**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

| **(Mark One)** |                                                                                                                                                                                                                     |   |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **x**          | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                      |
|           |                                                                                                                                                                                                                     |   |   |
|           | **For the fiscal year ended  December 31, 2007**                                                                                                                                                                    |   |   |
|           |                                                                                                                                                                                                                     |   |   |
| **o**          | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                  |
|           |                                                                                                                                                                                                                     |   |   |
|           | **For the transition  period                 to                 ** |   |   |

 

**Commission file number:  0-23150**

 

**IBIS TECHNOLOGY CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Massachusetts**

(State or other  jurisdiction   of incorporation or organization) | ** ** | **04-2987600**  (I.R.S. Employer Identification No.) |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------|
| ** **                                                                           | ** ** | ** **                                           |
| **32  Cherry Hill Drive, Danvers, MA**  (Address of principal executive offices)     | ** ** | **01923**  (Zip Code)                                |
| ** **                                                                           | ** ** | ** **                                           |
| Registrant’s  telephone number, including area code: **(978) 777-4247**         |

 

Securitiesregistered pursuant to Section 12(b) of the Exchange Act:

 

**None.**

 

Securitiesregistered pursuant to Section 12(g) of the Exchange Act:

 

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

(Title of class)

 

Indicateby check mark if the registrant is a well-known seasoned issuer as defined inRule 405 of the Securities Act. Yes o  No x

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act. Yes o  No x

 

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 x  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.    x

 

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, a non-accelerated filer or a smallerreporting company.

 

Large Accelerated Filer  o     AcceleratedFiler  o     Non-AcceleratedFiler  o     SmallerReporting Company  x

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yeso No x

 

The aggregate market value of the registrant’s voting and non-votingcommon equity held by non-affiliates of the registrant (without admitting thatany person whose shares are not included in such calculation is an affiliate)computed by reference to the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last businessday of the registrant’s most recently completed fourth fiscal quarter (based onthe last reported sale price on the Nasdaq National Market of such date) was $6,156,517.

 

As of May 22, 2008, the registrant had 14,317,482of common stock outstanding.

 

 

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** **

**PART I**

 

**Special Note RegardingForward-Looking Statements**

 

ThisForm 10-K contains express or implied forward-looking statements withinthe meaning of the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995 that relate to future events or our futurefinancial performance. In some cases, you can identify forward-lookingstatements by terminology, such as “may,” “will,” “should,” “could,” “expect,”“plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,”“potential” or “continue” or the negative of such terms or other comparableterminology, although not all forward-looking statements contain such terms. Inaddition, these forward-looking statements include, but are not limited to,statements regarding, among other things: (i) the Company’s ability to conduct its operations in a mannerconsistent with its current plan and to obtain additional implanter orders tocontinue as a going concern, (ii) regaining compliance with theminimum bid price requirement and the continued inclusion of the Company’s CommonStock on the Nasdaq Global Market or transfer to the Nasdaq Stock Market; (iii) theCompany’s expectations regarding future orders for i2000 implanters, (iv) the Company’s expectationsregarding it’s strategic alternatives, including the potential sale of theCompany, (v) the continuedemployment of key management and technical personnel, and attaining implanterimprovements to the degree and in the timeframe necessary to meet ourcustomer’s expectations, (vi) the timing of our major customer’s rampingto production quantities on the i2000 implanter and the sustained productionworthiness of the i2000 implanter, (vii) the reliance on a single or smallnumber of large customers, interest in and demand for, and marketacceptance of, the Company’s SIMOX-SOI technology including the Company’simplanters, (viii) the involvement generally of the silicon wafermanufacturing industry in the SOI wafer market and the ability of the wafermanufacturer’s to produce sufficiently low cost SIMOX-SOI wafers utilizing bothour SIMOX equipment and technology, as well as other equipment manufacturer’stools, (ix) the timing andlikelihood of revenue recognition on orders for the Company’s implanters,(x) the Company’s belief that wafer manufacturers will become theprimary suppliers of SIMOX-SOI wafers to the chipmaking industry, (xi) thethroughput and production capacity of the i2000 implanter for manufacturing300-mm SIMOX-SOI wafers, attaining implanter improvements to the degree and inthe timeframe necessary to meet customer expectations, and the ability of thei2000 implanter to achieve acceptable production yields, (xii) the Company’splan to focus on supplying implanters to wafer manufacturers, (xiii) theability to operate with existing capital resources or to secure financing andto continue as a going concern and (xiv) the Company’s expectation of havingsufficient cash for operations. Such statements are neither promises norguarantees but rather are subject to risks and uncertainties, which could causeactual results to differ materially from those described in the forward-lookingstatements. Such risks and uncertainties include, but are not limited to:future continued migration to SOI technology and market acceptance of SIMOX;the level of demand for the Company’s products; limited customers and products;lack of order backlog and visibility to the timing of new orders; the Company’sability to pursue and maintain further strategic relationships, partnershipsand alliances with third parties; loss of key personnel; the Company’s abilityto protect its proprietary technology; the potential trends in thesemiconductor industry generally; the ease with which the i2000 can beinstalled and qualified in fabrication facilities; the likelihood thatimplanters, if ordered, will be qualified and accepted by customers withoutsubstantial delay, modification, or cancellation, in whole or in part; thelikelihood and timing of revenue recognition on such transactions; the impactof rapidly changing technology; the possibility of the impact of competitiveproducts, technologies and pricing; the impact of rapidly changing technology;the possibility of further asset impairment and resulting charges; equipmentcapacity and supply constraints or difficulties; the Company’s limited historyin selling implanters; general economic conditions; and other risks anduncertainties described elsewhere in this Form 10-K and in the Company’sSecurities and Exchange Commission filings from time to time. All informationset forth in this Form 10-K is as of the date of this Form 10-K, andIbis undertakes no duty to update this information, unless required by law.

 

**Item 1.    BUSINESS**

 

**Introduction**

 

Ibis TechnologyCorporation (“Ibis”) develops, manufactures and markets SIMOX-SOI implantationequipment for the worldwide semiconductor industry. SIMOX, which stands for **S**eparation by **IM**plantation of**OX**ygen, is a form ofsilicon-on-insulator, or SOI, technology that creates an insulating oxidebarrier below the top surface of a silicon wafer through implantation andannealing. Our proprietary oxygen implanters produce SIMOX-SOI wafers byimplanting oxygen atoms just below the surface of a silicon wafer to create avery thin layer of silicon dioxide between the thin operating region of thetransistor at the surface and the underlying silicon wafer itself. The buriedlayer of silicon dioxide acts as an insulator for the devices fabricated on thesurface of the silicon wafer and reduces the electrical current leakage whichotherwise slows integrated circuit performance, and/or increases the loss ofpower during circuit operation. The buried layer of 

 

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silicon dioxide alsohelps to reduce the heat generated by the transistors. Through this process ourcustomers can produce integrated circuits, which we believe, offer significantadvantages over circuits constructed on conventional silicon wafers. We believethat these advantages include:

 

·                  substantiallyimproved speed for microprocessors and other logic integrated circuits,

 

·                  reducedpower consumption,

 

·                  reducedsoft error rate,

 

·                  Compatibilitywith a higher temperature operating environment, and

 

·                  lowertemperature operation

 

Webelieve these characteristics make SIMOX-SOI wafers, and the finishedintegrated circuits, well-suited for many commercial applications, including:

 

·                  serversand workstations,

 

·                  portableand desktop computers,

 

·                  entertainmentdevices such as TVs and game consoles,

 

·                  wirelesscommunications and battery powered feature rich hand held devices includingcell phones, and

 

·                  harsh-environmentelectronics.

 

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 evolved through stages where previously our revenue was at timesprimarily derived from selling wafers for evaluation purposes, and at othertimes it was primarily derived from equipment sales. This often occurs whendeveloping and promoting a fundamental new technology, especially as it relatesto the semiconductor industry embracing any change that affects fabricationoperations. In mid-2004 we exited the wafer manufacturing business toconcentrate our efforts on supplying equipment and process technology to ourequipment customers, the major silicon manufacturers. We did this havingadvanced our primary goal of establishing SIMOX-SOI as an important SOItechnology with the potential to be the low cost, high volume offering. Weintend to continue to work with the major wafer manufacturers to support themarket acceptance of 300mm SIMOX technology through continuing process researchand development in conjunction with our customers. We believe this effort willdirectly support the wafer manufacturers’ 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 differentmanufacturing processes, including Advantox® MLD and Advantox MLD-UTwafers. We believe the ability of the i2000 implanter to produce twelve-inch(or 300mm) SIMOX-SOI wafers using different processes from standard to thelatest MLD process positions us to capitalize on the growing SOI market. Inearly 2004, we received an order valued at approximately $7.0 million for ani2000 SIMOX oxygen implanter from a major silicon wafer manufacturer. Duringthe third quarter of 2004 this tool was accepted by the customer. In early January 2005,we received a $6.0 million order for an i2000 SIMOX oxygen implanter fromSUMCO, another major silicon wafer manufacturer. During the first quarter of2006, this tool was accepted by the customer. In October of 2005, wereceived a second order valued at $7.0 million for an i2000 SIMOX implanterfrom SUMCO and negotiated a master purchase agreement that will govern thegeneral commercial terms of potential future orders from SUMCO. We shipped thisimplanter in April of 2006, with final customer acceptance and associatedrevenue recognition taking place in the August of 2006.

 

We were incorporated inMassachusetts in October 1987 and commenced operations in January 1988.Our executive offices are located at 32 Cherry Hill Drive, Danvers,Massachusetts 01923 and our telephone number is (978) 777-4247. Our web site islocated at www.ibis.com.**We makeour periodic reports on 

 

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Form 10-K, Form 10-Qand Form 8-K (and any amendments to those reports) available on the website, free of charge, as soon as reasonably practicable after these reports arefiled with or furnished to the Securities and Exchange Commission. We have notincorporated by reference into this document the information on our web siteand you should not consider it to be a part of this document. Our web siteaddress is included in the document as an inactive textual reference only. The public can also obtain access to suchreports at the Securities and Exchange Commission’s Public ReferenceRoom at 450 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.Unless the context otherwise requires, the terms “Ibis”, “we”, “us”, and “our”refer to Ibis Technology Corporation.

 

#### **Our Strategies**

#### ** **

The Company announced in February 2008 that ithired an investment banker to explore strategic alternatives, including thepotential sale of the Company, while it continues to focus on its operationalobjectives. The Company took this step as a result of our recurring losses fromoperations and net capital deficiency, and the current lack of visibility foradditional orders for implanter equipment. Since we began sellingimplanters in 1996, we have only sold a total of eight Ibis 1000 oxygenimplanters at an average sale price of approximately $4.0 million each and fouri2000 oxygen implanters at a selling price between $6.0 and $8.0 million. Themost recent order received was in October 2005, for which the Companyrecognized revenue in the quarter ended September 30, 2006.  The Company did not record implanter revenueduring 2007 and as of April 10, 2008, does not have an order for animplanter from our customers.  At presenttime, only one of the four major wafer manufacturers are a current prospectivecustomer.  The Company currently does nothave a backlog for implanters, nor does it have visibility to the timing of thenext order from any customer.

 

As the Company continuesto assess its strategic alternatives, subject to the availability of resources,Ibis will continue with its primary objective to be the dominant supplier ofoxygen implantation equipment to the world’s silicon wafer manufacturers. Ourprimary emphasis will continue to be on implanter sales and support. We alsoplan on continuing process development for SIMOX-SOI wafers in partnership withour equipment customers to hasten the adoption and broaden the marketacceptance of SIMOX-SOI. Key elements of our strategies for achieving thisobjective include:

 

·                  *Capitalizing on Fundamental Trends in SemiconductorManufacturing.* We believe that semiconductor manufacturers face anincreasing demand for faster integrated circuit speed, reduced powerconsumption, smaller feature size and immunity to soft failure errors, whichare changes in logic state due to exposure to radiation. In addition, heatgeneration caused by current leakage has become a major problem at the 65 nmfeature size and will continue to increase in importance at the 45 and 32 nmtechnology nodes as production comes on stream over the next four years. In ourexperience, these manufacturers prefer to satisfy the demand with minimaladditions or modifications to their existing equipment base. We believe thatSIMOX-SOI technology will be a leadingalternative in addressing these requirements and that there will be a continuousmigration of SOI wafer manufacturing into the major silicon wafer suppliers.We reach this conclusion for a number of reasons. First, we believe thattremendous price pressure exists on commodity type products, such as siliconwafers. Because the starting wafer represents a significant component of theSOI wafer cost, silicon wafer manufacturers should have a natural coststructure advantage leading to a higher gross margin, and therefore can managesuch pricing 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 

 

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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 this thought process, 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.

 

·                  *Pursuing Strategic Marketing, Manufacturing andDevelopment Alliances.* We intend to continue to pursue relationshipsthrough which third parties will provide assistance with joint research anddevelopment opportunities on both process and equipment. In January 2003,we entered into an agreement with IBM todevelop an enhanced, modified low-dose (“MLD”) process for themanufacture of SIMOX-SOI wafers.

 

·                  *Enhancing and Extending Current Product Offerings.*We intend to continue to use our resources and our strategic partners’technical expertise to improve our existing equipment products, expand our coreproduct functionality, add products to our existing product line and furtheradvance our process technology. Our implanter research and development programsare aimed at improving quality, and increasing throughput which results inreducing the cost of SIMOX-SOI wafers. We are also exploring severalalternative technologies that could utilize our engineering expertise, andrepresent either product extensions or potentially new applications of ourtechnology.

 

·                  *Increasing our SIMOX-SOI Equipment ManufacturingCapacity.* Going forward, we intend to gauge SIMOX-SOI equipmentdemand from the silicon wafer manufacturers and adjust our equipmentmanufacturing capacity accordingly. We currently have capacity to buildapproximately 10 implanters per year in our existing manufacturing space.

 

**Marketing,Sales and Customers**

 

Over the lastseveral years, Ibis had focused on integrating SIMOX-SOI wafers into commercialapplications. We believe that commercial shipments of our wafers had been usedprincipally for evaluation purposes or pilot production in products, includingmicroprocessors, gate arrays, ASICs (application specific integrated circuits),and memories (DRAMs, SRAMs, etc.). We believe that one of our customers isproviding SIMOX-SOI wafers for commercial production and that a number of ourpotential customers are sampling SIMOX wafers or are developing prototypeproducts.

 

Our primary focus more recently has been on getting the silicon wafermanufacturers to embrace SIMOX-SOI technology. Where we have succeeded, we haveaccomplished this through joint research and development programs, the use ofsales representative agreements, and the provision of SIMOX-SOI wafer foundryservices to our customers. 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 wafermanufacturing business Ibis cancelled its Sales Representative Agreement withMEMC for SIMOX SOI wafers. We believe that by canceling this agreement we haveopened new market opportunities with the other silicon wafer manufacturers forthe sale of our i2000 oxygen implanters. We also believe this has allowed Ibisto work closely as an independent, non-competitive resource with several of theleading wafer manufacturers regarding SIMOX-SOI process improvements.

 

The following table sets forth, in thousands ofdollars, the amount of revenue derived from our significant customers duringthe fiscal years ended December 31, 2005, 2006 and 2007, as well as thepercent of our revenue represented by these customers’ purchases (inthousands):

 

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| ** **      | ** ** | **2005**    | ** ** | **2006**    | ** ** | **2007**    | ** ** |
|-----------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Customer**    | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| IBM             |       | $           | 74         |        | 12         | %           | $          | 4 |   | — |   | — |   | — |   |
| Simgui          |       | —      |       | —      |       | $           | 10         |   | — |   | $ | 64 |   | 7 | % |
| SEH             |       | —      |       | —      |       | —      |       | — |   | $ | 18 |   | 2 | % |
| Nissin Electric |       | $           | 279        |        | 46         | %           | $          | 369 |   | 3 | % | $ | 372 |   | 39 | % |
| Tokyo Iovenus   |       | $           | 162        |        | 27         | %           | $          | 92 |   | 1 | % | $ | 265 |   | 28 | % |
| SUMCO           |       | —      |       | —      |       | $           | 13,325     |   | 95 | % | $ | 178 |   | 19 | % |
| Axcelis         |       | —      |       | —      |       | $           | 175        |   | 1 | % | $ | 50 |   | 5 | % |

 

The revenue from SUMCO in 2007 was for the balance ofthe relocation of an i2000 implanter from their Noda facility to Yonezawa andfor services on the two implanters they own. The revenue from Nissin in 2007was from license royalties, the revenue from Tokyo Iovenus in 2007 was from thesale of parts, and the revenue from Axcelis in 2007 was for the additionalpayment on the purchase of a license option. The revenue from SUMCO in 2006 wasfor the purchase of two i2000 implanters for a total of approximately $13million, and for the relocation of one of these systems from their Nodafacility to Yonezawa. The revenue from Nissin in 2006 was from licenseroyalties, the revenue from Tokyo Iovenus in 2006 was from the sale of parts,and the revenue from Axcelis in 2006 was for the purchase of a license option.The revenue from IBM in 2005 was for service and parts, the revenue from Nissinin 2005 was from license royalties, and the revenue from Tokyo Iovenus in 2005was from the sale of parts.

 

Sales to overseas customers in 2005, 2006 and 2007were 81%, 99% and 94% of total revenue, respectively. In 2005, sales to Japanwere 81% of total revenue, which was primarily attributable to Nissin ElectricCo. Ltd., license royalties. In 2006, sales to Japan were 99% of total revenue,which was primarily attributed to SUMCO Corporation, implanter sales. In 2007,sales to Japan were 88% of total revenue, which was primarily attributed NissinElectric Co. Ltd. for license royalties and Tokyo Iovenus for service revenue.

 

#### **Strategic Alliances**

#### ** **

Ibis has entered into anumber of strategic alliances that we believe enable us to better address ourtarget market, to advance our technology more effectively, and to match ourtechnical developments and expansion to the needs of our key customers. Webelieve that strategic alliances with existing and potential customers whichare essential to developing a worldwide commercial market for our SIMOX-SOIimplanters.

 

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 Ibis1000 oxygen implanter in order to establish a Japanese-based manufacturingfacility for SIMOX-SOI wafers. This implanter was installed in SUMCO’s wafer manufacturingfacility in Chiba, Japan in July 2001. In 1999, we completed an agreementto license our standard and Advantox SIMOX-SOI wafer fabrication process toSUMCO.  Under this agreement we receivedan initial royalty fee and are entitled to future royalties based on apercentage of SUMCO’s sales of Advantox SIMOX-SOI wafers that are manufacturedusing the licensed process. In January 2005 and October 2005, SUMCOordered i2000 SIMOX oxygen implanters which were subsequently shipped, and forwhich final customer acceptance was received in 2006. Revenue was alsorecognized for both i2000s upon final acceptance during 2006.

 

In January 2003,we announced the signing of a Joint Development Agreement with IBM. The objective ofthe agreement was to develop an enhanced, MLD processfor the manufacture of SIMOX-SOI wafers,which are used as the starting material in the manufacture of advancedintegrated circuits (“ICs”). Aimed at producing lower-cost, higher qualitySIMOX-SOI wafers with thinner top silicon layers, the joint development workwas being conducted at both Ibis and IBM. We believe that both companiesbrought extensive expertise and experience regarding SIMOX-SOI technology tothe joint effort. 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 theproduction-proven 

 

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MLD process for sale to IBM and all other Ibis customers. Ourimplanters can operate using both the MLD process and other processes as well,including non-proprietary processes.

 

In February 2004,we announced the signing of a service agreement with Tokyo Iovenus based inTokyo, Japan. This agreement provides for local training of Japanese serviceengineers for our oxygen implanter customers in Japan.

 

**Research and Development**

 

Ibis continues to have active research and developmentprograms in both equipment and wafer process technology. For the past fouryears a primary focus has been developing implanter technology and advancedprocess capability to produce 300 mm SIMOX wafers. This required thedevelopment of a new generation oxygen implanter, the i2000, and theprocurement and qualification of annealing, cleaning, and metrology tools forcompleting the full SIMOX process at 300 mm.

 

The proprietary i2000 wasdesigned to support the volume production of high quality SIMOX-SOI 300 mmwafers for the global semiconductor industry. To minimize process risks, thei2000 duplicates the process environment of the Ibis 1000. However, itincorporates 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 alsobelieve that the simpler beam line design of the i2000 also offers extensivecapabilities, facilitating the manufacture of the Advantox product portfolio.We believe that taken together, these features significantly increaseproductivity of the i2000 over the Ibis 1000. Finally, the i2000 is designed tobe far more fab friendly than the Ibis 1000. It is designed to be bulkhead orballroom mounted in the clean room, offers front-opening unified pod (FOUP)capability and meets SEMI safety and ergonomic guidelines. We also believe thatthe i2000’s improved automation and operator-friendly controls will improveproduct yield and afford ease-of-use. Our plans are to improve the i2000 interms of both quality (reduced particles) and quantity (increased throughput)of as-implanted SIMOX wafers, in order to provide continuous improvement to thecost 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-SOIwafers of higher quality. In the fall of 2004 we announced a 3x to 4x reductionin the silicon roughness of the SIMOX MLD;

 

·**                 **Jointly developing a technology formanufacturing high resistivity SIMOX-SOI wafers for mixed signal and radiofrequency (“RF”) applications with a major silicon wafer manufacturer. Withthis alliance, we developed advancements in SIMOX wafer manufacturing,including reduced wafer cost, scalability to 300 mm and stability of thematerial’s high resistivity characteristic through thermal cycling common inintegrated circuit manufacturing. We filed a joint patent application with SEHentitled *Method of Producing a HighResistivity SIMOX Silicon Substrate* in May 2003. As of December 31,2006 this patent has been granted**;**

 

·                  Processing strained silicon (anotheremerging wafer-materials technology) for use in SOI (“SSOI” wafers), aninnovation enabling a further significant boost of device speed forcomplementary metal oxide semiconductor (“CMOS”) products. Improved electron mobilityin strained silicon leads to an increased drive current in MOS devices and iscomplemented by benefits provided by SOI, such as reduction of parasiticcapacitances in CMOS devices. We assist our customers in their development ofSSOI SIMOX wafers; and

 

·                  Responding to specific customerrequirements and emerging industry trends, such as the development of ourAdvantox MLD-UT (ultra thin) product line to address requirements for fullydepleted devices. The term “fully depleted” describes a MOS transistor structurein which the depletion region under normal operation extends as far as a buriedinsulator layer. We believe that ultra-thin SOI wafers provide superiorresults, especially in terms of increased power efficiency 

 

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and heat reduction in the operation of fully depletedsubstrate transistors for next generation semiconductor devices.

 

During the fiscal yearsended December 31, 2005, 2006 and 2007, Ibis’ internally funded researchand development expenses were approximately $6.0 million, $5.4 million and $3.8million or 995%, 39% and 398% of our revenues, respectively.

 

**Competition**

 

We believe we face threegeneral sources of competition: (1) direct SIMOX-SOI competition, (2) competingSOI technologies, and (3) competing non-SOI technologies.

 

Among direct SIMOX-SOIcompetitors, we believe we are presently the only manufacturer of SIMOX-SOIimplanters. To our knowledge, Hitachi, Ltd. of Japan had been the only othercompany manufacturing SIMOX implanters and has sold a limited number of toolsin prior years. We believe that in early 2004, Hitachi exited this business. Weare not aware of plans by any of the major ion implant manufacturers, includingHitachi, to design and develop oxygen ion implanters, but they may already havesuch plans, or may develop them in the future. We believe that it would takeone to three years to develop such an implanter.

 

We also believe thatSUMCO, and Simgui are manufacturing or marketing SIMOX wafers. We expect thatthe availability of SIMOX-SOI wafers from silicon wafer manufacturers will helpaddress customer concerns about adequate sources of supply and their desire topurchase all of their silicon wafer requirements (e.g., bulk silicon,epitaxial, strained silicon and SOI wafers) from the same company. Ourobjective is to be the dominant supplier of SIMOX implanters to the world’ssilicon wafer manufacturers so they can, in turn, efficiently andcost-effectively supply SOI wafers to the global semiconductor industry. In addition,we believe that these wafer manufacturers would be potential equipmentcustomers for our implanters.

 

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 reclaimed and reused. Regions of stress are first created usingimplantation and/or epitaxial growth prior to the bonding step. The wafer issplit along the stress interface by the application of heat (SOITEC’s Smartcut®process), a gas jet (Silicon Genesis’ process), or a water jet (Canon’s ELTRAN®process). SEH also offers a thin SOI Unibond® wafer manufactured with theSmartCut® process, which is licensed from SOITEC. Our evidence to date suggeststhat both SIMOX and bonded wafers perform equally well. We believe, however,that the SIMOX process can result in an inherently lower manufacturing cost inhigher volume production. We also believe that, at this stage in the market’sdevelopment, multiple SOI suppliers will help accelerate the adoption of SOItechnology.

 

The third source of competition is derived fromalternative non-SOI technologies designed to obtain benefits similar to thoseof SOI, including improvements to existing technologies. Significant resourcesare continually expended to improve epitaxial and conventional bulk siliconwafers.

 

The semiconductorindustry has demonstrated its resourcefulness in improving materials throughcreative circuit design and manufacturing techniques, thereby extending theuseful life of conventional substrates, and we cannot be sure that it will notcontinue to do so. The relatively lower cost of these substrates provides anincentive to the semiconductor industry to improve existing material withoutmoving to new, more advanced substrates. In addition, complex variations ofmore conventional approaches, such as elaborate circuit structures built on conventionalsilicon substrates, and compound materials (such as silicon-germanium, 

 

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gallium-arsenide, indium phosphide, etc.), are other alternativesubstrate choices. Strained silicon and silicon super lattices are technologiesthat can be used to increase the operating speed of computer chips, such asmicroprocessors. Strain can be applied locally (at the fab) or globally (at thewafer manufacturer). These technologies can be applied to bare wafers, SIMOX SOI wafers orBonded SOI wafers. The spacing between silicon atoms is stretched – orstrained - farther apart, allowing holes or electrons to flow with lessresistance, leading to chips that are faster, as reported by IBM. Siliconsuperlattices are thin layers inserted in the channel region of the transistorthat provide low impedance for current flow horizontally in the channel regionjust below the gate, and higher impedance for vertical current flow into theregions further below the surface. The emergence of strained silicon andsilicon superlattices in wafer-materials technology will lead to comparisonswith SOI, among other emerging wafer-materials technologies. Although strainedsilicon, superlattices and SOI are wafer-material technologies that increasechip speed; they work in different – and complementary – ways and if combinedcan provide additional benefits.

 

Strained silicon and silicon superlattices increasetransistor speed by increasing the mobility of holes or electrons travelingthrough the channel region near the silicon surface. On the other hand, SOIincreases transistor speed by reducing parasitic capacitances associated withsource and drain junctions. Therefore, we believe strained silicon, siliconsuperlattices, and SOI (as applied through either SIMOX or Bonded SOI) arecomplementary and mutually enhancing - not competing – technologies, althoughone technology may be adopted without the other. Similarly, in the area ofreducing wasteful power, high-k dielectrics with metal gates and SOI addressdifferent sources of wasteful power consumption. The high-k dielectric/metalgate combinations lower power losses by reducing charge leakage through thegate dielectric. (While the gate dielectric may be similar or even identicalfor all transistor types, different metals/metal stacks are used for NMOS vs.PMOS gates to ensure they perform similarly as they did with doped polysilicongates in larger geometry nodes.)  SOIlowers power losses by blocking the conduction paths to the bulk silicon andbetween adjacent devices.  We believe thereal wave of the future will be combining these complementary technologies –strained silicon/silicon superlattice + high-k gate dielectric/metal gates +SOI – to create the highest speed, lowest-power competitive combinations, muchlike the way copper interconnects, low k dielectric materials and SOIsubstrates have been combined.

 

**Backlog**

 

As of April 10, 2008, Ibis did not have anyorders for implanters. All customer orders are subject to modification or cancellationby the customers. Backlog can, and often does fluctuate significantly basedupon, among other matters, the timing and receipt of orders and subsequent toolshipments. Therefore, variations in backlog may not represent a fair indicationof future business trends.

 

**Patents and Proprietary Rights**

 

Ibis’ssuccess is dependent in part upon certain proprietary technologies and coreintellectual property. Ibis has been awarded a number of patents and has anumber of pending patent applications. For example, we added sevenpatents to our intellectual property portfolio during 2005, five, includinginternational patents, during 2006 and two patents during 2007. We have severalmore patents pending relating to our proprietary i2000 oxygen implanter or theSIMOX fabrication process. Additionally, we diligently monitor our research anddevelopment process to identify inventions that warrant pursuing patentprotection.

 

Notwithstandingour patent 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 toassign to us all patent rights and technical or other information developed bythem during their employment with us and also agree not to disclose any tradesecret or confidential information without our prior written consent.

 

Despite the efforts we taketo protect our proprietary technologies and core intellectual property, the useof 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 claims 

 

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allowed will be sufficiently broad to protect our technology. Inaddition, we cannot ensure that any patents that have been or may be issuedwill not be challenged, invalidated or circumvented or that any rights grantedby those patents would protect our proprietary rights. Failure of any patentsto protect our technology may make it easier for our competitors to offerequivalent or superior technology. In addition, unauthorized parties mayattempt to copy or otherwise misappropriate aspects of our products orservices, or to obtain or use information that we regard as proprietary. Evenif a competitor’s products were to infringe patents owned or licensed by us, itwould be very costly for us to enforce our rights in an enforcement action,which would also divert funds and resources which otherwise could be used inour operations. Furthermore, third parties may also independently developsimilar technology without breach of our proprietary rights.

 

Inaddition to our efforts to develop proprietary technology, historically we havealso supplemented and commercialized our intellectual property through thegrant and receipt of licenses. For example, Ibis has an exclusiveworldwide sublicense to the proprietary beam scanning system developed andpatented by a consultant of ours during the development of the Ibis 1000. Ourbeam scanning system sublicense agreement also grants us certain rights tofurther sublicense the beam scanning system for certain applications other thanoxygen implantation. Pursuant to these rights, we have entered into fournon-exclusive sublicense agreements that permit the respective sub-licensees tomanufacture, use and sell implantation machines incorporating the beam scanningsystem so long as such machines are not designed for the production of oxygenimplanted wafers. Each sub-licensee has paid us a non-refundable option feeupon signing an agreement and pays an initial license fee when it exercises itsoption to use the licensed technology. In addition, each sub-licensee will paya royalty fee with respect to each implantation machine using this beamscanning system manufactured, used or sold after its option fee and initiallicense fee has been applied. License fees received by us from sub-licenses areto be shared on a substantially equal basis with the licensor of the beamscanning system. As of December 31, 2007, Ibis had received approximately$3.2 million in net license fees, after deducting amounts paid to the 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, 2007, Ibis has paid $0.6 million forlicense fees for implantation machines that have been manufactured by us. Underthe terms of this agreement, Superion Limited has retained the right to utilizethe technology for uses not involving oxygen implantation of silicon or othersemiconductor materials. During 2001, this agreement was modified toincorporate i2000 implantation machines. Ibis also entered into a sublicenseagreement during 2001 which gives our customer a royalty-bearing, non-exclusivelicense to utilize this technology for ion implantation machines, excludingoxygen implanters.

 

During 1999, we completedan agreement to license our standard and Advantox SIMOX-SOI wafer fabricationprocess to SUMCO. The agreement consisted of an initial royalty fee. Futureroyalties shall be payable based on a percentage of SUMCO’s SIMOX-SOI waferssold 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-SOIwafers which we marketed as Advantox MLD. Advantox MLD wafers were broadlymarketed to integrated circuit manufacturers looking to accelerate their SOIadoption process. Under the agreement we granted IBM rights to our patentsutilized in the modified low dose, or MLD process. Although we believe thatother SIMOX-SOI wafer processing methods exist and are being used today, ourexisting or potential equipment customers that intend to use the MLD process tomanufacture SIMOX-SOI wafers would be required to license this technologydirectly from IBM. Two major silicon wafer manufacturers have already licensedthis technology from IBM and others have developed their own SIMOX processes.No assurances can be given that the remaining equipment customers that intendto use the MLD process and IBM would come to terms acceptable to both partiesin a timely manner, or at all. These MLD process license issues may effect thetiming of placement of customer orders in the future if customers plan tolicense this technology.

