**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-K**

**(MarkOne)**

| **ý** |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                         |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   | **For  the fiscal year ended December 31, 2003**                                                                                                                                                                                  |
|       |   |                                                                                                                                                                                                                              |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                     |
|       |   | **For  the transition  period                to                ** |

 

**Commissionfile number:  0-23150**

 

| **IBIS  TECHNOLOGY CORPORATION**                                |
|-----------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)         |
|                                                            |
| **Massachusetts**                                               |   | **04-2987600** |
| (State or other jurisdiction  of incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                            |   |   |
| **32 Cherry Hill Drive, Danvers, MA**                           |   | **01923** |
| (Address of principal executive offices)                        |   | (Zip Code) |
|                                                            |   |   |
|                                                            | Registrant’s  telephone number, including area code: **(978) 777-4247** |   |
|                                                                 |  |  |  |  |

 

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

 

**None.**

 

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

 

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

(Title of class)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.     Yes  ý     No  o

 

Indicate by check 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 Form10-K.     ý

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Act Rule12b-2).     Yes  ý     No  o

 

The aggregate marketvalue of the registrant’s voting stock held by non-affiliates of the registrant(without admitting that any person whose shares are not included in suchcalculation is an affiliate) on February 25, 2004 was $147,626,116 based on thelast sale price as reported by the Nasdaq National Market System.

 

As of February 25, 2004, the registrant had 10,651,170shares of common stock outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

The following documents (or parts thereof) areincorporated by reference into the following parts of this Form 10-K: Certaininformation required in Part III of this Annual Report on Form 10-K isincorporated from the Registrant’s Proxy Statement for the Annual Meeting ofStockholders to be held on May 13, 2004.

 

 

----

 

**PART I**

 

**Item 1.    BUSINESS**

 

**Business Outlook**

 

This Form 10-K contains forward-looking statementswithin the 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-looking statements by terminology, such as “may,”“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,”“estimate,” “project,” “predict,” “intend,” “potential” or “continue” or thenegative of such terms or other comparable terminology, although not allforward-looking statements contain such terms. In addition, these forward-looking statements include, but are notlimited to, statements regarding, among other things, Ibis’ belief in thepotential acceptance of and demand for Ibis-produced SIMOX-SOI wafers formainstream commercial applications, the potential acceptance of and demand forIbis’ implanters, the evolution of Ibis’ business model from supplying mainlySIMOX-SOI wafers to semiconductor fabs to supplying mainly implanters to wafermanufacturers who will supply SIMOX-SOI wafers to the fabs, our intent topursue, and our ability to maintain, further strategic relationships,partnerships and alliances with third parties, our ability to obtainintellectual property rights necessary to produce certain kinds of wafers, ourintention to add products and advance our process technology, our ability toprotect our proprietary technology, the potential trends in wafer sales and thesemiconductor industry generally, the capabilities of and anticipated benefitsof the i2000, including the ability of the i2000 to support volume productionof high quality SIMOX-SOI wafers, the ability of the i2000 to reduce costs, andthe ease with which the i2000 can be installed and qualified in fabricationfacilities, the likelihood that implanters, if ordered, will be qualified andaccepted by customers, the likelihood and timing of revenue recognition on suchtransactions, our ability to obtain the components and materials necessary tomanufacture wafers and/or implanters, and the sufficiency of our capitalresources.  Such statements are neitherpromises nor guarantees but rather are subject to a number of risks anduncertainties which could cause actual results to differ materially from thosedescribed in the forward-looking statements. Such factors and uncertainties include, but are not limited to those setforth below in “Business — Risk Factors” and elsewhere throughout this Form10-K. All information set forth in this Form 10-K is as of the date of thisForm 10-K, and Ibis undertakes no duty to update this information, unlessrequired by law.

** **

**Introduction**

 

Ibis Technology Corporation (“Ibis”) develops,manufactures and markets SIMOX-SOI implantation equipment and wafers for theworldwide semiconductor industry. SIMOX, which stands for **S**eparation by **IM**plantationof **Ox**ygen,is a form of silicon-on-insulator, or SOI, technology that creates an insulatingbarrier below the top surface of a silicon wafer. Our proprietary oxygenimplanters produce SIMOX-SOI wafers by implanting oxygen atoms just below thesurface of a silicon wafer to create a very thin layer of silicon dioxidebetween the thin operating region of the transistor at the surface and theunderlying silicon wafer itself.  Theburied layer of silicon dioxide acts as an insulator for the devices fabricatedon the surface of the silicon wafer and reduces the electrical current leakagewhich otherwise slows integrated circuit performance and increases the loss ofpower during circuit operation.  Throughthis process our customers can produce integrated circuits, which we believe,offer significant advantages over circuits constructed on conventional siliconwafers.  We believe that theseadvantages include:

 

•                                      substantiallyimproved speed for microprocessors and other logic integrated circuits,

•                                      reducedpower consumption,

•                                      reducedsoft error rate, and

•                                      highertemperature operation.

 

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

 

•                                      serversand workstations,

•                                      portableand desktop computers,

 

2

----

 

•                                      wirelesscommunications and battery powered feature rich hand held devices and cellphones,  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 has evolved through stages where sometimes our revenue was primarilyderived from selling wafers for evaluation purposes, and at other times it wasprimarily derived from equipment sales. This is a normal path to follow whiledeveloping and promoting a fundamental new technology, especially when itrelates to the semiconductor industry embracing any change that affectsfabrication operations. This trend is expected to continue in the near term asour customers continue to sample SOI and the early adopters work to achievestable production processes and enter pilot production. We believe that we arein the technology rollout stage of our corporate life cycle with respect to ouri2000 SIMOX-SOI implanters.

 

Our fundamental SIMOX-SOItechnology has been developed, refined, and tested over the last dozen years.In 2002, Ibis introduced the current-generation of SIMOX-SOI technology, whichincluded our second generation oxygen implanter (i2000ä)and the modified low dose (“MLD”) SIMOX wafer process which was licensed to usby IBM. The i2000’s flexibility, automation and operator-friendly controlsallow this tool to produce a wide range of SIMOX-SOI wafer products, includingAdvantox® MLD and Advantox MLD-UT wafers. We believe the ability ofthe i2000 implanter to produce eight and twelve-inch (or 200 and 300 mm)SIMOX-SOI wafers coupled with the MLD process positions us to capitalize on thegrowing SOI market. In September 2002, we received an order valued atapproximately $8 million for an i2000 oxygen implanter from a majorsemiconductor manufacturer.  During thesecond quarter ended June 30, 2003, our largest customer accepted the i2000implanter that we shipped to them late last year. As a result of thisacceptance, we recognized revenue of approximately $8 million in the secondquarter ended June 30, 2003.

 

During February 2004, we announced the receipt of anorder for one Ibis i2000 SIMOX implanter, with an option to purchase a secondi2000, from a leading international silicon wafer manufacturer. Although noassurances can be given, we expect to ship this system in the second quarter of2004 depending on completion of the tool and customer acceptance of the tool atour facility. Revenue recognition for this implanter order will be based onfinal customer acceptance at their facility, the timing of which may varydepending on a number of factors, which include the customer’s site beingproperly facilitized (power, water, air) and performance of the tool.

 

We believe that strategicalliances with existing and potential customers will continue to play animportant role in developing a worldwide commercial market for our SIMOX-SOIwafers and implanters. We currently have agreements with IBM and MEMC.

 

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

 

We were incorporated inMassachusetts in October 1987 and commenced operations in January 1988. Ourexecutive offices are located at 32 Cherry Hill Drive, Danvers, Massachusetts01923 and our telephone number is (978) 777-4247.  Our web site is located at www.ibis.com.*.*We make our periodic reports on Form10-K, Form 10-Q and Form 8-K (and any amendments) available on the web site,free of charge, as soon as reasonably practicable after these reports are filedwith 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

 

3

----

 

inactive textual reference only. Unless the context otherwise requires,the terms “Ibis”, “we”, “us”, and “our” refer to Ibis Technology.

