |       | 2,432                                         |       | 165 |   | 2,403 |   | 5,066 |   | 3,189 |   |
| Operating expenses:                                    |       |                                          |       |   |   |   |   |   |   |   |   |
| General and administrative                             |       | 1,998                                         |       | 2,273 |   | 2,174 |   | 2,337 |   | 2,221 |   |
| Marketing and selling                                  |       | 1,640                                         |       | 1,813 |   | 1,510 |   | 1,236 |   | 1,521 |   |
| Research and development                               |       | 4,587                                         |       | 5,119 |   | 6,258 |   | 5,381 |   | 5,329 |   |
| Total operating expenses                               |       | 8,225                                         |       | 9,205 |   | 9,942 |   | 8,954 |   | 9,071 |   |
| Loss from operations                                   |       | (5,793                                        | )          | (9,040 | ) | (7,539 | ) | (3,888 | ) | (5,882 | ) |
| Total other income                                     |       | 1,943                                         |       | 2,265 |   | 255 |   | 27 |   | 242 |   |
| Income (loss) before income taxes                      |       | (3,850                                        | )          | (6,775 | ) | (7,284 | ) | (3,861 | ) | (5,640 | ) |
| Income tax expense (benefit)                           |       | 1                                             |       | 1 |   | 1 |   | (8 | ) | 1 |   |
| Loss from continuing operations.                       |       | (3,851                                        | )          | (6,776 | ) | (7,285 | ) | (3,853 | ) | (5,641 | ) |
| Discontinued operations: (2)                           |       |                                          |       |   |   |   |   |   |   |   |   |
| Gain (loss) from discontinued operations.              |       | 2,349                                         |       | (2,819 | ) | (6,811 | ) | (17,597 | ) | (3,178 | ) |
| Loss on disposal                                       |       | —                                        |       | — |   | — |   | — |   | (2,099 | ) |
| Income (loss) from discontinued operations             |       | 2,349                                         |       | (2,819 | ) | (6,811 | ) | (17,597 | ) | (5,277 | ) |
| Net loss                                               |       | $                                             | (1,502     | ) | $ | (9,595 | ) | $ | (14,096 | ) | $ | (21,450 | ) | $ | (10,919 | ) |
| Loss from continuing operations per common  share (1). |       | $                                             | (0.47      | ) | $ | (0.81 | ) | $ | (0.79 | ) | $ | (0.40 | ) | $ | (0.53 | ) |
| Net loss per common share (1)                          |       | $                                             | (0.18      | ) | $ | (1.15 | ) | $ | (1.53 | ) | $ | (2.21 | ) | $ | (1.02 | ) |
| Weighted average common shares outstanding             |       | 8,286                                         |       | 8,378 |   | 9,208 |   | 9,728 |   | 10,666 |   |

 

** **
| ** **                           | ** ** | **As of  December 31,** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **2000**                     | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(In thousands)**           | ** ** |
| **Balance Sheet Data:**              | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital                      |       | $                            | 32,585     |   | $ | 11,232 |   | $ | 5,551 |   | $ | 12,607 |   | $ | 12,415 |   |
| Total assets                         |       | 56,299                       |       | 54,920 |   | 51,699 |   | 35,343 |   | 22,283 |   |
| Long-term debt, less current portion |       | 18                           |       | 2,718 |   | 1,184 |   | — |   | — |   |
| Total liabilities                    |       | 6,780                        |       | 14,560 |   | 12,944 |   | 4,226 |   | 1,863 |   |
| Stockholders’ equity            |       | 49,519                       |       | 40,360 |   | 38,755 |   | 31,117 |   | 20,420 |   |
|                                 |       |                         |       |   |   |   |   |   |   |   |   |
|                                      |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) Computed on the basis described for net earnings (loss) percommon share in Note 2(g) of Notes to Financial Statements.

 

(2) Historically, much of the Company’s revenue was derived fromresearch and development contracts and sales of wafers for military andcommercial applications.  In mid-2004, wediscontinued the wafer manufacturing portion of our business in order to focusexclusively on our equipment business. We will maintain a research and development effort relating to wafersfor our equipment improvement programs. This revision to our business strategy could materially affect thecomparability of the information reflected in the above selected financialdata.

 

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**Item 7.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion should be read inconjunction with the Financial Statements of Ibis (including Notes thereto) andSelected Financial Data included elsewhere in this Annual Report on Form 10-K.*

 

**OVERVIEW**

 

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

 

Initially, much of our revenue was derived fromresearch and development contracts and sales of wafers for militaryapplications. Over the years, the Company decided to focus its businessoperations and sales strategy on the manufacture and sale of our implanterequipment products and de-emphasized the sale of wafers given that, among otherthings, we believed that the wafer manufacturing companies were in the bestposition to manufacture SIMOX-SOI wafers using our implanter equipment in lightof their expertise and operating efficiencies. As we announced on July 21,2004, we have exited the wafer manufacturing business. Our wafer business hadbeen highly concentrated on providing wafers for the Company’s largest customer,and was characterized by very volatile production volumes and costs associatedwith periodic changes and continuing improvements to the process. Our majorwafer customer had tended to order fluctuating quantities of wafers on anirregular basis. This customer also could revise or cancel orders at any timeprior to delivery. This meant that this customer, who had accounted for asignificant portion of our net revenue in the past, could have reduced ordecided not to place any orders in the succeeding quarter or quarters.Furthermore, most of our other wafer customers were sampling SIMOX wafers orare in the process of developing prototype products and have also tended toorder small quantities of wafers on an irregular basis.  These customers could also revise or cancelorders at any time prior to delivery. As previously announced, 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 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 and annual fluctuations in revenue andresults of operations due to various factors, including (i) the timing ofreceipt of equipment orders, and (ii) dependence on a limited number ofcustomers.

 

We believe that a migration of SOI wafer manufacturinginto the major silicon wafer suppliers is taking place. We reach thisconclusion for a number of reasons. First, we believe that tremendous pricepressure exists on commodity type products, such as silicon wafers, and thispressure is already eroding price expectations of SOI wafers. Because thestarting wafer represents a significant component of the SOI wafer cost, webelieve that silicon wafer manufacturers should have a natural cost structureadvantage leading to a higher gross margin, and therefore should be able tomanage such price pressure better than stand-alone SOI producers that do notalso produce the silicon wafer itself. Second, we expect that the pricepressure will encourage silicon wafer manufacturers to seek out higher marginproducts, like SOI wafers, to increase their margins. Third, we believe thatsilicon wafer manufacturers have traditionally developed proprietaryintellectual property in silicon materials science, which can be applied todesigning optimal starting wafers for SOI production. We believe that thisshould give them an advantage in both minimizing wafer cost and maximizing SOIwafer quality and yield. Fourth, our experience suggests that silicon wafermanufacturers already have a well-developed infrastructure for themanufacturing, 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 reship 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

 

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plan to focus a majority of our technical andmarketing resources on the sale of implanters to the leading silicon wafermanufacturers and our key customers in the semiconductor industry who webelieve are the leaders in the adoption of SOI technology. We expect thatimplanter sales to chipmakers should be minimal, and that these sales will befocused on SOI processes that the chipmaker wishes to keep proprietary, such asselective (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, which 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 of manufacturingprocesses, including Advantox® MLD and Advantox MLD-UT wafers. Wealso 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 andbegan shipping 300 mm wafers implanted from this machine shortly thereafter.Customers who purchase the i2000 can utilize more than one SIMOX wafermanufacturing process on the implanter including the IBM MLD process, whenlicensed, as well as other SIMOX-SOI wafer manufacturing processes that do notrequire the IBM 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 factoryacceptance of the implanter at the customer’s location. As a result, deferralof revenue will be recorded on our balance sheet until the Company is able tomeet these criteria.

 

In January 2005, we announced the booking (i.e. receipt) of anorder for one Ibis i2000 SIMOX implanter from SUMCO, a leading internationalsilicon wafer manufacturer. Although no assurances can be given, we expect toship this system in the second quarter of 2005 depending on completion of the tooland customer acceptance of the tool at our facility. Revenue recognition forthis implanter will be based on final customer acceptance at their facility,the timing of which may vary depending on a number of factors, includingperformance of the tool.

 

In July 2004, the Company announced its intention to discontinueits wafer manufacturing business. The Company’s final disposal plans relativeto the closure of the wafer manufacturing operation resulted in a loss fromdisposal of inventory and certain production assets from discontinuedoperations of $2.1 million. This loss combined with the negative marginincurred by the wafer manufacturing business in 2004 of $3.2 million resultedin the total loss from discontinued operations of $5.3 million.

 

 Wafer product sales, as well aswafer revenue reported in previous quarters, are reported net of associatedcosts, as loss from discontinued operations on our income statement. Currentquarter and all previously reported quarterly and year to date financial informationdescribed on the financial statements have been adjusted and reportedaccordingly. The Company believes that its decision to discontinue the waferbusiness permit broader strategic collaboration efforts between Ibis and thewafer manufacturers. The Company also believes elimination of wafermanufacturing and associated sales at Ibis, potentially allows our primarycustomers the opportunity to supply additional wafer volume with better qualityand at lower cost to their end customers. We believe this has the potential tolead to the placement of additional SIMOX SOI equipment orders, and toaccelerate customer acceptance of our technology.

 

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During February 2004, we announced the booking (i.e. receipt) ofan order for one Ibis i2000 SIMOX implanter, with an option to purchase asecond i2000, from a leading international silicon wafer manufacturer. Wesubsequently achieved customer acceptance of this implanter at our facility andin the second quarter of 2004 this system was shipped to the customer’sfacility. Revenue for this implanter order was recognized in the third quarterof 2004, based on the final acceptance by the customer.

 

 During thefourth quarter ended December 31, 2003, a number of unexpected eventsoccurred that impacted our 200 mm and smaller wafer size production lineincluding the line’s projected cash flow generation and our projectedutilization of the assets within our revised plans. Based on these events andtheir impact on current and future projected cash flows, and our subsequentimpairment analysis under the provisions of SFAS No. 144, Accounting forImpairment or Disposal of Long-Lived Assets, resulted in an impairment chargeof $11.1 million for our 200 mm and smaller SIMOX wafer production line, whichwas principally comprised of Ibis 1000 implanters and associated machinery andequipment not expected to be utilized or sold. The remaining carrying amount ofassets for this line was charged to the loss from discontinued operations inthe third quarter of 2004.

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that have a significant impact onthe results we report in our financial statements. Some of our accountingpolicies require us to make difficult and subjective judgments, often as aresult of the need to make estimates on matters that are inherently uncertain. Ourmost critical accounting policies include: revenue recognition, inventoryvaluation and reserves, accounts receivable reserves and the assessment oflong-lived asset impairment. Actual results may differ from these estimatesunder different assumptions or conditions. Below, we discuss these policiesfurther, as well as the estimates and judgments involved.

 

***Revenue Recognition. ***We recognize revenue from wafer product sales,equipment sales and the sales of spare parts when all of the following criteriahave been met: (1) evidence exists that the customer is bound to thetransaction; (2) the product has been delivered to the customer and, whenapplicable, the product has been installed and accepted by the customer; (3) thesales price to the customer has been fixed or is determinable; and (4) collectibilityof the sale price is reasonably assured. We recognize revenue from implantersales upon acceptance at the customer’s site. Provisions for estimated salesreturns and allowances are made at the time the products are sold. Revenuederived from contracts and services is recognized upon performance. Significantmanagement judgments and estimates must be made and used in connection withrevenue recognized in any period. Management analyzes various factors, includinga review of specific transactions, historical experience, credit worthiness ofcustomers and current market and economic conditions. Changes in judgmentsbased upon these factors could impact the timing and amount of revenue and costrecognized.

 

***Inventory Valuation andReserves. ***Our policy for the valuation ofinventory, including the determination of obsolete or excess inventory,requires us to forecast the future demand for our products within specific timehorizons, generally twelve months or less. If our forecasted demand forspecific products is greater than actual demand and we fail to reducemanufacturing output accordingly, we could be required to record additionalinventory reserves, which would have a negative impact on our gross margin. Wereserve for obsolescence when engineering changes or other technologicaladvances indicate that obsolescence has occurred.  With the discontinuance of the wafermanufacturing business and the write-off of all inventory, the focus is now onthe reserves required for equipment part inventory.

 

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

 

***Valuation of Long-LivedAssets. ***Ibis reviews the valuation of long-livedassets, including property and equipment and licenses, under the provisions ofSFAS No. 144, Accounting for Impairment or Disposal of Long-LivedAssets.  Management is required to assessthe recoverability of its long-lived assets whenever events and circumstancesindicate that the carrying value may not be recoverable. Based on currentconditions, factors we consider important and that could trigger an impairmentreview include the following:

 

•                  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 with SFAS No. 144, when wedetermine that the carrying value of applicable long-lived assets may not berecoverable based upon the existence of one or more of the above indicators ofimpairment, we evaluate whether the carrying amount of the asset exceeds thesum of the undiscounted cash flows expected to result from the use and eventualdisposition of that asset. If such a circumstance exists, we would measure animpairment loss to the extent the carrying amount of the particular long-livedasset or group exceeds its fair value. We would determine the fair value basedon a projected discounted cash flow method using a discount rate determined byour management to be commensurate with the risk inherent in our currentbusiness model. We adopted SFAS No. 144 during the first quarter of 2002and during the fourth quarter of 2003 we recognized an impairment charge of$11.1 million for our 200 mm and smaller SIMOX wafer production line. Theremaining loss on disposal for this line along with other assets associatedwith wafer manufacturing were charged to the loss from discontinued operationsin 2004.

 

**Results of Operations**

 

***Fiscal Year Ended December 31, 2004Compared to Fiscal Year Ended December 31, 2003***

 

***Contract and Other Revenue***.  Contract and other revenue for the fiscalyear ended December 31, 2004 was $0.4 million compared to $0.7 million forthe fiscal year ended December 31, 2003, a decrease of $0.3 million, or41%. This decrease is attributable to a reduction of revenue recognized fromthe transfer of wafer technology to a customer, pursuant to a license transferagreement in the year ended December 31, 2003. This was offset by anincrease in royalty fees related to equipment technology in the year ended December 31,2004.

 

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***Equipment Revenue.***  Equipment revenue represents revenuerecognized from the sale of implanters, spare parts and field service revenue.Equipment revenue decreased to $7.5 million for the fiscal year ended December 31,2004 from $8.8 million for the fiscal year ended December 31, 2003, adecrease of $1.3 million, or 14%. Equipment revenue in 2003 includedapproximately $8.0 million from the i2000 implanter we shipped to our largestcustomer late in 2002 and which was accepted in the fiscal year ended December 31,2003. The implanter revenue recognized in the fiscal year ended December 31,2004 was for $7.0 million. Field service revenue accounted for $0.4 million, or5% of equipment revenue for the fiscal year ended December 31, 2004 ascompared to $0.3 million, or 3% of equipment revenue for the fiscal year ended December 31,2003. Sales of spare parts accounted for $0.2 million, or 2% of equipmentrevenue for the fiscal year ended December 31, 2004 as compared to $0.5million, or 6% of equipment revenue, for the fiscal year ended December 31,2003. Sales of spare parts fluctuate depending on customer demand and when thewarranties expire on individual pieces of equipment. Warranty expense iscalculated on our anticipated replacement costs for equipment accepted by ourcustomers over a one or two year contract period.