 

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Finally, during 2001 welicensed our Advantox 50 and 150 SIMOX wafer fabrication processes to Simgui.Ibis received the initial license fee from Simgui in January 2003, and thetechnology transfer took place in the first quarter ended March 31, 2003.License revenue of approximately $0.5 million was recognized in that quarter.

 

**Government Regulation**

 

Ibis is subject to avariety of federal, state and local environmental regulations related to thestorage, treatment, discharge or disposal of chemicals used in its operationsand to the exposure of our personnel to occupational hazards. Although webelieve that we have all permits necessary to conduct our business, the failureto comply with present or future regulations could result in fines beingimposed on us, suspension of production, or a cessation of operations. Ourfuture activities may result in our being subject to additional regulations.Such regulations could require us to acquire significant equipment or to incurother substantial expenses to comply with regulations. Any failure by us tocontrol the use of, or to restrict adequately the discharge of, hazardoussubstances or to properly control other occupational hazards could subject usto substantial financial liabilities.

 

Certain technologies associated with Ibis’ implantersare subject to export regulations administered by the U.S. Department ofCommerce. Accordingly, Ibis may be required to secure U.S. export licenses withrespect to sales of implanters or transfers of technologies to end users incertain foreign countries. There can be no assurance that if necessary, Ibis willbe able to secure such licenses in a timely manner, or at all.

 

**Manufacturing and Supplies**

 

Ibis manufactures itsoxygen implanters from standard components and from components manufacturedin-house or by other vendors according to our design specifications. Most rawmaterials and components not produced by us are available from more than onesupplier. However, certain raw materials, components and subassemblies areobtained from a limited group of suppliers and at least one major subsystem isa long lead time, sole source component. Semiconductor equipment is a growthindustry and is very cyclical in nature, so if our suppliers experience anincrease in demand from other semiconductor equipment manufacturers with muchhigher volumes than us, the lead-time and/or price for some of our componentsmay increase. Although we have sought to reduce our dependence on these limitedsource suppliers and we have not experienced significant production delays dueto unavailability or delay in procurement of component parts or raw materialsto date, increased market demand for the materials supplied by, or disruptionor termination of, certain of these sources could occur and such increaseddemand, disruptions, or termination could have a material adverse effect on ourbusiness and results of operations.

 

**Employees**

 

As of December 31,2007, we employed 20 persons on a full-time basis. In January 2007 certainexecutive and senior level management personnel accepted voluntary salaryreductions that ranged from 10% to 50% of their salaries. These reductions areanticipated to remain in place until market conditions warrant further review.None of our employees are represented by a labor union and we believe ourrelations with our employees are good.

 

**Item 1A.  RISK FACTORS**

 

***OurRegistered Public Acoounting Firm Has Expressed Substantial Doubt About OurAbility to Continue as a Going Concern.***

 

In their report dated May 22,2008, our registered public accounting firm stated that our financialstatements for the fiscal year ended December 31, 2007 were preparedassuming we would continue as a going concern; however our recurring losses andaccumulated deficit raise substantial doubts about our ability to continue as agoing concern.  Our ability to continueas a going concern is an issue raised as a result of our recurring losses fromoperations and net capital deficiency and is subject to our ability to secureadditional 

 

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orders of our implanter equipment or, in the alternative, identify andconsummate a strategic transaction, including the potential sale of theCompany, or other strategic alternative.

 

***OurEfforts to Identify, Evaluate and Consummate a Transaction or Other Initiativeto Increase the Value of the Company for our Stockholders May Not BeSuccessful. Should We Consummate a Strategic Transaction or Other StrategicAlternative, There is No Guarantee that Our Stockholders will Realize GreaterValue For, or Preserve Existing Value of, Their Shares of the Company.***

 

InFebruary 2008, we announced the engagement of the investment bankBlueLake Partners, LLC for the purpose of assessing strategic alternatives forIbis, including a potential sale of the Company and/or its assets. Wecan give no assurance that we will identify an alternative that allows ourstockholders to realize an increase in the value of the Company’s stock. Wealso can give no assurance that a transaction or other strategic alternative,once identified, evaluated and consummated, will provide greater value to ourstockholders than that reflected in the current stock price.  Infact, if we are unable to recognize revenue through the sale of our productspursuant to our current operating plan, and if we are unable to identify aviable strategic alternative, we may be unable to continue as a goingconcern.  Further, in pursuit of thehighest value for shareholders, our Board also may consider alternatives thatinclude a liquidation of our assets and resulting cash distribution per shareafter payment of outstanding liabilities. In such case, any per-share cash liquidation distribution could be lessthan the purchase price per share that stockholders may have paid for theirCompany securities.

 

***WeHave Received Only Limited Orders for Our Oxygen Implanter Equipment.  If We Are Unable to Secure Additional OrdersWithin a Reasonable Timeframe in the Future, or Otherwise Obtain OffsettingRevenue, We may Be Unable to Continue to Conduct Operations in a MannerConsistent with Our Current Plan.***

 

Since the Company began selling implanters in 1996,only sold a total of eight Ibis 1000 oxygen implanters have been sold at anaverage sale price of approximately $4.0 million each and four i2000 oxygenimplanters at a selling price between $6.0 and $8.0 million.  The most recent order received was in October 2005,for which the Company recognized revenue in the quarter ended September 30,2006.  The Company did not recordimplanter revenue during 2007 and as of April 10, 2008, the Company doesnot have an order for an implanter from its customers.  At present time, only one of the four majorwafer manufacturers is counted as a current prospective customer.  Although the sale of one implanter would generallyrepresent a substantial portion of the Company’s annual revenue, there is noexpectation to sell more than a limited number of implanters in the nearfuture.  The Company currently does nothave a backlog for implanters, nor is there visibility to the timing of thenext order from any customer. The Company’s failure to obtain any orders forits implanters in the foreseeable future, notwithstanding the  belief that sufficient cash remains tosupport current operations through 2008, or to obtain other sources ofoffsetting revenue, would have a material adverse impact on the Company’sbusiness and hinder its ability to continue as a going concern.  The Company’s inability to generate revenuelikely will result in the inability to continue to invest in researchdevelopment and manufacturing capabilities, hinder the Company’s ability topursue and maintain relationships, partnerships and alliances with thirdparties, result in a loss of key personnel by way of workforce reduction or byvoluntary termination of employment, limit the Company’s ability to securefinancing on acceptable terms, if at all, and create greater volatility in thetrading of its common stock.

 

***The Commercial Market for SIMOX-SOI Technology is StillDeveloping and May Never Fully Develop.***

 

The sources of ourrevenue have shifted from primarily research and development contracts andsales of SIMOX-SOI wafers for commercial applications to sales and support ofoxygen implantation equipment. We are aware of only a few commercialmanufacturers that are using SIMOX-SOI wafers in low volume production for alimited number of products. The performance advantages of SIMOX-SOI wafers maynever be realized commercially and a commercial market for SIMOX-SOI wafers maynever fully develop which in turn would adversely affect the sales of ouroxygen implanters. The failure of major semiconductor manufacturers and /ormajor silicon wafer manufacturers to adopt SIMOX-SOI technology would adverselyaffect, and may prevent, the adoption of this technology by others.

 

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***We Have Relied Heavily on Sales to One Customer.******We Expect toRely on Sales to a Limited Number of Customers Which May CauseSales to Vary Significantly from Quarter to Quarter Causing Our OperatingResults to Fluctuate******.***

 

We have derived all of our sales of wafer manufacturing equipment fromone customer over the last two years. The details for the last three years canbe seen in section 1 under the title: Marketing, Sales and Customers in thisAnnual Report on Form 10-K. Ibis expects that we will continue to rely ona relatively small number of customers as sources of revenue in the foreseeablefuture.  The loss of one or more of thesemajor customers and our failure to obtain other sources of offsetting revenuewould have 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 asignificant decrease in any sales of our implanters to these customers, whichwould have an adverse effect on our business.

 

***We May Need Substantial Additional Capital to ContinueOperations in the Future.***

 

The Company’s management believes that it will have sufficient cashresources to support current operations until at least June 2009 with the receipt of the proceeds ofapproximately $5.3 million from the Company’s sale of common stock and warrantspursuant to a financing agreement made in 2007 with Special Situations Funds.This expectation however, is based on the Company’s current operating plan andgeneral sales outlook, each of which may change rapidly.

 

We intend to continue to invest in our research, development andmanufacturing capabilities. 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 warrant andoption 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 actual needs will not exceed expectations or that we will beable to fund our operations on a long-term basis in the absence of othersources. There also can be no assurance that any additional required longerterm financing will be available through additional bank borrowings, debt orequity offerings or otherwise, or that if such financing is available, that itwill be available on terms acceptable to us. If future financing is notavailable or is not available on a timely basis or on acceptable terms, we maynot be able to fund our future needs, which would seriously harm our businessand results of operations and our ability to continue as a going concern. Inaddition, if we raise additional funds through the sale of equity orconvertible debt securities, the value of our common stock outstanding may bediluted. We may also have to issue securities that have rights, preferences andprivileges senior to our common stock.

 

***TheCompany Received Notice from the Nasdaq Stock Market that at April 16,2008 Nasdaq******had not received theCompany’s Form 10-K for the fiscal year ended December 31, 2007, asrequired by Marketplace Rule 4310(c)(14).***

 

OnMarch 31, 2008 the Company requested and received a 15 day extension tofile its Annual Report 10K to allow additional time to conduct an impairmentanalysis with respect to Ibis’ assets, as permitted by Rule 12b-25.

 

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On April 16, 2008, the Company received a letter from the NasdaqStock Market advising that it had not received the Company’s Form 10-K forthe fiscal year ended December 31, 2007, as required by Marketplace Rule 4310(c)(14).Accordingly, unless the Company requests an appeal of this determination,trading of the Company’s common stock will be suspended at the opening ofbusiness on April 25, 2008, and a Form 25-NSE will be filed with theSecurities and Exchange Commission (the “SEC”), which will remove the Company’ssecurities from listing and registration on The Nasdaq Stock Market. TheCompany believes that, as a result of filing this Form 10-K, it is now incompliance with Marketplace Rule 4310(c)(14).

 

***TheCompany Received Notice from the Nasdaq Stock Market that its Bid Price isBelow the Minimum Share Price Requirement.***

 

On December 10, 2007, the Company received aletter from the Nasdaq Stock Market advising that for the previous 30consecutive business days, the bid price of the Company’s common stock (the“Common Stock”) had closed below the minimum $1.00 per share requirement forcontinued inclusion on the Nasdaq Global Market pursuant to Nasdaq Marketplace Rule 4450(a)(5).

 

Nasdaq stated in its letter that in accordance withNasdaq Marketplace Rule 4450(e)(2), the Company will be provided 180calendar days, or until June 9, 2008, to regain compliance with theminimum bid price requirement. The bid price of the Common Stock must close at$1.00 per share or more for a minimum of 10 consecutive business days toachieve compliance.

 

If the Company does not regain compliance with theminimum bid price requirement by June 9, 2008, the Nasdaq staff willprovide the Company with written notification that the Common Stock will bedelisted from the Nasdaq Global Market. At that time, the Company may appealthe delisting determination to a Nasdaq Listings Qualifications Panel pursuantto applicable Nasdaq rules. Alternatively, Nasdaq Marketplace Rule 4450(i) maypermit the Company to transfer the Common Stock to the Nasdaq Capital Market ifthe Common Stock satisfies all criteria, other than compliance with the minimumbid price requirement, for initial inclusion on such market. In the event ofsuch a transfer, the Nasdaq Marketplace Rules provide that the Companywill be afforded an additional 180 calendar days to comply with the minimum bidprice requirement while listed on the Nasdaq Capital Market.  If the Company’s common stock does notqualify for, or is subsequently delisted from the Nasdaq Capital Market,investors may have difficulty converting their investment into cashefficiently.  The price of our commonstock and the ability of holders to sell such stock would be adverselyaffected, and we would be required to comply with the initial listing requirementsto be re-listed on Nasdaq.

 

***The issuance of shares in connection with the February 2007financing and the exercise of the related warrants will dilute the value of ourshares of common stock and could cause the price of our shares of common stockto decline.***

 

Prior to the February 2007financing, there were 10,915,481 shares outstanding and there were 370,784shares of common stock reserved for issuance under our equity incentive andstock purchase plans.  In connection withthe first closing of the two tranche financing, we issued 1,400,000 shares ofcommon stock and warrants to purchase 1,124,434 shares of common stock,including warrants to purchase 74,434 shares of common stock issued to TNCapital Equities, Ltd., which served as placement agent, and its designees.  At the second closing, we sold an additional1,978,377 shares of common stock and warrants to purchase 1,588,966 shares ofcommon stock, including 105,185 to the placement agent and its designees.  As of May 22, 2008, Special SituationFunds and its affiliates beneficially own approximately 41% of our capitalstock, all of which was purchased in the February 2007 financing.

 

The exercise of the warrantsissued in the February 2007 financing would result in dilution in thevalue of the shares of the Company’s outstanding common stock and the votingpower represented thereby.  In addition,the exercise price of the warrants may be lowered under the price adjustmentprovisions in the event of a “dilutive issuance,” that is, if we issue commonstock at any time prior to their maturity as a per share price below suchconversion or exercise price, either directly or in connection with theissuance of securities that are convertible into, or exercisable for, shares ofour common stock.  A reduction in theexercise price may result in the issuance of a significant number of additionalshares upon the exercise of the warrants.

 

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Thewarrants do not establish a “floor” that would limit reductions in suchconversion price or exercise price.  Thedownward adjustment of the exercise price of these warrants could result infurther dilution in the value of the shares of our outstanding common stock andthe voting power represented thereby.

 

Noprediction can be made as to the effect, if any, that future sales of shares ofour common stock, or the availability of shares for future sale, will have onthe market price of our common stock prevailing from time to time.  Sales of substantial amounts of shares of ourcommon stock in the public market, or the perception that such sales couldoccur, may adversely affect the market price of our common stock and may makeit more difficult for us to sell our equity securities in the future at a timeand price which we deem appropriate.

 

Tothe extent the security-holders who have purchased our common shares and theholders of our warrants exercise such securities and then sell the shares ofour common stock they receive upon exercise, our stock price may decrease dueto the additional amount of shares available in the market. The subsequentsales of these shares could encourage short sales by our security holders andothers, which could place further downward pressure on our stock price.  Moreover, holders of these warrants may hedgetheir positions in our common stock by shorting our common stock, which couldfurther adversely affect our stock price.

 

Tothe extent the selling security-holders who have purchased our common sharesand the holders of our warrants exercise such securities and then sell theshares of our common stock they receive upon exercise, our stock price maydecrease due to the additional amount of shares available in the market. Thesubsequent sales of these shares could encourage short sales by oursecurity-holders and others, which could place further downward pressure on ourstock price. Moreover, holders of these warrants may hedge their positions inour common stock by shorting our common stock, which could further adverselyaffect our stock price.

 

***We Have Significant Losses and May Never Be Able toSustain Profitability.***

 

We experienced anet loss of $9.2 million in 2005, net income of $0.4 million in 2006 and a netloss of $8.5 million in 2007, respectively. As of December 31, 2007, wehad an accumulated deficit of $90.2 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.

 

***Revenue Recognition and Cash Payments from CustomersDepend on a Manufacturing and Customer Qualification and Acceptance Processthat is Complex, Lengthy and Costly.***

 

In the semiconductor industry customers regularly require equipmentmanufacturers to qualify the equipment at the customer’s site. The timerequired to customer-qualify an implanter at a customer’s site is verydifficult to predict because the qualification process for each of ourimplanters is complex, lengthy and costly and varies depending on thecustomer’s varying specifications. The manufacturing and qualification processfor each implanter requires us to construct and the customer qualify themachine at our premises, disassemble the machine for transportation, andreassemble and re-qualify it at the customer’s premises. During thisqualification period, we invest significant resources and dedicate substantialproduction and technical personnel to achieve acceptance of the implanter. Acustomer will not accept the implanter until it has successfully producedwafers to exact specifications at the customer’s premises. Even very smalldifferences in the customer’s environment or initially imperceptible changesthat may occur to the implanter during the transportation and reassembly of theimplanter at the customer’s site can cause a large percentage of wafersproduced by the implanter to be rejected, which would delay the acceptance ofthe implanter by the customer. Historically, we have experienced delays inachieving customer acceptance. Delays or difficulties in our manufacturing andqualification process could increase manufacturing and warranty costs andadversely affect our relationships with our customers. In addition, because wedo not recognize revenue on the sale of an implanter until it is delivered andqualified by the customer, any delay in qualification would result in a delayin our ability to recognize revenue from the sale and receipt of final payment.Historically it has taken approximately nine to eighteen months from ourreceipt of our order to build, ship and obtain customer acceptance of ourimplanters.

 

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***We Expect Our Quarterly Revenue and Operating Results toFluctuate Significantly.***

 

We anticipate thatour revenue and operating results are likely to vary significantly from quarterto quarter in the foreseeable future, and it is likely that in future quartersour operating results may from time to time be below the expectations of publicmarket analysts or investors. Our stock price has been volatile and if we failto meet expectations of public market analysts or investors, the price of ourcommon stock would likely decrease. Further, customers may cancel or reviseorders at any time prior to delivery. These ordering patterns most likely willresult in significant quarterly fluctuations in our revenue and operatingresults, and accordingly in our share price. In addition, because we have onlysold a limited number of implanters to date on an irregular basis, therecognition of revenue from the sale of even one implanter is likely to resultin a significant increase in the revenue for that quarter. A number of otherfactors, many of which are discussed in more detail in other risk factors, mayalso cause variations in our results of operations and 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 other industriesin which our customers operate.

 

A high percentageof our expenses are essentially fixed in the short term. As a result, if weexperience delays in generating and recognizing revenue, our quarterlyoperating results are likely to be seriously harmed. Due to this, as well as tothe cyclicality of the semiconductor industry and other factors, we believethat quarter-to-quarter comparisons of our operating results will not bemeaningful. You should not rely on our results for one quarter as anyindication of our future performance.

*** ***

***Competitors and Competing Technologies May Render Someor All of Our Products or Future Products Noncompetitive or Obsolete WhichWould Result in a 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.Further, in addition to the SIMOX implanter other equipment must be purchasedand implemented in order to complete the SIMOX wafer manufacturing process.This other equipment can involve substantial cost that can increase the overallcost of SIMOX-SOI wafers.

 

If semiconductormanufacturers fail to adopt SIMOX technology during the current or subsequentprocess cycle (such cycles typically last two to three years), widespread adoptionof SIMOX technology may never materialize, our technology may become obsoleteand we may be required to recognize an additional material impairment loss inthe future.

 

In addition, although we are aware of no other company manufacturingoxygen implant equipment, other major semiconductor implant equipmentmanufacturers could develop a less expensive oxygen implanter with superiortechnology. Our ability to compete with other manufacturers of semiconductorimplanters, 

 

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manufacturers ofcompeting SOI wafers, as well as with bulk silicon, epitaxial, strained siliconand compound materials wafer manufacturers, will depend on numerous factorswithin and outside our control, including:

 

·                  the success andtiming of our product introductions and those of our competitors,

 

·                  productdistribution,

 

·                  customersupport,

 

·                  sufficiency offunding available to us, and

 

·                  the price,quality and performance of competing products and technologies.

 

***We Must Continually Improve Existing Products, Design andSell New Products and Manage the Costs of Research and Development in Order toCompete Effectively.***

 

The semiconductorindustry is characterized by rapid technological change, evolving industrystandards and continuous improvements in products and required customerspecifications. Due to the constant changes in our markets, our future successdepends on our ability to improve our manufacturing processes, improve existingproducts and develop new products. For example, our oxygen implanters mustremain competitive on the basis of cost of ownership, process performance andevolving customer needs. To remain competitive we must continually introduceoxygen implanters with higher capacity, better production yields and theability to process larger wafer sizes.

 

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 toimprove our existing products on a timely basis,

 

·                  our new productsare not introduced on a timely basis,

 

·                  we incur budgetoverruns or delays in our research and development efforts, or

 

·                  our new productsexperience reliability or quality problems.

 

***The Sales Cycle for Our Oxygen Implanter Equipment isLengthy and Complex and Certain Third Party Licensing Agreements May CauseSignificant Delays.***

 

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 four i2000 oxygen implanters at aselling price between $6.0 and $8.0 million. The sales cycle typically goesfrom equipment demonstration, equipment specification negotiations, formalquotation, contract negotiations and receipt of order and could take up to oneyear or longer. In addition, our potential equipment customers that would liketo use the MLD process, owned by IBM, to manufacture SIMOX-SOI wafers using ourimplanters would be required to license this technology directly from IBM. Webelieve two silicon wafer manufacturers have already licensed this technologyfrom IBM and others have developed their own SIMOX processes. Our potentialequipment customers may wish to secure this license prior to giving us an orderfor equipment and these negotiations between IBM and our customer are beyondour control and no assurances are given that our customers and IBM would cometo terms acceptable to both parties in a timely manner, or at all. These MLDprocess license issues may affect 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 or deliveryof even one unit or the modification, change or cancellation of any such orderwould have a material adverse effect on our quarterly and annual results ofoperations.

 

17

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***Our Implanters and Associated Technology are Subject toExport Regulations, Which Could Prevent or Delay the Sale of Such Products inForeign 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 Scientific and ManagementStaff Could Delay and May Prevent the Achievement of Our Research,Development and Business Objectives.***

 

Our President andChief 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 improvement 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 Chairman, undercertain circumstances he may be able to terminate his employment with us.Furthermore, although our employees are subject to certain confidentiality andnon-competition obligations, our key personnel may terminate their employmentat any time and may become employed by a competitor. The current composition ofIbis management and of its board of directors is subject to change and shouldnot be unduly relied upon.

 

***Changes in Accounting Standards Regarding StockOption Plans Could Limit the Desirability of Granting Stock Options, WhichCould Harm Our Ability to Attract and Retain Employees, and Have AlsoNegatively Impacted Our Results of Operations.***

 

OnDecember 2004, the Financial Accounting Standards Board issued FASBStatement No. 123R, Share Based Payment, which requires all companies totreat the fair value of stock options granted to employees as an expense. As aresult of this standard, effective for periods beginning after January 1,2006, we and other companies are required to record a compensation expenseequal to the fair value of each stock option granted. This amounted to anexpense of $0.4 million in each of the fiscal years ending December 31,2006 and December 31, 2007. FAS 123(R) requirements reduce theattractiveness of granting stock options because of the additional expenseassociated with these grants, which have impacted and will continue to negativelyimpact our results of operations. Nevertheless, stock options are an importantemployee recruitment and retention tool, and we may not be able to attract andretain key personnel if we reduce the scope of our employee stock optionprogram. In addition, this accounting standard could negatively impact ourability to use stock options as an employee recruitment and retention tool inthe future.

 

***We May Not Be Able to Successfully Produce Our Productson a Large-Scale.***

 

We have limitedmanufacturing experience and have only manufactured limited quantities ofoxygen implanters. To be successful, our products must be manufactured incommercial quantities, at acceptable costs. We may not be able to make thetransition to high volume commercial production successfully. Future productionin commercial quantities may create technical and financial challenges for us.Any difficulty or delay in constructing additional implanters, if needed, couldhave a material adverse effect on our business.

 

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***Our Latest Products Have Not Been Used in Large-ScaleLong-Term Production and Consequently They May Not Be Able to Perform atthe Availability Levels Expected for Continuous (7 Days per Week / 24 Hours perDay) Operation. (and May Be Subject to Unknown and Undetected Hardware orSoftware Failures).***

 

Semiconductor equipment is subject tostringent mean time between failure (MBTF) and similar quality and reliabilityrequirements. Although our equipment has previously been used in our own productionenvironment for manufacturing SIMOX SOI wafers, and has been used in limitedmanufacturing runs in our customers sites, as our equipment is exposed tolong-term extended production processing on an automated basis, previouslyunknown and undetected hardware or software failures or combinations thereofmay occur. Such failures could adversely affect our relationship with ourcustomers.

 

***We May Not Be Able to Use All of Our Existing or FutureManufacturing Capacity at a Profitable Level.***

 

At times we mayhave the capacity to produce more oxygen implantation machines than we haveorders for at such times. During such idle time we would continue to beresponsible for the fixed costs of our facility and maintaining personnel,which could have a material adverse effect on our business.

 

***We May Not Successfully Form or Maintain DesirableStrategic Alliances.***

 

We believe we willneed to form or maintain alliances with strategic partners for themanufacturing, marketing and distribution of our products. We may enter intothese strategic alliances to satisfy customer demand and to address possiblecustomer 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 formingand maintaining other alliances, including satisfying our contractualobligations with our strategic partners, and our partners may not devoteadequate resources to manufacture, market and distribute these productssuccessfully or may attempt to compete with us.

 

***We May Have Difficulty Obtaining the Materials andComponents Needed to Produce Our Products, and************At Least OneMajor Component Has Only One Source.***

 

Ibis manufactures itsoxygen implanters from standard components and from components manufacturedin-house or by other vendors according to our design specifications. Most rawmaterials and components not produced by us are available from more than onesupplier. However, certain raw materials, components and subassemblies areobtained from a limited group of suppliers and at least one major component hasa sole source. If we areunable to obtain such materials and components on a timely basis and onacceptable terms, if at all, our ability to complete orders could besignificantly delayed and our business and results from operations could bematerially and adversely affected. Semiconductor equipment is a growthindustry and is very cyclical in nature, so if our suppliers experience anincrease in demand from other semiconductor equipment manufacturers with muchhigher volumes than us, the lead-time and/or price for some of our componentsmay increase. Although we have sought to reduce our dependence on these limitedsource suppliers and we have not experienced significant production delays dueto unavailability or delay in procurement of component parts or raw materialsto date, increased market demand for materials from, or disruption ortermination of, certain of these sources could occur and such increased demand,disruptions, or termination could have a material adverse effect on ourbusiness and results of operations.

 

***We May Not Be Able to Protect Our Patents andProprietary Technology.***

 

Our ability tocompete effectively with other companies will depend, in part, on our abilityto maintain the proprietary nature of our technology. Although we have beenawarded or have filed applications for a number of patents in the U.S. and foreigncountries, those patents may not provide meaningful protection, or pendingpatents may not be issued. As part of the charge for impairment of assets in2007, we wrote-down $0.3 million in patent expenditures previously carried onthe balance sheet. Our competitors in both the U.S. and foreign countries, manyof which have substantially greater resources and have made substantialinvestments in competing technologies, may have or may obtain patents that willprevent, limit or interfere with our ability to make and sell our products orinfringe on our patents. The defense and prosecution of patent suits is bothcostly and time-consuming, even if the outcome is favorable to us. In addition,there is an inherent 

 

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unpredictabilityregarding obtaining and enforcing patents. An adverse outcome in the defense ofa patent suit could:

 

·                  subject us tosignificant liabilities to third parties,

 

·                  require disputedrights to be licensed from third parties, or

 

·                  require us tocease selling our products.

 

We also rely inlarge part on unpatented proprietary technology and others, including strategicpartners, may independently develop the same or similar technology or otherwiseobtain access to our proprietary technology. To protect our rights in theseareas, we currently require all of our employees to enter into confidentialityagreements. However, these agreements may not provide meaningful protection forour trade secrets, know-how or other proprietary information in the event ofany unauthorized use, misappropriation or disclosure of such trade secrets,know-how or other proprietary information.

 

Others may claimthat our technology infringes on their proprietary rights. Any infringementclaims, even if without merit, can be time consuming and expensive to defendand may divert management’s attention and resources. If successful, they couldalso require us to enter into costly royalty or licensing agreements. Asuccessful claim of product infringement against us and our inability tolicense the infringed or similar technology could adversely affect ourbusiness.

 

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

 

We are subject toa variety of federal, state and local environmental regulations related to thestorage, treatment, discharge or disposal of chemicals used in our operationsand to the exposure of our personnel to occupational hazards. Although webelieve that we have all permits necessary to conduct our business, the failureto comply with present or future regulations could result in fines beingimposed on us, suspension of production or a cessation of operations. Ourfuture activities may result in our being subject to additional regulations.Such regulations could require us to acquire significant equipment or to incurother substantial expenses to comply with regulations. Our failure to controlthe use of, or to restrict adequately the discharge of, hazardous substances orproperly control other occupational hazards could subject us to substantialfinancial liabilities.

 

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

 

The market prices for securities of high techcompanies have been volatile. This volatility has significantly affected themarket prices for these securities for reasons frequently unrelated to theoperating performance of the specific companies. These broad marketfluctuations may adversely affect the market price of our common stock. Themarket price for our common stock has fluctuated significantly. Since January 1,1999, our stock price has fluctuated from a high of $135.00 to a low of $0.25.It is likely that the market price of our stock will continue to fluctuate inthe future. Events or factors that may have a significant impact on ourbusiness and on the market price of our common stock 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 and /or customer acceptance from major 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,

 

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

 

·                  the cyclical nature of thesemiconductor industry, and its current negative outlook

 

·                  general market conditions.

 

***ConcentratedOwnership of Shares by One Shareholder and Its Affiliates Could Affect thePrice of Our Common Stock.***

 

As of May 22, 2008, our largest known shareholdersinclude Special Situations Fund III QP, L.P and affiliates (“SSF”), which ownan aggregate of 3,378,377 shares, or approximately 24% of our outstandingshares, as well as warrants to purchase an additional 2,533,781 shares. Atpresent, SSF’s ownership may have the effect of delaying, deferring orpreventing a change in control of our company, or may directly or indirectlyeffect a change in control of our company.  Moreover, the disposition bySSF of a substantial amount of its shares of our common stock in the openmarket could have an adverse impact on the market for our common stock.

 

***Future Issuances of PreferredStock May Diminish the Rights of Our Common 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 OurCharter and Bylaws and Provisions of Massachusetts Law Could Make anAcquisition of the Business by a Third-Party Difficult.***

 

Our restated articles of organization, as amended andrestated bylaws and the Massachusetts Business Corporation Law contain certainprovisions that may make a third-party acquisition of us difficult, including:

 

·                  aclassified board of directors, with three classes of directors each serving astaggered three-year term,

 

·                  theability of the board of directors to issue preferred stock, and

 

**·****                **a75% super-majority shareholder vote to amend certain provisions of our articlesof organization and bylaws*.*

 

***Limitations onEffectiveness of Controls.***

 

The Company’s management, including the Chief ExecutiveOfficer and President and the Chief Financial Officer, does not expect that ourinternal controls will prevent all errors and intentional misrepresentations. Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs.  Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues, if any, within the Companyhave been detected.  These inherentlimitations include the realities that judgments in decision-making can befaulty and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented bythe individual acts of some persons, by collusion of two or more people, or bymanagement override of the control.  Thedesign of any system of controls also is based in part upon certain assumptionsabout the likelihood of future events, and no assurance can be given that anydesign will succeed in achieving its stated goals under all potential futureconditions; over time, controls may become inadequate because of changes inconditions, or the degree of compliance with the policies or procedures maydeteriorate.  Because of the inherentlimitations in a cost-effective control system, misstatements due to error orintentional conduct may occur and not be detected.

 

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***If WeFail to Maintain an Effective System of Internal Control over FinancialReporting and Disclosure Controls and Procedures, We May Be Unable toAccurately Report our Financial Results and Comply with the ReportingRequirements Under the Exchange Act.***

 

Pursuant to Section 404of the Sarbanes-Oxley Act of 2002 (“Section 404”), we are required to includeour management’s report on internal control over financial reporting beginningwith our annual report on Form 10-K for the fiscal year ending December 31,2007.  Accordingly, we have completed ourcompliance for management’s report and management has concluded that theCompany did not have effective controls in its financial reporting process asof December 31, 2007.  A discussion ofthe material weaknesses that have been identified can be found in Item 9A,Disclosure Controls and Procedures, together with the Company’s remediationplan.  Although we believe that theconsolidated financial statements included in this Form 10-K present fairly, inall material respects, our financial position, results of operations and cashflow for the periods presented in conformity with GAAP, and we are taking theremedial steps described in Item 9A with respect to the identified materialweaknesses, we cannot assure you that additional material weaknesses in ourinternal control over financial reporting will not be identified in thefuture.  Any further inability on thepart of the Company to maintain effective internal controls over financialreporting could, among other things, cause us to file our periodic reports withthe SEC in an untimely manner, require us to incur additional costs, divertmanagement resources or result in a material misstatement of the Company’sannual or interim financial statements that would not be prevented or detectedon a timely basis.