 

#### **Our Strategy**

 

Ibis’ primary goal is tobe the dominant supplier of oxygen implantation equipment to the world’ssilicon wafer manufacturers so they can, in turn, efficiently andcost-effectively supply SOI wafers to the global semiconductor industry. Wewill continue to supply wafers, including for test and evaluation purposes, butwe expect that our primary emphasis will be on implanter sales andsupport.  We also plan on continuingprocess development for SIMOX-SOI wafers. Key elements of our strategy for achieving this objective 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 errors, which arechanges in logic state due to exposure to radiation. In our experience, thesemanufacturers prefer to satisfy the demand with minimal additions ormodifications to their existing equipment base. We believe that SIMOX-SOItechnology is a leading alternative to address these requirements and thatthere will be a migration of SOI wafer manufacturing into the major siliconwafer suppliers.  We reach thisconclusion for a number of reasons. First, we believe that tremendous price pressure exists on commoditytype products, such as silicon wafers, and this pressure is already eroding theprice of SOI wafers.  Because thestarting wafer represents a significant component of the SOI wafer cost,silicon wafer manufacturers should have a natural cost structure advantageleading to a higher gross margin, and therefore can manage such price pressurebetter than stand-alone SOI producers that do not also produce the siliconwafer itself.  Second, we expect thatthe price pressure will encourage silicon wafer manufacturers to seek outhigher margin products, like SOI wafers, to increase their margins.  Third, we believe that silicon wafermanufacturers have traditionally developed proprietary intellectual property insilicon materials science, which can be applied to designing optimal startingwafers for SOI production.  This shouldgive them an advantage in both minimizing wafer cost and maximizing SOI waferquality and yield.  Fourth, ourexperience suggests that silicon wafer manufacturers already have awell-developed infrastructure for manufacturing, sales and marketing largevolumes of substrates.  Lastly, webelieve that there is greater efficiency in producing the SOI wafer as part ofthe wafer manufacturers existing product flow, specifically avoiding the needto repackage, reclean, reinspect and reship substrates twice, once as startingsilicon wafers, and a second time as SOI wafers. Therefore, as a result ofthese trends, we expect our ultimate customers will be drawn from these siliconwafer manufacturers and we plan to focus a majority of our technical andmarketing resources on the leading silicon wafer manufacturers and our majorkey customers in the semiconductor industry who are the leaders in the adoptionof SOI technology. We expect that implanter sales to chipmakers should beminimal, but focused on SOI processes, which the chipmaker wishes to keepproprietary, such as selective (or patterned) SIMOX, or other specialtysubstrates.

 

•                  *Pursuing Strategic Marketing, Manufacturing,Distribution and Development Alliances.* We intend to continue topursue relationships through which third parties will distribute some of ourproducts and/or assist us in research and development activities. In January2003, we entered into an agreement with IBM to develop an enhanced, modifiedlow-dose (“MLD”) process for the manufacture of SIMOX-SOI wafers. We also planto continue our joint development activities with our customers.

 

•                  *Enhancing and Extending Current Product Offerings.*We intend to continue to use our resources and our strategic partners’technical expertise to improve our existing products, expand our core productfunctionality, add products to our existing product line and further advanceour process technology. Our implanter research and development programs areaimed at increasing throughput and thereby reducing the cost of SIMOX-SOIwafers.

 

•                  *Increasing Our SIMOX-SOI Manufacturing Capacity.*During 2002 and 2003, we put in place a second line for 300 mm SIMOX wafermanufacturing that consists of balance-of-process (anneal,

 

4

----

 

clean and metrology)equipment. Going forward we intend to gauge SIMOX-SOI equipment demand from thesilicon wafer manufacturers and adjust our equipment manufacturing capacityaccordingly. We currently have capacity to build ten to fifteen implanters peryear in our existing space.

 

**Marketing, Sales and Customers**

 

Over the last severalyears, Ibis has focused on integrating SIMOX-SOI wafers into commercialapplications. We believe that commercial shipments of our wafers have 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 isusing our SIMOX-SOI wafers in commercial production and that a number of ourcustomers are sampling SIMOX wafers or are developing prototype products.

 

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

 

In February 2001, Ibisentered into an agreement with MEMC, pursuant to which MEMC became a globalsales representative for Ibis’ SIMOX-SOI wafers. We believe that MEMC has aworldwide presence of sales and applications personnel and operatesmanufacturing facilities directly, or through joint ventures, in Italy, Japan,Malaysia, South Korea, Taiwan and the United States.

 

Our internal salespersonnel generally focus on our potential or existing equipment customers,largest SIMOX-SOI wafer customers, silicon wafer manufacturers, as well assupporting our strategic partners. Our objective in these broad-based salesefforts is to promote the adoption of SIMOX-SOI technology on an industry-widebasis.

 

Overseas, we rely on ourinternal sales personnel and our strategic partners to market and sell ourproducts. We also have a SIMOX implanter sales representation agreement withIRAM Systems Co., Ltd, a Korean corporation, to solicit orders for our Ibis1000 implanters from customers located in China.

 

The following table sets forth, in thousands ofdollars, the amount of revenue derived from our significant customers duringthe fiscal years ended December 31, 2001, 2002 and 2003, as well as the percentof our revenue represented by these customers’ purchases:

 
|         |   | **2001**    |   | **2002**    |   | **2003**    |   |
|--------------|--------|-------------|--------|-------------|--------|-------------|--------|
| **Customer** |   | **Dollars** |   | **Percent** |   | **Dollars** |   | **Percent** |   | **Dollars** |   | **Percent** |   |
| IBM          |   | $           | 806    |        | 11     | %           | $      | 4,632 |   | 33 | % | $ | 16,887 |   | 92 | % |
| SUMCO        |   | 1,288       |   | 17          | %      | 172         |   | 1 | % | 183 |   | 1 | % |
| Bookham      |   | 2,097       |   | 28          | %      | 947         |   | 7 | % | 85 |   | — |   |
| Simgui       |   | —      |   | —      |   | 5,555       |   | 40 | % | 526 |   | 3 | % |
|              |        |             |        |             |        |             |        |  |  |  |  |  |  |  |  |  |

 

The sales to IBM in 2003 resulted primarily from thesale of an i2000 oxygen implanter at a sale price of approximately $8 millionand sales of 300 mm SIMOX-SOI wafers. Revenues from Simgui in 2002 representthe sale of an Ibis 1000 oxygen implanter and certain parts.

 

Sales to overseas customers in 2001, 2002 and 2003were 52%, 56% and 7%, of total revenue, respectively. In 2001, 2002 and 2003sales to the United Kingdom were 28%, 7% and less than 1%**,** respectively, of total revenue, which wasattributable to Bookham Technology.  In2002, sales to China were 40% of total revenue, which was attributable toSimgui.

 

5

----

 

#### **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 production expansion to the needs of our keycustomers. We believe that strategic alliances with existing and potentialcustomers will continue to play an important role in developing a worldwidecommercial market for our SIMOX-SOI wafers and implanters.

 

We have a long-standing relationship with SUMCO whichbegan as a sales distribution arrangement, progressed to a joint research anddevelopment effort, and ultimately SUMCO purchased an Ibis 1000 oxygenimplanter in order to establish a Japanese-based manufacturing facility forSIMOX-SOI wafers. This implanter was installed in SUMCO’s wafer manufacturingfacility in Chiba, Japan in July 2001. In 1999, we completed an agreement tolicense our standard and Advantox SIMOX-SOI wafer fabrication process to SUMCO.  Under this agreement we received an initialroyalty fee and are entitled to future royalties based on a percentage ofSUMCO’s Advantox SIMOX-SOI wafer sales.

 

In January 2003, we announced the signing of a JointDevelopment Agreement with IBM. The objective of the agreement is to develop anenhanced, MLD process for the manufacture of SIMOX-SOI wafers, which are usedas the starting material in the manufacture of advanced integrated circuits(“ICs”). Aimed at producing lower-cost, higher quality SIMOX-SOI wafers withthinner top silicon layers, the joint development work is being conducted atboth Ibis and IBM. We believe that both companies bring extensive expertise andexperience regarding SIMOX-SOI technology to the joint effort. IBM, a pioneerin the development and adoption of SOI technology, developed the original MLDprocess for high quality, low cost SIMOX-SOI wafers. IBM then licensed Ibis tomanufacture SIMOX-SOI wafers using the production-proven MLD process for saleto IBM and all other Ibis customers. Advantox MLD wafers are being broadlymarketed to integrated circuit manufacturers looking to accelerate their SOIadoption process.

 

Since 2001 MEMC has been a global sales representativefor our entire SIMOX-SOI wafer product line, including Advantox MLD, and the primarysupplier to us of silicon substrate material. In February 2002, Ibis and MEMCexpanded this alliance by entering into a Technical Cooperation Agreement aimedat developing advanced SIMOX-SOI wafers for semiconductor manufacturersworldwide. The alliance also grants MEMC the right to license our SIMOX-SOIwafer technology and to purchase oxygen implanters manufactured by us. Suchrights are designed to provide MEMC with the option to produce and sellSIMOX-SOI wafers at some point in the future.

 

**Research and Development**

** **

Ibis has active researchand development programs in both equipment and wafer process technology. Forthe past two years a primary focus has been developing capacity to produce 300mm SIMOX wafers. This required the development of a new generation oxygenimplanter, the i2000, and the procurement and qualification of annealing,cleaning, and metrology tools for balance of process at 300 mm.