 

***Total Sales and Revenue.***  Total sales and revenue for the fiscal yearended December 31, 2004 was $7.9 million, a decrease of $1.5 million, or16%, from $9.4 million for the fiscal year ended December 31, 2003, asdescribed above.

 

***Total Cost of Sales and Revenue***. Cost of contract and other revenue consists of labor and materialsexpended during the twelve month period. Cost of contract and other revenue forthe fiscal year ended December 31, 2004 was $15 thousand, as compared to$45 thousand for the fiscal year ended December 31, 2003 a decrease of $30thousand, or 66%. This decrease is attributable to a reduction in labor costsassociated with license revenue compared to the prior year.

 

Cost of equipment revenue represents the cost ofequipment, the cost for spare parts, and the cost of labor incurred for fieldservice. Cost of equipment revenue for the fiscal year ended December 31,2004 was $4.7 million, as compared to $4.3 million for the fiscal year ended December 31,2003, an increase of $0.4 million, or 9%. This increase is due to an underabsorption of manufacturing cost of $0.5 million and the increase in inventoryreserves for equipment parts of $0.2 million. This was offset by decreasedcosts associated with the implanter sold in the fiscal year ended December 31,2004 in the amount of $0.4 million and the reduction in sales volume ofequipment parts.

 

The total cost of sales and revenue for the fiscalyear ended December 31, 2004 was $4.7 million, as compared to $4.3 millionfor the fiscal year ended December 31, 2003, an increase of $0.4 million,or 8%. The gross margin for all sales was 40% for the fiscal year ended December 31,2004, as compared to a gross margin of 54% for the fiscal year ended December 31,2003. This decrease in the gross margin for all sales is attributable to anapproximate gross margin of 55% achieved on the i2000 implanter sale,recognized in the fiscal year ended December 31, 2003 as compared to theapproximate gross margin of 50% for the i2000 implanter recognized in thefiscal year ended December 31, 2004 as well as the unabsorbedmanufacturing costs and the increase in inventory reserves.

 

***General and Administrative Expenses***.  General and administrative expenses for thefiscal year ended December 31, 2004 were $2.2 million (28% of totalrevenue) as compared to $2.3 million (25% of total revenue) for the fiscal yearended December 31, 2003, a decrease of $0.1 million, or 5%. This is due todecreased professional services of $0.1 million, decreased premiums on Director’s &Officers liability insurance of $0.1 million and decreased payroll and payrollrelated expenses of $0.1 million which were offset

 

27

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by increased securities compliance costs of $0.1 million, increasedcomputer expenses of $45 thousand, and increased service charges of  $33 thousand for the letter of credit relatedto the sale of the i2000 implanter.

 

***Marketing and Selling Expenses. ***Marketing andselling expenses for the fiscal year ended December 31, 2004 were $1.5million (19% of total revenue) as compared to $1.2 million (13% of totalrevenue) for the fiscal year ended December 31, 2003, an increase of $0.3million, or 23%. The increase in marketing and selling expenses is a result ofincreased subcontractor costs associated with our service group in Japan of$0.2 million and increased salaries of $0.1 million, which were partiallyoffset by a reduction in public relations expense of $43 thousand.

 

***Research and Development Expenses. ***Internallyfunded research and development expenses decreased by $0.1 million, or 1% to$5.3 million (67% of total revenue) for the fiscal year ended December 31,2004 from $5.4 million (57% of total revenue) for the fiscal year ended December 31,2003. This decrease is due to reduced payroll and payroll related expenses of$0.4 million, reduced joint development project costs of $0.4 million, reduceddepreciation expense of $0.5 million, reduced consulting and subcontractorcosts of $0.1 million, reduced project material of $0.4 million and reductionsin other miscellaneous expenses. This was offset by the wafer research anddevelopment costs of $1.9 million that were previously part of the cost ofsales but are now supporting equipment development.

 

***Other Income.***** **Totalother income for the fiscal year ended December 31, 2004 was $0.2 millionas compared to $28 thousand for the fiscal year ended December 31, 2003,an increase of $0.2 million, or 780%. The increase in total other income isattributable to the expiration of a wafer volume option of $0.2 million thatwas associated with an asset obtained by the wafer production group from awafer customer. This volume option was to be used on orders received over aone-year period. Since the time expired, and no orders were received, theCompany reduced it’s liability and recognized the amount in income, as nofurther obligation exists. The increase in other income was reduced by anincrease in miscellaneous expenses. Interest income also increased by $30thousand for the fiscal year ended December 31, 2004 due to interest ratesand increased cash balances. Interest expense decreased by $24 thousand  for the fiscal year ended December 31,2004 due to the decrease in wafer sales that involved a financing arrangemententered into with the customer during the second quarter of 2002.

 

***Discontinued Operations. *** Discontinuedoperations generated sales of $4.0 million and $9.0 million in 2004 and 2003,respectively, and operating losses of $3.2 million and $17.6 millionrespectively. The 2003 operating loss related to discontinued operationsincludes $11.1 million impairment charge related to wafer manufacturinginventory and fixed assets. The loss on disposal in 2004 was $2.1 million andconsisted of $0.9 million in net fixed asset impairments, $1.2 million ininventory impairments, and employee severance pay of $78 thousand.

 

***Fiscal Year Ended December 31, 2003Compared to Fiscal Year Ended December 31, 2002***

 

***Contract and Other Revenue***.  Contract and other revenue for the fiscalyear ended December 31, 2003 was $0.7 million compared to $0.3 million forthe fiscal year ended December 31, 2002, an increase of $0.4 million or133%.  This increase is attributable torevenue recognized from the transfer of wafer technology to a customer pursuantto a license agreement.  Royalty fees onlicensed equipment technology also increased but these were offset by adecrease in government contract work.

 

***Equipment Revenue.***  Equipment revenue increased to $8.8 millionfor the fiscal year ended December 31, 2003 from $6.1 million for thefiscal year ended December 31, 2002, an increase of $2.7 million, or 44%.Equipment revenue in 2003 included approximately $8.0 million from the sale ofan i2000

 

28

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implanter compared to the fiscal year ended December 31, 2002which included approximately $5.0 million from the sale of an Ibis 1000implanter to a customer in China. Field service revenue accounted for $0.3 million,or 3% of equipment revenue for the fiscal year ended December 31, 2003 ascompared to $0.3 million, or 5% of equipment revenue for the fiscal year ended December 31,2002. Sales of spare parts accounted for $0.5 million, or 6% of equipmentrevenue for the fiscal year ended December 31, 2003 as compared to $0.8million, or 13% of equipment revenue for the fiscal year ended December 31,2002. Sales of spare parts fluctuate depending on the number of tools sold andwhen the associated warranty expires.

 

***Total Sales and Revenue.***  Total sales and revenue for the fiscal yearended December 31, 2003 was $9.4 million, an increase of $3.0 million, or48%, from $6.4 million for the fiscal year ended December 31, 2002.

 

***Total Cost of Sales and Revenue.***  Cost of contract and other revenue for thefiscal year ended December 31, 2003 was $45 thousand, as compared to $0.1million for the fiscal year ended December 31, 2002, a decrease of $71thousand, or 61%, due to a decrease in work performed on government contracts.

 

 Cost of equipment revenue forthe fiscal year ended December 31, 2003 was $4.3 million, as compared to$3.9 million for the fiscal year ended December 31, 2002, an increase of$0.4 million, or 12%. This increase is due to higher costs recognized on thesale of the i2000 implanter this year compared to the Ibis 1000 in the prioryear. In addition, although variable overhead expenses decreased due to costsavings initiatives, we experienced an under absorption of overhead due to lackof implanter demand.

 

 The total cost of sales andrevenue for the fiscal year ended December 31, 2003 was $ 4.4 million ascompared to $4.0 million for the fiscal year ended December 31, 2002, anincrease of $0.4 million, or 10%. The gross margin for all sales was 54% forthe fiscal year ended December 31, 2003 as compared to 38% for the fiscalyear ended December 31, 2002. This improvement in the gross margin for allsales is attributable to a 55% gross margin achieved on the i2000 implantersale.

 

***General and Administrative Expenses***.  General and administrative expenses for thefiscal year ended December 31, 2003 were $2.3 million (25% of totalrevenue) as compared to $2.2 million (34% of total revenue) for the fiscal yearended December 31, 2002, an increase of $0.1 million, or 8%. This isprimarily a result of increased professional services and premiums on Director’s &Officers liability insurance which were offset by decreased payroll and payrollrelated expenses due to cost savings initiatives.

 

***Marketing and Selling Expenses. ***Marketing andselling expenses for the fiscal year ended December 31, 2003 were $1.2 million(13% of total revenue) as compared to $1.5 million (24% of total revenue) forthe fiscal year ended December 31, 2002, a decrease of $0.3 million, or18%. The decrease in marketing and selling expenses is primarily a result ofdecreases in payroll and payroll related expenses, travel and promotionalexpenses due to cost savings initiatives.

 

***Research and Development Expenses. ***Internallyfunded research and development expenses decreased by $0.9 million, or 14%, to$5.4 million (57% of total revenue) for the fiscal year ended December 31,2003 from $6.3 million (98% of total revenue) for the fiscal year ended December 31,2002. This is primarily a result of decreased payroll, payroll related costsand consulting expenses due to cost savings initiatives.

 

29

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***Other Income.* **Total other income for the fiscal yearended December 31, 2003 was $28 thousand as compared to $0.3 million forthe fiscal year ended December 31, 2002, a decrease of $0.3 million, or 89%.The decrease in total other income is primarily attributable to decreasedinterest income earned as a result of lower cash balances and a reduction ininterest rates along with increased interest expense due to a financingarrangement entered into during the second quarter of 2003.

 

***DiscontinuedOperations. ***Discontinued operations incurred a loss of $17.6 million for the yearended December 31, 2003. The negative margin of $6.5 million for the yearended December 31, 2003 along with the impairment charge of $11.1 millionresulted in the total discontinued operations loss shown of $17.6 million. Thisis in comparison to the discontinued operations loss of $6.8 million for theyear ended December 31,2002 which was the result of the negative marginfor this period.

 

***Taxes.****   *Ibis had federal net operating loss andgeneral business credit carryovers of approximately $82.6 million and $1.3million, respectively, at December 31, 2004, that may be used to offsetfuture taxable income, if any, through 2024. State net operating loss andcredit carryovers of $63.9 million and $1.5 million, respectively, have varyingexpiration dates. Deferred tax assets and related valuation allowance of $3.2million related to the net operating loss carryover results from the exerciseof employee stock options, the tax benefit of which, when recognized, will beaccounted for as a credit to additional paid-in capital rather than a reductionof income tax expense. Net operating loss carryovers and other tax attributesmay be limited in the event of certain changes in ownership interests.

 

#### **Liquidity and Capital Resources**

#### ** **

As of December 31, 2004, Ibis had cash and cashequivalents of $7.7 million, including the full payment of $7.0 million for thei2000 SIMOX implanter which was recognized as revenue in the third quarter of2004 based on the final acceptance by the customer.

 

Based on the Company’s final disposal plans relativeto the closure of the wafer operation, the Company was required to take cashrelated charges of approximately $0.1 million. The Company will maintain awafer research and development effort focused on continuous improvement of theequipment capabilities and for supporting the Company’s equipment customers’needs at what is expected to be at a significantly reduced cost to the businessgoing forward. As a result, the Company expects to reduce its monthly cash burnrate and believes it has sufficient cash for operations through the foreseeablefuture or at least the next twelve months.

 

During the fiscalyear ended December 31, 2004, Ibis used $3.3 million of cash for operatingactivities of continuing operations as compared to $6.2 million in 2003. Todate, Ibis’ working capital requirements have been funded primarily throughdebt (capital leases) and equity financings. The principal uses of cash duringthe fiscal year ended December 31, 2004 were to fund operations andadditions to property and equipment which totaled $0.7 million. At December 31,2004, Ibis had commitments to purchase approximately $0.4 million in materialto be used for the i2000 implanter currently under construction and operatingexpenses.

 

As part of our cash management plan we initiatedadditional cost savings measures during 2003 and 2004. This included the layoffof twenty-nine employees. In the third quarter of 2004 the Company announcedthat it was discontinuing the wafer manufacturing portion of the business. Thisresulted in the layoff of an additional seventeen employees. Our headcount forthe year ended December 31, 2004 was 59 employees.

 

30

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In June of 2003, Ibis entered into an agreementwith a financing agent to obtain payment for products from it’s largestcustomer on an expedited basis. The discounted rate associated with thisagreement was based on the prime rate and may fluctuate.

 

 In September 2001,Ibis entered into a $4.5 million equipment lease line with Heller Financial’sCommercial Equipment Finance Group. The lease line was used to finance thepurchase of process equipment for wafer production, primarily 300 mm wafers.This line was fully drawn down in two sale-leaseback transactions, bearinginterest at approximately 8% with a term of three years, and a monthly netpayment of approximately $0.1 million. Ibis had a fair market value purchaseoption at the end of the lease term. The lease-line ended in the third quarterof 2004 and the Company exercised the fair market value purchase option at thenegotiated buyout price of $0.9 million. The Company intends to use themajority of the equipment to support its ongoing process development effortsand anticipates that it will be able to sell a portion of the equipmentpurchased for approximately $0.5 million.

 

Our existingcash resources are believed to be sufficient to support our current operatingplan for the next twelve months with the receipt of our latest order in January 2005,which we plan to ship during the second quarter of 2005. This expectationhowever, is based on our current operating plan and general sales outlook, eachof which may change rapidly. We intend to continue to invest in our 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 anadditional order from SUMCO for an i2000 implanter and the opportunity to workwith leading 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. Although noassurances can be given, the Company expects to ship the system in the secondquarter of 2005 and collect 80% of the purchase price of the system, or $4.8million. Revenue recognition and receipt of the final 20% of the purchase pricewill be based on final customer acceptance at the customer’s facility, which isexpected to occur in the third or fourth quarter of this year. The timing offinal acceptance and revenue recognition may vary depending on a number offactors, which include among other things tool performance at the customersite, and no guarantees can be given with respect to whether or when theCompany will recognize revenue on this transaction. The timing of future ordersis important and difficult to predict because customers can delay orders and/orrequest early shipment, either of which could cause the need for additionalcash requirements. Forecasting future revenue, on a quarter-by-quarter basis,remains exceedingly difficult and significant variations quarter to quarter,are likely. We expect to continue to explore equity offerings and other formsof financing and anticipate that we may be required to raise additional capitalin the future in order to finance future growth and our research anddevelopment programs. There can be no assurance, however, that our actual needswill not exceed expectations or that we will be able to fund our operations ona long-term basis in the absence of other sources. There also can be noassurance that any additional required longer term financing will be availablethrough additional bank borrowings, debt or equity offerings or otherwise, orthat if such financing is available, that it will be available on termsacceptable to us.