 

Compliance with therequirements of Section 404 is expensive and time-consuming. If we fail tocomplete this evaluation in a timely manner, we could be subject to regulatoryscrutiny and a loss of public confidence in our internal control over financialreporting.  In addition, any failure toestablish and maintain an effective system of disclosure controls andprocedures could cause our current and potential stockholders and customers tolose confidence in our financial reporting and disclosure required under theExchange Act, which could adversely affect our business.

 

***Evolving Regulation ofCorporate Governance and Public Disclosure May Result in AdditionalExpenses and Continuing Uncertainty.***

 

Changing laws, regulations and standards relating tocorporate governance and public disclosure, including the Sarbanes-Oxley Act of2002 and related SEC regulations as well as the listing standards of the NASDAQStock Market, are creating uncertainty for public companies. We continuallyevaluate and monitor developments with respect to new and proposedrules and cannot predict or estimate the amount of the additional costs wemay incur or the timing of such costs. These new or changed laws, regulationsand standards are subject to varying interpretations, in many cases due totheir lack of specificity, and as a result, their application in practice mayevolve over time as new guidance is provided by regulatory and governingbodies. This could result in continuing uncertainty regarding compliancematters and higher costs necessitated by ongoing revisions to disclosure andgovernance practices. We are committed to maintaining high standards ofcorporate governance and public disclosure. As a result, we have investedresources to comply with evolving laws, regulations and standards. Thisinvestment may result in increased general and administrative expenses and adiversion of management time and attention from revenue-generating activitiesto compliance activities. If our efforts to comply with new or changed laws,regulations and standards differ from the activities intended by regulatory orgoverning bodies due to ambiguities related to practice, regulatory authoritiesmay initiate legal proceedings against us and we may be harmed.

 

**Item 2.****           PROPERTIES**

 

Ibis’ corporate officeand manufacturing site are located at a leased facility in Danvers,Massachusetts. The equipment manufacturing business and the engineering andwafer processing research and development efforts are housed in approximately32,000 square feet which includes a modernized clean-room that containsmetrology equipment, cleaning equipment and an implantation equipmentmanufacturing and service area. The lease on the space we currently occupy wasrenewed during 2006 and will expire on June 30, 2011, and contains anoption to renew for five years.

 

**Item 3.****           LEGAL PROCEEDINGS**

 

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

 

OnApril 10, 2007, the Company announced that the shareholder derivativeaction filed in February 2004 against certain of the Company’s directorsand officers: Louis F. Matheson, Jr. v. Martin J. Reid et al., Civ. Act. No. 04-10341(RCL) (D. Mass) had been voluntarily dismissed by the plaintiff. The notice ofdismissal filed by the plaintiff dismissed the action with prejudice. As setforth in the notice, the plaintiff received a $55,000 payment following thedismissal in consideration of plaintiff’s analysis of information provided bythe Company regarding, among other things, the Company’s contention that thelitigation should be dismissed for failure to make a demand on the Board ofDirectors before filing suit as required by Massachusetts law. The payment wasfunded entirely by the Company’s insurance carrier.

 

**Item 4.****           SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

 

# **No matters were submitted tostockholders during the fourth quarter of the year ended December 31,2007.**

 

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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, 1994on the Nasdaq SmallCap Market and on the Boston Stock Exchange. Prior to May 20,1994, there was no public market for the Common Stock or any other securitiesof Ibis.  On April 4, 1996, Ibiscommenced trading on the Nasdaq National Market and is currently trading on theNasdaq Global Market. Our Common Stock is traded under the symbol “IBIS.” Thefollowing table sets forth, for the periods so indicated the high and low saleprices for the Common Stock as reported by the Nasdaq National Market or NasdaqGlobal Market, as applicable.

 
| ** **     | ** ** | **Common Stock** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **High**              | ** ** | **Low** | ** ** |
| ** **     | ** ** | ** **            | ** ** | ** ** | ** ** |
| 2006:          |       |                  |       |   |   |
| First Quarter  |       | $                     | 4.50       |   | $ | 2.58 |   |
| Second Quarter |       | $                     | 3.78       |   | $ | 2.20 |   |
| Third Quarter  |       | $                     | 3.65       |   | $ | 1.99 |   |
| Fourth Quarter |       | $                     | 3.56       |   | $ | 1.32 |   |
| 2007:          |       |                  |       |   |   |
| First Quarter  |       | $                     | 1.86       |   | $ | 1.28 |   |
| Second Quarter |       | $                     | 1.65       |   | $ | 1.29 |   |
| Third Quarter  |       | $                     | 1.54       |   | $ | 0.96 |   |
| Fourth Quarter |       | $                     | 1.35       |   | $ | 0.25 |   |

 

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** **

**StockPerformance Graph**

 

The following graphcompares the annual cumulative total stockholders return (assuming reinvestmentof dividends) from investing $100 on December 31, 2001 and plotted at theend of each fiscal year thereafter, in each of (i) the Company’s CommonStock, (ii) the Nasdaq Stock Market, and (iii) the Media GeneralFinancial Services SIC Code Index 3674-Semiconductors, Related Devices-whichconsists of other companies on the Common Stock, and no dividends are includedin the representation of the Company’s performance. The stock price performanceon the graph below is not necessarily indicative of future price performance.

 

** **

**COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE ORMORE**

**COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/ORBROAD MARKETS**

** **

**FISCAL YEAR ENDING**

** **
| **COMPANY/INDEX/MARKET**            | ** ** | **12/31/02** | ** ** | **12/31/03** | ** ** | **12/31/04** | ** ** | **12/30/05** | ** ** | **12/29/06** | ** ** | **12/31/07** | ** ** |
|-------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
| **Ibis  Technology Corp**           | ** ** | **$**        | **100.00** | ** **   | **$**      | **239.36**   | ** ** | **$**        | **79.15**  | ** **   | **$**      | **74.47**    | ** ** | **$** | **31.49** | ** ** | **$** | **9.15** | ** ** |
| **Semiconductors,  Related Device** | ** ** | **$**        | **100.00** | ** **   | **$**      | **188.19**   | ** ** | **$**        | **144.02** | ** **   | **$**      | **157.87**   | ** ** | **$** | **157.25** | ** ** | **$** | **169.42** | ** ** |
| **NASDAQ  Market Index**            | ** ** | **$**        | **100.00** | ** **   | **$**      | **150.36**   | ** ** | **$**        | **163.00** | ** **   | **$**      | **166.58**   | ** ** | **$** | **183.68** | ** ** | **$** | **201.91** | ** ** |

 

The Graph is not“soliciting material” under Regulation 14A or 14C of the rules promulgatedunder the Securities Exchange Act of 1934, is not deemed filed with theSecurities and Exchange Commission and is not to be incorporated by referencein any filing of the Company under the Securities Act of 1933, as amended, orthe Exchange Act whether made before or after the date hereof and irrespectiveof any general incorporation language in any such filing. Information used inthe graph was obtained from Hemscott, Inc., a source believed to bereliable, but the company is not responsible for any errors or omissions insuch information

 

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**Stockholders**

 

As of May 22,2008, there were approximately 144 stockholders of record of the 14,317,482outstanding shares of Common Stock and approximately 4,071 beneficial owners ofthe Common Stock.

 

**Dividends**

 

Ibis has never declared or paid any dividends and doesnot anticipate paying such dividends on its Common Stock in the foreseeablefuture.  Ibis currently intends to retainany future earnings for use in its business. The payment of any futuredividends will be determined by the Board of Directors in light of conditionsthen existing, including our financial condition and requirements, futureprospects, restrictions in financing agreements, business conditions and otherfactors deemed relevant by the Board of Directors.

 

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**Item 6.  SELECTEDFINANCIAL DATA**

 

The selected financial data presented below under thecaptions “Statement of Operations Data” and “Balance Sheet Data” for, and as ofthe end of each of the years in the five-year period ended December 31,2007, are derived from the financial statements of Ibis, which have beenaudited by KPMG LLP, independent registered public accounting firm. The auditedbalance sheets at December 31**,**2006 and 2007and the related statements of operations, stockholders equity and cash flowsfor each of the years in the three-year period ended December 31, 2007 andthe independent registered public accounting firm’s report thereon, areincluded elsewhere in this Annual Report on Form 10-K. The data set forthbelow should be read in conjunction with Ibis’ financial statements, therelated notes thereto and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included elsewhere in this Annual Reporton Form 10-K. The historical results are not necessarily indicative of theoperating results to be expected in the future.

 
| ** **                                                     | ** ** | **Years Ended December 31,**                                 | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2003**                                                                    | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except for per share data)** | ** ** |
| ** **                                                     | ** ** | ** **                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Statement  of Operations Data:**                             | ** ** | ** **                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                           |       |                                                                        |       |   |   |   |   |   |   |   |   |
| License and  other revenue                                     |       | $                                                                           | 660        |   | $ | 391 |   | $ | 324 |   | $ | 560 |   | $ | 426 |   |
| Equipment  revenue                                             |       | 8,782                                                                       |       | 7,535 |   | 278 |   | 13,427 |   | 525 |   |
| Total revenue  (2)                                             |       | 9,442                                                                       |       | 7,926 |   | 602 |   | 13,987 |   | 951 |   |
| Cost of license  and other revenue                             |       | 45                                                                          |       | 15 |   | — |   | — |   | — |   |
| Cost of  equipment revenue                                     |       | 4,331                                                                       |       | 4,722 |   | 750 |   | 5,893 |   | 2,214 |   |
| Total cost of  revenue                                         |       | 4,376                                                                       |       | 4,737 |   | 750 |   | 5,893 |   | 2,214 |   |
| Gross profit  (loss)                                           |       | 5,066                                                                       |       | 3,189 |   | (148 | ) | 8,094 |   | (1,263 | ) |
| Operating  expenses:                                           |       |                                                                        |       |   |   |   |   |   |   |   |   |
| General and  administrative                                    |       | 2,337                                                                       |       | 2,221 |   | 2,217 |   | 2,401 |   | 2,005 |   |
| Marketing and  selling                                         |       | 1,236                                                                       |       | 1,521 |   | 1,319 |   | 1,096 |   | 578 |   |
| Research and  development                                      |       | 5,381                                                                       |       | 5,329 |   | 5,993 |   | 5,396 |   | 3,789 |   |
| Impairment of  long lived assets                               |       | —                                                                      |       | — |   | — |   | — |   | 1,603 |   |
| Total operating  expenses                                      |       | 8,954                                                                       |       | 9,071 |   | 9,529 |   | 8,893 |   | 7,975 |   |
| Income (loss)  from operations                                 |       | (3,888                                                                      | )          | (5,882 | ) | (9,677 | ) | (799 | ) | (9,238 | ) |
| Total other  income                                            |       | 27                                                                          |       | 242 |   | 218 |   | 1,205 |   | 699 |   |
| Income (loss)  before income taxes                             |       | (3,861                                                                      | )          | (5,640 | ) | (9,459 | ) | 406 |   | (8,539 | ) |
| Income tax  expense (benefit)                                  |       | (8                                                                          | )          | 1 |   | 1 |   | 1 |   | 1 |   |
| Income (loss)  from continuing operations                      |       | (3,853                                                                      | )          | (5,641 | ) | (9,460 | ) | 405 |   | (8,540 | ) |
| Discontinued  operations (2):                                  |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Loss from  discontinued operations                             |       | (17,597                                                                     | )          | (3,179 | ) | — |   | — |   | — |   |
| Loss on disposal                                               |       | —                                                                      |       | (2,099 | ) | 215 |   | — |   | — |   |
| Income (loss)  from discontinued operations                    |       | (17,597                                                                     | )          | (5,278 | ) | 215 |   | — |   | — |   |
| Net income  (loss)                                             |       | $                                                                           | (21,450    | ) | $ | (10,919 | ) | $ | (9,245 | ) | $ | 405 |   | $ | (8,540 | ) |
| Income (loss)  from continuing operations per common share (1) |       | $                                                                           | (0.40      | ) | $ | (0.53 | ) | $ | (0.88 | ) | $ | 0.04 |   | $ | (0.64 | ) |
| Net Income  (loss) per common share (1)                        |       | $                                                                           | (2.21      | ) | $ | (1.02 | ) | $ | (0.86 | ) | $ | 0.04 |   | $ | (0.64 | ) |
| Weighted average  common shares outstanding                    |       | 9,728                                                                       |       | 10,666 |   | 10,738 |   | 10,853 |   | 13,411 |   |
| Weighted average  common shares outstanding basic              |       | 9,728                                                                       |       | 10,666 |   | 10,738 |   | 10,980 |   | 13,411 |   |

 
| ** **                            | ** ** | **As of December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **(In thousands)**               | ** ** |
| ** **                            | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance  Sheet Data:**              | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital                       |       | $                                     | 12,607     |   | $ | 12,415 |   | $ | 5,145 |   | $ | 7,494 |   | $ | 7,304 |   |
| Total assets                          |       | 35,343                                |       | 22,283 |   | 19,992 |   | 13,789 |   | 9,763 |   |
| Long-term debt,  less current portion |       | —                                |       | — |   | — |   | — |   | — |   |
| Total  liabilities                    |       | 4,226                                 |       | 1,863 |   | 8,695 |   | 1,534 |   | 732 |   |
| Shareholders’  equity            |       | 31,117                                |       | 20,420 |   | 11,297 |   | 12,255 |   | 9,031 |   |
|                                       |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1) Computed on thebasis described for net earnings (loss) per common share in Note 2(g) ofNotes to Financial Statements.

 

(2) Historically, much of the Company’s revenue wasderived from research and development contracts and sales of wafers formilitary and commercial applications. In mid-2004, we discontinued the wafermanufacturing portion of our business in order to focus exclusively on ourequipment business. Wafer product sales, as well as wafer revenue reported insubsequent periods, are reported net of associated costs, as loss fromdiscontinued operations or other income after 2005. We will maintain a researchand development effort relating to wafers for our equipment improvementprograms. 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**

 

IbisTechnology Corporation (“Ibis”) was formed in October 1987 and commencedoperations in January 1988. Ibis’ initial activities consisted ofproducing and selling SIMOX-SOI wafers and conducting research and developmentactivities. This effort led to the development of a proprietary oxygenimplanter, the Ibis 1000, which we began selling in 1996, the next generationimplanter, 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 exited the wafer manufacturing business. Wafer product sales, as wellas wafer revenue reported in subsequent periods, are reported net of associatedcosts, as loss from discontinued operations or other income after 2005 on ourincome statement. The Company believes that its decision to discontinue thewafer business permits broader strategic collaboration efforts between Ibis andthe wafer manufacturers. We reach this conclusion for a number of reasons.First, we believe that tremendous price pressure exists on commodity typeproducts, such as silicon wafers, and this pressure is already eroding futureprice expectations of SOI wafers. Because the starting wafer represents asignificant component of the SOI wafer cost, we believe that silicon wafer manufacturersshould have a natural cost structure advantage leading to a higher grossmargin, and therefore should be able to manage such price pressure better thanstand-alone SOI producers that do not also produce the silicon wafer itself.Second, we expect that the price pressure will encourage silicon wafermanufacturers to seek out higher margin products, like SOI wafers, to increasetheir margins. Third, we believe that silicon wafer manufacturers havetraditionally developed proprietary intellectual property in silicon materialsscience, which can be applied to designing optimal starting wafers for SOIproduction. We believe that this should give them an advantage in bothminimizing wafer cost and maximizing SOI wafer quality and yield. Fourth, ourexperience suggests that silicon wafer manufacturers already have awell-developed infrastructure for manufacturing, sale and marketing of largevolumes of substrates. Lastly, we believe that there is greater efficiency inproducing the SOI wafer as part of the wafer manufacturers existing productflow, specifically avoiding the need to repackage, re-clean, re-inspect andre-ship substrates twice, once as starting silicon wafers, and a second time asSOI wafers. Therefore, as a result of these trends, we expect our ultimatecustomers will be drawn from these silicon wafer manufacturers and we plan tofocus a majority of our technical and marketing resources on the sale ofimplanters to the leading silicon wafer manufacturers and our key customers inthe semiconductor industry who we believe are the leaders in the adoption ofSOI technology. We expect that implanter sales to chipmakers should be minimal,and that these sales will be focused on SOI processes that the chipmaker wishesto keep proprietary, such as selective (or patterned) SIMOX, or other specialtysubstrates.

 

Our fundamentalSIMOX-SOI technology has been developed, refined, and tested over the lastdozen years. In 2002, we introduced the current generation of SIMOX-SOItechnology, which included our second-generation oxygen implanter (i2000ä) andthe MLD wafer process which was licensed to us by IBM. We believe that thei2000’s flexibility, automation and operator-friendly controls allow this toolto produce a wide range of SIMOX-SOI wafer products using a range ofmanufacturing processes, including Advantox® MLD and Advantox MLD-UTwafers. We also believe the ability of the i2000 implanter to producetwelve-inch (or 300 mm) SIMOX-SOI wafers coupled with the MLD process positionsus to capitalize on the growing SOI market. In 1999, we commenced a program todesign and develop the i2000, introduced it in March 2002 and beganshipping 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

 

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**IBIS TECHNOLOGY CORPORATION**

** **

**PART I - ITEM 2**

** **

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF**

**FINANCIAL CONDITION AND RESULTSOF OPERATION**

 

MLD process, whenlicensed, as well as other SIMOX-SOI wafer manufacturing processes that do notrequire the IBM license.

 

In their report dated May22, 2008, our registered public accounting firm stated that our financialstatements for the fiscal year ended December 31, 2007 were preparedassuming we would continue as a going concern; however, the Company’s recurringlosses and accumulated deficit raise substantial doubts about its ability tocontinue as a going concern. The Company’s ability to continue as a goingconcern is an issue raised as a result of our recurring losses from operationsand net capital deficiency and is subject to our ability to secure additionalorders of our implanter equipment or, in the alternative, identify andconsummate a strategic transaction, including the potential a sale of theCompany, or other strategic alternative.

 

Since we beganselling implanters in 1996, we have only sold a total of eight Ibis 1000 oxygenimplanters at an average sale price of approximately $4.0 million each and fouri2000 oxygen implanters at a selling price between $6.0 and $8.0 million. Because we have sold only a limitednumber of implanters to date on an irregular basis, the recognition of revenuefrom the sale of even one implanter is likely to result in a significantincrease in the revenue during that quarter. We recognize implanter revenue inaccordance with SAB 104, which includes, among other criteria, the shipment andfinal customer acceptance of the implanter at the customer’s location. As a result,deferral of implanter revenue will be recorded on our balance sheet until theCompany is able to meet these criteria The most recent orderreceived was in October 2005, for which the Company recognized revenue inthe quarter ended September 30, 2006.  The Company did not record implanter revenueduring 2007 and as of April 10, 2008, does not have an order for animplanter from its customers.  At presenttime, only one of the four major wafer manufacturers are a current prospectivecustomer.  The Company currently does nothave a backlog for implanters, nor does it have visibility to the timing of thenext order from any customer.  In thefourth quarter of 2007, we recorded an obsolescence charge to inventory reflectingthe current lack of marketability for the Company’s implanters. If we areunable to sell the implanters through a normal sales process to our customers,the Company may seek to find alternative methods to monetize the inventory.

 

InFebruary 2008, the Company announced the engagement of the investmentbank BlueLake Partners, LLC for the purpose of assessing strategic alternativesfor Ibis, including a potential sale of the Company and/or its assets. No decision to date has been made as to whetherIbis will engage in a transaction or transactions resulting from itsconsideration of strategic alternatives, and no assurance can be given that anytransaction or transactions will occur or, if undertaken, the terms or timingof such a transaction.

 

**Critical Accounting Policies**

 

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

 

***Revenue Recognition****. *We recognize revenue from equipment salesand the sales of spare parts when all of the following criteria have been met: (1) evidenceexists that the customer is bound to the transaction; (2) the product hasbeen delivered to the customer and, when applicable, the product has beeninstalled and accepted 

 

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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. Revenue derived from contractsand services is recognized upon performance. Significant management judgmentsand estimates must be made and used in connection with revenue recognized inany period. Management analyzes various factors, including a review of specifictransactions, historical experience, credit worthiness of customers and currentmarket and economic conditions. Changes in judgment based upon these factorscould impact the timing and amount of revenue and cost recognized.

 

***Inventory Valuation and Reserves****. *Inventoriesare stated at the lower of cost or market. Cost is determined using thefirst-in, first-out (“FIFO”) cost method. 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. Forthe year ended December 31, 2007, the Company recorded a $1.8 million increasein reserves charged to cost of goods for potential obsolescence of inventory.We also reserve for obsolescence when engineering changes or othertechnological advances indicate that obsolescence has occurred.

 

***Valuation of Long-Lived Assets****. *Ibis reviewsthe valuation of long-lived assets, including property and equipment andlicenses, under the provisions of SFAS No. 144, Accounting for Impairmentor Disposal of Long-Lived Assets. Management is required to assess the recoverability of its long-livedassets or asset groups whenever events and circumstances indicate that thecarrying value may not be recoverable. Based on current conditions, factors weconsider important and that could trigger an impairment review include thefollowing:

 

·                  Significant underperformance relative to expected historical orprojected future operating results,

 

·                  Significant changes in the manner of our use of the acquired assets orthe strategy of our overall business,

 

·                  Significant negative industry or economic trends,

 

·                  Significant decline in our stock price for a sustained period, and

 

·                  Our market capitalization relative to book value.

 

Inaccordance with SFAS No. 144, when the Company determine that the carryingvalue of applicable long-lived assets may not be recoverable based upon theexistence of one or more of the above indicators of impairment, an evaluationtakes place regarding whether the carrying amount of the asset exceeds the sumof the undiscounted cash flows expected to result from the use and eventual dispositionof that asset or asset group. If such a circumstance exists, the Company wouldmeasure an impairment loss to the extent the carrying amount of the particularlong-lived asset or group exceeds its fair value. The Company would determinethe fair value based on either a projected discounted cash flow method using adiscount rate determined by our management to be commensurate with the riskinherent in our current business model, or estimatedfair value based on comparable sales prices for similar used equipment. We recorded an impairment loss on certainlong-lived assets used in our manufacturing process, as well as certain of ourpatents for the fourth quarter of 2007 of $1.6 million.

 

**Results of Operations**

 

***FiscalYear Ended December 31, 2007 Compared to Fiscal Year Ended December 31,2006***

 

***Licenseand Other Revenue***. License and other revenue for the fiscal year ended December 31,2007 was $0.5 million compared to $0.6 million for the fiscal year ended December 31,2006, a decrease of $0.1 million, 

 

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or 24%. This decrease is primarily attributable to a new sublicenseagreement valued at approximately $0.2 million related to equipment technologyin the year ended December 31, 2006.

 

***EquipmentRevenue.***  Equipmentrevenue represents revenue recognized from the sale of implanters, spare partsand field service revenue. Equipment revenue decreased to $0.5 million for thefiscal year ended December 31, 2007 from $13.4 million for the fiscal yearended December 31, 2006, a decrease of $12.9 million. Equipment revenue in2006 included revenue recognized for two i2000 implanters for $13.0 million ascompared to no implanter revenue recognition in 2007. Field service revenueaccounted for $0.2 million, or 37% of equipment revenue for the fiscal yearended December 31, 2007 as compared to $0.3 million, or 2% of equipmentrevenue for the fiscal year ended December 31, 2006. Sales of spare partsaccounted for $0.3 million, or 63% of equipment revenue for the fiscal yearended December 31, 2007 as compared to $0.1 million, or 1% of equipmentrevenue for the fiscal year ended December 31, 2006. Sales of spare partsfluctuate depending on customer demand and when the warranties expire onindividual pieces of equipment. Warranty expense is calculated on ouranticipated replacement costs for equipment accepted by our customers over aone or two year contract period.

 

***TotalSales and Revenue.*** Total sales and revenue for the fiscal year ended December 31, 2007was approximately $1.0 million, a decrease of $13.0 million, from $14.0 millionfor the fiscal year ended December 31, 2006. The decrease is due torevenue recognition for two i2000 implanters of $13.0 million for the fiscalyear ended December 31, 2006 along with decreased license revenue of $0.1million and decreased service revenue of $0.1 million which was offset by anincrease in spare parts revenue of $0.2 million for the fiscal year ended December 31,2007.

 

***Total Cost of Sales and Revenue***. Cost of license and other revenue consists of labor and materialsexpended during the year. There were no license costs or costs for otherrevenue during the period.

 

Cost of equipment revenue represents the cost ofequipment including manufacturing labor, the cost for spare parts, and the costof labor incurred for field service. Cost of equipment revenue also includes$1.8 million for the increase in inventory reserves for potential obsolescenceof the Company’s inventory. Cost of equipment revenue for the fiscal year endedDecember 31, 2007 was $2.2 million, as compared to $5.9 million for thefiscal year ended December 31, 2006, a decrease of $3.7 million. Thisdecrease of $3.7 million was due to the costs associated with the recognitionof revenue for the two i2000 implanters during the year ended December 31,2006, offset by the increase in inventory reserves in the year ended December 31,2007.

 

The gross margin for all sales was a negative 133% forthe fiscal year ended December 31, 2007, as compared to a positive gross marginof 58% for the fiscal year ended December 31, 2006. The decrease in thegross margin for all sales is attributable to the approximate gross margin of55% for the two i2000 implanter sales recognized in the fiscal year ended December 31,2006, the inventory reserve increase of $1.8 million in the fiscal year ended December 31,2007 for inventory obsolescence and $0.6 million reduction in cost from theexpiration of warranties on two i2000 implanters in the fiscal year ended December 31,2006 as compared to the $0.4 million reduction in cost from the expiration ofwarranties on two i2000 implanters in the fiscal year ended December 31,2007.

 

***Generaland Administrative Expenses***.  General and administrative expenses for thefiscal year ended December 31, 2007 were $2.0 million as compared to $2.4million for the fiscal year ended December 31, 2006, a decrease of $0.4million or 16%. This is due to $0.4 million in decreased payroll and payrollrelated expenses from headcount reductions and reduced salaries.

 

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***Marketingand Selling Expenses. ***Marketingand selling expenses for the fiscal year ended December 31, 2007 were $0.6million as compared to $1.1 million for the fiscal year ended December 31,2006, a decrease of $0.5 million, or 47%. The decrease in marketing and sellingexpenses is a result of decreased payroll and payroll related expenses of $0.5million from headcount reductions and labor costs charged out for consulting ata neighboring business in the fiscal year ended December 31, 2007.

 

***Research and Development Expenses. ***Internallyfunded research and development expenses decreased by $1.6 million, or 30% to$3.8 million for the fiscal year ended December 31, 2007 from $5.4 millionfor the fiscal year ended December 31, 2006. This decrease was due to areduction in wafer research and development costs of $0.7 million, which wasthe result of $0.3 million from reduced payroll and payroll related expensesfrom reduced headcount and reduced salaries along with $0.1 million of reducedwafer testing material, $0.1 million of reduced utility expense and $0.1million in reduced depreciation and amortization. In addition, for theequipment research and development area, which reduced spending by $0.9 million,$0.5 million was from reduced payroll and payroll related expenses fromheadcount reductions and reduced salaries, reduced R&D material of $0.3million and reduced utilities and equipment repair and maintenance of $0.1million.

 

***Impairment of Long-Lived Assets.*********  **During the fourth quarter ended December 31, 2007a number of unexpected developments occurred which impacted our assets,including changes in the projected cash flow generation and our projectedutilization of the assets within our revised plans. As a result of oursubsequent impairment analysis under the provisions of SFAS No. 144,Accounting for Impairment or Disposal of Long-Lived Assets we recognized animpairment charge of approximately $1.6 million. Of this total impairment,approximately $1.3 million related to fixed assets and the balance of $0.3million was associated with certain patents.

 

***Other Income.***** **Total other income for the fiscal year ended December 31,2007 was $0.7 million as compared to $1.2 million for the fiscal year ended December 31,2006, a decrease of $0.5 million. The decrease in total other income isattributed to $0.8 million received from the expiration of an option to placean order for an additional implanter prior to the end of 2006. This was offsetby an increase of $0.3 million as a result of outside consulting provided to aneighboring business under a staffing services agreement in the fiscal yearended December 31, 2007.

 

***Taxes. ***The Company had federal net operating loss and generalbusiness credit carryovers of approximately $91.6 million and $1.2 million,respectively, at December 31, 2007, that may be used to offset futuretaxable income through 2027. State net operating loss and credit carryovers of$44.1 million and $1.2 million, respectively, have varying expiration dates.Included in the total deferred tax assets, offset by the valuation allowance,was $3.2 million related to the net operating loss carryover resulting from theexercise of employee stock options the tax benefit of which, when recognized,will be accounted for as a credit to additional paid-in capital rather than areduction of income tax expense. Net operating loss carryovers and other taxattributes may be limited due to past or future changes in ownership interests.

 

***FiscalYear Ended December 31, 2006 Compared to Fiscal Year Ended December 31,2005***

 

***Licenseand Other Revenue***. License and other revenue for the fiscal year ended December 31,2006 was $0.6 million compared to $0.3 million for the fiscal year ended December 31,2005, an increase of $0.3 million, or 73%. This increase is primarilyattributable to a new sublicense agreement valued at $0.2 million related toequipment technology in the year ended December 31, 2006.

 

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***EquipmentRevenue.***  Equipmentrevenue represents revenue recognized from the sale of implanters, spare partsand field service revenue. Equipment revenue increased to $13.4 million for thefiscal year ended December 31, 2006 from $0.3 million for the fiscal yearended December 31, 2005, an increase of $13.1 million. Equipment revenuein 2006 included revenue recognized for two i2000 implanters for $13.0 millionas compared to no implanter revenue recognition in 2005.

 

Field service revenueaccounted for $0.3 million, or 2% of equipment revenue for the fiscal yearended December 31, 2006 as compared to $0.1 million, or 34% of equipmentrevenue for the fiscal year ended December 31, 2005. Sales of spare partsaccounted for $0.1 million, or 1% of equipment revenue for the fiscal yearended December 31, 2006 as compared to $0.2 million, or 66% of equipmentrevenue, for the fiscal year ended December 31, 2005. Sales of spare partsfluctuate depending on customer demand and when the warranties expire onindividual pieces of equipment. Warranty expense is calculated on ouranticipated replacement costs for equipment accepted by our customers over aone or two year contract period.

 

***TotalSales and Revenue.*** Total sales and revenue for the fiscal year ended December 31, 2006was $14.0 million, an increase of $13.4 million, from $0.6 million for thefiscal year ended December 31, 2005. The increase is due to revenuerecognition for two i2000 implanters of $13.0 million for the fiscal year endedDecember 31, 2006 along with increased license revenue of $0.2 million andincreased service revenue of $0.2 million which was offset by a decrease inspare parts revenue of $0.1 million.

 

***Total Cost of Sales and Revenue***. Cost of license and other revenue consists of labor and materials expendedduring the twelve month period. There were no license costs or costs for otherrevenue during the period.

 

Cost of equipment revenue represents the cost ofequipment including manufacturing labor, the cost for spare parts, and the costof labor incurred for field service. Cost of equipment revenue for the fiscalyear ended December 31, 2006 was $5.9 million, as compared to $0.8 millionfor the fiscal year ended December 31, 2005, an increase of $5.1 million.This increase of $5.1 million was primarily due to the costs associated withthe recognition of revenue for the two i2000 implanters during the period endedDecember 31, 2006.

 

The gross margin for all sales was a positive 58% forthe fiscal year ended December 31, 2006, as compared to a negative grossmargin of 25% for the fiscal year ended December 31, 2005. This increasein the gross margin for all sales is attributable to the approximate grossmargin of 55% for the two i2000 implanter sales recognized in the fiscal yearended December 31, 2006 and $0.6 million reduction in cost from theexpiration of warranties on two i2000 implanters in the fiscal year ended December 31,2006.

 

***Generaland Administrative Expenses***.  General and administrative expenses for thefiscal year ended December 31, 2006 were $2.4 million as compared to $2.2million for the fiscal year ended December 31, 2005, an increase of $0.2million or 8%. This is due to $0.2 million in stock based compensation expensewhich impacted the financial statements in compliance with the new accounting rule inthe fiscal year ended December 31, 2006.