 

The proprietary i2000 wasdesigned to support the volume production of high quality SIMOX-SOI 200 and 300mm wafers for the global semiconductor industry. We began shipping 300 mm SIMOXwafers in early 2002. The i2000 duplicates the process environment of the Ibis1000. To minimize process risks; however, it incorporates a number of featuresdesigned to improve throughput and reduce costs. These include increased beamcurrent, faster wafer handling, off-hub wafer cooling, and modularconstruction, which we believe will enable improved serviceability anddiagnostics, while simplifying the assembly and shipping of the machine. Wealso believe that the simpler beam line design of the i2000 also offersextensive capabilities, facilitating the manufacture of the Advantox productportfolio. We believe that taken together, these features increase productivityof the i2000 over the Ibis 1000 by a factor greater than two.  Finally, the i2000 is designed to be farmore fab friendly than the Ibis 1000. It is designed to be bulkhead or ballroommounted in the clean room, offers front-opening unified pod (FOUP) capabilityand meets SEMI safety and ergonomic guidelines. We also believe that thei2000’s improved automation and operator-friendly controls will improve productyield and afford ease-of-use.

 

6

----

 

Our wafer technologyR&D has concentrated on enhancing the range of potential commercialapplications for Ibis’ SIMOX-SOI wafers by:

 

•                                          Refiningtechniques to produce SIMOX-SOI wafers of higher quality;

•                                          Developingnew processes to produce SIMOX-SOI wafers with thinner top silicon and buriedoxide layers at lower cost, to a large extent expanding and improving the MLDprocess;

•                                          Jointlydeveloping a technology for manufacturing high resistivity SIMOX-SOI wafers formixed signal and radio frequency (“RF”) applications with a major silicon wafermanufacturer. With this alliance, we developed advancements in SIMOX wafermanufacturing, including reduced wafer cost, scalability to 300 mm andstability of the material’s high resistivity characteristic through thermalcycling common in integrated circuit manufacturing. We filed a joint patentapplication entitled *Method of Producing aHigh Resistivity SIMOX Silicon Substrate* in May 2003;

•                                          Integratingstrained silicon (another emerging wafer-materials technology) with SOI (“SSOI”wafers), an innovation enabling a further significant boost of complementarymetal oxide semiconductor (“CMOS”) device speed. Improved electron mobility instrained 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 are seeing increased activity in this area; and

•                                          Respondingto specific customer requirements and emerging industry trends, such as thedevelopment of our Advantox MLD-UT (ultra thin) product line to addressrequirements for fully depleted devices. Fully depleted is a MOS transistorstructure in which the depletion region under normal operation extends as faras a buried insulator layer. We believe that ultra-thin SOI wafers providesuperior results, especially in terms of increased power efficiency and heatreduction in the manufacture of fully depleted substrate transistors for nextgeneration semiconductor devices.

 

During the fiscal yearsended December 31, 2001, 2002 and 2003, Ibis’ internally funded research anddevelopment expenses were approximately $5,119,000, $6,258,000 and $5,381,000or 69%, 45% and 29% 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.

 

(1) Among directSIMOX-SOI competitors, we believe we are presently the only U.S. manufacturerof SIMOX-SOI implanters.  To ourknowledge, Hitachi, Ltd. of Japan is the only other company manufacturing SIMOXimplanters and has sold a limited number of tools to date. We are not aware ofplans by any of the major ion implant manufacturers to design and developoxygen ion implanters, but they may already have such plans, or may developthem in the future.  We believe that itwould take one to three years to develop such an implanter.

 

We also believe thatSUMCO, Wacker Nippon Steel Corporation (“WNC”), Komatsu and Simgui aremanufacturing or marketing SIMOX wafers. We expect that the availability ofSIMOX-SOI wafers from silicon wafer manufacturers will help address customerconcerns about adequate sources of supply and their desire to purchase all of theirsilicon wafer requirements (e.g., bulk silicon, epitaxial, strained silicon andSOI wafers) from the same company. Increased direct SIMOX-SOI competition wouldadversely affect our SIMOX wafer sales; however, our strategy is to be thedominant supplier of SIMOX implanters to the world’s silicon wafermanufacturers so they can, in turn, efficiently and cost-effectively supply SOIwafers to the global semiconductor industry. In addition, we believe these wafer manufacturers could be potentialequipment customers of ours.

 

(2) 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. SOITEC, a French-basedcompany that spun off from LETI, a French government research lab, uses abonded method. SOITEC has, to date, been our major wafer product competitor andhas sold larger volumes of SOI wafers than us. The thin-

 

7

----

 

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. The wafer is split along the stressinterface 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® wafermanufactured with the SmartCut® process, which is licensed from SOITEC. Ourevidence to date suggests that both SIMOX and bonded wafers perform equallywell. We believe, however, that the SIMOX process results in a lowermanufacturing cost. We also believe that, at this stage in the market’sdevelopment, multiple SOI suppliers will help accelerate the adoption of SOItechnology.

 

(3) The third source ofcompetition is derived from alternative non-SOI technologies designed to obtainbenefits similar to those of SOI, including improvements to existingtechnologies. Significant resources are continually expended to improveepitaxial and conventional silicon wafers.

 

The semiconductorindustry has demonstrated its resourcefulness in improving materials through creativecircuit design and manufacturing techniques, thereby extending the useful lifeof conventional substrates, and we cannot be sure that it will not continue todo so. The relatively lower cost of these substrates provides an incentive tothe semiconductor industry to continuously improve existing material withoutmoving to new, more advanced substrates. In addition, complex variations ofmore conventional approaches, such as elaborate circuit structures built onconventional silicon substrates, and compound materials (silicon-germanium,gallium-arsenide, indium phosphide, etc.), are other alternative substratechoices. Strained silicon is a technology that can be used to increase theoperating speed of computer chips, such as microprocessors. The spacing betweenSi atoms is stretched – or strained - farther apart, allowing electrons to flowwith less resistance, leading to chips that are faster, as reported by IBM. Thefact that strained silicon is an emerging wafer-materials technology raisesquestions about how it compares to SOI, another emerging wafer-materialstechnology. Although both strained silicon and SOI are wafer-materialstechnologies that can increase chip speed, they work in different – andcomplementary – ways and if combined can provide additional benefits.

 

Strained silicon increases transistor speed byincreasing the mobility of electrons traveling through the top silicon. On theother hand, SOI increases transistor speed by reducing parasitic capacitancesassociated with source and drain junctions. So, strained silicon and SOI arecomplementary and mutually enhancing - not competing – technologies, althoughone technology may be adopted without the other. We believe the real wave ofthe future will be combining these two complementary technologies, much likethe way copper interconnects, low k dielectric materials and SOI substrateshave been combined.

 

**Backlog**

** **

Ibis’ backlog consists ofwritten orders for SIMOX-SOI wafers expected to be delivered during 2004,equipment revenue expected to be recognized during 2004 and other contractsexpected to be performed during 2004. The backlog is as follows:

 
|                     |   | **As of  February 28,** |      |
|--------------------------|--------|-------------------------|-----------|
|                     |   | **2003**                |      | **2004** |   |
|                     |   | **Dollars**             |      | **Percent** |   | **Dollars** |   | **Percent** |   |
| Wafer orders:            |   |                    |      |   |   |   |   |   |   |
| 100 mm                   |   | $                       | 44,000    |   | 1 | % | $ | — |   | — |   |
| 150 mm                   |   | 28,000                  |      | — |   | — |   | — |   |
| 200 mm                   |   | 183,000                 |      | 2 | % | 70,000 |   | 1 | % |
| 300 mm                   |   | 7,913,000               |      | 97 | % | 6,332,000 |   | 92 | % |
| Total wafer orders       |   | $                       | 8,168,000 |   | 100 | % | $ | 6,402,000 |   | 100 | % |
| Equipment related orders |   | $                       | 8,054,000 |   |   |   | $ | 7,000,000 |   |   |   |
| Contracts/service        |   | $                       | 688,000   |   |   |   | $ | 271,000 |   |   |   |

 

8

----

 

Approximately 98% of thewafer backlog is comprised of orders from one customer of Ibis. All customerorders are subject to modification or cancellation by the customers.  Backlog can, and often does, fluctuategreatly based upon, among other matters, the timing of receipt of orders,especially equipment orders. Therefore, variations in backlog may not representa fair indication of future business trends.

 

**Patents and Proprietary Rights**

** **

During 2003, Ibis addedthree patents to its intellectual property portfolio and we have more thantwo-dozen patents pending relating to our proprietary i2000 oxygen implanter orthe SIMOX fabrication process.

 

Ibis has an exclusiveworldwide sublicense to the proprietary beam scanning system developed andpatented by a consultant to us 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 sublicensees 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 sublicensee has paid us a non-refundable option fee uponsigning an agreement and an initial license fee when it exercised its option touse the licensed technology. In addition, each sublicensee will pay a royaltyfee with respect to each implantation machine manufactured, used or sold afterits option fee and initial license fee has been applied. License fees receivedby us from sublicenses are to be shared on a substantially equal basis with thelicensor of the beam scanning system. As of December 31, 2003, Ibis hadreceived approximately $1,631,000 in net license fees, after deducting amountspaid to the licensor.