 

**Off-BalanceSheet Arrangements**

 

We do not have any off-balance sheet arrangements asdefined in Regulation S-K Section 303(a)(4)(ii).

 

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**Contractual Obligations**

 

We have no significant contractual obligations not fully recorded onour Balance Sheets or fully disclosed in the Notes to our Financial Statements.  We have no off-balance sheet arrangements asdefined in Regulation S-K Section 303(a)(4)(ii).

 

At December 31, 2004, our outstanding contractual obligationsincluded:

 
| ** **                          | ** ** | **Payment due by period** | ** ** |
|-------------------------------------|------------|---------------------------|------------|
| ** **                          | ** ** | **Total**                 | ** ** | **Less than  1 year** | ** ** | **1  year** | ** ** | **2  years** | ** ** | **3-5  years** | ** ** | **More  than  5 years** | ** ** |
| **Contractual Obligations**         | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Minimum Operating Lease Payments    |       | $                         | 915,043    |   | $ | 548,493 |   | $ | 362,978 |   | $ | 3,572 |   | $ | — |   | $ | — |   |
| Minimum Royalty Payment Obligations |       | 15,000                    |       | 5,000 |   | 10,000 |   | — |   | — |   | — |   |
| Total                               |       | $                         | 930,043    |   | $ | 553,493 |   | $ | 372,978 |   | $ | 3,572 |   | $ | — |   | $ | — |   |

 

Additional information regarding our financial commitments at December 31,2004 is provided in the Notes to our Financial Statements. See “Notes toFinancial Statements, Note 8, Commitments and Contingencies”.

 

**Effects Of Inflation**

 

Ibis believes that over the past three years inflationhas not had a significant impact on our sales or operating results.

 

**New Accounting Pronouncements**

 

InDecember 2004, the FASB issued FASB Statement No. 123 (revised 2004),*“Shared-Based Payment.”* Statement123(R) addresses the accounting for share-based payment transactions in whichan enterprise receives employee services in exchange for (a) equityinstruments of the enterprise or (b) liabilities that are based on thefair value of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. Statement 123(R) requires an entity torecognize the grant-date fair-value of stock options and other equity-basedcompensation issued to employees in the income statement. The revised Statementgenerally requires that an entity account for those transactions using thefair-value-based method, and eliminates the intrinsic value method ofaccounting in APB Opinion No. 25, *“Accountingfor Stock Issued to Employees”,* which was permitted under Statement123, 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.

 

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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 June 15, 2005 (i.e.,third quarter 2005 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 Companyhas not yet completed the evaluation of the impact of adopting of thispronouncement which must be adopted in the third quarter of our fiscal year2005.

 

InNovember 2004, the FASB issued Statement No. 151, *“Inventory Costs”*, to amend the guidancein Chapter 4, *“Inventory Pricing”*,of FASB Accounting Research Bulletin No. 43, *“Restatement and Revision of Accounting Research Bulletins.”*StatementNo. 151 clarifies the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage). The Statementrequires that those items be recognized as current-period charges.Additionally, Statement 151 requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. Statement No. 151 is effective for fiscal yearsbeginning after June 15, 2005. The Company is currently evaluating theimpact of the adoption of this Statement.

 

As part of its short-term international convergenceproject with the IASB, on December 16, 2004, the FASB issued Statement 153to address the accounting for nonmonetary exchanges of productive assets.Statement 153 amends APB No. 29, *“Accountingfor Nonmonetary Exchanges”*, which established a narrow exception fornonmonetary exchanges of similar productive assets from fair value measurement.This Statement eliminates that exception and replaces it with an exception forexchanges that do not have commercial substance. Under Statement 153nonmonetary exchanges are required to be accounted for at fair value,recognizing any gains or losses, if their fair value is determinable withinreasonable limits and the transaction has commercial substance.

 

The Statement specifies that a nonmonetary exchangehas commercial substance if future cash flows of the entity are expected tochange significantly as a result of the exchange. An entity should apply theprovisions of Statement 153 prospectively for nonmonetary asset exchange transactionsin fiscal periods beginning after June 15, 2005. The Company will adoptthis Statement in fiscal 2005 and adoption is not expected to have a materialimpact on our financial position or results of operations.

 

# **Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

# ** **

The exposure of market risk associated withrisk-sensitive instruments is not material to Ibis, as we do not transact oursales denominated in other than United States dollars, invest primarily inshort-term commercial paper, hold our investments until maturity and have notentered into hedging transactions.

 

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**FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**IBISTECHNOLOGY CORPORATION**

 

**Item 8.  Index to FinancialStatements and Financial Statement Schedule**

 
| Financial Statements:                                                                                                | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                 |       |
|  Report of Independent Registered Public  Accounting Firm                                                       |       |
|  Balance Sheets as of December 31, 2003  and 2004                                                          |       |
|  Statements of Operations for the Years Ended  December 31, 2002, 2003 and 2004                            |       |
|  Statements of Stockholders’ Equity for the  Years Ended December 31, 2002, 2003 and 2004             |       |
|  Statements of Cash Flows for the Years Ended  December 31, 2002, 2003 and 2004                            |       |
|  Notes to Financial Statements                                                                                  |       |
|                                                                                                                 |       |
| Schedule:                                                                                                            |       |
| Report of Independent Registered Public  Accounting Firm on Financial Statement Schedule.                            |       |
| Schedule II – Valuation and Qualifying  Accounts for the Years Ended December 31, 2002, 2003 and 2004 |       |

 

34

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

The Board of Directors and Stockholders

Ibis Technology Corporation:

 

We have audited the accompanying balance sheets of Ibis TechnologyCorporation as of December 31, 2003 and 2004, and the related statementsof operations, stockholders’ equity and cash flows for each of the years in thethree-year period ended December 31, 2004. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Ibis TechnologyCorporation at December 31, 2003 and 2004, and the results of itsoperations and its cash flows for each of the years in the three-year periodended December 31, 2004, in conformity with U.S. generally acceptedaccounting principles.

 

 
|   | /s/ KPMG LLP |   |
|--------|--------------|--------|

 

 

Boston, Massachusetts

March 30, 2005

 

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**IBIS TECHNOLOGY CORPORATION**

 

**BALANCE SHEETS**

 

**December 31, 2003 and 2004**

 
| ** **                                                                                                                                            | ** ** | **2003**    | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Assets**                                                                                                                                            |       |        |       |        |       |
| **Current assets:**                                                                                                                                   |       |        |       |        |       |
| Cash and cash equivalents                                                                                                                             |       | $           | 14,174,716 |        | $          | 7,726,072 |   |
| Accounts receivable, trade, net (notes 4  and 15)                                                                                                     |       | 123,548     |       | 34,458      |       |
| Unbilled revenue                                                                                                                                      |       | 528,581     |       | —      |       |
| Inventories, net (note 5).                                                                                                                            |       | 1,758,449   |       | 5,625,167   |       |
| Prepaid expenses and other current assets                                                                                                             |       | 247,602     |       | 760,721     |       |
| Assets held for sale                                                                                                                                  |       | —      |       | 131,416     |       |
| Total current assets                                                                                                                                  |       | 16,832,896  |       | 14,277,834  |       |
| Property and equipment (notes 6, 8 and 17)                                                                                                            |       | 40,584,764  |       | 33,660,086  |       |
| Less: Accumulated depreciation and  amortization                                                                                                      |       | (23,743,179 | )          | (27,335,477 | )          |
| Net property and equipment                                                                                                                            |       | 16,841,585  |       | 6,324,609   |       |
| Patents and other assets, net (note 7)                                                                                                                |       | 1,668,558   |       | 1,680,197   |       |
| Total assets                                                                                                                                          |       | $           | 35,343,039 |        | $          | 22,282,640 |   |
|                                                                                                                                                  |       |        |       |        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                         |       |        |       |        |       |
| **Current liabilities:**                                                                                                                              |       |        |       |        |       |
| Capital lease obligation, current (note 8)                                                                                                            |       | $           | 1,184,399  |        | $          | — |   |
| Accounts payable                                                                                                                                      |       | 404,512     |       | 392,875     |       |
| Accrued liabilities (note 9)                                                                                                                          |       | 2,384,915   |       | 1,417,904   |       |
| Deferred revenue (note 10)                                                                                                                            |       | 252,000     |       | 52,000      |       |
| Total current liabilities                                                                                                                             |       | 4,225,826   |       | 1,862,779   |       |
| Total liabilities                                                                                                                                     |       | 4,225,826   |       | 1,862,779   |       |
|                                                                                                                                                  |       |        |       |        |       |
| **Commitments and contingencies (notes 8, 10  and 15)**                                                                                               |       |        |       |        |       |
|                                                                                                                                                  |       |        |       |        |       |
| **Stockholders’ equity (notes 13 and 14):**                                                                                                      |       |        |       |        |       |
| Undesignated preferred stock, $.01 par  value. Authorized 2,000,000 shares; none issued                                                               |       | —      |       | —      |       |
| Common stock, $.008 par value. Authorized  50,000,000 shares; issued and outstanding 10,651,170 shares and 10,719,595 in  2003 and 2004, respectively |       | 85,209      |       | 85,757      |       |
| Additional paid-in capital                                                                                                                            |       | 92,903,618  |       | 93,124,259  |       |
| Accumulated deficit                                                                                                                                   |       | (61,871,614 | )          | (72,790,155 | )          |
| Total stockholders’ equity                                                                                                                       |       | 31,117,213  |       | 20,419,861  |       |
| Total liabilities and stockholders’ equity                                                                                                       |       | $           | 35,343,039 |        | $          | 22,282,640 |   |

 

See accompanying notes to financialstatements.

 

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# **IBISTECHNOLOGY CORPORATION**

# ** **

**STATEMENTS OF OPERATIONS**

 

# **Years ended December 31,2002, 2003 and 2004**

 
| ** **                                 | ** ** | **2002**   | ** **  | **2003**    | ** ** | **2004**    | ** ** |
|--------------------------------------------|------------|------------|-------------|-------------|------------|-------------|------------|
|                                       |       |       |        |        |       |        |       |
| Contract and other revenue (note 11)       |       | $          | 282,979     |        | $          | 660,429     |       | $ | 390,975 |   |
| Equipment revenue                          |       | 6,102,748  |        | 8,781,907   |       | 7,535,270   |       |
| Total sales and revenue (note 15)          |       | 6,385,727  |        | 9,442,336   |       | 7,926,245   |       |
|                                       |       |       |        |        |       |        |       |
| Cost of contract and other revenue         |       | 115,141    |        | 44,579      |       | 15,370      |       |
| Cost of equipment revenue                  |       | 3,868,197  |        | 4,331,044   |       | 4,721,673   |       |
| Total cost of sales and revenue            |       | 3,983,338  |        | 4,375,623   |       | 4,737,043   |       |
|                                       |       |       |        |        |       |        |       |
| Gross profit                               |       | 2,402,389  |        | 5,066,713   |       | 3,189,202   |       |
|                                       |       |       |        |        |       |        |       |
| Operating expenses:                        |       |       |        |        |       |        |       |
| General and administrative                 |       | 2,174,198  |        | 2,337,463   |       | 2,221,167   |       |
| Marketing and selling                      |       | 1,509,792  |        | 1,235,798   |       | 1,520,508   |       |
| Research and development                   |       | 6,257,839  |        | 5,380,868   |       | 5,329,528   |       |
| Total operating expenses                   |       | 9,941,829  |        | 8,954,129   |       | 9,071,203   |       |
|                                       |       |       |        |        |       |        |       |
| Loss from operations                       |       | (7,539,440 | )           | (3,887,416  | )          | (5,882,001  | )          |
|                                       |       |       |        |        |       |        |       |
| Other income (expense):                    |       |       |        |        |       |        |       |
| Interest income                            |       | 266,370    |        | 80,511      |       | 110,385     |       |
| Interest expense                           |       | (11,379    | )           | (58,399     | )          | (34,718     | )          |
| Other (note 16)                            |       | —     |        | 5,398       |       | 166,418     |       |
| Total other income                         |       | 254,991    |        | 27,510      |       | 242,085     |       |
|                                       |       |       |        |        |       |        |       |
| Loss before income taxes                   |       | (7,284,449 | )           | (3,859,906  | )          | (5,639,916  | )          |
|                                       |       |       |        |        |       |        |       |
| Income tax expense (benefit) (note 12)     |       | 1,256      |        | (7,744      | )          | 1,256       |       |
| Loss from continuing operations            |       | (7,285,705 | )           | (3,852,162  | )          | (5,641,172  | )          |
|                                       |       |       |        |        |       |        |       |
| Discontinued operations (note 17):         |       |       |        |        |       |        |       |
| Gain (loss) from discontinued operations   |       | (6,810,474 | )           | (17,597,627 | )          | (3,178,529  | )          |
| Loss on disposal                           |       | —     |        | —      |       | (2,098,840  | )          |
| Income (loss) from discontinued operations |       | (6,810,474 | )           | (17,597,627 | )          | (5,277,369  | )          |
|                                       |       |       |        |        |       |        |       |
| Net loss                                   |       | $          | (14,096,179 | )           | $          | (21,449,789 | )          | $ | (10,918,541 | ) |
|                                       |       |       |        |        |       |        |       |
| Earnings (loss) per share:                 |       |       |        |        |       |        |       |
| Basic                                      |       |       |        |        |       |        |       |
| Continuing operations                      |       | $          | (0.79       | )           | $          | (0.40       | )          | $ | (0.53 | ) |
| Discontinued operations                    |       | (0.74      | )           | (1.81       | )          | (0.49       | )          |
| Net loss                                   |       | $          | (1.53       | )           | $          | (2.21       | )          | $ | (1.02 | ) |
|                                       |       |       |        |        |       |        |       |
| Diluted                                    |       |       |        |        |       |        |       |
| Continuing operations                      |       | $          | (0.79       | )           | $          | (0.40       | )          | $ | (0.53 | ) |
| Discontinued operations                    |       | (0.74      | )           | (1.81       | )          | (0.49       | )          |
| Net Loss                                   |       | $          | (1.53       | )           | $          | (2.21       | )          | $ | (1.02 | ) |
|                                       |       |       |        |        |       |        |       |
| Weighted average common shares outstanding |       |       |        |        |       |        |       |
| Basic                                      |       | 9,207,922  |        | 9,727,513   |       | 10,665,842  |       |
| Diluted                                    |       | 9,207,922  |        | 9,727,513   |       | 10,665,842  |       |

 

See accompanying notes to financialstatements.