 

***Marketingand Selling Expenses. ***Marketingand selling expenses for the fiscal year ended December 31, 2006 were $1.1million as compared to $1.3 million for the fiscal year ended December 31,2005, a decrease of $0.2 million, or 17%. The decrease in marketing and sellingexpenses is a result of decreased payroll and payroll related expenses of $0.2million from headcount reductions.

 

***Research and Development Expenses. ***Internallyfunded research and development expenses decreased by $0.6 million, or 10% to$5.4 million for the fiscal year ended December 31, 2006 from $6.0 millionfor the fiscal year ended December 31, 2005. This decrease was due to areduction in wafer research 

 

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and development costs of $0.3 million. In addition, reduced payroll andpayroll related expenses of $0.3 million offset by $0.1 million associated withFAS 123(R) stock based compensation expense contributed to these resultsfor the fiscal year ended December 31, 2006.

 

***Other Income.***** **Total other income for the fiscal year ended December 31,2006 was $1.2 million as compared to $0.2 million for the fiscal year ended December 31,2005, an increase of $1.0 million. The increase in total other income isattributed to $0.8 million received from the expiration of an option to placean order for an additional implanter prior to the end of 2006. In addition, interestincome increased by $0.1 million due to the increase in interest rates andmiscellaneous income increased by $0.1 million from the sales of excessmaterial and equipment.

 

***Discontinued Operations. *** There was no gain or loss shown for the fiscalyear ended December 31, 2006. For the fiscal year ended December 31,2005, the Company recognized a gain on disposal of $0.2 million consistingprimarily of the sale of excess equipment, sale of wafer materials previouslywritten off and an accrual adjustment related to sales tax.

 

***Taxes. ***The Company had federal net operating loss and generalbusiness credit carryovers of approximately $87.1 million and $1.2 million,respectively, at December 31, 2006, that may be used to offset futuretaxable income through 2026. State net operating loss and credit carryovers of$52.4 million and $1.2 million, respectively, have varying expiration dates.Included in the total deferred tax assets, offset by the valuation allowance,was $3.2 million related to the net operating loss carryover resulting from theexercise of employee stock options the tax benefit of which, when recognized,will be accounted for as a credit to additional paid-in capital rather than areduction of income tax expense. Net operating loss carryovers and other taxattributes may be limited in the event of certain changes in ownershipinterests. The Company recorded and paid Massachusetts and California exciseand corporate tax which in aggregate was $1,256 for 2006.

 

#### **Liquidity and CapitalResources**

#### ** **

Our financial statementsfor the fiscal year ended December 31, 2007 were prepared assuming theCompany would continue as a going concern; however, the Company’s recurringlosses and accumulated deficit raise substantial doubts about its ability tocontinue as a going concern.  The Company’sability to continue as a going concern is an issue raised as a result oflimited equipment sales, recurring losses from operations and accumulateddeficit and is subject to the Company’s ability to secure additional orders ofour implanter equipment or, in the alternative, identify and consummate astrategic transaction, including the potential a sale of the Company, or otherstrategic alternative.

 

As of December 31, 2007, the Company had cash andcash equivalents of $5.8 million, including the gross proceeds from thefinancing of $5.3 million from the sale of 3.4 million shares of common stockand 2.5 million common stock warrants in the year ended December 31, 2007.

 

Duringthe fiscal year ended December 31, 2007, the Company used $3.9 million ofcash for operating activities compared to $2.1 million in 2006. To date,  working capital requirements have been fundedprimarily through debt (capital leases) and equity financings, including the2007 financing discussed below. The principal uses of cash during the fiscalyear ended December 31, 2007, as described in the Statement of Cash Flowsin this 10K, were to fund operations. At December 31, 2007, the Companyhad commitments to purchase approximately $0.2 million in material. Headcountfor the year ended December 31, 2007 was 20 employees.

 

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Cash flow projectionsdeveloped by management indicate the Company believes it will have sufficientcash resources to support current operations until at least June 2009.However, since it began selling implanters in 1996, only a total of eight Ibis1000 oxygen implanters have been sold at an average sale price of approximately$4.0 million each and four i2000 oxygen implanters at a selling price between$6.0 and $8.0 million.  The most recentorder received was in October 2005, for which the Company recognizedrevenue in the quarter ended September 30, 2006.  The Company did not record implanter revenueduring 2007 and as of April 10 2008, does not have an order for animplanter from our customers.  At presenttime, only one of the four major wafer manufacturers can be viewed as a currentprospective customer.  The Companycurrently does not have a backlog for implanters, nor does it have visibilityto the timing of the next order from any customer.  Our failure to obtain any orders forimplanters in the foreseeable future, notwithstanding our belief that we havesufficient cash for the 2008 fiscal year, or to obtain other sources ofoffsetting revenue, will have a material adverse impact on the Company’s businessand hinder its ability to continue as a going concern.  The Company’s continuing inability togenerate revenue likely will result in its inability to continue to invest inresearch development and manufacturing capabilities, hinder its ability to pursueand maintain relationships, partnerships and alliances with third parties,result in a loss of key personnel by way of workforce reduction or by voluntarytermination of employment, limit its ability to secure financing on acceptableterms, if at all, and create greater volatility in the trading of the Company’scommon stock.

 

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

 

On December 10, 2007, the Company received aletter from the Nasdaq Stock Market advising that for the previous 30consecutive business days, the bid price of the Company’s common stock (the“Common Stock”) had closed below the minimum $1.00 per share requirement forcontinued inclusion on the Nasdaq Global Market pursuant to Nasdaq Marketplace Rule 4450(a)(5).

 

Nasdaq stated in its letter that in accordance withNasdaq Marketplace Rule 4450(e)(2), the Company will be provided 180calendar days, or until June 9, 2008, to regain compliance with theminimum bid price requirement. The bid price of the Common Stock must close at$1.00 per share or more for a minimum of 10 consecutive business days toachieve compliance.

 

If the Company does notregain compliance with the minimum bid price requirement by June 9, 2008, 

 

35

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the Nasdaq staff will provide the Company with written notificationthat the Common Stock will be delisted from the Nasdaq Global Market. At thattime, the Company may appeal the delisting determination to a Nasdaq ListingsQualifications Panel pursuant to applicable Nasdaq rules. Alternatively, NasdaqMarketplace Rule 4450(i) may permit the Company to transfer theCommon Stock to the Nasdaq Capital Market if the Common Stock satisfies allcriteria, other than compliance with the minimum bid price requirement, forinitial inclusion on such market.

 

InFebruary 2008, the Company announced the engagement of the investmentbank, BlueLake Partners, LLC for the purpose of assessing strategicalternatives for Ibis, including a potential sale of the Company and/or itsassets. The Company can give noassurance that it will identify an alternative that allows stockholders torealize an increase in the value of the Company’s stock. The Company can alsogive no assurance that a transaction or other strategic alternative, onceidentified, evaluated and consummated, will provide greater value tostockholders than that reflected in the current stock price.  In fact, if the Company is unable torecognize revenue through the sale of our products pursuant to its currentoperating plan, and if it is unable a viable strategic alternative is notidentified, the Company may be unable to continue as a going concern.  Further, in pursuit of the highest value forshareholders, the Board of Directors also may consider alternatives thatinclude a liquidation of assets and resulting cash distribution per share afterpayment of outstanding liabilities.  Insuch case, any per-share cash liquidation distribution could be less than thepurchase price per share that stockholders may have paid for their Companysecurities.

 

OnMarch 31, 2008 the Company requested and received a 15 day extension tofiles its Annual Report 10K to additional time to conduct an impairmentanalysis with respect to Ibis’ assets, as permitted by Rule 12b-25.

 

OnApril 16, 2008, the Company received a letter from the Nasdaq Stock Marketadvising that it had not received the Company’s Form 10-K for the fiscalyear ended December 31, 2007, as required by MarketplaceRule 4310(c)(14). Accordingly, unless the Company requests an appeal ofthis determination, trading of the Company’s common stock will be suspended atthe opening of business on April 25, 2008, and a Form 25-NSE will befiled with the SEC, which will remove the Company’s securities from listing andregistration on The Nasdaq Stock Market. The Company believes that, as a resultof filing this Form 10-K, it is now in compliance with Marketplace Rule 4310(c)(14).

 

**Off-BalanceSheet Arrangements**

 

We do not have any off-balance sheetarrangements as defined in Regulation S-K Section 303(a)(4)(ii).

 

**Contractual Obligations**

 

We have no significant contractual obligations notfully recorded on our Balance Sheets or fully disclosed in the Notes to ourFinancial Statements.  We have nooff-balance sheet arrangements as defined in Regulation S-K Section 303(a)(4)(ii).

 

At December 31,2007, our outstanding contractual obligations included:

 
| ** **                        | ** ** | **Payment due by period** | ** ** |
|-----------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations**  | ** ** | **Total**                                | ** ** | **Less than   1 year** | ** ** | **1  year** | ** ** | **2  years** | ** ** | **3-5  years** | ** ** | **More   than   5 years** | ** ** |
| Minimum  operating lease payments |       | $                                        | 1,329,230  |   | $ | 400,164 |   | $ | 375,308 |   | $ | 369,456 |   | $ | 184,302 |   | $ | — |   |
|                                   |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

36

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Additional informationregarding our financial commitments at December 31, 2007 is provided inthe Notes to our Financial Statements.  See“Notes to Financial Statements, Note 8, Commitments and Contingencies”.

 

**Effects Of Inflation**

 

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

 

**NewAccounting Pronouncements**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) whichdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements. SFAS 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years. We do not expect the adoption of SFAS No. 157to have a material impact on our financial position or results of operations.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities —Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”).SFAS No. 159 permits entities to choose to measure many financialinstruments and certain other items at fair value and is effective as of thebeginning of the Company’s fiscal year beginning after November 15, 2007.The Company is currently evaluating the potential impact of SFAS No. 159on its financial position and results of operations.

 

37

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**Item7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Theexposure of market risk associated with risk-sensitive instruments is notmaterial to Ibis, as we do not transact our sales denominated in other thanUnited States dollars, invest primarily in short-term commercial paper, holdour investments until maturity and have not entered into hedging transactions.

 

38

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**FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**IBISTECHNOLOGY CORPORATION**

 

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

 

Financial Statements:
| ** **                                                                                                      | **Page  Number** |
|-----------------------------------------------------------------------------------------------------------------|------------------|
|                                                                                                            |             |
| Report of Independent Registered Public Accounting  Firm                                                        | 40               |
| Balance Sheets as of December 31, 2006 and 2007                                                            | 41               |
| Statements of Operations for the Years Ended  December 31, 2005, 2006 and 2007                             | 42               |
| Statements of Stockholders’ Equity for the Years  Ended December 31, 2005, 2006 and 2007              | 43               |
| Statements of Cash Flows for the Years Ended  December 31, 2005, 2006 and 2007                             | 44               |
| Notes to Financial Statements                                                                                   | 45-66            |
|                                                                                                            |             |
| Schedule:                                                                                                       |             |
| Report of Independent Registered Public Accounting  Firm on Financial Statement Schedule                        |             |
| Schedule II – Valuation and Qualifying Accounts for  the Years Ended December 31, 2005, 2006 and 2007 |             |

 

39

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board ofDirectors and Stockholders of Ibis Technology Corporation:

 

We have auditedthe accompanying balance sheets of Ibis Technology Corporation as of December 31,2006 and 2007, and the related statements of operations, stockholders’ equity,and cash flows for each of the years in the three-year period ended December 31,2007. 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 ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating 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 present fairly, in all materialrespects, the financial position of Ibis Technology Corporation as of December 31,2006 and 2007, and the results of its operations and its cash flows for each ofthe years in the three-year period ended December 31, 2007, in conformitywith U.S. generally accepted accounting principles.

 

The accompanying financial statements have beenprepared assuming that the Company will continue as a going concern. Asdescribed in note 3 to the financial statements, the Company has sufferedrecurring losses from operations and has a net capital deficiency that raisesubstantial doubt about its ability to continue as a going concern. Management’splan with regard to these matters, are also discussed in Note 3. The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

As described innote 2(k) to the financial statements, the Company adopted Statement ofFinancial Accounting Standards No. 123 (revised 2004), *Share-based Payment*, effective January 1, 2006.

 
|                   |   | /s/ KPMG LLP |
|------------------------|--------|--------------|
|                   |   |         |   |   |   |
| Boston,  Massachusetts |   |         |   |   |   |
| May 22, 2008           |   |         |   |   |   |

 

40

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**IBISTECHNOLOGY CORPORATION**

 

**BALANCESHEETS**

** **

**December 31, 2006 and 2007**

** **
| ** **                                                                                                                    | ** ** | **2006**    | ** ** | **2007**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
|                                                                                                                          |       |        |       |        |       |
| **Assets**                                                                                                                    |       |        |       |        |       |
| **Current  Assets:**                                                                                                          |       |        |       |        |       |
| Cash and cash  equivalents                                                                                                    |       | $           | 4,812,477  |        | $          | 5,770,072 |   |
| Accounts  receivable, trade, net (notes 4 and 17)                                                                             |       | 349,154     |       | 308,768     |       |
| Inventories, net  (note 5 and 7)                                                                                              |       | 3,575,296   |       | 1,790,394   |       |
| Prepaid expenses  and other current assets                                                                                    |       | 290,780     |       | 165,925     |       |
| Total current  assets                                                                                                         |       | 9,027,707   |       | 8,035,159   |       |
| Property and  equipment (notes 6, 7, and 9)                                                                                   |       | 24,728,824  |       | 19,598,897  |       |
| Less:  Accumulated depreciation and amortization                                                                              |       | (20,744,772 | )          | (18,026,667 | )          |
| Net property and  equipment                                                                                                   |       | 3,984,052   |       | 1,572,230   |       |
| Patents and  other assets, net (note 7 and 8)                                                                                 |       | 777,082     |       | 155,444     |       |
| Total assets                                                                                                                  |       | $           | 13,788,841 |        | $          | 9,762,833 |   |
|                                                                                                                          |       |        |       |        |       |
| **Liabilities  and Stockholders’ Equity**                                                                                |       |        |       |        |       |
| **Current  Liabilities:**                                                                                                     |       |        |       |        |       |
| Accounts payable                                                                                                              |       | $           | 409,705    |        | $          | 260,372 |   |
| Accrued  liabilities (notes 10 and 11)                                                                                        |       | 973,994     |       | 471,219     |       |
| Deferred revenue  (note 12)                                                                                                   |       | 150,000     |       | —      |       |
| Total current  liabilities                                                                                                    |       | 1,533,699   |       | 731,591     |       |
|                                                                                                                          |       |        |       |        |       |
| **Commitments  and contingencies (notes 9, 12 and 17)**                                                                       |       |        |       |        |       |
|                                                                                                                          |       |        |       |        |       |
| **Stockholders’  Equity (notes 15 and 16):**                                                                             |       |        |       |        |       |
| 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 10,915,481 shares and 14,317,482  shares in 2006 and 2007, respectively |       | 87,324      |       | 114,540     |       |
| Additional  paid-in capital                                                                                                   |       | 93,798,393  |       | 99,087,089  |       |
| Accumulated  deficit                                                                                                          |       | (81,630,575 | )          | (90,170,387 | )          |
| Total stockholders’  equity                                                                                              |       | 12,255,142  |       | 9,031,242   |       |
| Total  liabilities and stockholders’ equity                                                                              |       | $           | 13,788,841 |        | $          | 9,762,833 |   |

 

See accompanyingnotes to financial statements.

 

41

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# **IBIS TECHNOLOGY CORPORATION**

# ** **

**STATEMENTS OF OPERATIONS**

 

**Years ended December 31, 2005, 2006, 2007**

** **
| ** **                                                    | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                          |       |       |       |       |       |       |       |
| License and  other revenue (note 13)                          |       | $          | 324,621    |       | $          | 560,384    |       | $ | 425,924 |   |
| Equipment  revenue                                            |       | 277,684    |       | 13,427,035 |       | 525,267    |       |
| Total net sales  and revenue (note 17)                        |       | 602,305    |       | 13,987,419 |       | 951,191    |       |
|                                                          |       |       |       |       |       |       |       |
| Cost of license  and other revenue                            |       | —     |       | —     |       | 257        |       |
| Cost of  equipment revenue (note 5)                           |       | 750,472    |       | 5,893,600  |       | 2,214,619  |       |
| Total cost of  sales and revenue                              |       | 750,472    |       | 5,893,600  |       | 2,214,876  |       |
|                                                          |       |       |       |       |       |       |       |
| Gross profit  (loss)                                          |       | (148,167   | )          | 8,093,819  |       | (1,263,685 | )          |
|                                                          |       |       |       |       |       |       |       |
| **Operating  expenses:**                                      |       |       |       |       |       |       |       |
| General and  administrative                                   |       | 2,216,748  |       | 2,400,645  |       | 2,004,614  |       |
| Marketing and  selling                                        |       | 1,318,979  |       | 1,095,844  |       | 578,001    |       |
| Research and  development                                     |       | 5,993,350  |       | 5,396,321  |       | 3,789,164  |       |
| Impariment of  long-lived assets (note 7)                     |       | —     |       | —     |       | 1,602,407  |       |
| Total operating  expenses                                     |       | 9,529,077  |       | 8,892,810  |       | 7,974,186  |       |
|                                                          |       |       |       |       |       |       |       |
| Loss from  operations                                         |       | (9,677,244 | )          | (798,991   | )          | (9,237,871 | )          |
|                                                          |       |       |       |       |       |       |       |
| **Other  income (expense):**                                  |       |       |       |       |       |       |       |
| Interest income                                               |       | 208,818    |       | 304,008    |       | 313,326    |       |
| Interest expense                                              |       | (536       | )          | —     |       | —     |       |
| Other (note 18)                                               |       | 9,671      |       | 901,124    |       | 385,533    |       |
| Total other  income                                           |       | 217,953    |       | 1,205,132  |       | 698,859    |       |
|                                                          |       |       |       |       |       |       |       |
| Income (loss)  from continuing operations before income taxes |       | (9,459,291 | )          | 406,141    |       | (8,539,012 | )          |
| Income tax  expense (note 14)                                 |       | 1,256      |       | 1,256      |       | 800        |       |
| Income (loss)  from continuing operations                     |       | (9,460,547 | )          | 404,885    |       | (8,539,812 | )          |
|                                                          |       |       |       |       |       |       |       |
| **Discontinued  operations (note 19):**                       |       |       |       |       |       |       |       |
| Gain (loss) on  disposal                                      |       | 215,242    |       | —     |       | —     |       |
| Income (loss)  from discontinued operations                   |       | 215,242    |       | —     |       | —     |       |
|                                                          |       |       |       |       |       |       |       |
| Net income  (loss)                                            |       | $          | (9,245,305 | )          | $          | 404,885    |       | $ | (8,539,812 | ) |
|                                                          |       |       |       |       |       |       |       |
| **Earnings  (loss) per share:**                               |       |       |       |       |       |       |       |
| Basic and  diluted                                            |       |       |       |       |       |       |       |
| Continuing  operations                                        |       | $          | (0.88      | )          | $          | 0.04       |       | $ | (0.64 | ) |
| Discontinued  operations                                      |       | 0.02       |       | —     |       | —     |       |
|                                                          |       |       |       |       |       |       |       |
| Net income  (loss)                                            |       | $          | (0.86      | )          | $          | 0.04       |       | $ | (0.64 | ) |
|                                                          |       |       |       |       |       |       |       |
| **Weighted  average common shares outstanding:**              |       |       |       |       |       |       |       |
| Basic                                                         |       | 10,737,924 |       | 10,853,304 |       | $          | 13,410,938 |   |
| Diluted                                                       |       | 10,737,924 |       | 10,979,783 |       | $          | 13,410,938 |   |

 

See accompanying notes to financial statements.

 

42

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**IBISTECHNOLOGY CORPORATION**

 

**STATEMENTSOF STOCKHOLDERS’ EQUITY**

 

**Yearsended December 31, 2005, 2006 and 2007**

 
| ** **                                  | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total  Stockholders’   Equity** | ** **  |
|---------------------------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|---------------------------------------------|-------------|
|                                        |       |              |       |                             |       |                     |       |                                        |        |
| **Balances  at December 31, 2004**     |       | $                 | 85,757     |                             | $          | 93,124,259               |       | $                                           | (72,790,155 | ) | $ | 20,419,861 |   |
|                                        |       |              |       |                             |       |                     |       |                                        |        |
| Exercise of  stock options                  |       | —            |       | 8,550                            |       | —                   |       | 8,550                                       |        |
| Employee Stock  Purchase Plan               |       | 771               |       | 112,945                          |       | —                   |       | 113,716                                     |        |
| Net loss                                    |       | —            |       | —                           |       | (9,245,305               | )          | (9,245,305                                  | )           |
|                                        |       |              |       |                             |       |                     |       |                                        |        |
| **Balances  at December 31, 2005**     |       | 86,528            |       | 93,245,754                       |       | (82,035,460              | )          | 11,296,822                                  |        |
|                                        |       |              |       |                             |       |                     |       |                                        |        |
| Exercise of stock  options                  |       | 8                 |       | 1,386                            |       | —                   |       | 1,394                                       |        |
| Share-based  compensation                   |       | —            |       | 398,599                          |       | —                   |       | 398,599                                     |        |
| Employee Stock  Purchase Plan               |       | 788               |       | 152,654                          |       | —                   |       | 153,442                                     |        |
| Net income                                  |       | —            |       | —                           |       | 404,885                  |       | 404,885                                     |        |
|                                        |       |              |       |                             |       |                     |       |                                        |        |
| **Balances  at December 31, 2006**     |       | 87,324            |       | 93,798,393                       |       | (81,630,575              | )          | 12,255,142                                  |        |
|                                        |       |              |       |                             |       |                     |       |                                        |        |
| Common stock  issued, net of issuance costs |       | 27,027            |       | 4,850,426                        |       | —                   |       | 4,877,453                                   |        |
| Share-based  compensation                   |       | —            |       | 410,276                          |       | —                   |       | 410,276                                     |        |
| Employee Stock  Purchase Plan               |       | 189               |       | 27,994                           |       | —                   |       | 28,183                                      |        |
| Net loss                                    |       | —            |       | —                           |       | (8,539,812               | )          | (8,539,812                                  | )           |
|                                        |       |              |       |                             |       |                     |       |                                        |        |
| **Balances  at December 31, 2007**     |       | $                 | 114,540    |                             | $          | 99,087,089               |       | $                                           | (90,170,387 | ) | $ | 9,031,242 |   |

 

See accompanying notes to financial statements.

 

43

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**IBISTECHNOLOGY CORPORATION**

 

**STATEMENTSOF CASH FLOWS**

 

**Years ended December 31, 2005, 2006, 2007**

** **
| ** **                                                                            | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash  flows from operating activities:**                                            |       |       |       |       |       |       |       |
| Net income  (loss)                                                                    |       | $          | (9,245,305 | )          | $          | 404,885    |       | $ | (8,539,812 | ) |
| Less: income  from discontinued operations                                            |       | 215,242    |       | —     |       | —     |       |
| Income (loss)  from continuing operations                                             |       | (9,460,547 | )          | 404,885    |       | (8,539,812 | )          |
|                                                                                  |       |       |       |       |       |       |       |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |       |       |       |       |       |       |       |
| Share-based  compensation expense                                                     |       | —     |       | 394,776    |       | 410,276    |       |
| Depreciation and  amortization                                                        |       | 1,746,989  |       | 1,535,856  |       | 1,511,659  |       |
| Impairment of  long-lived assets                                                      |       | —     |       | —     |       | 1,602,407  |       |
| Changes in  operating assets and liabilities:                                         |       |       |       |       |       |       |       |
| Accounts  receivable, trade                                                           |       | 117,023    |       | (258,276   | )          | 40,386     |       |
| Inventories                                                                           |       | (651,483   | )          | 2,705,177  |       | 1,784,902  |       |
| Prepaid expenses  and other current assets                                            |       | (42,302    | )          | 324,922    |       | 124,855    |       |
| Accounts payable                                                                      |       | (162,004   | )          | 178,834    |       | (149,333   | )          |
| Accrued  liabilities and deferred revenue                                             |       | 7,240,174  |       | (7,340,701 | )          | (652,775   | )          |
| Net cash used in  operating activities of continuing operations                       |       | (1,212,150 | )          | (2,054,527 | )          | (3,867,435 | )          |
| **Cash  flows from investing activities:**                                            |       |       |       |       |       |       |       |
| Additions to  property and equipment, net                                             |       | (149,648   | )          | (41,804    | )          | (11,840    | )          |
| Other assets                                                                          |       | 247,988    |       | (102,902   | )          | (68,766    | )          |
| Net cash  provided (used) in investing activities of continuing operations            |       | 98,340     |       | (144,706   | )          | (80,606    | )          |
| **Cash  flows from financing activities:**                                            |       |       |       |       |       |       |       |
| Proceeds from  sales of common stock, net of issuance costs                           |       | —     |       | —     |       | 4,877,453  |       |
| Exercise of stock  options, warrants and Employee Stock Purchase Plan                 |       | 122,266    |       | 154,836    |       | 28,183     |       |
| Net cash  provided by financing activities of continuing operations                   |       | 122,266    |       | 154,836    |       | 4,905,636  |       |
| Discontinued  operations (see note 19):                                               |       |       |       |       |       |       |       |
| Operating cash  flows                                                                 |       | 45,297     |       | —     |       | —     |       |
| Investing cash  flows                                                                 |       | 77,049     |       | —     |       | —     |       |
| Net cash  provided (used) in discontinued operations                                  |       | 122,346    |       | —     |       | —     |       |
| Net increase  (decrease) in cash and cash equivalents                                 |       | (869,198   | )          | (2,044,397 | )          | 957,595    |       |
| Cash and cash  equivalents, beginning of year                                         |       | 7,726,072  |       | 6,856,874  |       | 4,812,477  |       |
| Cash and cash  equivalents, end of year                                               |       | $          | 6,856,874  |       | $          | 4,812,477  |       | $ | 5,770,072 |   |
|                                                                                  |       |       |       |       |       |       |       |
| Supplemental  disclosures of cash flow information:                                   |       |       |       |       |       |       |       |
| Cash paid during  the year for interest                                               |       | $          | 536        |       | $          | —     |       | $ | — |   |

# ** **

See accompanyingnotes to financial statements.

 

44

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS**

 

# **December 31,2006 and 2007**

# ** **

**(1) Natureof Business and Organization**

 

Ibis Technology Corporation(the “Company”) was incorporated in October 1987 for the purpose ofsupplying silicon-on-insulator (SOI) wafers formed by SIMOX (Separation byImplantation of Oxygen) technology. SIMOX-SOI wafers were manufactured by theCompany using a specialized oxygen ion implanter, which was developed andmanufactured by the Company and is integrated with other specialized processesand characterization equipment. The Company is the leading manufacturer of highcurrent oxygen implanters and began selling these oxygen implanters in 1996.

 

**(2) Summary of SignificantAccounting Policies**

 

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

 

Cash equivalentsrepresent highly liquid investments with original maturities of three months orless.

 

**(b) *Inventory Valuation and Reserves***

 

Inventories are stated atthe lower of cost or market. Cost is determined using the first-in, first-out(“FIFO”) cost method. Our policy for the valuation of inventory, including thedetermination of obsolete or excess inventory, requires us to forecast the futuredemand for our products within specific time horizons, generally twelve monthsor less. If our forecasted demand for specific products is greater than actualdemand and we fail to reduce manufacturing output accordingly, we could berequired to record additional inventory reserves, which would have a negativeimpact on our gross margin. We have reserved for obsolescence when engineeringchanges or other technological advances indicate that obsolescence hasoccurred.

 

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

 

Property and equipment isstated at cost. Depreciation is provided using the straight-line method overthe estimated useful lives of the respective assets, ranging from three toeight years. Machinery and equipment is depreciated over eight years whilefurniture and fixtures are depreciated over three years. Amortization ofleasehold improvements is provided using the straight-line method over thelesser of the life of the lease, or the estimated useful life of the asset.Ibis reviews the valuation of long-lived assets, including property andequipment and licenses, under the provisions of SFAS No. 144, Accountingfor Impairment or Disposal of Long-Lived Assets. The Company reviews its long-lived assets forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset or asset group may not be recoverable. If such acircumstance exists, the Company would measure an impairment loss to the extentthe carrying amount of the particular long-lived asset or group exceeds itsfair value. The Company would determine the fair value based on either aprojected discounted cash flow method using a discount rate determined bymanagement to be commensurate with the risk inherent in the current businessmodel, or estimated fair value based on comparable sales prices for similarused equipment.

 

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

 

Other assets consistprincipally of deposits, prepaid royalties and licenses. Patents and prepaidroyalties are amortized over five years using the straight-line method.Licenses are amortized over seven years using the straight-line method.

 

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS**

 

**(e) *Revenue Recognition***

 

The Company recognizesrevenue from equipment sales and the sales of spare parts when all of thefollowing criteria have been met: (1) evidence exists that the customer isbound to the transaction; (2) the product has been delivered to thecustomer and, when applicable, the product has been installed and accepted bythe customer; (3) the sales price to the customer has been fixed or isdeterminable; and (4) collectibility of the sale price is reasonablyassured. The Company recognizes revenue from implanter sales upon acceptance atthe customer’s site. Revenue derived from contracts and services is recognizedupon performance. Provisions for anticipated losses are made in the period inwhich such losses become determinable.

 

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

 

Research and developmentcosts are charged to expense as incurred.

 

**(g) *Net Income (Loss) Per Common 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. Statement of Financial Accounting Standards No. 128, “Earningsper Share”, establishes standards for computing and presenting earnings pershare and applies to entities with publicly held common stock or potentialcommon stock. This Statement simplifies the standards for computing earningsper share previously found in APB Opinion No. 15, Earnings per Share, andmakes them comparable to international EPS standards. It replaces thepresentation of primary EPS with a presentation of basic EPS. It also requiresdual presentation of basic and diluted EPS on the face of the income statementfor all entities with complex capital structures and requires a reconciliationof the numerator and denominator of the basic EPS computation to the numeratorand denominator of the diluted EPS computation and requires the presentation ofbasic and diluted earnings (loss) per share for all periods presented. As theCompany was in a net loss position for the years ended December 31, 2005and December 31, 2007, common stock equivalents of 74,590 and zero for theyears ended December 31, 2005, and 2007, respectively, were excluded fromthe diluted loss per share calculation as they would be antidilutive. As aresult, diluted loss per share is the same as basic loss per share for 2005 and2007.

 

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:

 

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 
| ** **                                             | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **Diluted**                                 | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** |
|                                                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  from:                                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                  |       | $                                           | (9,460,547 | ) | $ | (9,460,547 | ) | $ | 404,885 |   | $ | 404,885 |   | $ | (8,539,812 | ) | $ | (8,539,812 | ) |
| Discontinued  operations                               |       | 215,242                                     |       | 215,242 |   | — |   | — |   | — |   | — |   |
| Net income  (loss)                                     |       | $                                           | (9,245,305 | ) | $ | (9,245,305 | ) | $ | 404,885 |   | $ | 404,885 |   | $ | (8,539,812 | ) | $ | (8,539,812 | ) |
| Weighted average  common shares outstanding            |       | 10,737,924                                  |       | 10,737,924 |   | 10,853,304 |   | 10,853,304 |   | 13,410,938 |   | 13,410,938 |   |
|                                                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Potential common  share equivalents                    |       | —                                      |       |   |   | 126,479 |   |   |   | — |   |   |   |
| Weighted average  shares outstanding                   |       | 10,737,924                                  |       |   |   | 10,979,783 |   |   |   | 13,410,938 |   |   |   |
|                                                   |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Earning (loss)  per common share and share equivalents |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Continuing  operations                                 |       | $                                           | (0.88      | ) | $ | (0.88 | ) | $ | 0.04 |   | $ | 0.04 |   | $ | (0.64 | ) | $ | (0.64 | ) |
| Discontinued  operations                               |       | 0.02                                        |       | 0.02 |   | — |   | — |   | — |   | — |   |
| Net income  (loss)                                     |       | $                                           | (0.86      | ) | $ | (0.86 | ) | $ | 0.04 |   | $ | 0.04 |   | $ | (0.64 | ) | $ | (0.64 | ) |

 

**(h) *Issuance Costs***

 

Common stock issuancecosts are netted against additional paid-in capital.