 

Ibis also obtained anexclusive license to technology that facilitates the presentation of wafers toion beams developed by Superion Limited, a United Kingdom corporation. ThroughDecember 31, 2003, Ibis has paid $552,000 for license fees for implantationmachines that have been manufactured by us. Under the terms of this agreement, Superion Limited has retained theright to utilize the technology for uses not involving oxygen implantation ofsilicon or other semiconductor materials. During 2001, this agreement was modified to incorporate i2000implantation machines. Ibis also entered into a Sublicense Agreement during2001 which gives our customer a royalty-bearing, non-exclusive license toutilize this technology for ion implantation machines, excluding oxygenimplanters.

 

During 1998, we entered into an equipment licensingand development agreement which gives the customer the right to aroyalty-bearing, non-exclusive license to supplement our equipmentmanufacturing capacity.  We have receivedno royalties under this agreement.

 

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 wafers soldwhich are manufactured using the licensed process.

 

In 2000, we licensed from IBM the right to manufactureand sell SIMOX-SOI wafers, using IBM’s proprietary SIMOX process, to IBM and toall our other customers. Under the royalty-bearing license agreement, we mayuse IBM’s process to produce SIMOX-SOI wafers which we market as Advantox MLD.Advantox MLD wafers are broadly marketed to integrated circuit manufacturerslooking to accelerate their SOI adoption process.  Under the agreement we granted IBM rights to our patents utilizedin the modified low dose, or MLD process. We believe that other SIMOX-SOI wafer processing methods exist and arebeing used today, however, our existing or potential equipment customers thatwould like to use the MLD process to manufacture SIMOX-SOI wafers using ourimplanters would be required to license this technology directly from IBM.  Two silicon wafer manufacturer have alreadylicensed this technology from IBM and others have developed their own SIMOXprocess. However, no assurances are given that our equipment customers and IBMwould come to terms acceptable to both parties in a timely manner, or at all.These MLD process license issues have caused delays in receiving an order fromone customer and could cause delays with other customers in the future if theyplan to license this technology.

 

9

----

 

During 2001, we licensedour Advantox 50 and 150 SIMOX wafer fabrication processes to Simgui. Ibisreceived the initial license fee from Simgui in January 2003, and thetechnology transfer took place in the first quarter ending March 31, 2003 andtherefore revenue of approximately $450,000 was recognized in that quarter.

 

Although we own or haveexclusive rights to several patents and several pending applications, and wediligently monitor the research and development process to identify inventionswhich warrant pursuing patent protection, we rely largely upon trade secretprotection to safeguard our proprietary technology. All of our employees arecurrently required to execute confidentiality agreements pursuant to which theyagree to assign to us all patent rights and technical or other informationdeveloped by the employees during their employment with us, and agree not todisclose any trade secret or confidential information without our prior writtenconsent. Notwithstanding these confidentiality agreements, we cannot be surethat other companies will not acquire information which we consider to beproprietary. Moreover, we cannot be sure that our patent rights will beenforceable or provide us with meaningful protection from competitors or thatpatent applications will be allowed. Even if a competitor’s products were toinfringe patents owned or licensed by us, it would be very costly for us toenforce our rights in an enforcement action, which would also divert funds andresources which otherwise could be used in our operations. We cannot be surethat we would be successful in enforcing such rights, that our products orprocesses do not infringe the patent or intellectual property rights of a thirdparty, or that if we are not successful in a suit involving patents or otherintellectual property rights of a third party, that a license for suchtechnology would be available, if at all, on commercially reasonable terms.

 

Pursuant to the terms ofour government contracts, Ibis will be required to grant to the U.S. governmenta royalty-free non-exclusive worldwide license to any inventions claimed by uswhich were funded by the U.S. government.

 

**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 exposure of our personnel to occupational hazards. Although we believe thatwe have all permits necessary to conduct our business, the failure to complywith present or future regulations could result in fines being imposed on us,suspension of production or a cessation of operations. Our future activitiesmay result in our being subject to additional regulations. Such regulationscould require us to acquire significant equipment or to incur other substantialexpenses to comply with regulations. Any failure by us to control the use of,or to restrict adequately the discharge of, hazardous substances or to properlycontrol other occupational hazards could subject us to substantial financialliabilities.

 

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

 

**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. Semiconductor equipment is a seculargrowth industry and is very cyclical in nature, so if our suppliers experiencean increase in demand from other semiconductor equipment manufacturers withmuch higher volumes than us, the lead-time and/or price for some of ourcomponents may increase. Although we have sought to reduce our dependence onthese limited source suppliers and we have not experienced significantproduction delays due to unavailability or delay in procurement of componentparts or raw materials to date, increased market demand for the materialssupplied by, or disruption or termination of, certain of these sources couldoccur and such increased demand, disruptions, or termination could have amaterial adverse effect on our business and results of operations.

 

10

----

 

We manufacture ourSIMOX-SOI wafers using conventional silicon wafers and a variety of chemicalsand gases, all of which are available from multiple sources. We order thechemicals and gases pursuant to blanket purchase orders which generally may bemodified or cancelled by us upon 60 days’ prior notice to the vendor.  In 2001, Ibis and MEMC, a leading globalproducer of silicon wafers, entered into an alliance pursuant to which MEMC becameour primary supplier of silicon substrate material.  In periods of increasing demand in the semiconductor industry forsilicon wafers, we cannot be sure that we will be able to purchase an adequatesupply of such silicon wafers for manufacture of our products at or nearcurrent prices, if at all.  Anyshortages in the availability of silicon wafers or a significant increase inthe price of silicon wafers could have a material adverse effect on ourbusiness and results of operations.

** **

**Employees**

** **

As of December 31, 2003,we employed approximately 80 persons on a full-time basis and one person on apermanent part-time basis. None of our employees are represented by a laborunion and we believe our relations with our employees are good.

** **

**Risk Factors**

** **

***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 military applications to primarily sales ofSIMOX-SOI wafers for commercial applications and sales and support of oxygenimplantation equipment. To date, most customers who have purchased ourSIMOX-SOI wafers in the commercial field have done so for the purpose ofcharacterizing and evaluating the wafers and developing prototypes. We areaware of only a few commercial manufacturers that are using SIMOX-SOI wafers inlow volume production for a limited number of products. The performanceadvantages of SIMOX-SOI wafers may never be realized commercially and acommercial market for SIMOX-SOI wafers may never fully develop. The failure ofmajor semiconductor manufacturers to adopt SIMOX-SOI technology would adverselyaffect, and may prevent, the widespread adoption of this technology by others.

 

***We Rely Heavily on Sales to Certain Significant Customers,Which May Vary Significantly From Quarter to Quarter Causing Our OperatingResults to Fluctuate.***

 

We derive a large portion of our sales of both wafersand wafer manufacturing equipment from certain significant customers. Thefollowing table sets forth, in thousands of dollars, the amount of revenuederived from our significant customers during the fiscal years ended December31, 2001, 2002 and 2003, as well as the percent of our revenue represented bythese customers’ purchases:

 
|         |   | **2001**    |   | **2002**    |   | **2003**    |   |
|--------------|--------|-------------|--------|-------------|--------|-------------|--------|
| **Customer** |   | **Dollars** |   | **Percent** |   | **Dollars** |   | **Percent** |   | **Dollars** |   | **Percent** |   |
| IBM          |   | $           | 806    |        | 11     | %           | $      | 4,632 |   | 33 | % | $ | 16,887 |   | 92 | % |
| SUMCO        |   | 1,288       |   | 17          | %      | 172         |   | 1 | % | 183 |   | 1 | % |
| Bookham      |   | 2,097       |   | 28          | %      | 947         |   | 7 | % | 85 |   | — | % |
| Simgui       |   | —      |   | —      |   | 5,555       |   | 40 | % | 526 |   | 3 | % |
|              |        |             |        |             |        |             |        |  |  |  |  |  |  |  |  |  |

 

Revenues from IBM in 2003resulted primarily from the sale of an i2000 oxygen implanter at a sale priceof approximately $8 million and sales of 300 mm SIMOX-SOI wafers.  Revenues from Simgui in 2002 represent thesale of an Ibis 1000 oxygen implanter and certain parts.  Ibis expects that we will continue to relyon a relatively small number of customers as sources of revenue in theforeseeable future.  The loss of one ormore of these major customers and our failure to obtain other sources ofoffsetting revenue would have a material adverse impact on our business.  In addition, any downturn in thesecustomers’ business or the industry in which these customers operate couldresult in a significant decrease in sales of our products to these customers,which would have an adverse effect on our business.

 

11

----

*** ***

***We Have Significant Losses and May Never Be Able to SustainProfitability.***

 

We experienced net lossesof $9,594,919, $14,096,179 and $21,449,789 in 2001, 2002 and 2003,respectively.  As of December 31, 2003,we had an accumulated deficit of $61,871,614. Net losses may continue for theforeseeable future. Although we have had profitable operating results from timeto time, we may not be able to achieve sustained profitability.