 

37

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**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTS OF STOCKHOLDERS’ EQUITY**

 

**Years ended December 31, 2002, 2003 and2004**

 
| ** **                                              | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total  Stockholders’  Equity** | ** **  |
|---------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|---------------------------------------|-------------|
|                                                    |       |              |       |                             |       |                     |       |                                  |        |
| **Balances at December 31, 2001**                  |       | $                 | 67,297     |                             | $          | 66,618,223               |       | $                                     | (26,325,646 | ) | $ | 40,359,874 |   |
|                                                    |       |              |       |                             |       |                     |       |                                  |        |
| Exercise of stock options                               |       | 1                 |       | 1                                |       | —                   |       | 2                                     |        |
| Common stock issued, net of issuance costs              |       | 8,000             |       | 12,105,469                       |       | —                   |       | 12,113,469                            |        |
| Employee Stock Purchase Plan                            |       | 501               |       | 377,339                          |       | —                   |       | 377,840                               |        |
| Net loss                                                |       | —            |       | —                           |       | (14,096,179              | )          | (14,096,179                           | )           |
|                                                    |       |              |       |                             |       |                     |       |                                  |        |
| **Balances at December 31, 2002**                  |       | 75,799            |       | 79,101,032                       |       | (40,421,825              | )          | 38,755,006                            |        |
|                                                    |       |              |       |                             |       |                     |       |                                  |        |
| Exercise of stock options                               |       | 989               |       | 986,814                          |       | —                   |       | 987,803                               |        |
| Common stock issued, net of issuance costs  of $696,571 |       | 8,000             |       | 12,545,429                       |       | —                   |       | 12,553,429                            |        |
| Employee Stock Purchase Plan                            |       | 421               |       | 270,343                          |       | —                   |       | 270,764                               |        |
| Net loss                                                |       | —            |       | —                           |       | (21,449,789              | )          | (21,449,789                           | )           |
|                                                    |       |              |       |                             |       |                     |       |                                  |        |
| **Balances at December 31, 2003**                  |       | 85,209            |       | 92,903,618                       |       | (61,871,614              | )          | 31,117,213                            |        |
| ** **                                              |       |              |       |                             |       |                     |       |                                  |        |
| Exercise of stock options                               |       | 4                 |       | 3,056                            |       | —                   |       | 3,060                                 |        |
| Employee Stock Purchase Plan                            |       | 544               |       | 217,585                          |       | —                   |       | 218,129                               |        |
| Net loss                                                |       | —            |       | —                           |       | (10,918,541              | )          | (10,918,541                           | )           |
|                                                    |       |              |       |                             |       |                     |       |                                  |        |
| **Balances at December 31, 2004**                  |       | $                 | 85,757     |                             | $          | 93,124,259               |       | $                                     | (72,790,155 | ) | $ | 20,419,861 |   |

 

See accompanying notes to financialstatements

 

38

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**IBIS TECHNOLOGY CORPORATION**

 

**STATEMENTS OF CASH FLOWS**

 

# **Years ended December 31,2002, 2003 and 2004**

 
| ** **                                                                             | ** ** | **2002**    | ** **  | **2003**    | ** ** | **2004**    | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
| **Cash flows from operating activities:**                                              |       |        |        |        |       |        |       |
| Net loss                                                                               |       | $           | (14,096,179 | )           | $          | (21,449,789 | )          | $ | (10,918,541 | ) |
| Less: loss from discontinued operations                                                |       | (6,810,474  | )           | (17,597,627 | )          | (5,277,369  | )          |
| Loss from continuing operations                                                        |       | (7,285,705  | )           | (3,852,162  | )          | (5,641,172  | )          |
| Adjustments to reconcile net loss to net cash  used in operating activities:           |       |        |        |        |       |        |       |
| Depreciation and amortization                                                          |       | 1,624,341   |        | 1,510,460   |       | 1,962,716   |       |
| Changes in operating assets and  liabilities:                                          |       |        |        |        |       |        |       |
| Accounts receivable, trade                                                             |       | 4,275,075   |        | 494,043     |       | 74,555      |       |
| Unbilled revenue                                                                       |       | —      |        | (528,581    | )          | 528,581     |       |
| Inventories                                                                            |       | —      |        | —      |       | 141,404     |       |
| Deferred costs                                                                         |       | (147,316    | )           | 2,621,580   |       | —      |       |
| Prepaid expenses and other current assets                                              |       | 97,801      |        | (134,873    | )          | 24,385      |       |
| Accounts payable                                                                       |       | (189,311    | )           | (133,468    | )          | 184,893     |       |
| Accrued liabilities and deferred revenue                                               |       | 21,492      |        | (6,150,171  | )          | (613,114    | )          |
| Net cash used in operating activities of  continuing operations                        |       | (1,603,623  | )           | (6,173,172  | )          | (3,337,752  | )          |
| **Cash flows from investing activities:**                                              |       |        |        |        |       |        |       |
| Additions to property and equipment, net                                               |       | (279,339    | )           | (30,133     | )          | (721,002    | )          |
| Additions to assets held for sale                                                      |       | —      |        | —      |       | (131,416    | )          |
| Other assets                                                                           |       | (117,781    | )           | (110,774    | )          | (102,815    | )          |
| Net cash used in investing activities of  continuing operations                        |       | (397,120    | )           | (140,907    | )          | (955,233    | )          |
| **Cash flows from financing activities:**                                              |       |        |        |        |       |        |       |
| Proceeds from sales of common stock, net of  issuance costs                            |       | 12,113,469  |        | 12,553,429  |       | —      |       |
| Exercise of stock options, warrants and  Employee Stock Purchase Plan                  |       | 377,840     |        | 1,258,567   |       | 221,189     |       |
| Net cash provided by financing activities. of  continuing operations                   |       | 12,491,309  |        | 13,811,996  |       | 221,189     |       |
| Net cash used for discontinued operations                                              |       | (11,832,447 | )           | (5,069,119  | )          | (2,376,848  | )          |
| Net decrease (increase) in cash and cash  equivalents                                  |       | (1,341,881  | )           | 2,428,798   |       | (6,448,644  | )          |
| Cash and cash equivalents, beginning of  year                                          |       | 13,087,799  |        | 11,745,918  |       | 14,174,716  |       |
| Cash and cash equivalents, end of year                                                 |       | $           | 11,745,918  |        | $          | 14,174,716  |       | $ | 7,726,072 |   |
|                                                                                   |       |        |        |        |       |        |       |
| Supplemental disclosures of cash flow  information:                                    |       |        |        |        |       |        |       |
| Cash paid during the year for interest                                                 |       | $           | 11,379      |        | $          | 58,399      |       | $ | 34,718 |   |
| Transfer of internally constructed  equipment from property and equipment to inventory |       | —      |        | —      |       | 3,674,903   |       |

 

See accompanying notes to financialstatements.

 

39

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**IBIS TECHNOLOGY CORPORATION**

 

**NOTES TO FINANCIAL STATEMENTS**

 

# **December 31,2003 and 2004**

# ** **

**(1) Nature of Business and Organization**

 

Ibis Technology Corporation (the “Company”) was incorporated in October 1987for the purpose of supplying silicon-on-insulator (SOI) wafers formed by SIMOX(Separation by Implantation of Oxygen) technology. SIMOX-SOI wafers aremanufactured by the Company using a specialized oxygen ion implanter, which wasdeveloped and manufactured by the Company and is integrated with other specializedprocesses and characterization equipment. The Company is the leadingmanufacturer of high current oxygen implanters and began selling these oxygenimplanters in 1996.

 

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

 

**(a) *Cash and Cash Equivalents***

 

Cash equivalents represent highly liquid investments with originalmaturities of three months or less.

 

**(b) *Inventories***

 

Inventories are stated at the lower of cost or market. Cost isdetermined using the first-in, first-out (“FIFO”) cost method.

 

**(c) *Property and Equipment andImpairment of Long-Lived Assets***

 

Property and equipment is stated at cost. Depreciation is providedusing the straight-line method over the estimated useful lives of therespective assets, ranging from three to eight years. Amortization is providedusing the straight-line method over the life of the lease, ranging from threeand one-half to five years.

 

The Company reviews its long-lived assets for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to future netundiscounted cash flows expected to be generated by the asset. If such assetsare considered to be impaired, the impairment to be recognized is measured bythe degree to which the carrying amount of the assets exceeds the fair value ofthe assets.

 

**(d) *Patents and Other Assets***

 

Other assets consist principally of deposits, prepaid royalties andlicenses. Patents and prepaid royalties are amortized over five years using thestraight-line method.  Licenses areamortized over seven years using the straight-line method.

 

**(e) *Revenue Recognition***

 

The Company historically recognized revenue from wafer product sales,equipment sales and the sales of spare parts when all of the following criteriahave been met: (1) evidence exists that the customer is bound to thetransaction; (2) the product has been delivered to the customer and, whenapplicable, the product has been installed and accepted by the customer; (3) thesales price to the customer has been fixed or is determinable; and (4) collectibilityof the sale price is reasonably assured. The Company historically recognizedrevenue from wafer sales upon shipment and recognizes revenue from implantersales upon acceptance at the customer’s site. Provisions for estimated salesreturns and allowances are made at the time the products are sold. Revenuederived from contracts and services is recognized upon performance.

 

40

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Contract revenue is recognized on thepercentage-of-completion method. Provisions for anticipated losses are made inthe period in which such losses become determinable. Unbilled revenue under customercontracts represents revenue earned under the percentage-of-completion methodbut not yet billable under the terms of the contract. These amounts arebillable based on the terms of the contract, which can include shipment of theproduct, achievement of milestones or completion of the contract.

 

**(f) *Research and Development***

 

Research and development costs are charged to expense as incurred.Research and development costs funded by contracts are included as a componentof cost of contract revenue.

 

**(g) *Net Income (Loss) PerCommon Share***

 

Net income (loss) per share of common stock iscomputed based upon the weighted average number of shares outstanding duringeach period and including the dilutive effect, if any, of stock options andwarrants. SFAS 128 requires the presentation of basic and diluted earnings(loss) per share for all periods presented. As the Company was in a net lossposition for each of the years in the three-years ended December 31, 2004,common stock equivalents of 39,644, 94,706 and 133,092 for the years ended December 31,2002, 2003 and 2004, respectively, were excluded from the diluted loss pershare calculation as they would be antidilutive. As a result, diluted loss pershare is the same as basic loss per share for 2002, 2003 and 2004.

 

The reconciliation of the denominators of the basicand diluted net income (loss) per common share for the Company’s net income(loss) is as follows:

 
| ** **                                                      | ** ** | **Years Ended December 31,** | ** **  |
|-----------------------------------------------------------------|------------|------------------------------|-------------|
| ** **                                                      | ** ** | **2002**                     | ** **  | **2003** | ** ** | **2004** | ** ** |
| ** **                                                      | ** ** | **Diluted**                  | ** **  | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** |
| Loss from:                                                      | ** ** | ** **                   | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Continuing operations                                           |       | $                            | (7,285,705  | ) | $ | (7,285,705 | ) | $ | (3,852,162 | ) | $ | (3,852,162 | ) | $ | (5,641,172 | ) | $ | (5,641,172 | ) |
| Discontinued operations                                         |       | (6,810,474                   | )           | (6,810,474 | ) | (17,597,627 | ) | (17,597,627 | ) | (5,277,369 | ) | (5,277,369 | ) |
| Net Loss                                                        |       | $                            | (14,096,179 | ) | $ | (14,096,179 | ) | $ | (21,449,789 | ) | $ | (21,449,789 | ) | $ | (10,918,541 | ) | $ | (10,918,541 | ) |
| Weighted average common shares outstanding-                     |       | 9,207,922                    |        | 9,207,922 |   | 9,727,513 |   | 9,727,513 |   | 10,665,842 |   | 10,665,842 |   |
|                                                            |       |                         |        |   |   |   |   |   |   |   |   |   |   |
| Potential common share equivalents.                             |       | —                       |        |   |   | — |   |   |   | — |   |   |   |
| Weighted average shares outstanding                             |       | 9,207,922                    |        |   |   | 9,727,513 |   |   |   | 10,665,842 |   |   |   |
|                                                            |       |                         |        |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss) per common share and common  share equivalents: |       |                         |        |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                           |       | $                            | (0.79       | ) | $ | (0.79 | ) | $ | (0.40 | ) | $ | (0.40 | ) | $ | (0.53 | ) | $ | (0.53 | ) |
| Discontinued operations                                         |       | (0.74                        | )           | (0.74 | ) | (1.81 | ) | (1.81 | ) | (0.49 | ) | (0.49 | ) |
| Net loss                                                        |       | $                            | (1.53       | ) | $ | (1.53 | ) | $ | (2.21 | ) | $ | (2.21 | ) | $ | (1.02 | ) | $ | (1.02 | ) |

 

**h) *Issuance Costs***

 

Common stock issuance costs are netted against additional paid-incapital.

 

41

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**(i) *Use ofEstimates***

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results may differ from theseestimates. Management exercises judgment and relies on estimates in recognizingrevenue, valuing inventory, accruing certain liabilities, and assessinglong-lived asset impairment, estimated useful lives of long-lived assets,inventory obsolescence and accounts receivable reserves.

 

**(j) *Fair Value of FinancialInstruments***

 

Financial instruments of the Company consist of cash and cashequivalents, accounts receivable, accounts payable, accrued liabilities andcapital lease obligations. The carrying amount of these financial instrumentsapproximates fair value.

 

**(k) *Stock-Based Compensation***

 

The Company accounts for its stock option plans underthe recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations.  No stock-based compensation cost is reflectedin net income for these plans, as all options granted under these plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The following tableillustrates the effect on net income (loss) and earnings (loss) per share ifthe Company had applied the fair value recognition provisions of FASB StatementNo. 123, Accounting for Stock Based Compensation, to stock basedcompensation.