 

**(i) *Use ofEstimates***

 

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingenciesat 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, valuinginventory, accruing certain liabilities, determining the measurement of share-basedcompensation, assessing long-lived asset impairment, and estimating the usefullives of long-lived assets.

 

**(j) *Fair Value of Financial Instruments***

 

Financialinstruments of the Company consist of cash and cash equivalents, accountsreceivable, accounts payable and accrued liabilities. The carrying amount ofthese financial instruments approximates fair value.

 

**(k) *Share-Based Compensation***

 

On January 1, 2006, theCompany adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment,”(“SFAS 123(R)”) which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to employees and directors including employee stock options,employee stock purchases related to the 2000 Employee Stock Purchase Plan (“theESPP”), restricted stock and other special equity awards based on grant-dateestimated fair values. SFAS 123(R) supersedes the Company’s previousaccounting under Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) for periods beginning in 2006. In March 2005,the Securities and Exchange Commission issued SAB 107 relating to SFAS 123(R).The Company has applied the provisions of SAB 107 in its adoption of SFAS123(R).

 

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

The Company’s financialstatements for the fiscal years ended December 31, 2006 and December 31,2007 reflect the impact of SFAS 123(R). In accordance with the modifiedprospective transition method, the Company’s financial statements for priorperiods have not been restated to reflect, and do not include, the impact ofSFAS 123(R). Share-based compensation expense recognized under SFAS 123(R) forthe years ended December 31, 2006 and December 31, 2007 was $0.4million or $0.04 per share and $0.4 million or $0.03 per share, respectively,which consisted of share-based compensation expense related to employee stockoptions and the employee stock purchase plan. Of this 2006 expense, fifty fourpercent came from options issued prior to December 31, 2005 and are valuedusing the accrual method, which is consistent with prior periods, while twentythree percent came from options issued in 2006 and are valued using thestraight-line prorated method, which was adopted in 2006 under the newguidance, and twenty three percent came from the valuation of shares issuedunder the employee stock purchase plan. Of this 2007 expense, twenty percentcame from options issued prior to December 31, 2005 and are valued usingthe accrual method, which is consistent with prior periods, while seventy threepercent came from options issued in 2006 and 2007 and are valued using thestraight-line prorated method, which was adopted in 2006 under the newguidance, and seven percent came from the valuation of shares issued under theemployee stock purchase plan. There was no share-based compensation expenserelated to employee stock options or employee stock purchases recognized duringthe fiscal year ended December 31, 2005 because the Company elected not toadopt the recognition provisions, and instead provided footnote disclosure permissible under Statementof Financial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”).

 

SFAS 123(R) requirescompanies to estimate the fair value of share-based payment awards on the dateof grant using an option-pricing model. The value of the portion of the awardthat is ultimately expected to vest is recognized as expense over the requisiteservice periods in the Company’s Statement of Operations. Prior to the adoptionof SFAS 123(R), the Company accounted for share-based awards to employees anddirectors using the intrinsic value method in accordance with APB 25, asallowed under SFAS 123. Under the intrinsic value method, share-basedcompensation expense had not been recognized in the Company’s statement ofoperations when the exercise price of the Company’s stock options granted toemployees and directors equaled or exceeded the fair market value of theunderlying stock at the date of grant.

 

 Share-based compensation expense recognizedduring the period is based on the value of the portion of share-based paymentawards that is ultimately expected to vest during the period. Share-basedcompensation expense recognized in the Company’s Statement of Operations forthe fiscal years ended December 31, 2006 and December 31, 2007included compensation expenses for share-based payment awards granted prior to,but not yet vested as of December 31, 2005, based on the grant date fairvalue estimated in accordance with the pro forma provisions of SFAS 123, andcompensation expense for the share-based payment awards granted subsequent to December 31,2005 based on the grant date fair value estimated in accordance with theprovisions of SFAS 123(R).

 

As share-based compensationexpense recognized in the Statement of Operations for the fiscal years ended December 31,2006 and December 31, 2007 is based on awards ultimately expected to vest,it has been reduced for estimated forfeitures. SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.

 

Upon adoption of SFAS 123(R),the Company elected to retain its method of valuation for share-based awardsgranted beginning in 2006 using the Black-Scholes option–pricing model (“Black–Scholesmodel”) which was also previously used for the Company’s pro forma informationrequired under SFAS 123. The Company’s determination of fair value ofshare-based payment awards on the date of grant using an option-pricing modelis affected by the Company’s stock price as well as assumptions regarding anumber of highly complex and subjective variables. These variables include, butare not limited to the Company’s expected stock price volatility over the termof the awards, and actual and projected employee stock option exercisebehaviors.

 

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

**(l)* ******Accounting for Income Taxes***

 

The Company accounts forincome taxes under Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes”, (SFAS 109). This Statement establishes financialaccounting and reporting standards for the effects of income taxes that resultfrom an enterprise’s activities during the current and preceding years.

 

In July 2006, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes – an interpretation of FASBStatement No. 109” (“FIN 48”), which clarifies the accounting anddisclosure for uncertainty in tax positions, as defined.  FIN 48 seeks to reduce the diversity inpractice associated with certain aspects of the recognition and measurementrelated to accounting for income taxes. This interpretation is effective for fiscal years beginning after December 15,2006 and prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken, orexpected to be taken, in a tax return, and provides guidance on de-recognition,classification, interest and penalties, accounting in interim periods, disclosuresand transition.  As a result of theimplementation of FIN 48, the Company recorded no adjustment for unrecognizedincome tax benefits.  At the adoptiondate of January 1, 2007, the Company had no unrecognized taxbenefits.  Ibis classifies any interest andpenalties related to income taxes as components of income tax expense.

 

**(m) *Reclassifications***

 

Certain prior year amounts have been reclassified to conform to currentyear presentation. These reclassifications had no effect on the Company’sreported net loss or financial position.

 

**(n) *New Accounting Pronouncements***

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) whichdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements. SFAS 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years. We do not expect the adoption of SFAS No. 157to have a material impact on our financial position or results of operations.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities — Including an Amendment of FASBStatement No. 115” (“SFAS No. 159”). SFAS No. 159 permitsentities to choose to measure many financial instruments and certain otheritems at fair value and is effective as of the beginning of the Company’sfiscal year beginning after November 15, 2007. The Company is currentlyevaluating the potential impact of SFAS No. 159 on its financial positionand results of operations.

 

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

#### ** **

The Company’s financialstatements for the fiscal year ended December 31, 2007 were preparedassuming the Company would continue as a going concern; however, the Company’srecurring losses and accumulated deficit raise substantial doubts about itsability to continue as a going concern. The Company’s ability to continue as agoing concern is an issue raised as a result of recurring losses fromoperations and net capital deficiency and is subject to the Company’s abilityto secure additional orders of our implanter equipment or, in the alternative,identify and consummate a strategic transaction, including the potential a saleof the Company, or other strategic alternative.

 

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

As of December 31, 2007, the Company had cash andcash equivalents of $5.8 million, including the gross proceeds from thefinancing of $5.3 million from the sale of 3.4 million shares of common stockand 2.5 million common stock warrants in the year ended December 31, 2007.

 

During the year ended December 31, 2007, theCompany used $3.9 million of cash for operating activities of continuingoperations as compared to $2.1 million in 2006. To date, the Company’s workingcapital requirements have been funded primarily through debt (capital leases)and equity financings, including the 2007 financing discussed below. Theprincipal uses of cash during the fiscal year ended December 31, 2007,were to fund operations. At December 31, 2007, the Company had commitmentsto purchase approximately $0.2 million in material. Headcount for the yearended December 31, 2007 was 20 employees.

 

Cash flow projectionsdeveloped by management indicate the Company believes it will have sufficientcash resources to support current operations through 2008. However, since theCompany began selling implanters in 1996, the Company has only sold a total ofeight Ibis 1000 oxygen implanters at an average sale price of approximately$4.0 million each and four i2000 oxygen implanters at a selling price between$6.0 and $8.0 million.  The most recentorder received was in October 2005, for which the Company recognizedrevenue in the quarter ended September 30, 2006.  The Company did not record implanter revenueduring 2007 and as of April 10, 2008, does not have an order for animplanter. At present time, only one of the four major wafer manufacturers arecounted as a current prospective customer. The Company currently does not have a backlog for implanters, nor doesit have visibility to the timing of the next order from any customer.  The Company’s failure to obtain any ordersfor implanters in the foreseeable future, notwithstanding the belief that theCompany has sufficient cash for the 2008 fiscal year, or to obtain othersources of offsetting revenue, will have a material adverse impact on theCompany’s business and hinder its ability to continue as a going concern.  The Company’s continuing inability togenerate revenue likely will result in the inability to continue to invest inresearch development and manufacturing capabilities, hinder the  ability to pursue and maintain relationships,partnerships and alliances with third parties, result in a loss of key personnelby way of workforce reduction or by voluntary termination of employment, limitits ability to secure financing on acceptable terms, if at all, and creategreater volatility in the trading of the Company’s common stock.

 

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

 

On December 10, 2007, the Company received aletter from the Nasdaq Stock Market advising that for the previous 30consecutive business days, the bid price of the Company’s common stock (the“Common 

 

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

Stock”) had closed below the minimum $1.00 per share requirement forcontinued inclusion on the Nasdaq Global Market pursuant to Nasdaq Marketplace Rule 4450(a)(5).

 

Nasdaq stated in its letter that in accordance withNasdaq Marketplace Rule 4450(e)(2), the Company will be provided 180calendar days, or until June 9, 2008, to regain compliance with theminimum bid price requirement. The bid price of the Common Stock must close at$1.00 per share or more for a minimum of 10 consecutive business days toachieve compliance.

 

If the Company does notregain compliance with the minimum bid price requirement by June 9, 2008,the Nasdaq staff will provide the Company with written notification that theCommon Stock will be delisted from the Nasdaq Global Market. At that time, theCompany may appeal the delisting determination to a Nasdaq ListingsQualifications Panel pursuant to applicable Nasdaq rules. Alternatively, NasdaqMarketplace Rule 4450(i) may permit the Company to transfer theCommon Stock to the Nasdaq Capital Market if the Common Stock satisfies allcriteria, other than compliance with the minimum bid price requirement, forinitial inclusion on such market.

 

In February 2008, theCompany announced the engagement of the investment bankBlueLake Partners, LLC for the purpose of assessing strategic alternatives forIbis, including a potential sale of the Company and/or its assets. The Company can give no assurance that itwill identify an alternative that allows stockholders to realize an increase inthe value of the Company’s stock. There can also be no assurance that atransaction or other strategic alternative, once identified, evaluated andconsummated, will provide greater value to the stockholders than that reflectedin the current stock price.  In fact, ifthe Company is unable to recognize revenue through the sale of its productspursuant to the current operating plan, and if a viable strategic alternativeis not identified, the Company may be unable to continue as a goingconcern.  Further, in pursuit of thehighest value for shareholders, the Board of Directors may also consideralternatives that include a liquidation of assets and the resulting cashdistribution per share after payment of outstanding liabilities.  In such case, any per-share cash liquidationdistribution could be less than the purchase price per share that stockholdersmay have paid for the Company’s securities.

 

**(4) AccountsReceivable**

** **

Accounts receivableconsisted of the following at December 31:

** **
| ** **                  | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts  receivable, trade |       | $          | 160,822    |       | $          | 110,125 |   |
| Accounts  receivable, other |       | 188,332    |       | 198,643    |       |
|                        |       | $          | 349,154    |       | $          | 308,768 |   |

 

**(5) Inventories**

** **

Inventories consisted of thefollowing at December 31:

** **
| ** **                 | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|----------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Raw materials              |       | $          | 1,445,182  |       | $          | 328,802 |   |
| Work in process            |       | 2,130,114  |       | 1,461,592  |       |
| Total equipment  inventory |       | $          | 3,575,296  |       | $          | 1,790,394 |   |

 

Equipment inventoryconsists of i2000 parts and/or implanters under construction or otherwiseavailable for resale. For the year ended December 31, 2007,the Company recorded a $1.8 million increase in reserves charged to cost ofgoods for potential obsolescence of inventory.

 

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

At December 31,2007, the Company had commitments to purchase approximately $0.2 million inmaterial.

 

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

**(6) Property and Equipment**

** **

Property and equipmentconsisted of the following at December 31:

** **
| ** **               | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|--------------------------|------------|------------|------------|------------|------------|
| ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Machinery and  equipment |       | $          | 19,448,571 |       | $          | 17,029,136 |   |
| Furniture and  fixtures  |       | 376,618    |       | 376,618    |       |
| Leasehold  improvements  |       | 4,903,635  |       | 2,193,143  |       |
|                     |       | $          | 24,728,824 |       | $          | 19,598,897 |   |

 

In 2007, the Company impaired approximately$1.3 million of property and equipment. See note 7.

 

**(7) Impairment of Long-LivedAssets**

 

During the fourth quarter ended December 31,2007, a number of unexpected events occurred which impacted our assets,including changes in cash flow generation and our projected utilization of theassets within our revised plans. As a result of our impairment analysis underthe provisions of SFAS No. 144, Accounting for Impairment or Disposal ofLong-Lived Assets we recognized an impairment charge of approximately $1.6million. Of this total impairment, approximately $1.3 million related to fixedassets and the balance of $0.3 million related to certain patents. The Companyrecognized these charges as part of operating expense in the business segmentfor SIMOX equipment.

 

**(8) Other Assets**

 

In December 2000, the Company entered into aroyalty-bearing license agreement which gives the Company the right tomanufacture SIMOX-SOI wafers using the licensed process. Much of the R&Ddevelopment work is still being done using this licensed process in support ofimplanter and process improvements. Warrants were issued in connection with thisagreement. The cost of the license agreement, including cash paid and the fairvalue of the warrants issued, was $2.3 million and is included in other assetsat December 31, 2006 and December 31, 2007, net of accumulatedamortization of $2.0 million and $2.3 million, respectively. The warrantsassociated with this transaction expired in December 2005 unexercised.

 

**(9) Commitments andContingencies**

 

***(a) Leases***

 

Ibis’corporate office and manufacturing site are located at a leased facility inDanvers, Massachusetts. The equipment manufacturing business and theengineering and wafer processing research and development effort are housed inapproximately 32,000 square feet which includes a modernized cleanroom thatcontains metrology equipment, cleaning equipment and an implantation equipmentmanufacturing and service area. The lease was renewed during 2006 and willexpire on June 30, 2011, and contains an option to renew for five years.The Company has no significant contractual obligations not fully recorded onits Balance Sheets or fully disclosed in the Notes to its Financial Statements.The Company has no off-balance sheet arrangements.

 

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

At December 31, 2007, the Company’s contractualobligations included:

 
| ** **                        | ** ** | **Payment due by period** | ** ** |
|-----------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations**  | ** ** | **Total**                                | ** ** | **Less than  1 year** | ** ** | **2  year** | ** ** | **3  year** | ** ** | **4  year** | ** ** | **More  than  4 years** | ** ** |
| Minimum  operating lease payments |       | $                                        | 1,329,230  |   | 400,164 |   | 375,308 |   | 369,456 |   | 184,302 |   | — |   |
|                                   |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

Rent expense wasapproximately $0.5 million, $0.3 million and $0.3 million for the years ended December 31,2005, 2006 and 2007, respectively.

 

***(b) Contingencies***

 

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

 

On April 10, 2007, the Company announced that theshareholder derivative action filed in February 2004 against certain ofthe Company’s directors and officers: Louis F. Matheson, Jr. v. Martin J.Reid et al., Civ. Act. No. 04-10341 (RCL) (D. Mass) had been voluntarilydismissed by the plaintiff. The notice of dismissal filed by the plaintiffdismissed the action with prejudice. As set forth in the notice, the plaintiffwill receive a $55,000 payment following the dismissal in consideration ofplaintiff’s analysis of information provided by the Company regarding, among otherthings, the Company’s contention that the litigation should be dismissed forfailure to make a demand on the Board of Directors before filing suit asrequired by Massachusetts law. The payment was funded entirely by the Company’sinsurance carrier.

 

**(10) AccruedLiabilities**

** **

Currentaccrued liabilities were as follows at December 31:

** **
| ** **       | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|------------------|------------|------------|------------|------------|------------|
| ** **       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued vacation |       | $          | 156,213    |       | $          | 129,903 |   |
| Accrued warranty |       | 435,979    |       | —     |       |
| Accrued payroll  |       | 128,343    |       | 39,401     |       |
| Accrued expenses |       | 253,459    |       | 301,915    |       |
| Total            |       | $          | 973,994    |       | $          | 471,219 |   |

 

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

**(11) Accrued Warranty**

 

At the time that revenue is recognized for the sale ofan implanter a liability for warranty is also established. An estimate of thewarranty cost is made based on the number of years involved and the Company’sprior experience. As material and labor is used during the warranty period theliability is reduced based on these charges. At the end of the warranty term,the balance in the liability is eliminated and adjusted through cost of sales,the account charged at inception. A reconciliation of warranty liability forthe years ended December 31, 2005, 2006 and 2007 is as follows:

 
| Warranty balance  December 31, 2004 |   | $        | 708,830 |   |
|------------------------------------------|--------|----------|---------|--------|
| Expense incurred  - 2005                 |   | (31,061  | )       |
| Initiated - 2005                         |   | —   |    |
| Expired - 2005                           |   | (24,636  | )       |
| Warranty balance  December 31, 2005 |   | $        | 653,133 |   |
| Expense incurred  - 2006                 |   | (160,939 | )       |
| Initiated - 2006                         |   | 608,220  |    |
| Expired - 2006                           |   | (664,435 | )       |
| Warranty balance  December 31, 2006 |   | $        | 435,979 |   |
| Expense incurred  - 2007                 |   | (45,391  | )       |
| Initiated - 2007                         |   | —   |    |
| Expired - 2007                           |   | (390,588 | )       |
| Warranty balance  December 31, 2007 |   | $        | —  |   |

 

**(12) Deferred Revenue**

 

Deferredrevenue at December 31, 2006 was $150,000 in deposits for service fromSUMCO and zero dollars at December 31, 2007.

 

**(13) License Agreements**

 

TheCompany obtained an exclusive sublicense in the field of oxygen implantation tothe proprietary beam scanning system developed by a consultant to the Companyduring the development of the first Ibis 1000 implanter. The beam scanningsystem sublicense agreement also grants the Company certain rights to furthersublicense the technology for certain applications. The Company received $0.3million, $0.5 million and $0.4 million in 2005, 2006 and 2007, respectively,for non-refundable option fees or royalty fees in accordance with non-exclusivesublicense agreements.

 

55

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

**(14) Income Taxes**

 

The income tax provision (benefit) attributable to continuingoperations consists of the following:

 
| ** ** | ** ** | **Years ended December 31,** | ** ** |
|------------|------------|---------------------------------------------|------------|
| ** ** | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
| Current:   |       |                                        |       |   |   |   |   |
| Federal    |       | $                                           | —     |   | $ | — |   | $ | — |   |
| State      |       | 1,256                                       |       | 1,256 |   | 800 |   |
| Deferred:  |       |                                        |       |   |   |   |   |
| Federal    |       | —                                      |       | — |   | — |   |
| State      |       | —                                      |       | — |   | — |   |
| Total      |       | $                                           | 1,256      |   | $ | 1,256 |   | $ | 800 |   |

 

State income tax expense(benefit), which consists of Massachusetts and California excise and corporatetaxes. Income tax expense differs from the amount computed by applying thestatutory federal income tax rate of 34% to the income (loss) before incometaxes from continuing operations as follows:

 
| ** **                                           | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Computed  “expected” tax expense (benefit) |       | $          | (3,216,586 | )          | $          | 142,444    |       | $ | (2,038,139 | ) |
| State income  taxes, net of federal tax benefit      |       | 829        |       | 26,441     |       | (376,632   | )          |
| Other                                                |       | —     |       | —     |       | 2,252      |       |
| Losses  (benefited)/not benefited                    |       | 3,217,013  |       | (167,629   | )          | 2,413,319  |       |
|                                                 |       | $          | 1,256      |       | $          | 1,256      |       | $ | 800 |   |

 

The tax effects oftemporary differences that give rise to significant portions of deferred taxassets and liabilities are presented below at December 31:

 
| ** **                                                              | ** ** | **2006**    | ** ** | **2007**    | ** ** |
|-------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ** **                                                              | ** ** | ** **  | ** ** | ** **  | ** ** |
| Deferred tax  assets:                                                   |       |        |       |        |       |
| Net operating  loss carryovers                                          |       | $           | 34,586,000 |        | $          | 33,902,000 |   |
| Accruals not  currently deductible for tax purposes                     |       | 1,607,000   |       | 2,027,000   |       |
| General business  tax credit carryovers                                 |       | 2,374,000   |       | 1,926,000   |       |
| Impairment  reserves                                                    |       | 1,906,000   |       | 1,765,000   |       |
| SFAS 123R equity  compensation                                          |       | 173,000     |       | 323,000     |       |
| Less: Valuation  allowance                                              |       | (38,715,000 | )          | (38,452,000 | )          |
| Total deferred  tax assets                                              |       | 1,931,000   |       | 1,491,000   |       |
| Deferred tax  liabilities:                                              |       |        |       |        |       |
| Property and  equipment, principally due to differences in depreciation |       | (1,735,000  | )          | (1,428,000  | )          |
| Patents                                                                 |       | (196,000    | )          | (63,000     | )          |
| Net deferred tax  assets                                                |       | $           | —     |        | $          | — |   |

 

56

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

Total valuation allowancedecreased by $2.0 million and decreased by $0.3 million for the years ended December 31,2006 and 2007, respectively. The Company has recorded a valuation allowanceagainst its net deferred tax assets for 2006 and 2007, since managementbelieves that, after considering all the available objective evidence, bothpositive and negative, historical and prospective, with the greater weightgiven to historical evidence, it is more likely than not that these assets willnot be realized in the foreseeable future.

 

TheCompany had federal net operating loss and general business credit carryoversof approximately $91.6 million and $1.2 million, respectively, at December 31,2007, with varying expiration dates through 2027 that may be used to offsetfuture taxable income. State net operating loss and credit carryovers of $44.1million and $1.2 million, respectively, have varying expiration dates. Includedin the total deferred tax assets, offset by the valuation allowance, was $3.2million related to the net operating loss carry forward resulting from theexercise of employee stock options, the tax benefit of which, will be accountedfor as a credit to additional paid-in capital rather than a reduction of incometax expense when the deductions reduce current taxes payable.

 

TheCompany adopted the provisions of FASB Interpretation No. 48 (“FIN 48”) Accounting for Uncertainty in Income Taxes,an interpretation of FASB Statement No. 109 (“SFAS 109”) on January 1,2007. As a result of the implementation of FIN 48, the Company recorded noadjustment for unrecognized income tax benefits. At the adoption date of January 1,2007 and also at December 31, 2007, the Company had no unrecognized taxbenefits. The Company does not expect that the total amount of unrecognized taxbenefits will significantly increase in the next twelve months.

 

The Company recognises interest and penalties related to uncertain taxpositions in income tax expense. As of December 31, 2007, the Company hadno accrued interest or penalties related to uncertain tax positions. ** **The tax years 2000 to2006 remain open to examination by the major taxing jurisdictions to which weare subject.  Preceding years also remainopen to examination by U.S. federal and state revenue authorities to the extentof future utilization of net operating losses (NOLs) and research anddevelopment (R&D) tax credits generated in each preceding year.

 

Utilizationof NOL and R&D credit carryforwards may be subject to a substantial annuallimitation due to ownership change limitations that have occurred previously orthat could occur in the future as provided by Section 382 of the InternalRevenue Code of 1986 and similar state provisions. These ownership changes maylimit the amount of NOL and R&D credit carryforwards that can be utilizedannually to offset future taxable income and tax.  In general, an ownership change, as definedin Section 382, results from transactions which increase the ownership ofcertain 5% or greater shareholders or public groups in the stock of acorporation by more than 50 percentage points over a three-year period.  Since the Company’s formation, the Companyhas raised capital through the issuance of capital stock on several occasionswhich, combined with the purchasing shareholders’ subsequent disposition ofthose shares, may have resulted in a change of control, as defined in Section 382,or could result in a change of control in the future upon subsequentdisposition. The Company has not currently completed a study to assess whethera change of control has occurred or whether there have been multiple changes ofcontrol since the Company’s formation. If the Company has experienced a change of control at any time sinceformation, or if Ibis experiences a change of control in the future,utilization of the NOL and R&D credit carryforwards would be subject to anannual limitation under Section 382. Any limitation may result inexpiration of all or a portion of the NOL or R&D credit carryforwardsbefore utilization.  Until a study iscompleted and any limitation known, no amounts are being presented as anuncertain tax position under FIN 48.

 

**(15) Capitalization**

 

The Company has50,000,000 shares of common stock and 2,000,000 shares of preferred stock(“Undesignated Preferred Stock”) authorized. At December 31, 2007,****50,368 common shares were reserved for issuance uponexercise of options outstanding under the Company’s 1993 Employee, Director andConsultant Stock Option Plan. At December 31, 2007, the Company also had1,301,532 common shares 

 

57

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

reserved for issuanceupon exercise of options outstanding under the Company’s 1997 Employee,Director and Consultant stock option plan. At December 31, 2007, theCompany also had 1,500,000 common shares reserved for issuance for grant underthe Company’s 2007 Employee, Director and Consultant Stock Option Plan. At December 31,2007, the Company had 146,038 common shares reserved for issuance under theCompany’s 2000 Employee Stock Purchase Plan.

 

OnFebruary 16, 2007, the Company entered into a purchase agreement pursuantto which it agreed to sell unregistered shares of its common stock and warrantsexercisable for common stock to Special Situation Funds for an aggregatepurchase price of $5.3 million in a two-tranche financing. In connection withthe first closing, we issued 1,400,000 shares of common stock and warrants topurchase 1,124,434 shares of common stock, for which the Company receivedapproximately $2.2 million in proceeds, on February 20, 2007. Pursuant tostockholder approval, received at the Company Annual Meeting on May 10,2007, at the second closing, the Company sold an additional 1,978,377 shares ofcommon stock and warrants to purchase 1,588,966 shares of common stock forwhich the Company received approximately $3.1 million in proceeds. Inconnection with the transaction, the Company also entered into a registrationrights agreement with the investors. The Company paid a placement fee to aplacement agent, of approximately $0.3 million, which represents a cash feeequal to 5% of the gross proceeds and warrants exercisable for common stockwith a dollar value equal to 5% of the aggregate gross proceeds received by thecompany in both closings of the financing. The Company also issued to theplacement agent an aggregate of 179,619 warrants, exercisable for common stock,with a dollar value equal to 5% of the aggregate gross proceeds. Totaltransaction costs associated with the financing were approximately $0.4million, providing net cash to the Company of $4.9 million.****Allof the securities were sold in a private placement pursuant to Regulation D ofthe Securities Act.

 

**(16) Stock Plans and Warrants**

 

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

 

In December 1993, the Board of Directors andstockholders approved the adoption of the Company’s 1993 Employee, Director andConsultant Stock Option Plan which provided for the issuance of options topurchase up to 250,000 shares of common stock to employees, consultants andnon-employee directors. In May 1996, the stockholders increased to 750,000shares the aggregate number of shares that may be granted under this plan.

 

In October 1997,the Board of Directors approved the adoption of the Company’s 1997 Employee,Director and Consultant Stock Option Plan (the “1997 Plan”) which provides forthe issuance of options to purchase up to 750,000 shares of common stock of theCompany to employees, consultants and non-employee directors. The stockholdersapproved the Plan at the May 1998 Annual Stockholders Meeting. In February 2001,the Board of Directors approved an amendment to the 1997 Plan to increase theaggregate number of shares reserved for issuance to 1,350,000. The stockholdersapproved this 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 number of shares reserved for issuance to 1,650,000. The stockholdersapproved this amendment at the May 2004 Annual Stockholders Meeting. In March 2006,the Board of directors approved an amendment to the 1997 plan to increase theaggregate number of shares reserved for issuance to 1,950,000. The stockholdersapproved this amendment at the May 2006 Annual Stockholders Meeting.

 

In May 2007, the Board of Directors and stockholdersapproved the adoption of the Company’s 2007 Employee, Director and ConsultantStock Option Plan which provided for the issuance of options to purchase up to1,500,000 shares of common stock to employees, consultants and non-employeedirectors.

 

The Company has stock-based compensation plans underwhich employees and directors may be granted options to purchase common stock.Options are generally granted with exercise prices at not less than the fairmarket value on the grant date, generally vest over 4 years and expire in 10years after the grant date. As of December 31, 2007 a total of 4.7 millionshares had been authorized for grant under the Company’s 

 

58

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

stock-based compensation plans. The number of common shares reservedfor granting of future awards to employees and directors under these plans was1.5 million at December 31, 2007. The remaining unrecognized compensationexpense on stock options at December 31, 2007 was $0.5 million. Theweighted average period over which the cost is expected to be recognized isapproximately 1.5 years.

 

As of December 31,2007, the Company had four equity compensation plans under which our equitysecurities have been authorized for issuance to our employees and/or directors:the 2000 Employee Stock Purchase Plan, as amended (see note 16), the 1993Employee, Director and Consultant Stock Option Plan, as amended (the 1993plan); the 1997 Employee, Directors and Consultant Stock Option Plan, asamended; and the 2007 Employee Director and Consultant Equity Plan, (the 2007plan). The 1993 Plan andthe 1997 Plan have expired and there are no options available for issuance;however, the 1993 Plan and the 1997 Plan continue to govern all options, awardsand other grants granted and outstanding under the 1993 Plan and the 1997 Plan,respectively.

 

*Distributionand Dilutive Effect of Options*

 

The following table illustrates the grant dilution and exercisedilution for the years ended December 31**:**

** **
| ** **                          | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                |       |       |       |       |       |       |       |
| Shares of common  stock outstanding |       | 10,816,029 |       | 10,915,481 |       | 14,317,482 |       |
|                                |       |       |       |       |       |       |       |
| Granted                             |       | 304,500    |       | 201,721    |       | 612,500    |       |
| Canceled/forfeited                  |       | (331,473   | )          | (167,573   | )          | (614,985   | )          |
| Expired                             |       | —     |       | —     |       | —     |       |
| Net options  granted (cancelled)    |       | (26,973    | )          | 34,148     |       | (2,485     | )          |
|                                |       |       |       |       |       |       |       |
| Grant dilution  (1)                 |       | 0.0        | %          | 0.3        | %          | 0.0        | %          |
| Exercised                           |       | —     |       | 1,025      |       | —     |       |
| Exercised  dilution (2)             |       | —     |       | 0.0        | %          | 0.0        | %          |

 

----

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

 

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

 

Basic and dilutedshares outstanding for the years ended December 31, 2005, 2006 and 2007were 10,737,924, 10,812,514, 10,853,304, 10,979,783, 13,410,938 and 13,410,938shares respectively. During the year ending December 31, 2007, thedilutive effect of in the money employee stock options was zero shares or 0.0%of the basic shares outstanding based on the Company’s average share price of$1.23 as all options were below this average share price.