 

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

 

We anticipate that ourexisting capital resources together with anticipated wafer and implanter saleswill enable us to maintain currently planned operations for at least the nexttwelve months from the date of this filing. However, this expectation is based on our current operating plan whichmay change.  We intend to continue toinvest in facilities and state-of-the-art equipment in order to increase ourresearch, development and manufacturing capabilities. Changes in technology orsales growth beyond currently established capabilities may require furtherinvestment. As a result, we may need to raise substantial additional capital inthe future.  We have previously financedour working capital requirements through:

 

•              equity financings, includingwarrant and option exercises,

•              equipment lines of credit,

•              a working capital line of credit,

•              a term loan,

•              sale-leaseback arrangements,

•              collaborative relationships,

•              wafer product and equipment sales,and

•              government contracts.

 

We may not be able toraise any required additional funds on a timely basis, terms favorable to us,or at all.  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. In addition, if we raise additional funds throughthe sale of equity or convertible debt securities, the value of our commonstock outstanding may be diluted.  Wemay also have to issue securities that have rights, preferences and privilegessenior to our common stock.

*** ***

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

 

We anticipate that ourrevenue and operating results are likely to vary significantly from quarter toquarter in the future, and it is likely that in future quarters our operatingresults may from time to time be below the expectations of public marketanalysts or investors.  Our stock pricehas been volatile and if this occurs, the price of our common stock wouldlikely decrease.  Our major wafercustomer tends to order fluctuating quantities of wafers on an irregular basis.This means that this customer, who may have accounted for a significant portionof our net revenue in a given quarter, may not place any orders in thesucceeding quarter or quarters. Most of our other wafer customers are samplingSIMOX wafers or are developing prototype products and tend to order smallquantities of wafers on an irregular basis. Further, customers may cancel orrevise orders at any time prior to delivery. These ordering patterns mostlikely will result in significant quarterly fluctuations in our revenue andoperating results, and accordingly in our share price. In addition, because wehave only sold a limited number of implanters to date on an irregular basis,the recognition of revenue from the sale of even one implanter is likely toresult in a significant increase in the revenue for that quarter.  A number of other factors, many of which arediscussed in more detail in other risk factors, may also cause variations inour results of operations and share price, including:

 

•              lack of orders;

•                                          cancellationsof orders and shipment delays and rescheduling;

•              our wafer manufacturing capacityand yields;

•              new product introductions, whichoften result in a mismatching of research and development expenses andrecognition of revenue;

•              the success of our marketingalliances; and

 

12

----

 

•              economic conditions and capitalspending in the semiconductor industry and in other industries in which ourcustomers operate.

 

A high percentage of ourexpenses are essentially fixed in the short term. As a result, if we experiencedelays in generating and recognizing revenue, our quarterly operating resultsare likely to be seriously harmed. Due to these 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 Some orAll of Our Products or Future Products Noncompetitive or Obsolete; PotentialWrite-down for Impaired or Obsolete Assets.***

 

The semiconductorindustry is highly competitive and has been characterized by rapid andsignificant technological advances. A number of established semiconductor andmaterials manufacturers, including certain of our customers, have expendedsignificant resources in developing improved wafer substrates. Our competitorsor others, many of which have substantially greater financial, technical andother resources than we do, may succeed in developing technologies and productsthat are equal to or more effective than any which we are developing, whichcould render our technology obsolete or noncompetitive. In addition tocompetition from other manufacturers of SIMOX-SOI wafers, we face competitionfrom manufacturers using bulk silicon and epitaxial wafer technology, compoundmaterials technology such as silicon-germanium, gallium-arsenide and indiumphosphide and SOI technology other than SIMOX technology. Although we believethat SIMOX-SOI wafers offer integrated circuit performance advantages,semiconductor manufacturers may develop improvements to existing bulk silicon,epitaxial or strained silicon wafer technology, and competing compoundmaterials or SOI technologies may be more successfully developed, which wouldeliminate or diminish the performance advantages of SIMOX-SOI wafers.

 

During the fiscal yearended December 31, 2003, we recognized an impairment loss of $11,051,324 forour 200 mm and smaller SIMOX wafer production line (see Item 7. ManagementsDiscussion and Analysis of Financial Condition and Results of Operation). Inaddition, if semiconductor manufacturers fail to adopt SIMOX technology duringthe current or subsequent process cycle (such cycles typically last two tothree years), widespread adoption of SIMOX technology may never materialize,our technology may become obsolete and we may be required to recognize anadditional material impairment loss in the future.

 

In addition, although weare aware of only one other company manufacturing oxygen implant equipment,other major semiconductor implant equipment manufacturers could develop a lessexpensive oxygen implanter with superior technology. Our ability to competewith other manufacturers of semiconductor implanters, SIMOX wafers andmanufacturers of competing SOI wafers, as well as with bulk silicon, epitaxial,strained silicon and compound materials wafer manufacturers, will depend onnumerous factors within and outside our control, including:

 

•              the success and timing of ourproduct introductions and those of our competitors;

•              product distribution;

•              customer support;

•              sufficiency of funding availableto us; and

•              the price, quality and performanceof 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.

 

13

----

 

The commercialization ofnew products involves, among other requirements, substantial expenditures inresearch and development, production and marketing. We may be unable tosuccessfully design or manufacture these new products and may have difficultypenetrating new markets.  Because it isgenerally not possible to predict the amount of time required and the costsinvolved in achieving certain research, development and engineering objectives,actual development costs may exceed budgeted amounts and estimated productdevelopment schedules may be extended. Our business may be materially andadversely affected if:

 

•              we are unable to improve ourexisting products on a timely basis;

•              our new products are notintroduced on a timely basis;

•              we incur budget overruns or delaysin our research and development efforts; or

•              our new products experiencereliability or quality problems.

 

***Our SIMOX-SOI Wafer Products are Difficult to Manufactureand Small Manufacturing Defects Can Adversely Affect Our Customers’ and Our OwnProduction Yields and Our Operating Results.***

 

The manufacture of ourSIMOX-SOI wafers is a highly complex and precise process. SIMOX-SOI waferproduction requires a tightly controlled, clean environment. Very smallimpurities in our manufacturing materials or process, contamination of themanufacturing environment and/or equipment failures can cause wafers to berejected, can adversely affect our customers’ manufacturing yields of theirintegrated circuits or can cause shipping delays. We may experience problems inachieving an acceptable yield in the manufacture of SIMOX-SOI wafers, and therisk of encountering difficulties increases as we transition to newmanufacturing methods or more exacting customer specifications. In the past, wehave experienced difficulties in keeping pace with evolving customerspecifications which have led to delayed SIMOX-SOI wafer shipments and/orincreased production costs.

 

***The Customer Qualification Process for Our Wafer Products isComplex and Lengthy.***

 

Our customers expendsignificant efforts in evaluating and qualifying our wafer products before theyplace any orders with us.  To date,commercial shipments of our wafers have been used principally for evaluationpurposes or pilot production in products by our customers. The time to developan integrated circuit on SIMOX-SOI is lengthy, sometimes taking twelve tothirty-six months. The cycle typically goes from initial sampling of SIMOX-SOIwafers to more intensive sampling, the manufacture of prototype integratedcircuits, circuit process modifications, yield optimization, pilot productionand finally, production. This is a normal cycle in the semiconductor industryfor any new advanced material such as Ibis’ SIMOX-SOI.  Even after this lengthy qualificationprocess, customers may not purchase our products in substantial amounts, or atall.  This lengthy sales cycle, as wellas the practice of semiconductor manufacturers to place sporadic orders andtheir right to cancel orders prior to delivery, may cause our revenue and operatingresults to vary significantly and unexpectedly from period to period.

 

***The Sales Cycle for Our Oxygen Implanter Equipment isLengthy and Complex and We Have Only Received Limited Orders for Our OxygenImplanter Equipment.***

 

Our customers expend significant efforts in evaluatingand qualifying our implanters before they place orders with us.  Since we began selling implanters in 1996,we have only sold a total of eight Ibis 1000 oxygen implanters at an average saleprice of approximately $4 million each and one i2000 oxygen implanter at aselling price of approximately $8 million. The sales cycle typically goes fromequipment 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.  We believe two silicon wafer manufacturerhave already licensed this technology from IBM and others have developed theirown SIMOX process. Our potential equipment customers may wish to secure thislicense prior to giving us an order for equipment and these negotiationsbetween IBM and our customer are beyond our control and no assurances are giventhat our customers and IBM would come to terms acceptable to both parties in atimely manner, or at all. This has caused delays in receiving an order from onecustomer and could cause delays with other customers in the future.  We do not

 

14

----

 

expect to sell more than a limited number of implanters in the nearfuture. The sale of one implanter would generally represent a substantialportion of our annual revenue. Accordingly, the delay in the receipt of orders, manufacture or deliveryof even one unit would have a material adverse effect on our quarterly andannual results of operations.