 

| ** **                                                                                                | ** ** | **Year Ended December 31,** | ** **  |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                                                | ** ** | **2002**                         | ** **  | **2003** | ** ** | **2004** | ** ** |
| Net loss, as reported                                                                                     |       | $                                | (14,096,179 | ) | $ | (21,449,789 | ) | $ | (10,918,541 | ) |
| Add: Stock-based employee compensation  expense included in reported net loss, net of related tax effects |       | (2,362,591                       | )           | (2,726,741 | ) | (1,284,491 | ) |
| Pro-forma net loss                                                                                        |       | $                                | (16,458,770 | ) | $ | (24,176,530 | ) | $ | (12,203,032 | ) |
| Net loss per share:                                                                                       |       |                             |        |   |   |   |   |
| Basic – as reported                                                                                  |       | $                                | (1.53       | ) | $ | (2.21 | ) | $ | (1.02 | ) |
| Basic – pro-forma                                                                                    |       | $                                | (1.79       | ) | $ | (2.49 | ) | $ | (1.14 | ) |
| Diluted – as reported                                                                                |       | $                                | (1.53       | ) | $ | (2.21 | ) | $ | (1.02 | ) |
| Diluted – pro-forma                                                                                  |       | $                                | (1.79       | ) | $ | (2.49 | ) | $ | (1.14 | ) |

 

The fair value of each stock option is estimated on the date of grantusing the Black-Scholes option-pricing model with the followingweighted-average assumptions:

 

| ** **                                                      | ** ** | **2002**           | ** ** |
|-----------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                      | ** ** | **Stock  Options** | ** ** | **ESPP1** | ** ** | **ESPP2** | ** ** |
| Risk-free interest rate                                         |       | 2.21               | %          | 1.74 | % | 1.60 | % |
| Expected dividend yield                                         |       | —             |       | — |   | — |   |
| Expected volatility                                             |       | 114.06             | %          | 87.60 | % | 103.3 | % |
| Expected life (years)                                           |       | 3                  |       | .5 |   | .5 |   |
| Weighted average fair value of options granted  during the year |       | $                  | 5.32       |   | $ | 2.80 |   | $ | 2.06 |   |
|                                                                 |            |                    |            |  |  |  |  |  |  |  |

 

| ** **                                                      | ** ** | **2003**           | ** ** |
|-----------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                      | ** ** | **Stock  Options** | ** ** | **ESPP1** | ** ** | **ESPP2** | ** ** |
| Risk-free interest rate                                         |       | 3.10               | %          | 1.19 | % | 1.01 | % |
| Expected dividend yield                                         |       | —             |       | — |   | — |   |
| Expected volatility                                             |       | 97.99              | %          | 103.34 | % | 81.01 | % |
| Expected life (years)                                           |       | 3                  |       | .5 |   | .5 |   |
| Weighted average fair value of options  granted during the year |       | $                  | 4.42       |   | $ | 2.05 |   | $ | 1.83 |   |
|                                                                 |            |                    |            |  |  |  |  |  |  |  |

 

42

----

 

| ** **                                                      | ** ** | **2004**           | ** ** |
|-----------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                      | ** ** | **Stock  Options** | ** ** | **ESPP1** | ** ** | **ESPP2** | ** ** |
| Risk-free interest rate                                         |       | 2.66               | %          | 1.08 | % | 1.90 | % |
| Expected dividend yield                                         |       | —             |       | — |   | — |   |
| Expected volatility                                             |       | 94.83              | %          | 79.10 | % | 116.50 | % |
| Expected life (years)                                           |       | 3                  |       | .5 |   | .5 |   |
| Weighted average fair value of options  granted during the year |       | $                  | 2.97       |   | $ | 2.23 |   | $ | 0.96 |   |
|                                                                 |            |                    |            |  |  |  |  |  |  |  |

 

Pro forma net loss reflects only options granted in 1995 through 2004.Therefore, the full impact of calculating compensation costs for stock optionsunder SFAS No. 123 is not reflected because compensation costs for optionsgranted prior to January 1, 1995 are not considered.

 

**(l) *Reclassifications***

 

Certain prior year amounts have beenreclassified to conform to current year presentation. These reclassificationshad no effect on the Company’s reported net loss or financial position.

 

**(m)  *New Accounting Pronouncements***

 

In December 2004, the FASB issued FASB StatementNo. 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) liabilitiesthat are based on the fair value of the enterprise’s equity instruments or thatmay be 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 permitted under 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 June 15, 2005 (i.e.,third quarter 2005 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 Companyhas not yet evaluated the impact of adoption of this pronouncement which mustbe adopted in the third quarter of our fiscal year 2005.

 

In November 2004, the FASB issued Statement No. 151,*“Inventory Costs”*, to amend theguidance in Chapter 4, *“Inventory Pricing”*,of FASB Accounting Research Bulletin No. 43, *“Restatement and Revision of Accounting Research Bulletins.”*StatementNo. 151 clarifies the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage). The Statementrequires that those items be recognized as current-period charges.Additionally, Statement 151 requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. Statement No. 151 is effective for fiscal yearsbeginning after June 15, 2005. The Company is currently evaluating theimpact of the adoption of this Statement.

 

43

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As part of its short-term international convergenceproject with the IASB, on December 16, 2004, the FASB issued Statement 153to address the accounting for nonmonetary exchanges of productive assets.Statement 153 amends APB No. 29, *“Accountingfor Nonmonetary Exchanges”*, which established a narrow exception fornonmonetary exchanges of similar productive assets from fair value measurement.This Statement eliminates that exception and replaces it with an exception forexchanges that do not have commercial substance. Under Statement 153nonmonetary exchanges are required to be accounted for at fair value,recognizing any gains or losses, if their fair value is determinable withinreasonable limits and the transaction has commercial substance.

 

The Statement specifies that a nonmonetary exchangehas commercial substance if future cash flows of the entity are expected tochange significantly as a result of the exchange. An entity should apply theprovisions of Statement 153 prospectively for nonmonetary asset exchangetransactions in fiscal periods beginning after June 15, 2005. The Companywill adopt this Statement in fiscal 2005 and adoption is not expected to have amaterial impact on our financial position or results of operations.

 

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

#### ** **

Historically, the Company has financed its operationsand met its capital requirements through funds generated from operations, theissuance of common stock, equipment lines of credit, a working capital line ofcredit, a term loan, sales-leaseback arrangements and collaborativearrangements. In July 2004, the Company discontinued its wafermanufacturing business, which was characterized by volatile production volumesand costs associated with periodic changes and continuing improvements in theprocess. Because of this unpredictability, and because it was also likely thatadditional capital investments would have to be made to keep the wafermanufacturing process up to date, the Company decided to discontinue the wafermanufacturing portion of the business in 2004 and to focus exclusively on theequipment manufacturing business.  TheCompany will maintain a research and development effort focused on continuousimprovement of the equipment capabilities and for supporting the Company’sequipment customers’ needs at what is expected to be a significantly reducedcost to the business going forward.

 

As part of our cash management plan we initiatedadditional cost savings measures during 2003 and 2004, including the layoff oftwenty-nine employees. Our headcount for the year ended December 31, 2004was 59 employees.

 

As of December 31,2004, the Company had cash and cash equivalents of $7.7 million, including thepayment of $7.0 million for the i2000 SIMOX implanter which was recognized asrevenue in the third quarter of 2004 based on the final acceptance by thecustomer. During the fiscal year ended December 31, 2004, Ibis used $3.3million of cash for operating activities of continuing operations as comparedto $6.2 million in 2003 The principal uses of cash during the fiscal year endedDecember 31, 2004 were to fund operations and additions to property andequipment which totaled $0.7 million. At December 31, 2004, Ibis hadcommitments to purchase approximately $0.4 million in material to be used forthe i2000 implanter currently under construction and operating expenses.

 

 In September 2001,Ibis entered into a $4.5 million equipment lease line with Heller Financial’sCommercial Equipment Finance Group. The lease line was used to finance thepurchase of process equipment for wafer production, primarily 300 mm wafers.This line was fully drawn down in two sale-leaseback transactions, bearinginterest at approximately 8% with a term of three years, and a monthly netpayment of approximately $0.1 million. Ibis had a fair market value purchaseoption at the end of the lease term. The lease-line ended in the third quarterof 2004 and the Company exercised the fair market value purchase option at thenegotiated buyout price of $0.9 million. The Company intends to use the majorityof the equipment to support its ongoing process development efforts. At December 31,2004 the accompanying balance sheet

 

44

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reflectsapproximately $0.1 million of assets held for sale, which the company anticipatesit will be able to sell in fiscal 2005.

 

TheCompany’s management believes that existing cash resources are sufficient tosupport the current operating plan for the next twelve months with the receiptof the latest i2000 order in January 2005, which the Company plans to shipduring the second quarter of 2005. This expectation however, is based on theCompany’s current operating plan and general sales outlook, each of which maychange rapidly. The Company intends to continue to invest in research, developmentand manufacturing capabilities. Changes in technology or sales growth beyondcurrently established capabilities may require further investment. Moreover,although Ibis is encouraged by the receipt of an additional order from SUMCOfor an i2000 implanter and the opportunity to work with leading wafermanufacturers like SUMCO to develop further both the i2000 implanter and toimprove the SIMOX process, SOI technology is still in an early stage. Furtheradoption of the technology and timing of future equipment orders are dependenton the continuing qualification of implanters and improvement programs at thedevice manufacturers, among other factors. Although no assurances can be given,the Company expects to ship the system in the second quarter of 2005 andcollect 80% of the purchase price of the system, or $4.8 million. Revenuerecognition and receipt of the final 20% of the purchase price will be based onfinal customer acceptance at the customer’s facility, which is expected tooccur in the third or fourth quarter of this year. The timing of finalacceptance and revenue recognition may vary depending on a number of factors,which include among other things tool performance at the customer site, and noguarantees can be given with respect to whether or when the Company willrecognize revenue on this transaction. The timing of future orders is importantand difficult to predict because customers can delay orders and/or requestearly shipment, either of which could cause the need for additional cash requirements.Forecasting future revenue, on a quarter-by-quarter basis, remains exceedinglydifficult and significant variations quarter to quarter, are likely. TheCompany expects to continue to explore equity offerings and other forms offinancing and anticipate that we may be required to raise additional capital inthe future in order to finance future growth and our research and developmentprograms. There can be no assurance, however, that our actual needs will notexceed expectations or that we will be able to fund our operations on along-term basis in the absence of other sources. There also can be no assurancethat any additional required longer term financing will be available throughadditional bank borrowings, debt or equity offerings or otherwise, or that ifsuch financing is available, that it will be available on terms acceptable tous.

 

**(4) Accounts Receivable**

 

Accounts receivable consisted of the following at December 31:

 
| ** **                            | ** ** | **2003** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Accounts receivable, trade            |       | $        | 188,548    |     | $          | 59,458 |   |
| Less: Allowance for doubtful accounts |       | (65,000  | )          | (25,000  | )          |
|                                  |       | $        | 123,548    |     | $          | 34,458 |   |

 

**(5) Inventories**

 

Inventories consisted of the following at December 31:

 
| ** **               | ** ** | **2003** | ** ** | **2004**  | ** ** |
|--------------------------|------------|----------|------------|-----------|------------|
|                     |       |     |       |      |       |
| Raw materials            |       | $        | 1,464,434  |      | $          | — |   |
| Work in process          |       | 177,715  |       | —    |       |
| Finished goods           |       | 116,300  |       | —    |       |
| Subtotal wafer inventory |       | $        | 1,758,449  |      | —     |   |
| Equipment inventory      |       | —   |       | 5,625,167 |       |
| Total inventory          |       | $        | 1,758,449  |      | $          | 5,625,167 |   |

 

45

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Equipment inventory at December 31, 2004 consists of i2000 partsand/or implanters under construction or otherwise available for resale. At December 31,2003 these costs were included in construction in progress under property andequipment and amounted to $3.7 million. With the discontinuance of the waferoperation in the third quarter of 2004, all wafer inventory was written off tothe loss from discontinued operations with the exception of the 300 mm rawwafers valued at $0.8 million, that was reclassified as prepaid expenses andother assets to be used for future R&D and implanter qualifications.

 

**(6) Property and Equipment**

 

Property and equipment consisted of the following at December 31:

 
| ** **               | ** ** | **2003**  | ** ** | **2004**  | ** ** |
|--------------------------|------------|-----------|------------|-----------|------------|
|                     |       |      |       |      |       |
| Machinery and equipment  |       | $         | 30,082,295 |      | $          | 27,662,517 |   |
| Furniture and fixtures   |       | 416,260   |       | 416,260   |       |
| Leasehold improvements   |       | 5,399,063 |       | 5,575,038 |       |
| Construction in progress |       | 4,687,146 |       | 6,271     |       |
|                     |       | $         | 40,584,764 |      | $          | 33,660,086 |   |

 

The Company discontinued its wafer manufacturing business in July 2004(see note 17). As a result the company recorded a net fixed asset impairmentcharge to the loss from discontinued operations of $0.9 million. Fixed assetssubject to capital leases at December 31, 2003 were $4.6 million.Accumulated depreciation for fixed assets subject to capital leases was $3.4million at December 31, 2003.

 

At December 31, 2004, the Company had commitments to purchaseapproximately $0.4 million in material or subassemblies to be used in normaloperations.

 

**(7) Other Assets**

 

In December 2000, the Company entered into a royalty-bearinglicense agreement which gives the Company the right to manufacture SIMOX-SOIwafers using the licensed process. Warrants were issued in connection with thisagreement. The cost of the license agreement, including cash paid and the fairvalue of the warrants issued, is $2.3 million and is included in other assetsat December 31, 2003 and December 31, 2004, net of accumulatedamortization of $1.0 million and $1.3 million, respectively (see note 14 (c)).

 

In the third quarter of 2004, with the discontinuance of the waferoperation, all wafer inventory was written off to the loss from discontinuedoperation with the exception of 300mm raw wafers that were reclassified asprepaid expenses an other assets to be used for future R&D and implanterqualifications. The amount at December 31, 2004 in other assets isapproximately $0.3 million.

 

**(8) Commitments and Contingencies**

 

**(a) *Leases***

 

In December 2003, the Company renewed itsnon-cancelable operating lease for its office and manufacturing facility with anew term expiring in 2006 and a five-year renewal option. In April 2000,the Company entered into a non-cancelable operating lease for an additionalmanufacturing facility expiring in 2005 with a five-year renewal option. Thislease was amended in September 2001 by which Ibis secured an

 

46

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additional 20,000square feet of adjacent space for future expansion. The Company has chosen notto renew this lease, due to expire on May 31, 2005 and will consolidate theoperations into the one location.

 

In September 2001Ibis entered into a $4.5 million equipment lease line. The lease line was usedto finance the purchase of process equipment for wafer production of primarily300mm wafers in a sale-leaseback transaction bearing interest at approximately8% with a term of three years and a monthly net payment of approximately $0.1million. Ibis had a fair market value purchase option at the end of the leaseterm. The lease-line was secured by the underlying assets and all otherproperty and equipment of Ibis. The gain of approximately $36 thousand underthe sale and leaseback has been deferred and will be amortized as a reductionof depreciation expense over the life of the lease. The unamortized amount ofthis gain at December 31, 2003 and 2004 was $9,110 and $0 respectively.The Company leased other equipment used in operations under non-cancelableoperating leases expiring through 2007. The Company also had equipment used inoperations under non-cancelable capital leases which expired in 2004. TheCompany exercised the fair market value purchase option of those leases at theend of the lease term in 2004 with a buyout price of $900,000.

 

The Company has no significant contractual obligations not fullyrecorded on its Balance Sheets or fully disclosed in the Notes to its FinancialStatements. The Company has no off-balance sheet arrangements.

 

At December 31, 2004, the Company’s contractual obligationsincluded:

 
| ** **                          | ** ** | **Payment due by period** | ** ** |
|-------------------------------------|------------|---------------------------|------------|
| ** **                          | ** ** | **Total**                 | ** ** | **Less than  1 year** | ** ** | **1  year** | ** ** | **2  years** | ** ** | **3-5  years** | ** ** | **More  than  5 years** | ** ** |
| **Contractual Obligations**         | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Minimum Operating Lease Payments    |       | $                         | 915,043    |   | $ | 548,493 |   | $ | 362,978 |   | $ | 3,572 |   | — |   | — |   |
| Minimum Royalty Payment Obligations |       | 15,000                    |       | 5,000 |   | 10,000 |   | — |   | — |   | — |   |
| Total                               |       | $                         | 930,043    |   | $ | 553,493 |   | $ | 372,978 |   | $ | 3,572 |   | $ | — |   | $ | — |   |
|                                     |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Rent expense was approximately $723,000, $742,000 and $702,000 for theyears ended December 31, 2002, 2003 and 2004 respectively.