 

59

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** **

**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

A summary of stock optionactivity under the plans is as follows:

 
| ** **                                     | ** ** | **Options Outstanding**           | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **Options Available  for  Grant** | ** ** | **Shares** | ** ** | **Weighted average  exercise price of    shares under plan** | ** ** |
|                                           |       |                                   |       |       |       |   |   |
| Balance  outstanding as December 31, 2004 |       | 158,218                                |       | 1,348,235  |       | $ | 14.06 |   |
| Granted                                        |       | (304,500                               | )          | 304,500    |       | 1.46 |   |
| Exercised                                      |       | —                                 |       | —     |       | — |   |
| Cancelled/forfeited                            |       | 331,473                                |       | (331,473   | )          | 12.95 |   |
| Expired                                        |       | —                                 |       | —     |       | — |   |
| Additional  shares reserved                    |       | —                                 |       | —     |       | — |   |
| Balance  outstanding as December 31, 2005 |       | 185,191                                |       | 1,321,262  |       | $ | 11.43 |   |
| Granted                                        |       | (201,721                               | )          | 201,721    |       | 3.17 |   |
| Exercised                                      |       | —                                 |       | (1,025     | )          | 1.36 |   |
| Cancelled/forfeited                            |       | 167,573                                |       | (167,573   | )          | 16.42 |   |
| Expired                                        |       | (10,117                                | )          | —     |       | — |   |
| Additional  shares reserved                    |       | 300,000                                |       | —     |       | — |   |
| Balance  outstanding as December 31, 2006 |       | 440,926                                |       | 1,354,385  |       | $ | 9.59 |   |
| Granted                                        |       | (612,500                               | )          | 612,500    |       | 1.47 |   |
| Exercised                                      |       | —                                 |       | —     |       | — |   |
| Cancelled/forfeited                            |       | 614,985                                |       | (614,985   | )          | 6.43 |   |
| Expired                                        |       | (443,411                               | )          | —     |       | — |   |
| Additional shares  reserved                    |       | 1,500,000                              |       | —     |       | — |   |
| Balance  outstanding as December 31, 2007 |       | 1,500,000                              |       | 1,351,900  |       | $ | 7.35 |   |

 

Thefollowing table summarizes information concerning outstanding and exercisableoptions as of December 31, 2007:

 
| **Range of   exercise prices** | ** ** | **Number  outstanding** | ** ** | **Weighted  Average  remaining  contractural  life (years)** | ** ** | **Weighted  Average  exercise price  per shares** | ** ** | **Aggregate  Intrinsic Value** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Average  exercise price  per shares** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------|------------|--------------------------------------------------------|------------|
| $.01  -   6.00                 |       | 932,997                 |       | 6.8                                                               |       | $                                                           | 2.53       |                                | $          | 0                        |       | 475,907                                                |       | $ | 3.08 |   |
| $6.01 -   9.00                      |       | 127,704                 |       | 4.7                                                               |       | $                                                           | 7.90       |                                |       |                     | 115,204    |                                                   | $          | 7.91 |   |
| $9.01 - 13.50                                 |       | 163,499                 |       | 2.4                                                               |       | $                                                           | 10.65      |                                |       |                     | 163,499    |                                                   | $          | 10.65 |   |
| $13.51 - 20.26                                |       | 30,000                  |       | 2.6                                                               |       | $                                                           | 18.14      |                                |       |                     | 30,000     |                                                   | $          | 18.14 |   |
| $20.27 - 30.37                                |       | 8,250                   |       | 1.8                                                               |       | $                                                           | 23.35      |                                |       |                     | 8,250      |                                                   | $          | 23.35 |   |
| $30.38 - 45.55                                |       | 11,250                  |       | 2.3                                                               |       | $                                                           | 37.24      |                                |       |                     | 11,250     |                                                   | $          | 37.24 |   |
| $45.56 - 68.32                                |       | 77,200                  |       | 1.9                                                               |       | $                                                           | 46.35      |                                |       |                     | 77,200     |                                                   | $          | 46.35 |   |
| $68.33 - 98.71                                |       | 1,000                   |       | 0.2                                                               |       | $                                                           | 89.94      |                                |       |                     | 1,000      |                                                   | $          | 89.94 |   |
|                                          |       | 1,351,900               |       |                                                              |       |                                                        |       | $                                   | 0          |                     | 882,310    |                                                   |       |   |

 

The aggregate intrinsic value in the preceding table represents thetotal pretax intrinsic value, based on the Company’s closing stock price of$0.43 as of December 31, 2007, which would have been received by theoption holders had all option holders exercised their options as of that date.Since all options that were exercisable were at a price higher than the closingprice at December 31, 2007, the intrinsic value is zero. The 

 

60

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** **

**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

** **

fair value of stock options vested at December 31, 2006 and 2007was $4.9 million and $3.6 million, respectively. The total number ofin-the-money options exercisable as of December 31, 2007 was zero. As of December 31,2007, 882,310 outstanding options were exercisable, and the weighted averageexercise price was $10.13.

 

For the yearsended December 31, 2006 and 2007, there were 201,721, and 612,500 optionsgranted at the weighted average fair value of $0.5 million and $0.7 million,respectively. There were 155,577, and 275,321 options that vested at theweighted average fair value of $0.4 million and $0.6 million, respectively. Theintrinsic value of options exercised were $1,456 and zero, respectively.

 

The Company hadnon-vested options of 497,785 shares with a weighted average fair value of $1.1million at January 1, 2007. At December 31, 2007, there werenon-vested options of 469,590 shares at the weighted average fair value of $0.8million.

 

*Valuation and Expense Information under SFAS 123(R)*

 

The following tablesummarizes share-based compensation expense related to employee stock optionsand employee stock purchases under SFAS 123(R) for the year ended December 31,2006 and December 31, 2007 which was allocated as follows:

 
| ** **                                                      | ** ** | **2006** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                            |       |     |       |     |       |
| Cost of sales                                                   |       | $        | 18,672     |     | $          | 26,276 |   |
| General and  administration                                     |       | 213,807  |       | 179,581  |       |
| Marketing and  selling                                          |       | 44,762   |       | 56,508   |       |
| Research and  development                                       |       | 117,536  |       | 147,911  |       |
| Stock based  compensation expense included in operation expense |       | $        | 394,777    |     | $          | 410,276 |   |

 

As of December 31,2007, the Company capitalized zero stock-based compensation in inventory. As ofDecember 31, 2006, the Company capitalized $4.0 thousand of stock-basedcompensation in inventory. The Company did not recognize any tax benefits onthe stock-based compensation recorded in the periods based on the current taxstatus of the Company.

 

61

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

The table below reflectsreported net loss per share, basic and diluted for the year ended December 31,2005 compared with the pro forma information as required by SFAS 123(R).

 
| ** **                                                                                            | ** ** | **Year ended  December 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                            | ** ** | ** **                                       | ** ** |
| Net loss as  reported for prior periods (1)                                                           |       | $                                                | (9,245,305 | ) |
|                                                                                                  |       |                                             |       |
| Stock-based  compensation expense related to employee stock options and employee stock  purchases (2) |       | (717,379                                         | )          |
|                                                                                                  |       |                                             |       |
| Net loss  including the effect of stock-based compensation expense (3)                                |       | $                                                | (9,962,684 | ) |
|                                                                                                  |       |                                             |       |
| Per share  information, basic and diluted:                                                            |       |                                             |       |
| Net loss as  reported for prior periods (1)                                                           |       | $                                                | (0.86      | ) |
| Net loss  including the effect of stock-based compensation expense                                    |       | $                                                | (0.93      | ) |

 

----

(1) Net lossand net loss per share for the year ended December 31, 2005 did notinclude stock-based compensation expense related to employee stock options andemployee stock purchases under SFAS 123 because the Company did not adopt therecognition provisions of SFAS 123.

 

(2) Stock-basedcompensation expense is calculated on the pro forma application of SFAS 123 aspreviously disclosed in the notes to the Financial Statements.

 

(3) Net lossand net loss per share represents pro forma information based on SFAS 123 aspreviously disclosed in the notes to the Financial Statements.

 

*Pro FormaInformation Under SFAS 123 for Periods Prior to Fiscal 2007*

 

The weighted-average estimated fair value of employeestock options granted during the year ended December 31, 2005 was $1.05using the Black Scholes option-pricing model with the following weightedaverage assumptions:

 
| ** **                                              | ** ** | **2005** | ** ** |
|---------------------------------------------------------|------------|----------|------------|
|                                                    |       |     |       |
| Expected  Volatility                                    |       | 97.62    | %          |
| Risk Free  Interest Rate                                |       | 2.91     | %          |
| Dividend yield                                          |       | 0.00     |       |
| Expected option  life (10 year contractual life option) |       | 4.00     |       |

 

For purposes of pro forma disclosures under SFAS 123,the estimated fair value of the options is assumed to be amortized to expenseover the options’ vesting period.

 

The weighted-average estimated fair value of employeestock options granted during the twelve months ended December 31, 2006 andDecember 31, 2007 was $2.69 and $1.21 per share using the Black Scholesoption-pricing model with the following weighted-average assumptions:

 

62

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 
| ** **                                              | ** ** | **2006** | ** ** | **2007** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |
| Expected  Volatility                                    |       | 102.49   | %          | 97.32    | %          |
| Risk Free  Interest Rate                                |       | 4.70     | %          | 4.87     | %          |
| Dividend yield                                          |       | 0.00     |       | 0.00     |       |
| Expected option  life (10 year contractual life option) |       | 6.25     |       | 6.25     |       |

 

The expected life of employee stock options is the anticipatedaverage time that an option will be outstanding. The Company chose to use thesimplified method provided under SAB107 to estimate the expected term for“plain vanilla” stock options. The expected term as calculated under thesimplified method is 6.25 years.

 

The Company determined the expected volatility of thestock price by using a period equal to the expected life of the stock options,6.25 years. Volatility was measured as the standard deviation of the differencein the natural logarithms of the stock over the expected life of the optionsusing the daily closing stock price. This resulted in the volatility of 102.49percent for the year ended December 31, 2006 and 97.32 percent for theyear ended December 31, 2007.

 

The risk-free interest rate assumption is based uponobserved treasury bill interest rates (risk free) appropriate for the expectedterm of the Company’s employee stock options.

 

As share-based compensation expense recognized in theStatement of Operations for the year ended December 31, 2006 and December 31,2007 is actually based on awards ultimately expected to vest, it has beenreduced for annualized estimated forfeitures of 14.18% and 33.26%,respectively. SFAS 123(R ) requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. Forfeitures were estimated based on historicalexperience.

 

**(b) *Employee Stock Purchase Plan***

 

On February 24,2000, the Board of Directors adopted the Ibis Technology Corporation 2000Employee Stock Purchase Plan (the “Purchase Plan”) pursuant to which a total of300,000 shares of the Company’s Common Stock may be sold to eligible employeesof the Company at a 15% discount from the market value of the shares. Thestockholders approved the plan at the May 2000 Annual StockholdersMeeting. On February 17, 2005, the Board of Directors approved anamendment to the 2000 Employee Stock Purchase Plan to increase by 300,000shares the aggregate number of shares of Common stock that can be sold toeligible employees. The stockholders approved the amendment at the May 2005Annual Stockholders Meeting. 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 end of the offering period. Approximately 51% of eligibleemployees participated in the Purchase Plan, 51% in 2005, 51% in 2006 and 66%in 2007. During 2005, 2006, and 2007 the Company sold 96,434, 98,427 and 23,624shares, respectively, to employees under the Purchase Plan.

 

**(c) *Warrants***

 

InFebruary 2007, in connection with the first closing of a two stepfinancing agreement, the Company issued 1,050,000 Common Stock warrantsexercisable for Common Stock at a strike price of $1.50 per share.Additionally, the Company issued 1,483,781 Common Stock warrants exercisablefor Common Stock, also at a strike price of $1.50 per share, in a secondclosing held in May 2007.

 

63

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**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

In connection with thetransaction, the Company also entered into a Registration Rights Agreement withthe Investors.  The Company paid aplacement fee to a placement agent, which includes a cash fee equal to 5% ofthe Company’s gross proceeds from the agreement, and warrants of 74,434 and105,185 exercisable for Common Stock with a dollar value also equal to 5% ofthe Company’s gross proceeds from the agreement All of the securities were sold in a private placement pursuant toRegulation D of the Securities Act of 1933, as amended (the “Act”), solely toaccredited investors, as defined in Rule 501 of the Act.

 

**(17) Significant Customers andConcentration of Business Risk**

 

The Company sells itsimplanters to a limited number of semiconductor manufacturers primarily in theUnited States and the Pacific Rim.

 

Significantcustomer revenue is shown in dollar amounts and as a percentage of totalrevenue as follows:

 
| **Year Ended**     | ** ** | **Significant  Customers** | ** ** | **Amount** | ** ** | **%**  | ** ** |
|-------------------------|------------|----------------------------|------------|------------|------------|--------|------------|
|                    |       |                       |       |       |       |   |       |
| December 31,  2005 |       | —                     |       | $          | —     |   | —     | % |
| December 31,  2006 |       | 1                          |       | $          | 13,325,000 |   | 95         | % |
| December 31,  2007 |       | —                     |       | $          | —     |   | —     | % |

 

Accounts receivable from significant customers waszero at December 31, 2005, $150,000 at December 31, 2006, and zero atDecember 31, 2007.

 

Export sales tounaffiliated customers in 2005, 2006, and 2007 were 81%, 99% and 94% of totalrevenues, respectively.

 

During 2005, 2006and 2007, 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.

 

**(18)Other Income**

 

In 2006, the Companyrecognized a gain in other income of approximately $0.8 million, which is theresult of the expiration of an option to place an order for an additionalimplanter prior to the end of 2006. This payment was received in the fiscalyear ended December 31, 2007. In 2007, approximately $0.3 million ofcontract work done at a neighboring business is shown as Other Income.

 

**(19)Discontinued Operations**

 

In mid-2004, the Companydiscontinued the wafer manufacturing portion of the business in order to focusexclusively on the equipment business. Wafer product sales, as well as waferrevenue reported in subsequent periods are reported net of associated costs, asloss from discontinued operations or other income after 2005.  For the year ending December 31, 2005,the Discontinued Operations generated a net gain of $0.2 million. The net gainof $0.2 million was the result of the reduction of $0.1 million of expensesassociated with the closure of the wafer operation and $0.1 million from scraprecovery. For the period ending December 31, 2006 and December 31,2007 there was no discontinued operations gain or loss recognized by theCompany. In 2005 and 2006, the Company has separately disclosed the operating,investing, and financing portions of the cash flows attributable todiscontinued operations.

 

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**IBIS TECHNOLOGYCORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

**(20) Industry Segments**

 

The Company’sreportable segments are SIMOX Equipment and Other Products or Services. Forpurposes of segment reporting, equipment spares and field service revenue arecombined and reported as SIMOX Equipment. Government contracts, other servicesand license revenue are combined and reported as Other Products or Services.

 

The accounting policiesof the operating segments are the same as those described in the summary ofsignificant accounting policies. The Company generally evaluates operatingperformance based on income or loss before interest and taxes.

 

Thetable below provides information for the years ended December 31, 2005,2006, and 2007 pertaining to the Company’s two industry segments after thediscontinuance of the wafer manufacturing business.

 
| ** **                         | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  Or Services** | ** ** | **Total**  | ** ** |
|------------------------------------|------------|----------------------|------------|-------------------------------------------|------------|------------|------------|
| **Net  Revenue**                   |       |                 |       |                                      |       |       |       |
| Year ended  December 31, 2005 |       | $                    | 277,684    |                                      | $          | 324,621    |       | $ | 602,305 |   |
| Year ended  December 31, 2006 |       | 13,427,035           |       | 560,384                                   |       | 13,987,419 |       |
| Year ended  December 31, 2007 |       | 525,267              |       | 425,924                                   |       | 951,191    |       |
|                               |       |                 |       |                                      |       |       |       |
| **Operating  Income (Loss)**       |       |                 |       |                                      |       |       |       |
| Year ended  December 31, 2005 |       | (7,785,117           | )          | 324,621                                   |       | (7,460,496 | )          |
| Year ended  December 31, 2006 |       | 1,041,270            |       | 560,384                                   |       | 1,601,654  |       |
| Year ended  December 31, 2007 |       | (7,658,924           | )          | 425,667                                   |       | (7,233,257 | )          |
|                               |       |                 |       |                                      |       |       |       |
| **Assets**                         |       |                 |       |                                      |       |       |       |
| Year ended  December 31, 2005 |       | 12,937,175           |       | 79,628                                    |       | 13,016,803 |       |
| Year ended  December 31, 2006 |       | 8,630,273            |       | 188,332                                   |       | 8,818,605  |       |
| Year ended  December 31, 2007 |       | 3,656,813            |       | 204,701                                   |       | 3,861,514  |       |
|                               |       |                 |       |                                      |       |       |       |
| **Capital  Expenditures**          |       |                 |       |                                      |       |       |       |
| Year ended  December 31, 2005 |       | 149,648              |       | —                                    |       | 149,648    |       |
| Year ended  December 31, 2006 |       | 41,804               |       | —                                    |       | 41,804     |       |
| Year ended  December 31, 2007 |       | 3,706                |       | —                                    |       | 3,706      |       |
|                               |       |                 |       |                                      |       |       |       |
| **Depreciation  and Amortization** | ** ** | ** **           | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Year ended  December 31, 2005 |       | 1,671,836            |       | —                                    |       | 1,671,836  |       |
| Year ended  December 31, 2006 |       | 1,474,900            |       | —                                    |       | 1,474,900  |       |
| Year ended  December 31, 2007 |       | 1,445,719            |       | —                                    |       | 1,445,719  |       |
|                                    |            |                      |            |                                           |            |            |            |  |  |  |

# ** **

65

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** **

**IBISTECHNOLOGY CORPORATION**

** **

**NOTES TOFINANCIAL STATEMENTS – (Continued)**

 

Thetable below provides the reconciliation of reportable segment operating income(loss), assets, capital expenditures, and depreciation and amortization to theCompany’s totals.

 
| ** **                                                    | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                    | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Segment  Reconciliation**                                   |       |                                        |       |   |   |   |   |
| Net Income  (Loss):                                           |       |                                        |       |   |   |   |   |
| Total operating  income (loss) for reportable segments        |       | $                                           | (7,460,496 | ) | $ | 1,601,654 |   | $ | (7,233,257 | ) |
| Corporate  general and administrative expenses                |       | (2,216,748                                  | )          | (2,400,645 | ) | (2,004,614 | ) |
| Net other income                                              |       | 217,953                                     |       | 1,205,132 |   | 698,859 |   |
| Income tax  expense                                           |       | 1,256                                       |       | 1,256 |   | 800 |   |
| Income (loss)  from discontinued operations                   |       | 215,242                                     |       | — |   | — |   |
| Net loss                                                      |       | $                                           | (9,242,793 | ) | $ | 404,885 |   | $ | (8,539,812 | ) |
|                                                          |       |                                        |       |   |   |   |   |
| Assets:                                                       |       |                                        |       |   |   |   |   |
| Total assets for  reportable segments                         |       | $                                           | 13,016,803 |   | $ | 8,818,605 |   | $ | 3,861,514 |   |
| Cash &  cash equivalents not allocated to segments   |       | 6,856,874                                   |       | 4,812,477 |   | 5,770,072 |   |
| Other unallocated  assets                                     |       | 118,711                                     |       | 157,759 |   | 131,247 |   |
| Total assets                                                  |       | $                                           | 19,992,388 |   | $ | 13,788,841 |   | $ | 9,762,833 |   |
|                                                          |       |                                        |       |   |   |   |   |
| Capital  Expenditures:                                        |       |                                        |       |   |   |   |   |
| Total capital  expenditures for reportable segments           |       | 149,648                                     |       | 41,804 |   | 3,706 |   |
| Corporate  capital expenditures                               |       | —                                      |       | — |   | 8,134 |   |
| Total capital  expenditures                                   |       | $                                           | 149,648    |   | $ | 41,804 |   | $ | 11,840 |   |
|                                                          |       |                                        |       |   |   |   |   |
| Depreciation and  Amortization:                               |       |                                        |       |   |   |   |   |
| Total  depreciation and amortization for reportable segements |       | $                                           | 1,671,836  |   | $ | 1,474,900 |   | $ | 1,445,719 |   |
| Corporation depreciation  and amortization                    |       | 75,153                                      |       | 60,956 |   | 65,940 |   |
| Total  depreciation and amortization                          |       | $                                           | 1,746,989  |   | $ | 1,535,856 |   | $ | 1,511,659 |   |

# ** **

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

 

Thetable below provides information for the years 2006 and 2007.

 
| ** **                                | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **2006**                                  | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Total sales and  revenue                  |       | $                  | 6,260,822  |                | $          | 42,411             |       | $                   | 7,223,863  |   | $ | 460,323 |   |
| Gross profit  (loss)                      |       | 3,588,030          |       | (11,073             | )          | 4,266,614          |       | 250,248             |       |
| Profit (loss)  from continuing operations |       | 1,364,886          |       | (2,166,062          | )          | 2,237,233          |       | (1,031,172          | )          |
| Net income  (loss)                        |       | 1,364,886          |       | (2,166,062          | )          | 2,237,233          |       | (1,031,172          | )          |
| Net income  (loss) per common share       |       | 0.12               |       | (0.20               | )          | 0.21               |       | (0.09               | )          |
| **2007**                                  | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Total sales and  revenue                  |       | $                  | 330,063    |                | $          | 265,130            |       | $                   | 193,009    |   | $ | 162,989 |   |
| Gross profit  (loss)                      |       | 214,225            |       | 60,751              |       | 14,003             |       | (1,552,664          | )          |
| Loss from  continuing operations          |       | (1,469,758         | )          | (1,446,740          | )          | (1,290,630         | )          | (4,332,684          | )          |
| Net loss                                  |       | (1,469,758         | )          | (1,446,740          | )          | (1,290,630         | )          | (4,332,684          | )          |
| Net loss per  common share                |       | (0.14              | )          | (0.11               | )          | (0.09              | )          | (0.30               | )          |

 

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| **Item 9.** | ** ** | **CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|------------|-------------------------------------------------------------------------------------------|

 

Not applicable.

 
| **Item 9A.** | ** ** | **CONTROLS AND PROCEDURES** |
|--------------|------------|-----------------------------|

 

**a)****      Evaluationof Disclosure Controls and Procedures**

 

As of the end of theperiod covered by this report, management of the Company, with theparticipation of the Chief Executive Office and the Chief Financial Officer,evaluated the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (defined in Rule 13a-15e) of the Securitiesand Exchange Act of 1934, as amended) as of December 31, 2007.  Based upon this evaluation, the Chief ExecutiveOfficer and the Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures were not effective as of December 31, 2007because of the material weakness described in internal control over financialreporting disclosed in 9A(b).

 

**b)****      Management’sReport on Internal Control over Financial Reporting**

 

Management of the Companyis responsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rule 13a-15(f) under the Securities andExchange Act of 1934, as amended.  TheCompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand preparation of published financial statements for external reportingpurposes in accordance with U.S. generally accepted accounting principles.  Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

The Company’s managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2007.  Inmaking its evaluation, the Company used the criteria set forth in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (“COSO”).  A material weaknessis a deficiency, or combination of deficiencies, in internal control overfinancial reporting such that there is a reasonable possibility that a materialmisstatement of the Company’s annual or interim financial statements will notbe prevented or detected on a timely basis. Based on this evaluation, management has concluded that internal controlover financial reporting was ineffective as of December 31, 2007 as a result ofthe material weakness described below.

 

The Company did not haveeffective controls in its financial reporting process.  Specifically:

 

·      TheCompany did not maintain effective policies and procedures to ensure asufficiently detailed management review of the preliminary financial statementsincluding consideration of the impact of non-routine transactions on thefinancial statements.  These deficienciesresulted in material adjustments to inventory reserves; property, plant andequipment and patents, errors in the income tax disclosures, and omissions ofrequired disclosures in the Company’s 2007 preliminary financial statementswhich were corrected prior to issuance.

 

The Company’s independentregistered public accounting firm did not issue an auditor’s report on theeffectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2007.

 

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**c)****     ****Changes in Internal Control over Financial Reporting**

 

Therehave been no changes in the Company’s internal control over financial reportingin the quarter ended December 31, 2007 that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

Toaddress the material weakness described above, the Company currently isevaluating its accounting processes and timelines for quality review of theCompany's financial statements and related disclosures. The Company has alsoenhanced procedures to help ensure that the proper accounting for all complex,non-routine transactions are researched, detailed in memoranda and reviewed byboth the Chief Financial Officer and the Chief Executive Officer prior torecording and before the issuance of financial statements.  These procedures increase (i) the requiredlevel of documentation with respect to assumptions supporting certainaccounting conclusions, including without limitation, with respect to any impairmentanalysis, and (ii) the required level of review performed with respect to thereasonableness of such assumptions. In addition, beginning in the secondquarter of 2008 and continuing until such time as management determines suchaction is no longer relevant or necessary, each quarter our Chief FinancialOfficer expects to prepare a summary and analysis of any change in ouroperations, forecasts of customer orders, overall financial position andstrategic alternatives under consideration by management to be used inconnection with any further asset impairment analysis.

 

Managementrecognizes that these enhancements require continual monitoring and evaluationfor effectiveness. The development of these actions is an interactive processand will evolve as the Company continues to evaluate and improve our internalcontrols over financial reporting. Management will review progress on these activities on a consistent andongoing basis at the senior management level in conjunction with our AuditCommittee. 

 

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**PART III**

 

###### **Item10.                 DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE**

###### ** **

**Directors**

 

The names of the Company’s current directors and certain informationabout them are set forth below:

 
| **Name**                   | ** ** | **Age**    | ** ** | **Position**                                     |
|----------------------------|------------|------------|------------|--------------------------------------------------|
| ** **                 | ** ** | ** ** | ** ** | ** **                                       |
| Martin  J. Reid            |       | 66         |       | Chairman,  President and Chief Executive Officer |
| Dimitri  Antoniadis, Ph.D. |       | 61         |       | Director                                         |
| Robert  L. Gable(1)        |       | 77         |       | Director                                         |
| Leslie  B. Lewis(1)(2)     |       | 67         |       | Director                                         |
| Donald  F. McGuinness      |       | 75         |       | Director                                         |
| Lamberto  Raffaelli(2)     |       | 57         |       | Director                                         |
| Cosmo  S. Trapani(2)       |       | 69         |       | Director                                         |

 

----

(1)                                  Member of the Compensation Committee

 

(2)                                  Member of the Audit Committee

 

The following is a brief summary of the background of each director ofthe Company:

 

*Martin J. Reid*joined Ibis in December 1997 as President and Chief Executive Officer andas a director. In May 2000, Mr. Reid was elected to serve as Chairmanof the Company’s Board of Directors. On November 20, 2006, Mr. Reidassumed the role of Executive Chairman and remained Chairman of the Board. On December 4,2007, Mr. Reid resumed his position as President and Chief ExecutiveOfficer and Chairman of the Board upon the unexpected death of the Company’sthen-current President and Chief Executive Officer, Charles McKenna. From 1991to 1996, Mr. Reid was President and Chief Executive Officer of AlphaIndustries (now known as Skyworks Solutions), a publicly held manufacturer of abroad range of Gallium Arsenide products and silicon integrated circuits forthe semiconductor industry. He served as a director of Alpha Industries from1985 to January 1998 and of Asahi America from 1997 to November 1999,which merged with Asahi Organic Chemical in December 1999.

 

*Dimitri Antoniadis, Ph.D.* was appointed to the Board of Directors in 1996. He is the Ray andMaria Stata Professor of Electrical Engineering at Massachusetts Institute ofTechnology (MIT) and has been a member of the faculty since 1978.

 

*Robert L. Gable*was appointed to the Board of Directors in 1997. He was a director and advisor(November 1998—October 1999), Chairman (June 1990—July 1998)and Chief Executive Officer (June 1990—October 1997) of UnitrodeCorporation, a publicly held company that was acquired by Texas Instruments in October 1999.

 

*Leslie B. Lewis*was appointed to the Board of Directors in 1998. From 1985 to 2002, he wasPresident of Asahi America, Inc., a publicly held company, which mergedwith Asahi Organic Chemical in December 1999. He was Chief ExecutiveOfficer of Asahi from 1989 to 2003 and Chairman from 1996 to 2002. In January 2004Mr. Lewis was appointed Operations Partner of Watermill Ventures, aprivate strategic investment firm.

 

*Donald F. McGuinness* was appointed to the Board of Directors in 1996. He was Chairman,President and Chief Executive Officer (November 1989 to February 1999)of White Electronic Designs, Inc., a publicly held company that wasacquired by Bowmar Instrument Corporation in October 1998.

 

*Lamberto Raffaelli* was appointed to the Board of Directors in 1998. In May 2001, hefounded privately held LNX Corporation and serves as President and Chief ExecutiveOfficer. From 1994 to December 2000, he was President and Chief ExecutiveOfficer of Arcom, Inc., which was acquired by Quadrant-Vectron, a divisionof Dover Corporation International, in September 1999.

 

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*Cosmo S. Trapani* was appointed to the Board of Directors in2003. From 1990 to 1999 he was Executive Vice President and Chief FinancialOfficer of Unitrode Corporation, a publicly held company. From 1999 to 2000 hewas Senior Vice President and Chief Financial Officer of Circor International,a publicly held company and from 2001 to 2003 was Vice President and ChiefFinancial Officer of PRI Automation, a publicly held company. Mr. Trapaniserves on the Board of Directors of Hittite Microwave Corporation, a publiclytraded diversified electronics company.

 

**Executive Officers**

 

Thenames of, and certain information regarding, current executive officers of theCompany who are not also directors, are set forth below. Except for thePresident, Chief Executive Officer and Chairman, who has an employmentagreement with the Company, all executive officers serve at the pleasure of theBoard of Directors.

 
| **Name**            | ** ** | **Age**    | ** ** | **Position**                                      |
|---------------------|------------|------------|------------|---------------------------------------------------|
| ** **          | ** ** | ** ** | ** ** | ** **                                        |
| William  J. Schmidt |       | 53         |       | Chief  Financial Officer, Treasurer and Secretary |
| Robert  P. Dolan    |       | 48         |       | Vice  President of Wafer Technology               |

 

*William J. Schmidt* joined the Company and was appointed Chief Financial Officer andTreasurer and Secretary in May 2004. Prior to joining Ibis, Mr. Schmidtwas Vice President of Finance and Corporate Controller from April 2002 to May 2004at High Voltage Engineering Corporation, a private equity based corporationfocused in the capital equipment markets for semiconductors, instruments andindustrial automation. Prior to joining High Voltage, from March 2000 to May 2002,Mr. Schmidt served as Vice President of Finance for PRI Automation(Brooks) and held senior level financial positions including Vice President ofFinance and CFO roles at the operations of several leading technology companiesincluding, PerkinElmer and Philips Electronics Corporation. Mr. Schmidtholds multiple Bachelors degree’s from West Virginia University and an MBA inAccounting and Taxation from Fairleigh Dickinson University (NJ).

 

*Robert P. Dolan* joined the Company in 1988 as Production Manager. In January 1997,he was appointed Vice President of Wafer Manufacturing. In August 2004, hewas appointed Vice President of Wafer Technology. The Wafer Technology Groupwas formed after discontinuance of wafer operations to continue to work withour customers to improve the SIMOX process.

 

**StockholderRecommendations of Director Nominees**

 

TheCompany’s By-laws include a procedure whereby its stockholders can nominatepersons for election to the Board of Directors. The Board of Directors willconsider director candidates recommended by the Company’s stockholders in asimilar manner as those recommended by members of management or otherdirectors, provided the stockholder submitting such nomination has compliedwith the procedures set forth in its By-laws. To date, the Company has notreceived any recommended nominees from any non-management stockholder or groupof stockholders that beneficially owns more than five percent of its votingstock.

 

**Section 16(a) Beneficial Ownership ReportingCompliance**

 

Section 16(a) ofthe Securities Exchange Act of 1934 requires the Company’s directors andofficers, and persons who own more than 10% of the Company’s Common Stock, tofile with the Securities and Exchange Commission (the “SEC”) initial reports ofbeneficial ownership and reports of changes in beneficial ownership of theCommon Stock and other equity securities of the Company. Officers, directorsand greater than 10% beneficial owners are required by SEC regulation tofurnish the Company with copies of all Section 16(a) forms they file.

 

To the Company’s knowledge,based solely on review of the copies of such reports furnished to the Companyand written representations that no other reports were required, during thefiscal year ended December 31, 2007, all Section 16(a) filingrequirements applicable to its officers, directors and greater than 10%beneficial owners were complied with on a timely basis.