 

***The Manufacturing and Customer Qualification Process for OurImplanters is Complex, Lengthy and Costly.***

 

In the semiconductor industry customers regularlyrequire equipment manufacturers to qualify the equipment at the customer’ssite. The time required to customer-qualify an implanter at a customer’s siteis very difficult to predict because the qualification process for each of ourimplanters is complex, lengthy and costly and varies depending on ourcustomer’s varying specifications. The manufacturing and qualification processfor each implanter requires us to construct and customer qualify the machine atour premises, disassemble the machine for transportation, and reassemble andrequalify it at the customer’s premises. During this qualification period, weinvest significant resources and dedicate substantial production and technicalpersonnel to achieve acceptance of the implanter. Each customer will not acceptthe implanter until it has successfully produced wafers to exact specificationsat the customer’s premises. Even very small differences in the customer’senvironment or initially imperceptible changes that may occur to the implanterduring the transportation to and reassembly of the implanter at the customer’ssite can cause a large percentage of wafers produced by the implanter to be rejected,which would delay the acceptance of the implanter by the customer.Historically, we have experienced delays in achieving customer acceptance.Delays or difficulties in our manufacturing and qualification process couldincrease manufacturing and warranty costs and adversely affect ourrelationships with our customers. In addition, because we do not recognizerevenue on the sale of an implanter until it is delivered and qualified by thecustomer, any delay in qualification would result in a delay in our ability torecognize revenue from the sale. Historically it has taken approximately nine to eighteen months tobuild, ship and obtain customer acceptance of our implanters.

 

***Our Implanters and Associated Technology are Subject toExport Regulations, Which Could Prevent or Delay the Sale of Such Products inForeign Countries.***

 

Certain technologiesassociated with our implanters are subject to export regulations administeredby the U.S. Department of Commerce. Accordingly, we may be required to secureU.S. export licenses with respect to sales of implanters or transfers oftechnologies to end users in certain foreign countries.  This requirement could result in significantdelays in, or the prevention of, sales of implanters or transfers of technologyor other such technical data to customers 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 no assurance that if necessary,we will be able to secure such licenses in the future in a timely manner, or atall.

 

***The Loss of Key Members of Our Scientific and ManagementStaff Could Delay and May Prevent the Achievement of Our Research, Developmentand Business Objectives.***

 

Our Chief ExecutiveOfficer, Martin J. Reid, and other current officers and key members of ourscientific staff are responsible for areas such as product development andimprovements, and process improvements research, which are important to ourspecialized scientific business. The loss of, and failure to promptly replace,any member of this group could significantly delay and may prevent theachievement of our research, development and business objectives. While we haveentered into an employment agreement with our Chief Executive Officer, 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 of Ibis management and of its board ofdirectors is subject to change and should not be unduly relied upon.

 

15

----

 

***We May Not Be Able to Successfully Produce Our Products on aLarge-Scale.***

 

We have limitedmanufacturing experience and have only manufactured limited quantities ofoxygen implanters and SIMOX-SOI wafers for low volume production. To besuccessful, our products must be manufactured in commercial quantities, atacceptable costs. We may not be able to make the transition to high volumecommercial production successfully. Future production in commercial quantitiesmay create technical and financial challenges for us. Any difficulty or delayin constructing additional implanters, if needed, could have a material adverseeffect on our business.

 

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

** **

At times we may have thecapacity to produce more oxygen implantation machines than we have orders forat such times. During such idle time we would continue to be responsible forthe fixed costs of our facility and maintaining personnel, which could have amaterial adverse effect on our business. We have also invested in two 300 mmSIMOX wafer production lines and a significant portion of our expenses arefixed. If we do not need this capacity and capability for any of a variety ofreasons, including inadequate demand, our existing capacity and capabilitycould be in excess of our actual needs and our fixed costs per wafer producedwill increase, which could adversely affect us.

 

***We May Not Successfully Form or Maintain Desirable StrategicAlliances.***

 

We believe we will needto form or maintain alliances with strategic partners for the manufacturing,marketing and distribution of our products. We may enter into these strategicalliances to satisfy customer demand and to address possible customer concernsregarding our being a sole source supplier. The limited number of reliablesources of supply other than Ibis may adversely affect or delay the integrationof SIMOX-SOI wafers in mainstream commercial applications. We may not besuccessful in maintaining alliances or in forming and maintaining otheralliances, including satisfying our contractual obligations with our strategicpartners, and our partners may not devote adequate resources to manufacture,market and distribute these products successfully or may attempt to competewith us.

 

***We May Have Difficulty Obtaining the Materials andComponents Needed to Produce Our Products.***

 

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. Semiconductor equipment is asecular growth industry and is very cyclical in nature, so if our suppliersexperience an increase in demand from other semiconductor equipmentmanufacturers with much higher volumes than us, the lead-time and/or price forsome of our components may increase. Although we have sought to reduce ourdependence on these limited source suppliers and we have not experiencedsignificant production delays due to unavailability or delay in procurement ofcomponent parts or raw materials to date, increased market demand for materialsfrom, or disruption or termination of, certain of these sources could occur andsuch increased demand, disruptions, or termination could have a materialadverse effect on our business and results of operations.

 

We manufacture ourSIMOX-SOI wafers using conventional silicon wafers and a variety of chemicalsand gases, all of which are available from multiple sources. We order thechemicals and gases pursuant to blanket purchase orders which generally may bemodified or cancelled by us upon 60 days’ prior notice to the vendor.  In 2001, Ibis and MEMC, a leading globalproducer of silicon wafers, entered into an alliance pursuant to which MEMCbecame our primary supplier of silicon substrate material.  In periods of increasing demand in thesemiconductor industry for silicon wafers, we cannot be sure that we will beable to purchase an adequate supply of such silicon wafers for manufacture ofour products at or near current prices, if at all.  Any shortages in the availability of silicon wafers or asignificant increase in the price of silicon wafers could have a materialadverse effect on our business and results of operations.

 

16

----

 

***We May Not Be Able to Protect Our Patents and ProprietaryTechnology.***

 

Our ability to competeeffectively with other companies will depend, in part, on our ability tomaintain the proprietary nature of our technology. Although we have beenawarded or have filed applications for a number of patents in the U.S. andforeign countries, those patents may not provide meaningful protection, orpending patents may not be issued. Our competitors in both the U.S. and foreigncountries, many of which have substantially greater resources and have madesubstantial investments in competing technologies, may have or may obtainpatents that will prevent, limit or interfere with our ability to make and sellour products or intentionally infringe on our patents. The defense andprosecution of patent suits is both costly and time-consuming, even if theoutcome is favorable to us. In addition, there is an inherent unpredictabilityregarding obtaining and enforcing patents. An adverse outcome in the defense ofa patent suit could:

 

•              subject us to significantliabilities to third parties,

•              require disputed rights to belicensed from third parties, or

•              require us to cease selling ourproducts.

 

We also rely in largepart 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 claim that ourtechnology infringes on their proprietary rights. Any infringement claims, evenif without merit, can be time consuming and expensive to defend and may divertmanagement’s attention and resources. If successful, they could also require usto enter into costly royalty or licensing agreements. A successful claim ofproduct infringement against us and our inability to license the infringed orsimilar technology could adversely affect our business.

 

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

 

We are subject to avariety of federal, state and local environmental regulations related to thestorage, treatment, discharge or disposal of chemicals used in our operationsand exposure of our personnel to occupational hazards. Although we believe thatwe have all permits necessary to conduct our business, the failure to complywith present or future regulations could result in fines being imposed on us,suspension of production or a cessation of operations. Our future activitiesmay result in our being subject to additional regulations. Such regulationscould require us to acquire significant equipment or to incur other substantialexpenses to comply with regulations. Our failure to control the use of, or torestrict adequately the discharge of, hazardous substances or properly controlother occupational hazards could subject us to substantial financialliabilities.

 

***Our Stock Price isHighly Volatile.***

** **

The market prices forsecurities of high tech companies have been volatile. This volatility hassignificantly affected the market prices for these securities for reasonsfrequently unrelated to the operating performance of the specific companies.These broad market fluctuations may adversely affect the market price of ourcommon stock. The market price for our common stock has fluctuatedsignificantly.  Since January 1, 1999,our stock price has fluctuated from a high of $135.00 to a low of $3.15.  It is likely that the market price of ourstock will continue to fluctuate in the future. Events or factors that may havea significant impact on our business and on the market price of our commonstock include the following:

 

•                                          quarterlyfluctuations in operating results,

•                                          difficultyin forecasting future results,

•                                          announcementsby us or our present or potential competitors,

•                                          technologicalinnovations or new commercial products or services by us or our competitors,

 

17

----

 

•                                          thetiming of receipt of orders from major customers,

•                                          productmix,

•                                          productobsolescence,

•                                          shiftsin customer demand,

•                                          ourability to manufacture and ship products on a cost-effective and timely basis,

•                                          marketacceptance of new and enhanced versions of our products or implanters,

•                                          theevolving and unpredictable nature of the markets for the products incorporatingour SIMOX-SOI wafers,

•                                          theamount of research and development expenses associated with new or enhancedproducts or implanters

•                                          thecyclical nature of the semiconductor industry, and

•              general market conditions.