 

**(b) Contingencies**

 

Five class action securities lawsuits have been filed in the UnitedStates District Court in the District of Massachusetts against Ibis and itsPresident and CEO: Martin Smolowitz v. Ibis Technology Corporation., et al.,Civ. No. 03-12613 (RCL) (D. Mass.); Fred Den v. Ibis TechnologyCorporation., et al., Civ. No. 04-10060 (RCL) (D. Mass.); Weinstein v.Ibis Technology Corporation., et al., Civ. No. 04-10088 (RCL) (D. Mass.);George Harrison v. Ibis Technology Corporation., 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 Courtentered an order consolidating these actions under the caption In re IbisTechnology Securities Litigation, C.A. 04-10446 RCL. On July 6, 2004, aconsolidated amended class action complaint was filed which alleges, amongother things, that the Company violated federal securities laws by allegedlymaking misstatements to the investing public relating to demand for certainIbis products and intellectual property issues relating to the sale of thei2000 oxygen implanter. The plaintiffs are seeking unspecified damages. On August 5,2004, we filed a motion to dismiss the consolidated amended complaint on thegrounds, among others, that it failed to state a claim on which the relief couldbe granted. That motion now has been fully briefed, and we are awaiting aruling from the Court. While we believe that the allegations are without merit,and we intend to vigorously defend against the suits, there can be no guaranteeas to how they ultimately will be resolved.

 

47

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In addition, Ibis has been named as a nominal defendant in ashareholder derivative action filed in February 2004 against certain ofits directors and officers: Louis F. Matheson, Jr. v. Martin J. Reid etal., 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,the Court entered an order staying this matter pending the entry of a finalorder on any motion filed by the Company to dismiss the consolidated classaction complaint referenced above.

 

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

 

48

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**(9) Accrued Liabilities**

 

Current accrued liabilities were as follows at December 31:

 
| ** **              | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |
| Accrued vacation        |       | $        | 195,638    |     | $          | 107,177 |   |
| Accrued warranty        |       | 593,969  |       | 708,830  |       |
| Accrued payroll         |       | 266,281  |       | 92,762   |       |
| Accrued equipment costs |       | 799,183  |       | —   |       |
| Accrued expenses        |       | 529,844  |       | 509,135  |       |
| Total                   |       | $        | 2,384,915  |     | $          | 1,417,904 |   |

 

**(10) Deferred Revenue**

 

Deferred revenue includes prepaid license and royalty fees in theamount of $52,000 at December 31, 2004.

 

**(11) License Agreements**

 

The Company obtained an exclusive sublicense in the field of oxygenimplantation to the proprietary beam scanning system developed by a consultantto the Company during the development of the first Ibis 1000 implanter. Thebeam scanning system sublicense agreement also grants the Company certainrights to further sublicense the technology for certain applications. TheCompany received $0.1 million, $0.2 million and $0.4 million in 2002, 2003 and2004, respectively, for non-refundable option fees or royalty fees inaccordance with non-exclusive sublicense agreements.

 

**(12) Income Taxes**

 

The income tax provision (benefit) attributable tocontinuing operations consists of the following:

 

| ** ** | ** ** | **Year Ended December 31,** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **2002**                         | ** ** | **2003** | ** ** | **2004** | ** ** |
|       |       |                             |       |   |   |   |   |
| Current:   |       |                             |       |   |   |   |   |
| Federal    |       | $                                | —     |   | $ | (9,000 | ) | $ | — |   |
| State      |       | 1,256                            |       | 1,256 |   | 1,256 |   |
| Deferred:  |       |                             |       |   |   |   |   |
| Federal    |       | —                           |       | — |   | — |   |
| State      |       | —                           |       | — |   | — |   |
| Total      |       | $                                | 1,256      |   | $ | (7,744 | ) | $ | 1,256 |   |

 

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Income tax expense (benefit) differs from the amount computed byapplying the statutory federal income tax rate of 34% to the loss before incometaxes from continuing operations as follows:

 

| ** **                                      | ** ** | **2002**  | ** ** | **2003**  | ** ** | **2004**   | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
|                                            |       |      |       |      |       |       |       |
| Computed “expected” tax benefit       |       | $         | (2,476,713 | )         | $          | (1,312,368 | )          | $ | (1,917,571 | ) |
| State income taxes, net of federal tax  benefit |       | 829       |       | 829       |       | 829        |       |
| Other                                           |       | —    |       | (9,000    | )          | —     |       |
| Losses not benefited                            |       | 2,477,140 |       | 1,312,795 |       | 1,917,998  |       |
|                                            |       | $         | 1,256      |      | $          | (7,744     | )          | $ | 1,256 |   |

 

The tax effects of temporary differences that give rise to significantportions of deferred tax assets and liabilities are presented below at December 31:

 

| ** **                                                              | ** ** | **2003**    | ** ** | **2004**    | ** ** |
|-------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Deferred tax assets:                                                    |       |        |       |        |       |
| Net operating loss carryovers                                           |       | $           | 24,541,000 |        | $          | 34,154,000 |   |
| Accruals not currently deductible for tax  purposes                     |       | 1,768,000   |       | 1,884,000   |       |
| General business tax credit carryovers                                  |       | 2,990,000   |       | 2,779,000   |       |
| Impairment reserves                                                     |       | 4,720,000   |       | 1,557,000   |       |
| Other                                                                   |       | 28,000      |       | 11,000      |       |
| Less: Valuation allowance                                               |       | (32,275,000 | )          | (36,859,000 | )          |
| Net deferred tax assets                                                 |       | 1,772,000   |       | 3,526,000   |       |
| Deferred tax liabilities:                                               |       |        |       |        |       |
| Property and equipment, principally due to  differences in depreciation |       | (1,613,000  | )          | (3,334,000  | )          |
| Patents                                                                 |       | (159,000    | )          | (192,000    | )          |
|                                                                    |       | $           | —     |        | $          | — |   |

 

As a result of the losses incurred to date by the Company, a 100%valuation allowance has been applied against the Company’s deferred tax assets.The net change in the total valuation allowance was an increase of $9.9 millionand $4.5 million for the years ended amount recorded as net deferred tax assetsas of December 31, 2003 and 2004, respectively.

 

The Company had federal net operating loss and general business creditcarryovers of approximately $82.6 million and $1.3 million, respectively, at December 31,2004, that may be used to offset future taxable income and taxes, if any. Thefederal net operating loss and general business credit carryovers expire from2005 through 2024. The Company also had state net operating loss and creditcarryovers of $63.9 million and $1.5 million, respectively, at December 31,2004, which will expire from 2005 through 2024. Included in the total deferredtax assets, offset by the valuation allowance was $3.2 million related to thenet operating loss carryover resulting from the exercise of employee stockoptions, the tax benefit of which, when recognized, will be accounted for as acredit to additional paid-in capital rather than a reduction of income taxexpense. Net operating loss carryovers and other tax attributes may be limitedin the event of certain changes in ownership interests.

 

**(13) Capitalization**

 

The Company has 50,000,000 shares of common stock and 2,000,000 sharesof preferred stock (“Undesignated Preferred Stock”) authorized. At December 31,2004**,**94,110 common shares were reserved

 

50

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for issuance upon exercise of options outstanding under the Company’s1993 Employee, Director and Consultant Stock Option Plan. At December 31,2004, the Company also had 1,430,843 and 200,000 common shares reserved forissuance upon exercise of options outstanding or available for grant under thecompany’s 1997 Employee, Director and Consultant stock option plan, and forexercise of warrants respectively.

 

In October 2003, Ibis completed an offering of1,000,000 shares of common stock at $13.25 per share, including an overallotment option exercised by the underwriter. Net proceeds to the Company wereapproximately $12.6 million.

 

**(14) Stock Plans and Warrants**

 

**(a) *Stock Option Plans***

 

In December 1993, the Board of Directors and stockholders approvedthe adoption of the Company’s 1993 Employee, Director and Consultant StockOption Plan which provided for the issuance of options to purchase up to250,000 shares of common stock to employees, consultants and non-employeedirectors. In May 1996, the stockholders increased to 750,000 shares theaggregate number of shares that may be granted under this plan.

 

In October 1997, the Board of Directors approvedthe adoption of the Company’s 1997 Employee, Director and Consultant StockOption Plan (the “1997 Plan”) which provides for the issuance of options topurchase up to 750,000 shares of common stock of the Company to employees,consultants and non-employee directors. The stockholders approved the Plan atthe May 1998 Annual Stockholders Meeting. In February 2001, the Boardof Directors approved an amendment to the 1997 Plan to increase the aggregatenumber of shares reserved for issuance to 1,350,000. The stockholders approvedthis amendment at the May 2001 Annual Stockholders Meeting. In February 2004,the Board of Directors approved an amendment to the 1997 Plan to increase theaggregate numbers of shares reserved for issuance to 1,650,000. Thestockholders approved this amendment at the May 2004 Annual StockholdersMeeting.

 

A summary of stock option activity under the plans isas follows:

 

| ** **                                     | ** ** | **Number** | ** ** | **Weighted average** | ** ** |
|------------------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                                     | ** ** | **of**     | ** ** | **exercise price**   | ** ** |
| ** **                                     | ** ** | **shares** | ** ** | **of shares**        | ** ** |
| Options outstanding at December 31,  2001 |       | 973,166    |       | $                    | 19.08      |   |
| Granted                                        |       | 225,150    |       | 7.24                 |       |
| Exercised                                      |       | —     |       | —               |       |
| Cancelled                                      |       | (15,812    | )          | 16.61                |       |
| Options outstanding at December 31,  2002 |       | 1,182,504  |       | $                    | 16.86      |   |
| Granted                                        |       | 245,076    |       | 7.41                 |       |
| Exercised                                      |       | (123,667   | )          | 7.99                 |       |
| Cancelled                                      |       | (131,659   | )          | 17.97                |       |
| Options outstanding at December 31,  2003 |       | 1,172,254  |       | $                    | 15.69      |   |
| Granted                                        |       | 242,700    |       | 4.99                 |       |
| Exercised                                      |       | (550       | )          | 5.56                 |       |
| Cancelled                                      |       | (66,169    | )          | 9.78                 |       |
| Options outstanding at December 31,  2004 |       | 1,348,235  |       | $                    | 14.06      |   |
|                                           |       |       |       |                 |       |
| Options exercisable at December 31,  2004 |       | 879,319    |       | $                    | 18.22      |   |

 

51

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The following table summarizes information concerning outstanding andexercisable options as of December 31, 2004:

 
| ** **          | ** ** | **Options Outstanding** | ** **       | **Options Exercisable** | ** ** |
|---------------------|------------|-------------------------|------------------|-------------------------|------------|
| ** **          | ** ** | ** **              | ** **       | **Weighted**            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **              | ** **       | **average**             | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **          | ** ** | ** **              | ** **       | **remaining**           | ** ** | **average** | ** ** | ** ** | ** ** | **average** | ** ** |
| **Range of**        | ** ** | **Number**              | ** **       | **contractual**         | ** ** | **outstanding** | ** ** | **Number** | ** ** | **exercise** | ** ** |
| **exercise prices** | ** ** | **outstanding**         | ** **       | **life (years)**        | ** ** | **option price** | ** ** | **exercisable** | ** ** | **price** | ** ** |
| $                   | 08         | -                       |   6.00 |                    | 368,906    |   | 8.5 |   | $ | 4.55 |   | 82,843 |   | $ | 5.57 |   |
| $                   | 6.01       | -                       |   9.00 |                    | 210,930    |   | 6.2 |   | $ | 7.84 |   | 120,439 |   | $ | 7.84 |   |
| $                   | 9.01       | -                       | 13.50            |                    | 488,774    |   | 5.3 |   | $ | 10.39 |   | 404,162 |   | $ | 10.45 |   |
| $                   | 13.51      | -                       | 20.26            |                    | 65,025     |   | 5.0 |   | $ | 18.28 |   | 58,025 |   | $ | 18.15 |   |
| $                   | 20.27      | -                       | 30.37            |                    | 11,250     |   | 4.9 |   | $ | 24.08 |   | 10,500 |   | $ | 24.10 |   |
| $                   | 30.38      | -                       | 45.55            |                    | 46,250     |   | 1.9 |   | $ | 36.34 |   | 46,250 |   | $ | 36.34 |   |
| $                   | 45.56      | -                       | 68.32            |                    | 154,100    |   | 4.4 |   | $ | 46.43 |   | 154,100 |   | $ | 46.43 |   |
| $                   | 68.33      | -                       | 98.71            |                    | 3,000      |   | 5.2 |   | $ | 83.06 |   | 3,000 |   | $ | 83.06 |   |
|                |       |                    |             |                    | 1,348,235  |   |   |   |   |   | 879,319 |   |   |   |

 

**(b) *Employee Stock PurchasePlan***

 

On February 24, 2000, the Board of Directorsadopted the Ibis Technology Corporation 2000 Employee Stock Purchase Plan (the “PurchasePlan”) pursuant to which a total of 300,000 shares of the Company’s CommonStock may be sold to eligible employees of the Company at a 15% discount fromthe market value of the shares. Under the terms of the Purchase Plan, employeesmay elect to have up to 15% of their base earnings withheld to purchase theseshares during each offering period, which is a six-month period. The purchaseprice under the Purchase Plan is 85% of the lesser of the market price on thebeginning or the ending of the offering period. Approximately 55% of eligibleemployees participated in the Purchase Plan in the initial offering period, 74%in 2002, 52% in 2003, and 51% in 2004. During 2002, 2003, and 2004, the Companysold 62,702, 52,563 and 67,875 shares, respectively, to employees under thePurchase Plan. The stockholders approved the Purchase Plan at the May 2000Annual Stockholders Meeting.

 

**(c) *Warrants***

 

During 2000, 38,263 warrants were exercised for thepurchase of 38,263 shares of common stock. Since some of these warrants wereexercised on a cashless basis, 35,840 shares of Common Stock were issued.  At December 31, 2000, there wereadditional warrants outstanding to purchase 1,392 shares of common stock at$8.40 per share.  These remainingwarrants expired in 2001.

 

In December 2000, the Company issued warrants topurchase 200,000 shares of Common Stock at $22.30 per share in connection witha license agreement. The value of the warrants is included in other assets (seenote 6) and was calculated using the Black-Scholes option-pricing model withthe following assumptions: expected volatility of 93.69%, risk-free interestrate of 5.50%, and an expected life of 5 years. At December 31, 2004,there were warrants outstanding to purchase up to 200,000 shares of CommonStock.

 

**(15) Significant Customers and Concentration of Business Risk**

 

The Company sells its implanters to a limited number of semiconductormanufacturers primarily in the United States and the Pacific Rim.

 

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Significantcustomers are shown in dollar amounts and as a percentage of total revenue asfollows:

 

| ** **             | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------|------------|-----------------|------------|------------|------------|------------|------------|
| **Year  Ended**        | ** ** | **Customers**   | ** ** | **Amount** | ** ** | **%**      | ** ** |
|                   |       |            |       |       |       |       |       |
| December 31, 2002 |       | 1               |       | $          | 5,555,000  |       | 87         | % |
| December 31, 2003 |       | 1               |       | $          | 8,564,115  |       | 91         | % |
| December 31, 2004 |       | 1               |       | $          | 7,000,000  |       | 88         | % |

 

Accounts receivable from significant customersamounted to $27,000 and $0 at December 31, 2003 and 2004, respectively.