 

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**Audit Committee**

 

The Audit Committee has three members and currently consists ofLamberto Raffaelli, Leslie B. Lewis and Cosmo S. Trapani, none of whom is anofficer or employee of the Company. The Audit Committee met four times in 2007.The Audit Committee reviews the engagement of the Company’s independent registeredpublic accounting firm, reviews quarterly and annual financial statements,considers matters relating to accounting policy and internal controls andreviews the scope of annual audits. A detailed listing of the Audit Committee’sresponsibilities is set forth in the Company’s Audit Committee Charter adoptedby the Board of Directors. All of the members of the Audit Committee, asevaluated by the Board of Directors in its business judgment, are independentdirectors within the meaning of Rule 4200(a)(15) of the Nasdaq MarketplaceRules and is independent pursuant to the rules of the Securities andExchange Commission for the purposes of being an independent member of theAudit Committee. In addition, the Board of Directors has determined that Mr. Trapaniqualifies as an “audit committee financial expert” under the rules of theSEC. Stockholders should understand that this designation is a disclosurerequirement of the SEC related to Mr. Trapani’s experience andunderstanding with respect to certain accounting and auditing matters. Thedesignation does not impose on Mr. Trapani any duties, obligations orliabilities that are greater than are generally imposed on him as a member ofthe Audit Committee and the Board of Directors, and his designation as an auditcommittee financial expert pursuant to the SEC requirement does not affect theduties, obligations or liabilities of any other member of the Audit Committeeor the Board of Directors. The charter for the audit committee can be found onthe “Corporate Governance” page located at the Investor Center tab of ourwebsite, www.ibis.com, free of charge.

 

**Code of Ethical Conduct**

 

The Company has adopted aCode of Ethical Conduct that applies to all officers, directors, employees andconsultants. The Code of Ethical Conduct is intended to comply with Item 406 ofRegulation S-K of the Securities Exchange Act of 1934 and with applicableNasdaq Marketplace Rules. The Company’s Code of Ethical Conduct and itsFinancial Information Integrity Policy are available on the Company’s web siteat*www.ibis.com*, free of charge.The Company intends to disclose any amendment to or waiver of a provision ofthe Code of Ethical Conduct that applies to its principal executive officer,principal financial officer, principal accounting officer or controller, orpersons performing similar functions, by posting such information on its website.

 

**Item 11.      EXECUTIVE COMPENSATION**

 

**Executive Compensation Disclosureand Analysis**

 

The Compensation Committee of the Board of Directors is responsible fordischarging the Board’s responsibilities relating to the compensation of ournamed executive officers, as well as our other officers and key employees, and,in this regard, has the responsibility to establish a compensation policy forofficers and key employees designed to (i) enhance the profitability ofthe Company and increase shareholder value, (ii) reward officers and keyemployees for their contribution to our growth and profitability, and (iii) providecompetitive compensation that will attract and retain qualified officers andkey employees.

 

The individuals who servedas our Chief Executive Officer (specifically Martin Reid and Charles McKenna)and Chief Financial Officer (specifically William Schmidt) during fiscal 2007,as well as other individuals (specifically Robert Dolan) included in theSummary Compensation Table on page 74, are referred to as “named executiveofficers” throughout this CD&A.

 

**Compensation Policy**

 

Subject to variation whereappropriate, the compensation policy for officers and key employees includes:

 

·                  basesalary, which is determined on an annual basis,

 

·                  annualor other time-based cash incentive compensation, and

 

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·                  long-termincentive compensation in the forms of equity participation and other awards.

 

In setting compensationpackages for the named executive officers, the Compensation Committee considersprinciples of internal equity with respect to each executive’s role relative toother executives and key employees within the Company, market competitiveness,short and long-term performance goals, and rewarding management’s collectiverole in the Company’s success. Although we seek to structure our compensationprogram to aggressively attract and retain key personnel, compensation is notset against any defined peer group in an effort to compete for talent at topprices. Given the Company’s ongoing strategic transitioning, the CompensationCommittee has determined that external benchmarking is inappropriate at thistime. Rather, a significant portion of our compensation program is based oninternal benchmarking, including progress toward customer orders and customertechnical servicing, which requires the application of judgment and subjectivedetermination of both individual and Company performance. The CompensationCommittee is comfortable with the benchmarking data and other supportinginformation provided to the Compensation Committee by the Company’s managementand believes it is adequately experienced and equipped to address the relevantissues. The Compensation Committee has not, to date, used a third-partycompensation consultant. The Compensation Committee believes that outsideconsultants are unnecessary at this time because of the limitedstraight-forward elements of the current compensation program.

 

**Elements of Compensation**

 

There is no pre-established policy or target for the allocation betweeneither cash and non-cash or short-term and long-term incentive compensation,however a significant percentage of total compensation is allocated toincentives as a result of the philosophy discussed in this CD&A. On anannual basis, the Compensation Committee determines the appropriate level andmix of incentive compensation. The named executive officers will realize moreincome from such incentive compensation as a result of the positive performanceof the Company. In some circumstances, the Company may establish incentiveplans to reward individual performance against established goals or inconnection with an employee retention plan. Historically, and in fiscal 2007and 2006, the Compensation Committee granted a majority of total compensationto executive officers and key employees in the form of a base salary.  In 2006, the only named executive officer toreceive any additional cash incentive compensation received a bonus equal to20% of his total base salary. In 2007, no additional cash incentivecompensation was awarded.

 

*Base Salary.  * The compensation philosophy of the Companyis to maintain executive base salaries at a competitive level to enable theCompany to attract and retain executive and key employee talent needed toaccomplish the Company’s goals. In determining appropriate base salary levelsand, to a lesser extent, other compensation elements, the CompensationCommittee considers the scope of responsibility, prior experience and pastaccomplishments, as well as historical practices within the Company, eachvis-à-vis other executives and key employees. Economic and business conditionsaffecting the Company are also considerations. Accordingly, the CompensationCommittee has maintained base salaries at fairly low levels to conserve cash.Periodic adjustments in base salary may be merit based with respect toindividual performance or tied to the Company’s financial condition or othercompetitive factors. As discussed below, at times, certain named executiveofficers have voluntarily agreed to reduce their base salaries in connectionwith Company’s cost-cutting initiatives.

 

*Annual Incentive Bonuses.***  ** The Compensation Committee, in its discretion,may establish cash incentive programs and otherwise award bonuses to executiveofficers. More than any other element, bonus decisions are influenced byeconomic and business conditions affecting the Company and, as a result, theCompensation Committee has approved only limited cash bonuses to the namedexecutive officers in recent years. It is anticipated that bonus awards in thefuture will be tied to obtained product orders.

 

*Stock Options.***  ** The Compensation Committee believes that granting stock options on anongoing basis provides officers with a strong economic interest in maximizingstock price appreciation over the long term. We believe that the practice ofgranting stock options is critical to retaining and recruiting the key talentnecessary at all employee levels to ensure the Company’s continued success.Historically options have been granted to all permanent employees under theSecond Amended and Restated 1997 Employee, Director and 

 

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Consultant Equity Plan, and particularly to key employees likely tocontribute significantly to the Company. Such options granted after October 23,2007 have been made pursuant to the 2007 Employee, Director and ConsultantEquity Plan.  In determining the size ofan option grant to a named executive officer, the Compensation Committeeconsiders not only competitive market factors, changes in responsibility andthe executive officer’s achievement of pre-established goals, but also thenumber, term and vesting of options previously granted to the officer. TheCompensation Committee may also consider an executive’s total compensationpackage, or changes made thereto, when determining whether to make an optiongrant.

 

Executive officers, as wellas other officers and employees, receive a grant of stock options uponemployment with the Company. Stock options are awarded at an exercise priceequal to the fair market value of our common stock on the date of grant, asdefined in the plan pursuant to which the options are issued, and typicallyvest one quarter per year over a four year period. The Compensation Committeetypically approves stock option grants annually at the meeting coinciding withthe annual meeting of stockholders. However, the Compensation Committee has thediscretion to make additional periodic stock option grants at its discretion,including without limitation, to offset salary reductions or in lieu of basesalary increases or bonus consideration.

 

*Benefits.  * The named executive officers are entitled toparticipate in benefit plans which are generally available to all employees,including health, dental, life, accidental disability and dismemberment and foreach of these benefit plans, the Company makes contributions to the premiumspaid to the Plans. The Company does not offer any kind of deferredcompensation, nor does it offer retirement benefits other than a 401(k) definedcontribution plan. The Company typically does not match contributions made byexecutive officers and other employees to the 401(k) plan. Named executiveofficers are also encouraged to participate in the Company’s Employee StockPurchase Plan, through which employees may purchase shares at a 15% discountfrom fair market value.

 

*Change of Control Arrangements.  * The Company has entered into certain Changeof Control agreements with Mr. Reid and Mr. Schmidt. It is theCompany’s belief that the interests of our shareholders will be best served ifthe interests of our executive officers are aligned with them, and providingchange of control benefits should eliminate, or at least reduce, the reluctanceof the executive officers to pursue potential change of control transactionsthat may be in the best interests of the shareholders.

 

**Role of Executive Officers inSetting Compensation Decisions**

 

Regarding most compensationmatters, Mr. Reid historically has provided recommendations to theCompensation Committee relying on his personal experience serving in thecapacity of President and Chief Executive Officer with respect to evaluatingthe contribution of our other executive officers. Through November 2007,compensation recommendations also included input from Dr. McKenna, ourthen-current President and Chief Executive Officer. The Compensation Committeeconsiders, but retains the right to accept, reject or modify suchrecommendations. Although Mr. Reid attends portion of the meetings of theCompensation Committee, neither he nor any other member of management ispresent during executive sessions of the Compensation Committee. Moreover, Mr. Reidis not present when decisions with respect to his compensation are made. TheCompensation Committee may, but does not currently delegate any of itsfunctions to others in setting compensation for the named executive officers**,** provided, however, that management may beresponsible for the implementation of certain compensation programs establishedby the Compensation Committee. The Company does not currently engage anyconsultant related to executive and/or director compensation matters.

 

**Compensation of Named ExecutiveOfficers**

 

On November 28, 2005,base salaries for Messrs. Reid, McKenna, Schmidt and Dolan were set at$214,240, $214,240, $161,200 and $146,600, respectively, marking a 4% increasefrom salaries set earlier in 2005. These November 2005 base salariesremained unchanged throughout 2006. The decision to maintain the 

 

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base salary rate did not reflect a negative view of the named executiveofficers’ performance, but rather the Compensation Committee determined thatthe base salaries provided adequate compensation given the Company’s limitedcash flow.

 

The Compensation Committee determined that there would continue to beno increases Company-wide in base salaries for fiscal 2007. In furtherance ofthese cost reductions, on January 8, 2007, the Compensation Committeeapproved voluntary reductions in base salaries for Dr. McKenna and Mr. Reid,reducing their base salaries by 50% to for 2007. Similar voluntary reductions were approved for Mr. Schmidt,reducing his salary by 33%, and for Mr. Dolan, reducing his salary by 20%for fiscal 2007. In light of these reductions, Messrs. McKenna, Schmidtand Dolan received grants of stock options. It is anticipated that the salaryreductions will continue until such time as the Company significantly increasesits product orders.

 

Payments of bonuses are atthe discretion of the Compensation Committee and, in fiscal 2006, no bonusawards were paid to the named executive officers other than to Mr. Dolan.The bonus payment, which was made in two equal installments, was in theaggregate equal to 20% of Mr. Dolan’s 2006 base salary and was intended toreward Mr. Dolan for his efforts in connection with customer acceptance ofan i2000 implanter during the year, developments of certain i2000 implanterspecifications for additional implanters and retention of key process groupstaff. The first bonus award was paid in the first quarter of 2006 based on Mr. Dolan’scontribution for that quarter, and the second payment was made in January, 2007for achievement over the remainder of 2006. Similar awards were made to threeother key employees within the Company. The Compensation Committee did notaward any cash bonus to Mr. Dolan, or to any of the other named executiveofficers in 2007, and such bonuses are not anticipated for 2008 other than inthe event of a significant increase in product orders.

 

The only awards of stockoptions to the named executive officers in fiscal 2006 were grants of 100,000and 25,000 incentive stock options made to Mr. Reid and Mr. Schmidt,respectively, in March of 2006. These grants were made in an effort toequitably award equity incentive compensation vis-à-vis the other namedexecutive officers.  Dr. McKenna hadreceived options in 2005 in connection with his consulting services and uponbecoming an officer of the Company and Mr. Dolan was the recipient of agrant in connection with a Company-wide option grant in May 2005. Neither Mr. Reidnor Mr. Schmidt received any stock options in fiscal 2005.

 

In November 2006, aspart of the Company’s efforts to conserve cash, the Company initiated an optiongrant in lieu of salary increase program, whereby employees rather thanreceiving a salary increase with respect to 2007 base salary compensation, wereinstead granted the equivalent of five percent of their 2006 base salary in theform of an option grant with one year vesting. The program was designed as partof an overall retention effort, as well as to improve morale, and provide theopportunity for employees to potentially earn in excess of five percent oftheir base salary if the Company’s operating performance improved and wasreflected in the Company’s stock price. The named executive officers did notparticipate in the option grant in lieu of salary increase program.

 

In light of the voluntaryreductions in salary by each of the named executive officers for fiscal 2007,in January 2007, the Compensation Committee approved grants to Messrs. McKenna,Schmidt and Dolan of 110,000, 30,000 and 30,000, respectively. The options wereintended to qualify as incentive stock options and vest over three years. Thegrants were made in an effort to align the named executive officers’ totalcompensation package with prior years and provide alternative compensation inlight of the voluntary salary reductions.

 

**Accounting and Tax Implications**

 

On December 2004, the Financial Accounting Standards Board issuedFASB Statement No. 123(R), Share Based Payment, which requires allcompanies to treat the fair value of stock options granted to employees as anexpense. As a result of this standard, effective for periods beginning after January 1,2006, we are required to record a compensation expense equal to the fair valueof each stock option granted. SFAS 123(R)

 

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requirements reduce the attractiveness of granting stock optionsbecause of the additional expense associated with these grants, which haveimpacted and will continue to negatively impact our results of operations.Nevertheless, the Compensation Committee has determined that stock options arean important employee recruitment and retention tool, and, to date, we have notreduced the scope of our stock option program.

 

The Compensation Committeehas reviewed and considered Section 162(m) of the Internal RevenueCode, which generally disallows a tax deduction of more than $1 million that ispaid to certain executive officers. Given the general range of salaries andbonuses for the named executive officers, as well as other officers andemployees, the threshold is unlikely to be reached in the foreseeable future.

 

Thefollowing table shows compensation information for fiscal 2007 and 2006 for thenamed executive officers.

 

**Summary Compensation Table**

** **
| **(a)**                                      | ** ** | **(b)**    | ** ** | **(c)**         | ** ** | **(d)**        | ** ** | **(e)**                    | ** ** | **(f)**                                  | ** ** | **(g)**            | ** ** |
|----------------------------------------------|------------|------------|------------|-----------------|------------|----------------|------------|----------------------------|------------|------------------------------------------|------------|--------------------|------------|
| **Name and Principal  Position**   | ** ** | **Year**   | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **Option  Awards  ($)(1)** | ** ** | **All Other  Compensation  ($)(2)** | ** ** | **Total ($)** | ** ** |
| ** **                                   | ** ** | ** ** | ** ** | ** **      | ** ** | ** **     | ** ** | ** **                 | ** ** | ** **                               | ** ** | ** **         | ** ** |
| Martin J. Reid,  Executive Chairman,         |       | 2007       | (3)        | 111,240         |       | —         |       | 108,868                    |       | 6,081                                    |       | 226,189            |       |
| Chairman of the  Board                       |       | 2006       | (4)        | 214,240         |       | —         |       | 120,850                    |       | 6,081                                    |       | 341,171            |       |
|                                         |       |       |       |            |       |           |       |                       |       |                                     |       |               |       |
| Charles M.  McKenna, PhD, President and |       | 2007       | (5)        | 97,566          |       | —         |       | 78,280                     |       | —                                   |       | 175,846            |       |
| Chief Executive  Officer                     |       | 2006       | (6)        | 214,240         |       | —         |       | 34,148                     |       | 3,160                                    |       | 251,548            |       |
|                                         |       |       |       |            |       |           |       |                       |       |                                     |       |               |       |
| William J.  Schmidt, CFO Treasurer and       |       | 2007       |       | 109,200         |       | —         |       | 88,921                     |       | 809                                      |       | 198,930            |       |
| Clerk                                        |       | 2006       |       | 161,200         |       | —         |       | 73,835                     |       | 809                                      |       | 235,844            |       |
|                                         |       |       |       |            |       |           |       |                       |       |                                     |       |               |       |
| Robert P. Dolan,  Vice President of Wafer    |       | 2007       |       | 118,440         |       | —         |       | 25,773                     |       | 475                                      |       | 144,688            |       |
| Technology                                   |       | 2006       |       | 146,640         |       | 29,328         |       | 17,389                     |       | 475                                      |       | 193,166            |       |

 

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(1)  The amounts in column (e) reflectthe dollar amount recognized for financial statement reporting for the fiscalyears ended December 31, 2007 and December 31, 2006 and computed inaccordance with SFAS 123(R), of incentive stock option awards granted pursuantto the Second Amended and Restated 1997 Employee, Director and ConsultantEquity Plan and thus include a portion of the SFAS 123(R) value of awardsgranted in and prior to 2006. The SFAS 123(R) valuations reflected incolumn (e) disregard the estimate of forfeitures related to service-basedvesting conditions and, thus, assume zero forfeitures. Other assumptions usedin the calculation of this amount are included in footnote 2(k) to theCompany’s audited financial statements for the fiscal year ended December 31,2007, included in this Annual Report on Form 10-K.

 

(2)  The amounts in column (f) reflectthe value attributable to group term life insurance benefits in excess of $50,000per year. The company provides all employees with Group Term Life (GTL). GTL to$50K is considered a non-taxable benefit. The cost of the premium over 50K iscalculated based on age and added to an employees’ income.

 

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(3)  Mr. Reid resumed his position asPresident, Chief Executive Officer and Chairman of the Board on December 4,2007 following the unexpected death of then-current President and ChiefExecutive officer, Dr. McKenna. Prior to such appointment Mr. Reid served as ExecutiveChairman.  The amount shown in column (c) isthe salary paid to Mr. Reid as Executive Chairman.  His appointment as President and ChiefExecutive Officer did not result in any changes to his compensation.

 

(4)  Mr. Reid served as President,Chief Executive Officer and Chairman of the Board until November 20, 2006,at which time he became Executive Chairman. The amount shown in column (c) isthe salary paid to Mr. Reid as President, Chief Executive Officer andChairman of the Board until such time and salary paid to Mr. Reid in hiscapacity as Executive Chairman after such time.

 

(5)  Dr. McKenna served as Presidentand Chief Executive Officer until his unexpected death on November 2,2007. The amount shown in column (c) is the salary paid to Dr. McKennain such capacity.

 

(6)  Dr. McKenna served as ExecutiveVice President and Chief Operating Officer until November 20, 2006, atwhich time he became President and Chief Executive Officer. The amount shown incolumn (c) is the salary paid to Dr. McKenna as Executive VicePresident and Chief Operating Officer until such time and salary paid to Dr. McKennain his capacity as President and Chief Executive Officer after such time.

 

Thefollowing table shows grants of plan-based awards for fiscal 2007 for the namedexecutive officers.

 

**Grants of Plan-Based Awards**

** **
| **Name**            | ** ** | **Grant  Date** | ** ** | **All Other  Option  Awards:  Number of  Securities  Underlying  Options(#)** | ** ** | **Exercise or  Base Price of  Option Based  Awards  ($/shares)** | ** ** | **Market Price  of Option  Based Award  on Date of  Grant  ($/Shares)(1)** | ** ** | **Grant Date  Fair Value of  Stock and  Option  Awards ($)(2)** | ** ** |
|---------------------|------------|-----------------|------------|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| **(a)**             | ** ** | **(b)**         | ** ** | **(c)**                                                                                 | ** ** | **(d)**                                                                              | ** ** | **(e)**                                                                                             | ** ** | **(f)**                                                                                  | ** ** |
| ** **          | ** ** | ** **      | ** ** | ** **                                                                              | ** ** | ** **                                                                           | ** ** | ** **                                                                                          | ** ** | ** **                                                                               | ** ** |
| Martin J. Reid      |       | —          |       | —                                                                                  |       | —                                                                               |       | —                                                                                              |       | —                                                                                   |       |
| Charles M.  McKenna |       | 1/17/07         |       | 110,000                                                                                 |       | 1.52                                                                                 |       | 1.57                                                                                                |       | 141,966                                                                                  |       |
| William J. Schmidt  |       | 1/17/07         |       | 30,000                                                                                  |       | 1.52                                                                                 |       | 1.57                                                                                                |       | 38,718                                                                                   |       |
| Robert P. Dolan     |       | 1/17/07         |       | 30,000                                                                                  |       | 1.52                                                                                 |       | 1.57                                                                                                |       | 38,718                                                                                   |       |
|                |       | 7/2/07          |       | 15,000                                                                                  |       | 1.53                                                                                 |       | 1.48                                                                                                |       | 17,585                                                                                   |       |

 

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(1)  The option grants made to the namedexecutive officers in 2007 are intended to qualify as incentive stock optionsand, as such, each option was issued with an exercise price equal to 100% offair market value. Pursuant to the 1997 Plan, from which all of the options tothe named executive officers were granted, “fair market value” means the closingor last price of the common stock on The Nasdaq Stock Market for the tradingday immediately preceding the grant date. The amounts in column (e) representthe closing market price on the grant date.

 

(2)  The amountsreflected in column (f) are the grant date fair values computed inaccordance with FAS 123(R). Regardless of the value placed on a stock option onthe grant date, the actual value of the option will depend on the market valueof the common stock at such future date as the option is exercised.

 

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Thefollowing table shows outstanding equity awards for fiscal 2007 for namedexecutive officers.

 

**Outstanding Equity Awards at 2007 Fiscal Year-End**

 
| **Name**            | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised Option  (#) Unexercisable** | ** ** | **Option  Exercise  Price($)** | ** ** | **Option Expiration  Date** | ** ** |
|---------------------|------------|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| **(a)**             | ** ** | **(b)**                                                                                | ** ** | **(c)**                                                                                     | ** ** | **(d)**                        | ** ** | **(e)**                          | ** ** |
| ** **          | ** ** | ** **                                                                             | ** ** | ** **                                                                                  | ** ** | ** **                     | ** ** | ** **                       | ** ** |
| Martin J. Reid      |       | 96,000                                                                                 | (1)        | —                                                                                      |       | 9.375                          |       | Expired                          |       |
|                |       | 50,000                                                                                 | (2)        | —                                                                                      |       | 11.75                          |       | 2/4/2009                         |       |
|                |       | 50,000                                                                                 | (2)        | —                                                                                      |       | 46.25                          |       | 1/4/2010                         |       |
|                |       | 6,000                                                                                  | (2)        | —                                                                                      |       | 20.00                          |       | 1/4/2011                         |       |
|                |       | 30,000                                                                                 | (2)        | —                                                                                      |       | 7.98                           |       | 8/7/2011                         |       |
|                |       | 4,083                                                                                  | (2)        | —                                                                                      |       | 9.79                           |       | 12/3/2011                        |       |
|                |       | 30,000                                                                                 | (2)        | —                                                                                      |       | 6.00                           |       | 6/17/2012                        |       |
|                |       | 15,000                                                                                 | (2)        | —                                                                                      |       | 4.75                           |       | 2/6/2013                         |       |
|                |       | 9,517                                                                                  | (3)        | —                                                                                      |       | 9.01                           |       | 8/26/2013                        |       |
|                |       | 6,000                                                                                  | (4)        | —                                                                                      |       | 10.70                          |       | 9/1/2013                         |       |
|                |       | 37,500                                                                                 | (2)        | 12,500                                                                                      | (2)        | 3.63                           |       | 8/24/2014                        |       |
|                |       | 50,000                                                                                 | (2)        | 50,000                                                                                      | (2)        | 3.45                           |       | 3/7/2016                         |       |
|                |       |                                                                                   |       |                                                                                        |       |                           |       |                             |       |
| Charles M.  McKenna |       | 5,842                                                                                  | (5)        | —                                                                                      |       | 1.26                           |       | 11/3/2008                        |       |
|                |       | 51,472                                                                                 | (6)        | —                                                                                      |       | 1.73                           |       | 11/3/2008                        |       |
|                |       | 29,031                                                                                 | (7)        | —                                                                                      |       | 1.52                           |       | 11/3/2008                        |       |
|                |       |                                                                                   |       |                                                                                        |       |                           |       |                             |       |
| William J.  Schmidt |       | 37,500                                                                                 | (2)        | 12,500                                                                                      | (2)        | 7.88                           |       | 5/10/2014                        |       |
|                |       | 5,250                                                                                  | (2)        | 1,750                                                                                       | (2)        | 3.63                           |       | 8/24/2014                        |       |
|                |       | 12,500                                                                                 | (2)        | 12,500                                                                                      | (2)        | 3.45                           |       | 3/7/2016                         |       |
|                |       | 10,000                                                                                 | (1)        | 20,000                                                                                      | (1)        | 1.52                           |       | 1/17/2017                        |       |
|                |       |                                                                                   |       |                                                                                        |       |                           |       |                             |       |
| Robert P. Dolan     |       | 8,500                                                                                  | (2)        | —                                                                                      |       | 11.75                          |       | 2/4/2009                         |       |
|                |       | 17,000                                                                                 | (2)        | —                                                                                      |       | 46.25                          |       | 1/4/2010                         |       |
|                |       | 6,000                                                                                  | (2)        | —                                                                                      |       | 20.00                          |       | 1/4/2011                         |       |
|                |       | 11,500                                                                                 | (2)        | —                                                                                      |       | 7.98                           |       | 8/7/2011                         |       |
|                |       | 2,015                                                                                  | (2)        | —                                                                                      |       | 9.79                           |       | 12/3/2011                        |       |
|                |       | 10,000                                                                                 | (2)        | —                                                                                      |       | 6.00                           |       | 6/17/2012                        |       |
|                |       | 5,000                                                                                  | (2)        | —                                                                                      |       | 4.75                           |       | 2/6/2013                         |       |
|                |       | 4,017                                                                                  | (3)        | —                                                                                      |       | 9.01                           |       | 8/26/2013                        |       |
|                |       | 5,625                                                                                  | (2)        | 1,875                                                                                       | (2)        | 3.63                           |       | 8/24/2014                        |       |
|                |       | 7,500                                                                                  | (2)        | 7,500                                                                                       | (2)        | 1.36                           |       | 5/2/2015                         |       |
|                |       | 10,000                                                                                 | (1)        | 20,000                                                                                      | (1)        | 1.52                           |       | 1/17/2017                        |       |
|                |       | 3,750                                                                                  | (8)        | 14,625                                                                                      | (8)        | 1.53                           |       | 7/2/2017                         |       |

 

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(1)  Options granted have a vestingschedule of one-third per year over three years and a ten year term.

 

(2)  Options granted have a vestingschedule of 25% per year over four years and a ten year term.

 

(3)  Options granted on August 26, 2003 have a vestingschedule of 50% per year over two years and a 10 year term. Options weregranted as part of an expense reduction which included mandatory salaryreductions for all employees who earned $60,000 or more per year.

 

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(4)  Optionsgranted on September 1, 2003, have a one year vesting and a ten year term.Options were granted as part of an expense reduction which included voluntarysalary reductions.

 

(5)  Optionsgranted pursuant to a consulting agreement dated May 11, 2005; 2,500options vested on July 1, 2005, 2500 options vested on  July 1, 2007,  and 842 prorated options vested upon theparticipants death. The options are exercisable within a one year periodfollowing the participant’s death.

 

(6)  Optionsgranted have a vesting schedule of 25% per year over four years and a ten yearterm. Ninety thousand options were granted on July 20, 2005; 22,500options vested on July 20, 2006, 22,500 options vested on July 20,2007, and 6,472 prorated options vested upon the participant’s death. Theoptions are exercisable within a one year period following the participant’sdeath.

 

(7)  Optionsgranted have a vesting schedule of one-third per year over three years and aten year term. One hundred and ten thousand options were granted on January 17,2007; 29,031 prorated options vested upon the participant’s death. The optionsare exercisable within a one year period following the participant’s death.

 

(8)  Optionsgranted have a vesting schedule of 25% each six months over two years and a tenyear term.

 

**Employment Contracts and Change ofControl Arrangements**

 

The Company has anemployment agreement with Martin J. Reid. This agreement, dated November 12,2003, as amended, provides that Mr. Reid is to serve as Executive Chairmanand Chief Executive Officer until December 31, 2008, at an initial annualbase salary of $220,000, subject to change from time to time as determined byaction of the Board of Directors and except as voluntarily reduced by Mr. Reid.The agreement also provides that Mr. Reid will be paid bonuses as aredetermined from time to time by the Board or its Compensation Committee in itsdiscretion, taking into account, among other factors, Mr. Reid’sperformance and the Company’s performance. In the event that Mr. Reid’semployment is terminated by the Company without cause or in certain othercircumstances, Mr. Reid will be paid at his then annual base salary ratefor a period of 12 months following the date of such termination and he will beentitled to be paid for the cost of 12 months of health benefits. Mr. Reidmay terminate his employment at any time, but will forfeit certain benefits ifhe does not provide the Company with at least 60 days prior written notice.This agreement also contains a one-year post termination non-competitionprovision.

 

In 2005, the Company enteredinto a Restated Change of Control Agreement with Martin J. Reid and a Change ofControl Agreement with William J. Schmidt. In the event that Mr. Reid’semployment is terminated within two years of a Change of Control (as defined inhis agreement) of the Company, he will be paid a lump sum equal to twice thehighest annual salary for the preceding three year period. In the event that Mr. Schmidt’semployment is terminated within two years of a Change of Control (as defined inhis agreement) of the Company, he will be paid a lump sum equal to one timeshis highest annual salary for the preceding three year period. Annual salaryincludes base salary and bonus and excludes reimbursements and amountsattributable to stock options and other non-cash compensation. Under theagreements, each of Mr. Reid and Mr. Schmidt will also be providedhealth benefits for a period of time following termination or until the datethey become eligible for such coverage offered by a subsequent employer if earlier.Mr. Reid is entitled to these benefits for two years and Mr. Schmidtis entitled to these benefits for one year. These severance compensation andbenefits replace, and are provided in lieu of, any severance compensation andbenefits that may be provided under any other agreement. “Change of Control” inboth agreements is deemed to occur upon (i) a sale or transfer of all orsubstantially all of the Company’s assets; (ii) a merger or consolidationin which the Company is not the continuing or surviving corporation or theCompany’s voting stockholders do not continue to hold 50% of the voting stockof the continuing or surviving corporation, or (iii) any person, togetherwith affiliates and associates, acquires, directly or indirectly, securitiesrepresenting 30% of the then outstanding shares of common stock or the combinedvoting power of all then outstanding securities having the right to vote in anelection of the Board of Directors of the Company.

 

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All of the Company’semployees are subject to certain confidentiality and non-competitionobligations. Each employee has also agreed that all inventions, discoveries anddevelopments which may be used in the Company’s business and that are developedby such employee during his or her employment with the Company are theCompany’s property and the employee will assign his or her rights therein tothe Company.

 

In the event of an“Acquisition” of the Company (as defined in the 1993 and 1997 Plans), theadministrator of the Plans may either (i) make appropriate provision forthe continuation of outstanding options, (ii) provide for acceleratedvesting and/or exercise of outstanding options on certain conditions, or (iii) terminateall options in exchange for a cash consideration payment in connection withsuch Acquisition.

 

**Compensation of Directors**

 

Thefollowing table shows the compensation of the Company’s directors:

 
| **Name (1)**          | ** ** | **Fees  Earned   or Paid** | ** ** | **Option  Awards  ($)(2)** | ** ** | **Total  ($)** | ** ** |
|----------------------------|------------|--------------------------------------|------------|----------------------------|------------|----------------|------------|
| **(a)**                    | ** ** | **(b)**                              | ** ** | **(c)**                    | ** ** | **(d)**        | ** ** |
| ** **                 | ** ** | ** **                           | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Dimitri  Antoniadis, Ph.D. |       | 3,000                                |       | 2,109                      |       | 5,109          |       |
| Robert L. Gable            |       | 4,250                                |       | 2,109                      |       | 6,359          |       |
| Leslie B. Lewis            |       | 2,750                                |       | 2,109                      |       | 4,859          |       |
| Donald F.  McGuinness      |       | 4,250                                |       | 2,109                      |       | 6,359          |       |
| Lamberto  Raffaelli        |       | 3,750                                |       | 2,109                      |       | 5,859          |       |
| Cosmo S. Trapani           |       | 6,000                                |       | 2,109                      |       | 8,109          |       |

 

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(1)  Martin J. Reid, the Company’sExecutive Chairman, is not included in this table, as he is an employee of theCompany and thus receives no compensation for his service as Director. Thecompensation received by Mr. Reid as an employee of the Company is shownin the Summary Compensation Table on page 74 of this Form 10-K.