 

***Securities Litigation Could Result in Substantial Cost andDivert the Attention of Key Personnel, Which Could Seriously Harm Our Business.***

 

Four class actionsecurities lawsuits have been filed in the United States District Court in theDistrict of Massachusetts against Ibis Technology and its President and CEO:Martin Smolowitz v. Ibis Technology Corp., et al., Civ. No. 03-12613 (RCL) (D.Mass.); Fred Den v. Ibis Technology Corp., et al., Civ. No. 04-10060 (RCL) (D.Mass.); Weinstein v. Ibis Technology Corp., et al., Civ. No. 04-10088 (RCL) (D.Mass.); and George Harrison v. Ibis Technology Corp., et al., Civ. No. 04-10286(RCL) (D. Mass.). The actions allege, among other things, that the Companyviolated the federal securities laws by allegedly making misstatements to theinvesting public relating to demand for certain Ibis products and intellectualproperty issues relating to the sale of the i2000 oxygen implanter. Theplaintiffs are seeking unspecified damages. While we believe that theallegations are without merit, and intend to vigorously defend against thesuits, there can be no guarantee as to how they ultimately will be resolved.Ibis has been named as a nominal defendant in a shareholder derivative actionfiled in February 2004 against certain of its directors and officers.  The complaint alleges, among other things,that the alleged conduct challenged in the securities cases pending againstIbis in Massachusetts (described above) constitutes a breach of the defendants’fiduciary duties to Ibis.  The complaintseeks unspecified money damages and other relief ostensibly on behalf ofIbis.  Litigation may be time-consuming,expensive and disruptive to normal business operations, and the outcome oflitigation is difficult to predict. An unfavorable resolution of thislitigation could have a material adverse effect on our business, results ofoperations and financial condition.

 

***Future Issuances of Preferred Stock May Diminish the Rightsof Our Common Stockholders.***

 

Our board of directorshas the authority to approve the issue of up to 2 million shares of preferredstock and to determine the price, rights, privileges and other terms of theseshares.  The board of directors mayexercise this authority without the approval of the stockholders.  The rights of the holders of common stockmay be adversely affected by the rights of the holders of any preferred stockthat may be issued in the future.

 

***Anti-takeover provisions in our charter and bylaws andprovisions of Massachusetts law could make a third-party acquisition of usdifficult.***

 

Our restated articles oforganization, as amended, and restated bylaws and the Massachusetts BusinessCorporation Law contain certain provisions that may make a third-partyacquisition 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;

•                                          a75% super-majority shareholder vote to amend certain provisions of our articlesof organization and bylaws; and

 

18

----

 

•              the requirement underMassachusetts law that any stockholder action by written consent be unanimous.

** **

**Item 2.    DESCRIPTIONOF PROPERTY**

 

Ibis’ corporate officeand manufacturing facilities are located at leased facilities in Danvers,Massachusetts. We have two buildings in Danvers, which effectively separate ourtwo business segments: Implantation equipment design and manufacture and SIMOXwafer production. The implantation equipment design and manufacturing facilityis approximately 20,000 square feet and we have an additional 20,000 squarefeet of adjacent space for future expansion. We have a 40,000 square footfacility dedicated to wafer operations which includes modernized cleanroomsthat contain implanters, upgraded metrology equipment and cleaning equipment.The leases expire on December 31, 2006 and May 31, 2005, respectively, andcontain options to renew for five years.

 

**Item 3.    LEGALPROCEEDINGS**

 

Four class actionsecurities lawsuits have been filed in the United States District Court in theDistrict of Massachusetts against Ibis Technology and its President and CEO:Martin Smolowitz v. Ibis Technology Corp., et al., Civ. No. 03-12613 (RCL) (D.Mass.); Fred Den v. Ibis Technology Corp., et al., Civ. No. 04-10060 (RCL) (D.Mass.); Weinstein v. Ibis Technology Corp., et al., Civ. No. 04-10088 (RCL) (D.Mass.); and George Harrison v. Ibis Technology Corp., et al., Civ. No. 04-10286(RCL) (D. Mass.). The actions allege, among other things, that the Companyviolated the federal securities laws by allegedly making misstatements to theinvesting public relating to demand for certain Ibis products and intellectualproperty issues relating to the sale of the i2000 oxygen implanter. Theplaintiffs are seeking unspecified damages. While we believe that theallegations are without merit, and intend to vigorously defend against thesuits, there can be no guarantee as to how they ultimately will be resolved.  Ibis has been named as a nominal defendantin a shareholder derivative action filed in February 2004 against certain ofits directors and officers.  Thecomplaint alleges, among other things, that the alleged conduct challenged inthe securities cases pending against Ibis in Massachusetts (described above)constitutes a breach of the defendants’ fiduciary duties to Ibis.  The complaint seeks unspecified moneydamages and other relief ostensibly on behalf of Ibis.  Litigation may be time-consuming, expensive anddisruptive to normal business operations, and the outcome of litigation isdifficult to predict. An unfavorable resolution of this litigation could have amaterial adverse effect on our business, results of operations and financialcondition.

** **

**Item 4.    SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters were submitted to stockholders during thefourth quarter of the year ended December 31, 2003.

 

19

----

 

# **PARTII**

 

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

 

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

 

Ibis’ Common Stock began trading on May 20, 1994 onthe 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.  Our Common Stock is traded under the symbol “IBIS.” The followingtables set forth, for 2002 and 2003, the high and low sale prices for theCommon Stock as reported by the Nasdaq National Market.

 
|            |   | **Common  Stock** |   |
|-----------------|--------|-------------------|--------|
|            |   | **High**          |   | **Low** |   |
|            |   |              |   |   |   |
| 2002:           |   |              |   |   |   |
| First  Quarter  |   | $                 | 15.64  |   | $ | 7.25 |   |
| Second  Quarter |   | $                 | 14.95  |   | $ | 4.35 |   |
| Third  Quarter  |   | $                 | 7.15   |   | $ | 3.59 |   |
| Fourth  Quarter |   | $                 | 7.50   |   | $ | 3.65 |   |
| 2003:           |   |              |   |   |   |
| First  Quarter  |   | $                 | 6.50   |   | $ | 3.92 |   |
| Second  Quarter |   | $                 | 8.68   |   | $ | 3.99 |   |
| Third  Quarter  |   | $                 | 13.17  |   | $ | 7.67 |   |
| Fourth  Quarter |   | $                 | 17.90  |   | $ | 9.90 |   |

 

**Stockholders**

 

As of February 26, 2004, there were approximately 140stockholders of record of the 10,651,170 outstanding shares of Common Stock andapproximately 6,900 beneficial owners of the 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 toretain any 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.

 

###### **Recent Sales ofUnregistered Securities**

 

During the fourth quarter of the fiscal year endedDecember 31, 2003, there were no sales of securities that were not registeredunder the Securities Act of 1933.

 

20

----

 

**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, 2003,are derived from the financial statements of Ibis, which have been audited byKPMG LLP, independent certified public accountants. The audited balance sheetsat December 31**,**2003 and 2002 and the related statements of operations,stockholders equity and cash flows for each of the years in the three-yearperiod ended December 31, 2003 and the auditors’ report thereon, are includedelsewhere in this Annual Report on Form 10-K. The data set forth below shouldbe read in conjunction with Ibis’ financial statements, the related notesthereto and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included elsewhere in this Annual Report on Form 10-K.