 

Export sales to unaffiliated customers in 2002, 2003 and 2004 were 91%,9% and 95% of total revenues, respectively.

 

During 2002, 2003and 2004, the Company purchased substantially all of its raw materials,components and subassemblies for its implanters from a limited group ofsuppliers. Disruption or termination of certain of these sources could occurand such disruptions could have a material adverse effect on the Company’sbusiness and results of operations.

 

**(16) Other Income**

 

In 2004, the Company recognized a gain in other income of approximately$200,000, which is the result of an expired wafer volume option that wasassociated with an asset obtained by the wafer production group from a wafercustomer. This volume option was to be used on orders received over a one yearperiod. Since the time expired and no orders were received, the Company reducedits liability and recognized the amount in income, as no further obligationexists.

 

**(17)Discontinued Operations**

 

In July 2004, theCompany announced its decision to discontinue its wafer manufacturing businessto concentrate its efforts on supplying equipment and process technology****to its equipment customers. As a result,the Company recorded an estimated loss on disposal of approximately $2.1 millonfor the year ended December 31, 2004, consisting principally of the writeoff of 300 mm wafer inventory not expected to be used in the Company’s ongoingR&D efforts ($1.2 million) and the net impairment of wafer manufacturingassets expected to be sold ($0.9 million). In addition to write-offs of wafermanufacturing assets, the Company also recognized $78 thousand in severancecosts associated with employee terminations. The 2002 and 2003 operatingactivities for the Company’s  wafermanufacturing business have been classified in discontinued operations: gain(loss) from discontinued operations in the accompanying statement ofoperations.

 

Discontinued operations generated sales of $7.6million, $9.0 million and $4.0 million in 2002, 2003 and 2004 respectively, andoperating losses of $6.8 million, $17.6 million and $3.2 million respectively.The 2003 operating loss related to discontinued operations includes $11.1million impairment charge related to wafer manufacturing inventory and fixedassets.

 

 **(18)Industry Segments**

 

The Company adopted SFAS No. 131, “Disclosures about Segments ofan Enterprise and Related Information” during 1998. SFAS No. 131established the standards for reporting information about operating segments inannual financial statements and requires selected information about operatingsegments in interim financial reports issued to stockholders.

 

53

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The Company’s reportable segments are SIMOX Equipmentand Other Products or Services. For purposes of segment reporting, equipmentspares and field service revenue are combined and reported as SIMOX Equipment.Government contracts, other services and license revenue are combined andreported as Other Products or Services.

 

The accounting policies of the operating segments are the same as thosedescribed in the summary of significant accounting policies. The Companygenerally evaluates operating performance based on income or loss beforeinterest and taxes.

 

The table below provides information for the yearsended December 31, 2002, 2003 and 2004 pertaining to the Company’s twoindustry segments after the discontinuance of the wafer manufacturing business.

 

| ** **                                                                                | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  or Services** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------|------------|---------------------------------|------------|------------|------------|
| **Net Revenues**                                                                          |       |                 |       |                            |       |       |       |
| Year Ended December 31, 2002                                                         |       | $                    | 6,102,748  |                            | $          | 282,979    |       | $ | 6,385,727 |   |
| Year Ended December 31, 2003                                                         |       | 8,781,907            |       | 660,429                         |       | 9,442,336  |       |
| Year Ended December 31, 2004                                                         |       | 7,535,270            |       | 390,975                         |       | 7,926,245  |       |
|                                                                                      |       |                 |       |                            |       |       |       |
| **Operating Income (Loss)**                                                               |       |                 |       |                            |       |       |       |
| Year Ended December 31, 2002                                                         |       | (5,533,080           | )          | 167,838                         |       | (5,365,242 | )          |
| Year Ended December 31, 2003                                                         |       | (2,165,803           | )          | 615,850                         |       | (1,549,953 | )          |
| Year Ended December 31, 2004                                                         |       | (4,036,440           | )          | 375,606                         |       | (3,660,834 | )          |
|                                                                                      |       |                 |       |                            |       |       |       |
| **Assets**                                                                                |       |                 |       |                            |       |       |       |
| December 31, 2002                                                                    |       | 5,501,872            |       | 546,948                         |       | 6,048,820  |       |
| December 31, 2003                                                                    |       | 1,692,883            |       | 118,615                         |       | 1,811,498  |       |
| December 31, 2004                                                                    |       | 13,839,523           |       | 187,321                         |       | 14,026,844 |       |
|                                                                                      |       |                 |       |                            |       |       |       |
| **Capital Expenditures**                                                                  |       |                 |       |                            |       |       |       |
| Year Ended December 31, 2002                                                         |       | 134,089              |       | —                          |       | 134,089    |       |
| Year Ended December 31, 2003                                                         |       | 8,891                |       | —                          |       | 8,891      |       |
| Year Ended December 31, 2004                                                         |       | 713,349              |       | —                          |       | 713,349    |       |
|                                                                                      |       |                 |       |                            |       |       |       |
| **Depreciation and Amortization of Property and Equipment** |       |                 |       |                            |       |       |       |
| Year Ended December 31, 2002                                                         |       | 1,478,767            |       | —                          |       | 1,478,767  |       |
| Year Ended December 31, 2003                                                         |       | 1,393,269            |       | —                          |       | 1,393,269  |       |
| Year Ended December 31, 2004                                                         |       | 1,884,687            |       | —                          |       | 1,884,687  |       |
|                                                                                           |            |                      |            |                                 |            |            |            |  |  |  |

 

54

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The table below provides the reconciliationof reportable segment operating income (loss), assets, capital expenditures,and depreciation and amortization to the Company’s totals.

 
| ** **                                                          | ** ** | **Years Ended December 31,** | ** **  |
|---------------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                          | ** ** | **2002**                          | ** **  | **2003** | ** ** | **2004** | ** ** |
| **Segment Reconciliation**                                          | ** ** | ** **                        | ** **  | ** ** | ** ** | ** ** | ** ** |
| Loss Before Income Taxes:                                           |       |                              |        |   |   |   |   |
| Total operating loss for reportable  segments                       |       | $                                 | (5,365,242  | ) | $ | (1,549,953 | ) | $ | (3,660,834 | ) |
| Corporate general & administrative  expenses               |       | (2,174,198                        | )           | (2,337,463 | ) | (2,221,167 | ) |
| Net other income                                                    |       | 254,991                           |        | 27,510 |   | 242,085 |   |
| Income tax expense (benefit)                                        |       | 1,256                             |        | (7,744 | ) | 1,256 |   |
| Loss from discontinued operations                                   |       | (6,810,474                        | )           | (17,597,627 | ) | (5,277,369 | ) |
| Net loss                                                            |       | $                                 | (14,096,179 | ) | $ | (21,449,789 | ) | $ | (10,918,541 | ) |
|                                                                |       |                              |        |   |   |   |   |
| Assets:                                                             |       |                              |        |   |   |   |   |
| Total assets for reportable segments                                |       | $                                 | 6,048,820   |   | $ | 1,811,498 |   | $ | 14,026,844 |   |
| Cash & cash equivalents not  allocated to segments         |       | 11,745,918                        |        | 14,174,716 |   | 7,726,072 |   |
| Other unallocated assets                                            |       | 33,904,221                        |        | 19,356,825 |   | 529,724 |   |
| Total assets                                                        |       | $                                 | 51,698,959  |   | $ | 35,343,039 |   | $ | 22,282,640 |   |
|                                                                |       |                              |        |   |   |   |   |
| Capital Expenditures:                                               |       |                              |        |   |   |   |   |
| Total capital expenditures for reportable  segments                 |       | $                                 | 134,089     |   | $ | 8,891 |   | $ | 713,349 |   |
| Corporate capital expenditures                                      |       | 145,250                           |        | 21,242 |   | 7,653 |   |
| Total capital expenditures                                          |       | $                                 | 279,339     |   | $ | 30,133 |   | $ | 721,002 |   |
|                                                                |       |                              |        |   |   |   |   |
| Depreciation and Amortization:                                      |       |                              |        |   |   |   |   |
| Total depreciation & amortization  for reportable segments |       | $                                 | 1,478,767   |   | $ | 1,393,269 |   | $ | 1,884,687 |   |
| Corporate depreciation &  amortization                     |       | 145,574                           |        | 117,191 |   | 78,029 |   |
| Total depreciation & amortization                          |       | $                                 | 1,624,341   |   | $ | 1,510,460 |   | $ | 1,962,716 |   |

 

**(19) Selected Quarterly Financial Data(Unaudited)**

 

The Table below provides information for the years 2002, 2003 and 2004.

 
| ** **                               | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **2002**                                 | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Total sales and revenue                  |       | $                  | 219,016    |                | $          | 283,004            |       | $                   | 5,718,306  |   | $ | 165,401 |   |
| Gross profit                             |       | 72,868             |       | 183,051             |       | 2,134,928          |       | 11,542              |       |
| Loss from continuing operations          |       | (2,284,005         | )          | (2,385,234          | )          | (354,097           | )          | (2,516,104          | )          |
| Net loss                                 |       | (3,786,562         | )          | (4,027,840          | )          | (2,272,591         | )          | (4,009,186          | )          |
| Net loss per common share                |       | (0.44              | )          | (0.43               | )          | (0.24              | )          | (0.42               | )          |
| **2003**                                 |       |               |       |                |       |               |       |                |       |
| Total sales and revenue                  |       | $                  | 732,451    |                | $          | 8,189,789          |       | $                   | 292,948    |   | $ | 227,148 |   |
| Gross profit (loss)                      |       | 594,441            |       | 4,494,095           |       | 77,730             |       | (99,553             | )          |
| Profit (loss) from continuing operations |       | (2,114,481         | )          | 2,322,705           |       | (1,872,106         | )          | (2,223,534          | )          |
| Net profit (loss)                        |       | (4,286,353         | )          | 1,226,026           |       | (3,162,837         | )          | (15,226,625         | )          |
| Net profit (loss) per common share       |       | (0.45              | )          | 0.13                |       | (0.33              | )          | (1.46               | )          |
| **2004**                                 |       |               |       |                |       |               |       |                |       |
| Total sales and revenue                  |       | $                  | 207,908    |                | $          | 203,253            |       | $                   | 7,240,770  |   | $ | 274,314 |   |
| Gross profit (loss)                      |       | (125,689           | )          | (174,382            | )          | 3,573,945          |       | (84,672             | )          |
| Profit (loss) from continuing operations |       | (2,083,103         | )          | (2,058,633          | )          | 921,198            |       | (2,661,463          | )          |
| Net profit (loss)                        |       | (3,481,155         | )          | (3,358,284          | )          | (1,677,961         | )          | (2,401,141          | )          |
| Net profit (loss) per common share       |       | (0.33              | )          | (0.32               | )          | (0.16              | )          | (0.22               | )          |

 

55

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###### **Item 9.**                                                           CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON

**ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not applicable.

 

###### **Item 9A.**                                                  CONTROLS AND PROCEDURES

###### ** **

 

**a)**     *Evaluation of DisclosureControls and Procedures*.  Asof the end of the period covered by this report, the Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement including the Company’s President and Chief Executive Officer andChief Financial Officer of the effectiveness of the design and operation of thecompany’s disclosure controls and procedures, as defined in Exchange Acts Rules13a-15(e) and 15d-15(e). Based upon that evaluation the Company’s President andChief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures are effective in enabling theCompany to record, process, summarize, and report information required to beincluded in the Company’s periodic SEC filings within the required time period.

**b)**     *Changes in InternalControls over Financial Reporting*. There were no changes in theCompany’s internal controls over financial reporting (as defined in Rule 13a-15(f)under the Exchange Act) during the fourth quarter of fiscal year 2004 that hasmaterially affected, or would be reasonably likely to materially affect, theCompany’s internal controls over financial reporting.

**Item 9B.****                                                 ****Other Information**

 

Not applicable.

 

**PART III**

 

###### **Item 10.**                                                    DIRECTORS AND OFFICERS OF THE REGISTRANT

###### ** **

The Response to this item is incorporated byreference from the discussion responsive thereto under the captions “Management”and “Section 16(a) Beneficial Ownership Reporting Compliance” in theCompany’s Proxy Statement for the 2005 Annual Meeting of Stockholders.

 

**Item 11.****                                                    EXECUTIVECOMPENSATION**

 

The response to this item is incorporated byreference from the discussion responsive thereto under the caption “ExecutiveCompensation” in the Company’s Proxy Statement for the 2005****AnnualMeeting of Stockholders.

 

**Item 12.****                                                    SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The response to this item is incorporated byreference from the discussion responsive thereto under the caption “ShareOwnership” in the Company’s Proxy Statement for the 2005 Annual Meeting ofStockholders.

 

**Item 13.****                                                    CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The response to this item is incorporated byreference from the discussion responsive thereto under the captions “CertainTransactions” and “Executive Compensation-Employment Contracts and Change ofControl Arrangements” in the Company’s Proxy Statement for the 2005 AnnualMeeting of Stockholders.

 

**Item 14.****                                                    PRINCIPALACCOUNTANT FEES AND SERVICES**

 

The response to this item is incorporated byreference from the discussion responsive thereto under the caption “IndependentRegistered Public Accountants” “Audit and Non Audit Fees” in the Company’sProxy Statement for the 2005 Annual Meeting of Stockholders.

 

56

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**Item 15.****                                                    EXHIBITS,FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM   8-K**

 

**(a)**           The following documents are filed aspart of this Annual Report on Form 10-K.

 

**(1) and (2)**              See “Index to Financial Statementsand Financial Statement Schedule” at Item 8 to this****AnnualReport on Form 10-K.  Otherfinancial statement schedules have not been included because they are notapplicable or the information is included in the financial statements or notesthereto.