 

(2)  The amounts in column (c) reflectthe dollar amount recognized for financial statement reporting for the fiscalyear ended December 31, 2007 and computed in accordance with SFAS 123(R),of incentive stock option awards granted pursuant to the Second Amended andRestated 1997 Employee, Director and Consultant Equity Plan and thus include aportion of the SFAS 123(R) value of awards granted in and prior to 2006. TheSFAS 123(R) valuations reflected in column (c) disregard the estimateof forfeitures related to service-based vesting conditions and, thus, assumezero forfeitures. Other assumptions used in the calculation of this amount areincluded in footnote 2(k) to the Company’s audited financial statementsfor the fiscal year ended December 31, 2007, included in this AnnualReport on Form 10-K.

 

**Director Compensation Policy**

 

The Company pays eachnon-employee director (Dr. Antoniadis, Mr. McGuinness, Mr. Gable,Mr. Lewis, Mr. Raffaelli and Mr. Trapani) $1,000 for eachmeeting of the Board of Directors or meeting of a committee of the Board thateach of them attends and $250 for each telephonic meeting of the Board ortelephonic meeting of a committee of the Board in which they participate. In2007, the aggregate amount of compensation and reimbursement for such expensespaid to all of these directors was approximately $24,000.

 

Pursuant to the 2007 Plan,each non-employee director of the Company then serving as a director isautomatically granted non-qualified stock options to purchase 1,250 shares ofCommon Stock following each Annual Meeting of Stockholders of the Company.These options vest in full immediately prior to the next annual meetingfollowing the date the options are granted and have an exercise price equal tothe closing price of the Common Stock for the trading day immediately precedingthe grant date.

 

79

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**Compensation Committee Interlocksand Insider Participation**

 

The Compensation Committeeconsists of two members, Leslie B. Lewis and Robert L. Gable, neither of whomwas at any time during the past fiscal year an officer or employee of theCompany, was formerly an officer of the Company or had any relationship withthe Company requiring disclosure herein. During the fiscal year ended December 31,2007, no executive officer of the Company served as a (a) member of thecompensation committee (or other board committee performing equivalentfunctions or, in the absence of any such committee, the entire board ofdirectors) of another entity, one of whose executive officers served on theCompensation Committee of the Company; (b) director of another entity, oneof whose executive officers served on the Compensation Committee of theCompany; or (c) member of the compensation committee (or other boardcommittee performing equivalent functions or, in the absence of any suchcommittee, the entire board of directors) of another entity, one of whoseexecutive officers served as a director of the Company.

 

**COMPENSATION COMMITTEE REPORT**

 

The Compensation Committeehas reviewed and discussed with management the Compensation Discussion andAnalysis contained in this proxy statement. The Compensation Committee issatisfied that the Compensation Discussion and Analysis fairly and completelyrepresents the philosophy, intent, and actions of the Compensation Committeewith regard to executive compensation. We recommended to the Board of Directorsthat the Compensation Discussion and Analysis be included in this proxystatement for filing with the Securities and Exchange Commission.

 
| ** ** | ** ** | **The Compensation   Committee:** |
|------------|------------|-----------------------------------|
|       |       | Robert  L. Gable                  |
|       |       | Leslie  B. Lewis                  |

 
| **Item 12.** | **SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|-----------------------------------------------------------------------------------------------------|

 

**Description of Equity Plans**

 

The Company maintains fourequity compensation plans under which the Company’s equity securities areauthorized for issuance to the Company’s employees and/or directors. Theseplans consist of (a) the Company’s 1993 Employee, Director and ConsultantStock Option Plan, as amended; (b) the Company’s 1997 Employee, Directorand Consultant Stock Option Plan, as amended; (c) the Company’s 2000Employee Stock Purchase Plan, as amended, and (d) Company’s 2007 Employee,Director, and Consultant Equity Plan at the Annual Meeting.

 

80

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Each of the foregoing equitycompensation plans was approved by the stockholders of the Company. The tablebelow presents information about all of the foregoing plans as of December 31,2007.

 
| **Plan Category**                                           | ** ** | **Number of  securities to be  issued upon exercise  of outstanding  options, warrants,  and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of  securities  remaining  available for  future issuance  under equity  compensation  plans (excluding  securities reflected  in column (a))** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **(a)**                                                                                                                                       | ** ** | **(b)**                                                                                                     | ** ** | **(c)**                                                                                                                                                                                          | ** ** |
|                                                             |       |                                                                                                                                          |       |                                                                                                        |       |                                                                                                                                                                                             |       |
| Equity  compensation plans approved by security holders (1) |       | 3,885,681                                                                                                                                     |       | $                                                                                                           | 3.54       |                                                                                                                                                                                             | 1,646,038  | (2) |
| Equity  compensation plans not approved by security holders      |       |                                                                                                                                          |       | $                                                                                                           |       |                                                                                                                                                                                             |       |   |
| Total                                                            |       | 3,885,681                                                                                                                                     |       | $                                                                                                           | 3.54       |                                                                                                                                                                                             | 1,646,038  | (2) |

 

----

(1)  The 2000 Employee Stock PurchasePlan, as amended, is not included in (a) and (b) above as the numberof outstanding options and weighted-average exercise price are not determinableunder the 2000 Employee Stock Purchase Plan.

 

(2)  This amount includes 146,038non-transferable options available for exercise as of December 31, 2007under the 2000 Employee Stock Purchase Plan.

 

**1993 Employee, Director andConsultant Stock Option Plan, as amended**

 

The 1993 Plan has expiredand there are no options available for issuance under this plan; however, the1993 Plan continues to govern all options, awards and other grants granted andoutstanding under the 1993 Plan. All employees, directors and consultants ofthe Company and its affiliates (approximately 26 people) were eligible toparticipate in the 1993 Plan. Options granted under the 1993 Plan were either (i) optionsto qualify as “incentive stock options” under Section 422 of the Code, or (ii) non-qualifiedstock options. Incentive stock options granted under the 1993 Plan were notgranted at a price less than the closing price of the Common Stock for thetrading day immediately preceding the grant date, or 110% of the fair marketvalue in the case of employees holding 10% or more of the voting stock of theCompany. Non-qualified stock options granted under the 1993 Plan were notgranted at an exercise price less than the closing price of the Common Stockfor the trading day immediately preceding the grant date.

 

A total of 750,000 shares ofCommon Stock were initially reserved for issuance under the 1993 Plan. As of December 31,2007, options to purchase up to an aggregate of 50,368 shares of Common Stockwere outstanding, at a weighted average exercise price of $ 11.98 per share.

 

Please refer to the actualtext of the 1993 Plan for a more detailed description of the features of the1993 Plan.

 

**1997 Employee, Director andConsultant Stock Option Plan, as amended**

 

The 1997 Plan has expiredand there are no options available for issuance under this plan, however, the1997 Plan continues to govern all options, awards and other grants granted andoutstanding under the 1997 plan.  Allemployees, directors and consultants of the Company and its affiliates(approximately 51 people) were eligible to participate in the 1997 Plan.Options granted under the 1997 Plan may be either (i) options to qualifyas “incentive stock options” under Section 422 of the Code, or (ii) non-qualifiedstock options. Incentive stock options granted under the 1997 Plan were notgranted at a price less than the closing price of the Common Stock for thetrading day immediately preceding the grant date, or 110% of the fair marketvalue

 

81

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in the case of employees holding 10% or more of the voting stock of theCompany. Non-qualified stock options granted under the 1997 Plan were notgranted at an exercise price less than the closing price of the Common Stockfor the trading day immediately preceding the grant date.

 

Upon the initial adoption ofthe 1997 Plan, a total of 750,000 shares of Common Stock were initiallyreserved for issuance. The 1997 Plan was amended by the Company’s Board ofDirectors and its Stockholders on three occasions in order to increase thenumber of shares of Common Stock reserved for issuance to its current total of1,950,000 shares. As of December 31, 2007, options to purchase up to anaggregate of  1,301,532 shares of CommonStock were outstanding, at a weighted average exercise price of $ 7.17 pershare.

 

Please refer to the actualtext of the 1997 Plan for a more detailed description of the features of the1997 Plan.

 

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**2000 Employee Stock Purchase Plan,as amended**

 

Allemployees that work 20 hours or more per week, who have been continuouslyemployed by the Company for at least three months immediately prior to anyoffering period and who are not considered temporary employees are eligible toparticipate in the Purchase Plan. Temporary employees are defined as employeeswho are employed by the company for a specified period of time, less than sixmonths.

 

However,any employee who would own more than 5% of the voting power of the Company’sstock immediately after a grant under the Purchase Plan is not eligible toparticipate and no participant may purchase more than $25,000 of Common Stock,based on the undiscounted value of the Common Stock at the beginning of eachoffering period, in any one calendar year.

 

ThePurchase Plan is implemented by a series of offering periods, with a newoffering period starting on June 1, and December 1 of each year (orsuch other times as may be determined by the Board of Directors). To participatein the Plan an eligible employee will authorize the Company to deduct up to 15%of the employee’s pay, not to exceed $21,250 per year, beginning on the firstday of each designated offering period. On the first business day of eachoffering period, each eligible employee who has elected to participate in thePurchase Plan will be granted an option to purchase shares of the Company’sCommon Stock. Unless a participating employee withdraws from the Purchase Planprior to the end of the offering period, on the last day of the offering periodthe option will be automatically exercised for the purchase of a number ofshares of the Company’s Common Stock determined by dividing the employee’scontributions during the offering period by the lesser of (i) 85% of thefair market value of the Common Stock on the first day of the offering period,or (ii) 85% of the fair market value of the Common Stock on the last ofthe offering period. Under the Purchase Plan, the fair market value of a shareof Common Stock on a given date shall be determined by the Board of Directorsbased on the closing sale price of the Common Stock for such date (or if theCommon Stock is not traded on such date, on the immediately preceding tradingdate), as reported on the Nasdaq National Market.

 

Aparticipant may, on one occasion only during an offering period, decrease theamount of payroll deductions or may withdraw from participation in the PurchasePlan at any time. If a participant withdraws from the Purchase Plan or becomesineligible to participate in the Purchase Plan, any accumulated employeecontributions are paid back to such participant.

 

Atotal of 300,000 shares of Common Stock were initially reserved for issuanceunder the Purchase Plan to be sold to eligible employees of the Company at adiscount from the market value of the shares. The Purchase Plan was amended bythe Company’s Board of Directors and its stockholders in order to increase thenumber of shares of Common Stock reserved for issuance to its current total of 600,000**.**  Asof December 31, 2006, non-transferable options to purchase up to anaggregate of 146,038 shares of Common Stock were outstanding. Theweighted-average exercise price is not determinable under the Purchase Plan.

 

Please refer to the actual text of the Purchase Plan for a moredetailed description of the features of the Purchase Plan.

 

**2007 Employee, Director, and Consultant Equity Plan**

 

All employees, directors and consultants of the Company and itsaffiliates (approximately 51 people) are eligible to participate in the 2007Plan.  Options granted under the 2007Plan may be either (i) options to qualify as “incentive stock options”under Section 422 of the Code, or (ii) non-qualified stockoptions.  Incentive stock options grantedunder the 2007 Plan may not be granted at a price less than the closing priceof the Common Stock on the grant date, or 110% of the fair market value in thecase of employees holding 10% or more of the voting stock of the Company.  Non-qualified stock options granted under the2007 Plan may not be granted at an exercise price less than the closing priceof the Common Stock on the grant date.

 

Upon the initial adoption of the 2007 Plan, a total of 1,500,000 sharesof Common Stock were initially reserved for issuance.  As of December 31, 2007,no stockoptions, stock purchase rights or other stock-based awards have been grantedunder the 2007 Plan  The 2007 Planexpires on March 5, 2017, if not otherwise amended.

 

83

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**Share Ownership**

 

The following table sets forth certain information as of May 22,2008 concerning the ownership of Common Stock by (i) each stockholderknown by the Company to be the beneficial owner of more than 5% of itsoutstanding shares of Common Stock, (ii) each current member of the Boardof Directors, (iii) each executive officer named in the SummaryCompensation Table contained herein, and (iv) all current directors andexecutive officers as a group.

 
| ** **                                                                                                                          | ** ** | **Shares Beneficially  Owned(2)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| **Names and Address (1)****                                                                                          | ** ** | **Number**                             | ** ** | **Percent** | ** ** |
|                                                                                                                                |       |                                   |       |   |   |
| Special  Situations Fund III QP, L.P. and its affiliated funds(3)(4)  527 Madison Avenue, Suite 2600  New York, New York 10022 |       | 5,912,148                              |       | 41.3 | % |
| Martin J. Reid  (5)                                                                                                                 |       | 304,100                                |       | 2.1 | % |
| Robert P. Dolan  (6)                                                                                                                |       | 90,907                                 |       | * |   |
| Robert L. Gable  (7)                                                                                                                |       | 46,250                                 |       | * |   |
| Charles M.  McKenna (8)                                                                                                             |       | 110,382                                |       | * |   |
| William J.  Schmidt (9)                                                                                                             |       | 76,227                                 |       | * |   |
| Leslie B. Lewis  (10)                                                                                                               |       | 37,050                                 |       | * |   |
| Lamberto  Raffaelli (11)                                                                                                            |       | 22,000                                 |       | * |   |
| Dimitri  Antoniadis, PhD (12)                                                                                                  |       | 11,250                                 |       | * |   |
| Cosmo S. Trapani  (13)                                                                                                              |       | 13,500                                 |       | * |   |
| Donald F.  McGuinness (14)                                                                                                          |       | 10,000                                 |       | * |   |
|                                                                                                                                |       |                                   |       |   |   |
| Executive  Officers and Directors as a group (10 Persons)                                                                           |       | 721,666                                |       | 4.8 | % |

 

----

*  Represents beneficialownership of less than 1% of the outstanding Common Stock.

 

**  Addresses are given forbeneficial owners of more than 5% of the outstanding Common Stock only.

 

(1) The address for each beneficial owner is c/o Ibis TechnologyCorporation, 32 Cherry Hill Drive, Danvers, Massachusetts, 01923.

 

(2) The number of shares of Common Stock issued and outstanding onMay 22, 2008  was 14,317,482. Thecalculation of percentage ownership for each listed beneficial owner is basedupon the number of shares of Common Stock issued and outstanding at May 22,2008, plus shares of Common Stock subject to options held by such person orgroup at May 22, 2008 and exercisable within 60 days thereafter. TheCompany believes that all the persons and entities named in the Table have thesole voting and investment power with respect to all the shares as beneficiallyowned by them, except as noted below.

 

(3) MGP Advisors Limited (“MGP”) is the general partner of theSpecial Situations Fund III QP, L.P. (“QP”). AWM Investment Company, Inc.(“AWM”) is the general partner of MGP and the investment adviser to QP, theSpecial Situations Technology Fund, L.P. (“Tech”), the Special SituationsTechnology Fund II, L.P. (“Tech II”) and the Special Situations Private EquityFund, L.P. (“PE”). Austin W. Marxe and David M. Greenhouse are the principalowners of MGP and AWM. Through their control of MGP and AWM, Messrs. Marxeand Greenhouse share voting and investment control over the portfoliosecurities of each of QP, Tech, Tech II and PE.

 

(4) Includes share voting and investment control over 1,689,189shares of Common Stock, 145,270 shares of Common Stock, 686,233 shares ofCommon Stock and 675,675 shares of Common Stock held by QP, Tech, Tech II andPE, respectively, as well as 1,266,891 shares of Common Stock, 108,952 sharesof Common Stock, 651,182 shares of Common Stock and 506,756shares of Common Stockissuable to QP, Tech, Tech II and PE upon the exercise of warrants exercisablewithin 60 days of the date hereof. The interest of Austin W. Marxe and David M.Greenhouse in the shares of Common Stock and Warrants owned by QP, PE, Tech andTech II is limited to the extent of his pecuniary interest. This information isbased solely on a Form SC 13D filed with the Securities and ExchangeCommission and dated May 24, 2007.

 

84

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(5) Includes 288,100 shares of Common Stock that may be acquiredupon the exercise of options within 60 days of May 22, 2008.

 

6) Includes 90,907 shares of Common Stock that may be acquired upon theexercise of options within 60 days of May 22, 2008.

 

(7) Includes11,250 shares of Common Stock that may be acquiredupon the exercise of options within 60 days of May 22, 2008.

 

(8) Includes 86,345 shares of Common Stock that may be acquiredupon the exercise of options within 60 days of May 22, 2008.

 

(9) Includes 65,250 shares of Common Stock that may be acquiredupon the exercise of options within 60 days of May 22, 2008.

 

(10) Includes 18,750 shares of Common Stock that may be acquiredupon the exercise of options within 60 days of May 22, 2008.

 

(11) Includes 15,000 shares of Common Stock that may be acquired uponthe exercise of options within 60 days of May 22, 2008.

 

(12) Consists of 11,250 shares of Common Stock that may be acquiredupon the exercise of options within 60 days of May 22, 2008.

 

(13) Includes 12,500 shares of Common Stock that may be acquired uponthe exercise of options within 60 days of May 22, 2008.

 

(14) Consists of 10,000 shares of Common Stock that may be acquiredupon the exercise of options within 60 days of May 22, 2008.

 

(15) See footnotes 5 through 14 above (10 Persons).

 

85

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**Item 13.       ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

**Transactions with Related Persons**

 

Inconnection with the review and approval or ratification, if appropriate, of anyrelated party transaction, the Audit Committee should consider whether thetransaction will compromise the Company’s professional standards included inits Code of Ethics. In the case of any related person transaction involving anoutside director or nominee for director, the Audit Committee should alsoconsider whether the transaction will compromise the director’s status as anindependent director as prescribed in the Nasdaq listing standards.

 

Allrelated person transactions are required to be disclosed in the Company’sapplicable filings under the Securities Act of 1933, as amended, or theSecurities Exchange Act of 1934, as amended and related rules.

 

In2007 the Company was not a participant in any transaction or series oftransactions or business relationship in which the amount involved exceeded$120,000 and in which any of its officers, directors or stockholders who ownmore than 5% of the Company’s Common Stock had or will have a direct orindirect material interest, nor is there currently proposed any suchtransaction or series of transactions or business relationship.

 

**DirectorIndependence**

 

TheBoard of Directors has determined that, with the exception of Martin J. Reid,who is the Executive Chairman, all of the members of the Board of Directors are“independent directors” within the meaning of the director independencestandards of The Nasdaq Stock Market, Inc. (“Nasdaq”) and the Securitiesand Exchange Commission (“SEC”), including Rule 10A-3(b)(1) under theExchange Act of 1934, as amended (the “Exchange Act”). In making thisdetermination, the Board considered relationships, transactions and/orarrangements with each of the directors, and concluded that, other than MartinJ. Reid’s position as Executive Chairman of the Company, none of the directorshas any relationships with the Company that would impair his or herindependence. Furthermore, the Board of Directors has determined that eachmember of each of the committees of the Board of Directors is independentwithin the meaning of Nasdaq’s and the SEC’s director independence standards.

 

**Item 14.****       ****PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

**Audit and Non Audit Fees**

 

The following table presents fees for professional services rendered byKPMG LLP and billed to us for the audit of the Company’s annual financialstatements for the years ended December 31, 2007 and December 31,2006 and fees billed for other services rendered by KPMG LLP during thoseperiods.

 
| **Fees**            | ** ** | **Fiscal 2007** | ** ** | **Fiscal 2006** | ** ** |
|---------------------|------------|----------------------|------------|----------------------|------------|
| ** **          | ** ** | ** **           | ** ** | ** **           | ** ** |
| Audit Fees          |       | $                    | 168,765    |                 | $          | 205,062 |   |
| Audit-Related  Fees |       |                 |       |                 |       |
| Tax Fees            |       |                 |       |                 |       |
| All Other Fees      |       |                 |       |                 |       |
| Totals              |       | $                    | 168,765    |                 | $          | 205,062 |   |

 

**Audit Fees***.  * Annual auditfees relate to services rendered in connection with the audit of the annualfinancial statements included in our Form 10-K, the SAS 100 quarterlyreviews of financial statements included in our Form 10-Q filings andservices, including, consent procedures rendered in conjunction with other SECfilings in fiscal years 2007 and 2006 through May 22, 2008. Additionalfees related to the audit of fiscal year 2007 will be billed subsequently andwill be approximately $40,000.

 

**Audit-Related Fees***.  * Audit-relatedservices include fees for assurance and related services by the independentregistered public accounting firm that are reasonably related to theperformance of the audit or the 

 

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reviewof the Company’s financial statements and are not reported as Audit Fees. Nosuch services were provided during fiscal years 2007 and 2006.

 

**Tax Fees***.  * Tax servicesinclude fees for professional services rendered by the independent registeredpublic accounting firm relating to tax compliance, tax advice and tax planning.No such services were provided during fiscal years 2007 and 2006.

 

**All Other Fees***.  * All other feesinclude all other non-audit services. No such services were provided duringfiscal years 2007 and 2006.

 

The Audit Committee has determined that the provision of the servicesprovided by the independent registered public accounting firm, as set forthherein, is compatible with maintaining the independence of the independentregistered public accounting firm.

 

**Policy on Audit CommitteePre-Approval of Audit and Non-Audit Services of Independent Auditor**

 

TheAudit Committee’s policy is to pre-approve all audit and allowable non-auditservices provided by the independent registered public accounting firm. Theseservices may include audit services, audit-related services, tax services andother services. The Audit Committee may delegate the authority to grantpre-approval of auditing or allowable non-audit services to one or more membersof the Audit Committee. Each pre-approval decision pursuant to this delegationwill be presented to the full Audit Committee at its next scheduled meeting forratification. All audit or allowable non-audit related fees described abovewere approved by the Audit Committee prior to services being rendered.

 

Theaffirmative vote of a majority of the shares voted affirmatively or negativelyat the Meeting is required to ratify the appointment of the independentregistered public accounting firm. In the event that ratification of theappointment of KPMG LLP as the independent registered public accounting firmfor the Company is not obtained at the Meeting, the Board of Directors willreconsider its appointment. If the selection of KPMG LLP as the independentregistered public accounting firm of the Company is ratified, the AuditCommittee in its discretion may select a different registered public accountingfirm at any time during the year if it determines that such a change would bein the best interests of the Company and its stockholders.

 

87

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

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

 

**(1) and(2)**                 See “Index to Financial Statements andFinancial 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 alist of exhibits filed as part 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                  | -          | 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*)                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                            |
| 4.3                  | -          | Purchase  Agreement dated February 16, 2007 between the Registrant and various  Investors (filed as Exhibit 4.1 to our Current Report on Form 8-K  filed on February 21, 2007 and incorporated herein by reference)                                         |
|                 |       |                                                                                                                                                                                                                                                                            |
| 4.4                  | -          | Registration  Rights Agreement dated February 16, 2007 between the Registrant. and  various Investors (filed as Exhibit 4.2 to our Current Report on Form 8-K  filed on February 21, 2007 and incorporated herein by reference).                            |
|                 |       |                                                                                                                                                                                                                                                                            |
| 4.5                  | -          | Form of  Warrant to Purchase Shares of Common Stock.                                                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                            |
| 4.6                  | -          | Placement  Agent Form of Warrant to Purchase Shares of Common Stock.  Hilton Glavish, and Zimec, Inc. (Filed as Exhibit 10.2*)                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                            |
| 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*)                                                                                                                                             |

 

88

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| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                             |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9                 | -          | Exclusive Patent  License Agreement, dated November 1, 1994, between the Registrant and  Superion Limited (Filed as Exhibit 10.26*)                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| 10.10                | -          | License Agreement,  dated as of September 1, 1994, between the Registrant and Nissin  Electric Co., Ltd. (Filed as Exhibit 10.27*)                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| 10.11                | -          | 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).                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| †10.12          | -          | Amended and Restated  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, as amended May 18, 2001 and June 17,  2004 and incorporated herein by reference).                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| 10.13                | -          | Form of Stock  Option Agreement under 1997 Employee, Director and Consultant Stock Option  Plan.                                                                                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| @10.14               | -          | 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)                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| 10.15                | -          | 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) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| †10.16          | -          | Restated Change of  Control Agreement, dated March 24, 2005, between the Registrant and  Martin J. Reid. (Filed as Exhibit 10.17 to  the Company’s Annual Report on Form 10-K for the Year Ended  December 31, 2004 and incorporated herein by reference).                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| @10.17               | -          | 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)                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| 10.18                | -          | 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, as amended May31, 2005 and incorporated herein by reference)                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| @10.19               | -          | 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)                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| †10.20          | -          | Employment Agreement,  dated November 12, 2003 between the Registrant and Martin J. Reid                                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| @10.21               | -          | 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)                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| 10.22                | -          | 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)                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |
| @10.23               | -          | 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)                                                                                  |   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |   |
| 10.24                | -          | 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)                                                                               |   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |   |
| †10.25          | -          | Change of Control  Agreement, dated March 24, 2005, between the Registrant and William J.  Schmidt. (Filed as Exhibit 10.31 to the Company’s Annual Report on Form 10-K  for the Year Ended December 31, 2004 and incorporated herein by  reference)                                                                               |   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                        |   |
| †10.26

   | -          | Amended and restated  Ibis Technology Corporation 1997 Employee, Directors 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, as amended May 18, 2001, June 17,  2004 and May 26, 2006 and incorporated herin by reference ).      |   |

 

89

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| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                    |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.27                | -          | Ninth Amendment to  Lease dated April 3, 2006 between the Company and Cherry Hill  Corporation Center LLC amending Lease Agreement dated December 22, 1987  between the company and Thomas J. Fatly d/b/a the Flatly Company (Filed as Exhibit 10.42  to the Company’s Quarterly Report as Form 10-Q for the Quarter Ended September 30,  1998 and incorporated herin by reference.) |   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| †10.28

   | -          | Amendment to Employment  Agreement dated November 12, 2003 between the Registrant and Martin J.  Reid, (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed on August 17, 2006 and incorporated herein by reference)                                                                                                                                            |   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| †10.29          | -          | 2007 Employee, Director  and Consultant Equity Plan (Filed as Appendix A to the Company’s Proxy  Statement filed on April 3, 2007 and incorporated herein by reference.)                                                                                                                                                                                                                                 |   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| †10.30          | -          | Extension of Employment  Agreement dated November 12, 2003 between the Registrant and Martin J.  Reid (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed on December 7, 2007 and incorporated herein by reference.)                                                                                                                                                |   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| ** 11                | -          | Statement regarding  computation of per share income (loss)                                                                                                                                                                                                                                                                                                                                                        |   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| **23                 | -          | Report and Consent 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)                                                                                                                                                                                                                                                                                                      |   |

 

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*                 Previously filed with the Commission as Exhibits to,and incorporated herein by reference from, the Company’s Registration Statementfiled on Form S-1, File No. 333-1174, effective April 2, 1996.

 

**          Filed herewith.

 

@            Confidential treatment previously obtained from theSecurities and Exchange Commission. The portions of the document for whichconfidential treatment has been granted are marked “Confidential” and suchconfidential portions have been filed separately with the Securities andExchange Commission.

 

†                  Management contract or compensatory plan, contract orarrangement.

 

Where a document is incorporatedby reference from a previous filing, the Exhibit number of the document inthat previous filing is indicated in parentheses after the description of suchdocument.

 

(B) *Financial Statement Schedules*

 

Schedule II – Valuationand Qualifying Accounts

 

90

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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 May 22, 2008.

 
| ** **   | **IBIS TECHNOLOGY CORPORATION**                  |                     |
|--------------|--------------------------------------------------|--------------------------|
|         |                                             |                     |
|         | By:                                              | /s/ ***Martin J. Reid*** |
| *** *** |                                             | Martin J. Reid           |
|         | President, Chief  Executive Officer and Chairman |
|              |                                                  |                          |  |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned by the following persons on behalf of the registrant and in thecapacities indicated and on the dates indicated.

 
| **Signatures**                | ** **                      | **Title**                                      | ** **                              | **Date**   |
|-------------------------------|---------------------------------|------------------------------------------------|-----------------------------------------|------------|
| ** **                    | ** **                      | ** **                                     | ** **                              | ** ** |
| By:                           | /s/ ***Martin J. Reid***        | ** **                                     | President, Chief  Executive Officer and | ** ** | May 22, 2008 |
|                          | Martin J. Reid                  | ** **                                     | Chairman (principal  executive officer) | ** ** |   |
|                          | ** **                      | and Director                                   | ** **                              |       |
|                          | ** **                      |                                           | ** **                              |       |
| By:                           | /s/ ***William J. Schmidt***    | ** **                                     | Chief Financial  Officer,               | ** ** | May 22, 2008 |
| William J. Schmidt            | ** **                      | Treasurer and Secretary,  (principal financial | ** **                              |       |
|                          | ** **                      | and accounting officer)                        | ** **                              |       |
|                          | ** **                      |                                           | ** **                              |       |
| By:                           | /s/ ***Dimitri A. Antoniadis*** | ** **                                     | Director                                | ** ** | May 22, 2008 |
| Dimitri A. Antoniadis,  Ph.D. | ** **                      |                                           | ** **                              |       |
|                          | ** **                      |                                           | ** **                              |       |
| By*:*                         | */s/ **Robert L.  Gable***      | ** **                                     | Director                                | ** ** | May 22, 2008 |
| Robert L. Gable               | ** **                      |                                           | ** **                              |       |
|                          | ** **                      |                                           | ** **                              |       |
| By:                           | /s/ ***Leslie B. Lewis***       | ** **                                     | Director                                | ** ** | May 22, 2008 |
| Leslie B. Lewis               | ** **                      |                                           | ** **                              |       |
|                          | ** **                      |                                           | ** **                              |       |
| By:                           | /s/ ***Donald McGuinnes***      | ** **                                     | Director                                | ** ** | May 22, 2008 |
| Donald McGuinness             | ** **                      |                                           | ** **                              |       |
|                          | ** **                      |                                           | ** **                              |       |
| By**:**                       | **/s/ *Lamberto  Raffaelli***   | ** **                                     | Director                                | ** ** | May 22, 2008 |
| Lamberto Raffaelli            | ** **                      |                                           | ** **                              |       |
|                          | ** **                      |                                           | ** **                              |       |
| By***:***                     | ***/s/  Cosmo S. Trapani***     | ** **                                     | Director                                | ** ** | May 22, 2008 |
| Cosmo S. Trapani              | ** **                      | ** **                                     | ** **                              | ** ** |

 

91

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**SCHEDULEII**

 

**IBISTECHNOLOGY CORPORATION**

**VALUATIONAND QUALIFYING ACCOUNTS**

 

**For theYears Ended December 31, 2005, 2006 and 2007**

 
| **Description**                     | ** ** | **Balance at  Beginning  of Period** | ** ** | **Expense** | ** ** | **Amounts  Written Off** | ** ** | **Balance at  End of  Period** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|-------------|------------|-------------------------------|------------|------------------------------------------|------------|
|                                |       |                                           |       |        |       |                          |       |                                     |       |
| Allowance for  Doubtful Accounts    |       |                                           |       |        |       |                          |       |                                     |       |
| December 31,  2005             |       | $                                              | 25,000     |        | —     |                          | —     |                                     | 25,000     |   |
| December 31,  2006             |       | 25,000                                         |       | (25,000     | )          | —                        |       | —                                   |       |
| December 31,  2007             |       | —                                         |       | —      |       | —                        |       | —                                   |       |
|                                |       |                                           |       |        |       |                          |       |                                     |       |
| Reserve for  Inventory Obsolescence |       |                                           |       |        |       |                          |       |                                     |       |
| December 31,  2005             |       | $                                              | 3,772,000  |        | —     |                          | (100,000   | )                                        | 3,672,000  |   |
| December 31,  2006             |       | 3,672,000                                      |       | —      |       | (225,000                      | )          | 3,447,000                                |       |
| December 31,  2007             |       | 3,447,000                                      |       | 1,790,000   |       | (60,000                       | )          | 5,177,000                                |       |

 

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