 

**(3)**           Exhibits

 

The following is a list of exhibits filed aspart of this Annual Report on Form 10-K.

 
| **Exhibit  Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                |
|---------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1                   |       |       |       | Underwriting Agreement dated October 16, 2003, between the  Registrant and CDC Securities (Filed as Exhibit 1.1 to the Company’s  Current Report on Form 8-K filed on October 17, 2003 and  incorporated herein by reference)                         |
| 3.1                 |       | -          |       | Restated Articles of Organization of Registrant (Filed as  Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the  Quarter Ended September 30, 2000 and incorporated herein by reference)                                                      |
| 3.1.1               |       | -          |       | Articles of Amendment to the Restated Articles of Organization of the  Registrant (Filed as Exhibit 3.1.1 to the Company’s Quarterly Report on  Form 10-Q for the Quarter Ended September 30, 2000 and incorporated  herein by reference)                  |
| 3.1.2               |       | -          |       | Articles of Amendment to the Restated Articles of Organization of the  Registrant (Filed as Exhibit 3.1.2 to the Company’s Quarterly Report on  Form 10-Q for the Quarter Ended September 30, 2000 and incorporated  herein by reference)                  |
| 3.2                 |       | -          |       | Amended and Restated Bylaws of Registrant (Filed as Exhibit 3.1  to the Company’s Quarterly Report on Form 10Q for the Quarter Ended  September 30, 2004 and incorporated herein by reference)                                                             |
| 4.1                 |       | -          |       | Article 4 of Restated Articles of Organization (Filed as  Exhibit 4.1*)                                                                                                                                                                                              |
| 4.2                 |       | -          |       | Form of Common Stock Certificate (Filed as Exhibit 4.2*)                                                                                                                                                                                                             |
| 10.1                |       | -          |       | Master Agreement, dated as of August 7, 1992, among the  Registrant, Dr. Hilton Glavish, and Zimec, Inc. (Filed as  Exhibit 10.1*)                                                                                                                         |
| 10.2                |       | -          |       | Sublicense Agreement, dated December 21, 1993, among the  Registrant, Dr. Hilton Glavish, and Zimec, Inc. (Filed as  Exhibit 10.2*)                                                                                                                             |
| @10.3               |       | -          |       | Business Development Agreement, dated as of July 15, 1994,  between the Registrant and Mitsubishi Materials Corporation (Filed as  Exhibit 10.3*)                                                                                                                    |
| 10.4                |       | -          |       | Lease Agreement, dated December 22, 1987, as amended, between  the Registrant and Thomas J. Flatley d/b/a The Flatley Company (“Flatley”)  (Filed as Exhibit 10.4*)                                                                                        |
| 10.4A               |       | -          |       | Fifth Amendment to Lease Agreement, dated February 4, 1997  between the Registrant and Flatley (Filed as Exhibit 10.4 to the  Registrant’s Quarterly Report on Form 10-Q for the Quarter ended  March 31, 1997 and Incorporated herein by reference). |
| 10.5                |       | -          |       | Form of Noncompetition, Nondisclosure and Assignment of  Inventions Agreement between the Registrant and each current employee of the  Registrant (Filed as Exhibit 10.11*)                                                                                          |
| †10.6          |       | -          |       | Ibis Technology Corporation 1993 Employee, Director and Consultant  Stock Option Plan as amended (Filed as Exhibit 10.15 to the Company’s  Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1996  and Incorporated herein by reference)        |
| †10.7          |       | -          |       | Form of Stock Option Agreement under 1993 Employee, Director and  Consultant Stock Option Plan (Filed as Exhibit 10.16*)                                                                                                                                             |
| †10.8          |       | -          |       | 1995/1996 Incentive Compensation Plan of the Registrant (Filed as  Exhibit 10.17*)                                                                                                                                                                                        |
| @10.9               |       | -          |       | Capacity Option Agreement, dated September 21, 1995, between  Registrant and Motorola Corporation (Filed as Exhibit 10.18*)                                                                                                                                          |
| 10.10               |       | -          |       | Exclusive Patent License Agreement, dated November 1, 1994,  between the Registrant and Superion Limited (Filed as Exhibit 10.26*)                                                                                                                                   |
| 10.11               |       | -          |       | License Agreement, dated as of September 1, 1994, between the  Registrant and Nissin Electric Co., Ltd. (Filed as Exhibit 10.27*)                                                                                                                                    |

 

57

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| **Exhibit  Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                            |
|---------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12               |       | -          |       | Equipment Purchase Master Agreement, dated as of May 22, 1996,  between Registrant, and IBM (Filed as Exhibit 10.1 to the Company’s  Current Report on Form 8-K/A (File No.0-13078) filed on  September 12, 1996 and incorporated herein by reference).                                                                           |
| †10.13         |       | -          |       | Ibis Technology Corporation 1997 Employee, Director and Consultant  Stock Option Plan (Filed as Exhibit 99.1 to the Company’s Form S-8  (File No. 333-45247) filed on January 30, 1998 and incorporated  herein by reference).                                                                                                    |
| @10.14              |       | -          |       | Task Order dated April 10, 1998, between the Registrant and  International Business Machines Corporation (“IBM”) (Filed as  Exhibit 10.40 to the Company’s Quarterly Report on Form 10-Q for  the Quarter Ended June 30, 1998 and incorporated herein by reference).                                                    |
| @10.15              |       | -          |       | Licensing and Development Agreement, dated June 9, 1998, between  the Registrant and IBM (Filed as Exhibit 10.41 to the Company’s  Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1998  and incorporated herein by reference)                                                                                       |
| 10.16               |       | -          |       | Sixth Amendment to Lease dated July 16, 1998, amending Lease  Agreement dated December 22, 1987 between the Company and Thomas J.  Flatley d/b/a the Flatley Company (Filed as Exhibit 10.42 to the  Company’s Quarterly Report on Form 10-Q for the Quarter Ended  September 30, 1998 and incorporated herein by reference) |
| †10.17         |       | -          |       | Restated Change of Control Agreement, dated March 24, 2004,  between the Registrant and Martin J. Reid.                                                                                                                                                                                                                                               |
| @10.18              |       | -          |       | License Agreement dated July 1, 1999, between the Registrant and  Mitsubishi Materials Silicon Corporation (Filed as Exhibit 10.45 to the  Company’s Annual Report on Form 10-K for the Year Ended  December 31, 1999 and incorporated herein by reference)                                                                       |
| 10.19               |       | -          |       | Lease Agreement, dated April 14, 2000, between the Registrant  and Flatley (Filed as Exhibit 10.46 to the Company’s Quarterly Report on  Form 10-Q for the Quarter Ended June 30, 2000 and incorporated  herein by reference)                                                                                                     |
| 10.20               |       | -          |       | Ibis Technology Corporation 2000 Employee Stock Purchase Plan (Filed  as Exhibit 99.1 to the Company’s Form S-8 (File No. 333-36706)  filed on May 10, 2000 and incorporated herein by reference)                                                                                                                                 |
| @10.21              |       | -          |       | Advantox 150 License Agreement dated November 1, 2000, between  the Registrant and Mitsubishi Materials Silicon Corporation (Filed as  Exhibit 10.48 to the Company’s Annual Report on Form 10-K for the  Year Ended December 31, 2000 and incorporated herein by reference)                                                      |
| †10.22         |       | -          |       | Employment Agreement, dated December 27, 2000 between the Registrant  and Martin J. Reid (Filed as Exhibit 10.49 to the Company’s Annual  Report on Form 10-K for the Year Ended December 31, 2000 and  incorporated herein by reference)                                                                                         |
| @10.23              |       | -          |       | License Agreement dated December 15, 2000, between the  Registrant and International Business Machines Corporation (“IBM”) (Filed as  Exhibit 10.50 to the Company’s Annual Report on Form 10-K for the  Year Ended December 31, 2000 and incorporated herein by reference)                                             |
| 10.24               |       | -          |       | Patent License Agreement dated December 15, 2000, between the  Registrant and IBM (Filed as Exhibit 10.51 to the Company’s Annual  Report on Form 10-K for the Year Ended December 31, 2000 and  incorporated herein by reference)                                                                                                |

 

58

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| **Exhibit  Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                             |
|---------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.25               |       | -          |       | Stock Purchase Warrant Agreement dated December 15, 2000,  between the Registrant and IBM (Filed as Exhibit 10.52 to the Company’s  Annual Report on Form 10-K for the Year Ended December 31, 2000 and  incorporated herein by reference)                                                                                                                         |
| 10.26               |       | -          |       | Amendment of Lease Agreement dated September 25, 2001, between  the Company and Thomas J. Flatley d/b/a the Flatley Company. (Filed as  Exhibit 10.53 to the Company’s Quarterly Report on Form 10-Q for  the Quarter Ended September 30, 2001 and incorporated herein by  reference)                                                                              |
| 10.27               |       | -          |       | Master Lease Agreement dated September 25, 2001, between the  Company and Heller Financial Leasing, Inc., including additional  Collateral Rider and Schedule A to Additional Collateral Rider. (Filed  as Exhibit 10.54 to the Company’s Quarterly Report on Form 10-Q for  the Quarter Ended September 30, 2001 and incorporated herein by  reference) |
| 10.28               |       | -          |       | Amendment to Warrant Agreement dated June 1, 2001 between the  Company and International Business Machines Corporation. (Filed as Exhibit 10.55  to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended  September 30, 2001 and incorporated herein by reference)                                                                                    |
| @10.29              |       |       |       | Amended and Restated License Agreement dated November 14, 2002,  between the Registrant and IBM (Filed as Exhibit 10.30 to the Company’s  Annual Report on Form 10-K for the Year Ended December 31, 2002 and  incorporated herein by reference)                                                                                                                   |
| 10.30               |       |       |       | Amendment to the Patent License Agreement dated November 14,  2002, between the Registrant and IBM (Filed as Exhibit 10.31 to the  Company’s Annual Report on Form 10-K for the Year Ended  December 31, 2002 and incorporated herein by reference)                                                                                                                |
| †10.31         |       |       |       | Change of Control Agreement, dated March 24, 2005, between the  Registrant and William J. Schmidt.                                                                                                                                                                                                                                                                                     |
| 11                  |       | -          |       | Statement regarding computation of per share income (loss)                                                                                                                                                                                                                                                                                                                                  |
| 23                  |       | -          |       | Consent and Report on Financial Statement Schedule of KPMG LLP                                                                                                                                                                                                                                                                                                                         |
| 31.1                |       | -          |       | CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                           |
| 31.2                |       | -          |       | CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                           |
| 32.1                |       | -          |       | CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (18 U.S. Section 1350)                                                                                                                                                                                                                                                                               |
| 32.2                |       | -          |       | CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (18 U.S. Section 1350)                                                                                                                                                                                                                                                                               |

 

----

*                 Previously filed with the Commissionas Exhibits to, and incorporated herein by reference from, the Company’sRegistration Statement filed on Form S-1, File No. 333-1174,effective April 2, 1996.

 

@            Confidential treatment previously obtainedfrom the Securities and Exchange Commission. The portions of the document forwhich confidential treatment has been granted are marked “Confidential” andsuch confidential portions have been filed separately with the Securities andExchange Commission.

 

†                        Management contract orcompensatory plan, contract or arrangement.

 

Where a document is incorporated by reference from a previous filing,the Exhibit number of the document in that previous filing is indicated inparentheses after the description of such document.

 

(B) *Financial Statement Schedules*

 

Schedule II - Valuation and Qualifying Accounts

 

59

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###### **SIGNATURES**

###### ** **

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized, inDanvers, Massachusetts on March 17, 2005.

 
|   | **IBIS TECHNOLOGY CORPORATION** |
|--------|---------------------------------|
|   |                            |
|   | By:                             | /s/ Martin J. Reid |   |
|   |                            | Martin J. Reid |
|   |                            | President |

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed by the followingpersons on behalf of the registrant and in the capacities indicated and on thedates indicated.

 
| **Signatures** | ** **                            | **Title**               | ** **                                 | **Date**                           |
|----------------|---------------------------------------|-------------------------|--------------------------------------------|------------------------------------|
|           |                                  |                    |                                       |                               |
| By:            | ***/s/ Martin J. Reid***              |                    |                                       | President, Chief Executive Officer |   | March 30, 2005 |
|           | Martin J.  Reid                       |                    | and Chairman (principal executive officer) |                               |   |
|           |                                  | and Director            |                                       |                               |
|           |                                  |                    |                                       |                               |
| By             | ***/s/ William J. Schmidt***          |                    |                                       | Chief Financial Officer,           |   | March 30, 2005 |
|           | William J. Schmidt                    |                    | Treasurer and Clerk, (principal financial  |                               |   |
|           |                                  | and accounting officer) |                                       |                               |
|           |                                  |                    |                                       |                               |
| By:            | ***/s/ Dimitri A. Antoniadis, Ph.D*** |                    |                                       | Director                           |   | March 30, 2005 |
|           | Dimitri A. Antoniadis, Ph.D           |                    |                                       |                               |   |
|           |                                  |                    |                                       |                               |
| By:            | ***/s/ Robert L. Gable***             |                    |                                       | Director                           |   | March 30, 2005 |
|           | Robert L. Gable                       |                    |                                       |                               |   |
|           |                                  |                    |                                       |                               |
| By:            | ***/s/ Leslie B. Lewis***             |                    |                                       | Director                           |   | March 30, 2005 |
|           | Leslie B. Lewis                       |                    |                                       |                               |   |
|           |                                  |                    |                                       |                               |
| By             | ***/s/ Donald McGuinness***           |                    |                                       | Director                           |   | March 30, 2005 |
|           | Donald McGuinness                     |                    |                                       |                               |   |
|           |                                  |                    |                                       |                               |
| By             | ***/s/ Lamberto Raffaelli***          |                    |                                       | Director                           |   | March 30, 2005 |
|           | Lamberto Raffaelli                    |                    |                                       |                               |   |
|           |                                  |                    |                                       |                               |
| By             | ***/s/ Cosmo S. Trapani***            |                    |                                       | Director                           |   | March 30, 2005 |
|           | Cosmo S. Trapani                      |                    |                                       |                               |   |
|                |                                       |                         |                                            |                                    |  |  |  |  |  |  |  |  |  |  |  |

 

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**SCHEDULE II**

 

**IBIS TECHNOLOGY CORPORATION**

**VALUATION AND QUALIFYING ACCOUNTS**

 

**For the Years Ended December 31, 2002,2003 and 2004**

 
| **Description**                    | ** ** | **Balance at  Beginning  of Period** | ** ** | **Reclass (1)** | ** ** | **Expense** | ** ** | **Amounts  Written Off (2)** | ** ** | **Balance  at End of  Period** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|-----------------|------------|-------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | ** **                           | ** ** | ** **      | ** ** | ** **  | ** ** | ** **                   | ** ** | ** **                     | ** ** |
| Allowance for Doubtful Accounts    |       |                                 |       |            |       |        |       |                         |       |                           |       |
| December 31, 2002             |       | 65,000                               |       | —          |       | —      |       | —                       |       | 65,000                         |       |
| December 31, 2003             |       | 65,000                               |       | —          |       | —      |       | —                       |       | 65,000                         |       |
| December 31, 2004             |       | 65,000                               |       | —          |       | (37,470     | )          | (2,530                       | )          | 25,000                         |       |
|                               |       |                                 |       |            |       |        |       |                         |       |                           |       |
| Reserve for Inventory Obsolescence |       |                                 |       |            |       |        |       |                         |       |                           |       |
| December 31, 2002             |       | 669,000                              |       | —          |       | 290,000     |       | —                       |       | 959,000                        |       |
| December 31, 2003             |       | 959,000                              |       | —          |       | 524,000     |       | (47,000                      | )          | 1,436,000                      |       |
| December 31, 2004.            |       | 1,436,000                            |       | 4,603,000       |       | 226,000     |       | (2,493,000                   | )          | 3,772,000                      |       |

 

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(1)          At December 31, 2003 equipment inventoryand the related reserves were included in construction in progress withinproperty and equipment. The balances were reclassified to inventory in thesecond quarter of fiscal 2004.

 

(2)          Includes inventory written off of $1.2million and inventory reserves included in discontinued operations of $1.3million.

 

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