 
|                                        |   | **Years  Ended December 31,**                  |   |
|---------------------------------------------|--------|------------------------------------------------|--------|
|                                        |   | **1999**                                       |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                                        |   | **(In  thousands, except for per share data)** |   |
| **Statement  of Operations Data:**          |   |                                           |   |   |   |   |   |   |   |   |   |
| Wafer  product sales                        |   | $                                              | 5,282  |   | $ | 8,173 |   | $ | 5,391 |   | $ | 7,646 |   | $ | 8,996 |   |
| Contract  and other revenue                 |   | 1,257                                          |   | 533 |   | 518 |   | 283 |   | 660 |   |
| Equipment  revenue                          |   | 10,064                                         |   | 5,769 |   | 1,525 |   | 6,103 |   | 8,782 |   |
| Total  revenue                              |   | 16,603                                         |   | 14,475 |   | 7,434 |   | 14,032 |   | 18,438 |   |
| Cost  of wafer product sales                |   | 4,644                                          |   | 5,824 |   | 8,210 |   | 14,457 |   | 15,542 |   |
| Cost  of contract and other revenue         |   | 443                                            |   | 388 |   | 376 |   | 115 |   | 45 |   |
| Cost  of equipment revenue                  |   | 7,242                                          |   | 3,482 |   | 1,502 |   | 3,868 |   | 4,331 |   |
| Total  cost of revenue                      |   | 12,329                                         |   | 9,694 |   | 10,088 |   | 18,440 |   | 19,918 |   |
| Gross  profit (loss)                        |   | 4,274                                          |   | 4,781 |   | (2,654 | ) | (4,408 | ) | (1,480 | ) |
| Operating  expenses:                        |   |                                           |   |   |   |   |   |   |   |   |   |
| General  and administrative                 |   | 1,787                                          |   | 1,998 |   | 2,273 |   | 2,174 |   | 2,337 |   |
| Marketing  and selling                      |   | 1,016                                          |   | 1,640 |   | 1,813 |   | 1,510 |   | 1,236 |   |
| Research  and development                   |   | 1,774                                          |   | 4,587 |   | 5,119 |   | 6,258 |   | 5,381 |   |
| Impairment  of long-lived assets            |   | —                                         |   | — |   | — |   | — |   | 11,051 |   |
| Total  operating expenses                   |   | 4,577                                          |   | 8,225 |   | 9,205 |   | 9,942 |   | 20,005 |   |
| Loss  from operations                       |   | (303                                           | )      | (3,444 | ) | (11,859 | ) | (14,350 | ) | (21,485 | ) |
| Total  other income                         |   | 1,140                                          |   | 1,943 |   | 2,265 |   | 255 |   | 27 |   |
| Income  (loss) before income taxes          |   | 837                                            |   | (1,501 | ) | (9,594 | ) | (14,095 | ) | (21,458 | ) |
| Income  tax expense (benefit)               |   | 10                                             |   | 1 |   | 1 |   | 1 |   | (8 | ) |
| Net  income (loss)                          |   | $                                              | 827    |   | $ | (1,502 | ) | $ | (9,595 | ) | $ | (14,096 | ) | $ | (21,450 | ) |
| Net  income (loss) per common share (1)     |   | $                                              | 0.11   |   | $ | (0.18 | ) | $ | (1.15 | ) | $ | (1.53 | ) | $ | (2.21 | ) |
| Weighted  average common shares outstanding |   | 7,404                                          |   | 8,286 |   | 8,378 |   | 9,208 |   | 9,728 |   |

 
|                                  |   | **As of  December31,** |       |
|---------------------------------------|--------|------------------------|------------|
|                                  |   | **1999**               |       | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                                  |   | **(In  thousands)**    | ** ** |
| **Balance  Sheet Data:**              |   |                   |       |   |   |   |   |   |   |   |   |
| Working  capital                      |   | $                      | 43,309     |   | $ | 32,585 |   | $ | 11,232 |   | $ | 5,551 |   | $ | 12,607 |   |
| Total  assets                         |   | 53,728                 |       | 56,299 |   | 54,920 |   | 51,699 |   | 35,343 |   |
| Long-term  debt, less current portion |   | 30                     |       | 18 |   | 2,718 |   | 1,184 |   | — |   |
| Total  liabilities                    |   | 5,347                  |       | 6,780 |   | 14,560 |   | 12,944 |   | 4,226 |   |
| Stockholders’  equity            |   | 48,381                 |       | 49,519 |   | 40,360 |   | 38,755 |   | 31,117 |   |
|                                       |        |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Computed on the basisdescribed for net earnings (loss) per common share in Note 2(g) of Notes toFinancial Statements.

 

21

----

 

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

 

*Thefollowing discussion should be read in conjunction with the FinancialStatements of Ibis (including Notes thereto) and Selected Financial Dataincluded elsewhere in this Annual Report on Form 10-K.*

 

**OVERVIEW**

 

Ibis Technology Corporation (“Ibis”) was formed inOctober 1987 and commenced operations in January 1988. Ibis’ initial activitiesconsisted of producing and selling SIMOX-SOI wafers and conducting research anddevelopment activities. This research led to the development of proprietarynext generation oxygen implanters, the Ibis 1000, which we began selling in1996, the i2000, and also 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, there was a shift in revenue to sales ofSIMOX-SOI wafers for commercial applications and the nature of our business hasevolved through stages where sometimes our revenue was primarily derived fromselling wafers for evaluation purposes, and at other times it was primarilyderived from equipment sales. This is a normal path to follow while developingand promoting a fundamental new technology, especially when it relates to thesemiconductor industry embracing any change that affects fabricationoperations.  This trend is expected tocontinue in the near-term as our customers continue to sample SOI and the earlyadopters work to achieve stable production processes and enter pilotproduction. We believe that we are in the technology rollout stage of ourcorporate life cycle with respect to our i2000 SIMOX-SOI implanters.

 

We believe that there will be a migration of SOI wafermanufacturing into the major silicon wafer suppliers.  We reach this conclusion for a number ofreasons.  First, we believe thattremendous price pressure exists on commodity type products, such as siliconwafers, and this pressure is already eroding the price of SOI wafers.  Because the starting wafer represents asignificant component of the SOI wafer cost, silicon wafer manufacturers shouldhave a natural cost structure advantage leading to a higher gross margin, andtherefore can manage such price pressure better than stand-alone SOI producersthat do not also produce the silicon wafer itself.  Second, we expect that the price pressure will encourage siliconwafer manufacturers to seek out higher margin products, like SOI wafers, toincrease their margins.  Third, webelieve that silicon wafer manufacturers have traditionally developedproprietary intellectual property in silicon materials science, which can beapplied to designing optimal starting wafers for SOI production.  This should give them an advantage in bothminimizing wafer cost and maximizing SOI wafer quality and yield.  Fourth, our experience suggests that siliconwafer manufacturers already have a well-developed infrastructure formanufacturing, sales and marketing large volumes of substrates.  Lastly, we believe that there is greaterefficiency in producing the SOI wafer as part of the wafer manufacturersexisting product flow, specifically avoiding the need to repackage, reclean,reinspect and reship substrates twice, once as starting silicon wafers, and asecond time as SOI wafers. Therefore, as a result of these trends, we expectour ultimate customers will be drawn from these silicon wafer manufacturers andwe plan to focus a majority of our technical and marketing resources on theleading silicon wafer manufacturers and our major key customers in thesemiconductor industry who are the leaders in the adoption of SOI technology.We expect that implanter sales to chipmakers should be minimal, but focused onSOI processes, which the chipmaker wishes to keep proprietary, such asselective (or patterned) SIMOX, or other specialty substrates.

 

Our fundamental SIMOX-SOItechnology has been developed, refined, and tested over the last dozenyears.  In 2002, we introduced thecurrent generation of SIMOX-SOI technology, which included our second- generationoxygen implanter (i2000ä) and the MLD waferprocess which was licensed to us by IBM. We believe that the i2000’sflexibility, automation and operator-friendly controls allow this tool toproduce a wide range of SIMOX-SOI wafer products, including Advantox®MLD and Advantox MLD-UT wafers. We also believe the ability of the i2000implanter to produce eight and twelve-inch (or 200 and 300 mm) SIMOX-SOI waferscoupled with the MLD process positions us to capitalize on the growing SOImarket. In 1999, we commenced a program to design and develop the i2000,introduced it in March 2002 and began shipping 300

 

22

----

 

mm wafers implanted fromthis machine shortly thereafter. A vast majority of the wafers shipped duringthe fiscal year ended December 31, 2003 were 300 mm.  In September 2002, we received an order valued at approximately$8 million for an i2000 oxygen implanter from a major semiconductormanufacturer.  During the second quarterended June 30, 2003, our largest customer accepted the i2000 implanter that weshipped to them late last year. As a result of this acceptance, we recognizedrevenue of approximately $8 million in the second quarter ended June 30, 2003.

 

During February 2004, we announced the receipt of anorder for one Ibis i2000 SIMOX implanter, with an option to purchase a secondi2000, from a leading international silicon wafer manufacturer. Although noassurances can be given, we expect to ship this system in the second quarter of2004 depending on completion of the tool and customer acceptance of the tool atour facility. Revenue recognition for this implanter order will be based onfinal customer acceptance at their facility, the timing of which may varydepending on a number of factors, which include the customer’s site beingproperly facilitized (power, water, air) and performance of the tool.

 

Commercial shipments of our wafers have been usedprincipally for evaluation purposes or pilot production in products, includingmicroprocessors, gate arrays, ASICs (application specific integrated circuits),memories (DRAMs, SRAMs, etc.), and cellular and mobile radio components. Fromour customers’ perspective, the pathway to SOI adoption is complex and timeconsuming.  Typically, a wafer customerwill go through three major stages:

 

•                                          Sampling,where preliminary performance characteristics are explored and verified;

•                                          R&D,where specific customer specifications are tested and developed; and

•                                          Production,where yield and cost benefits are optimized.

 

Each of these stages has many steps, and customersmust evaluate each new wafer technology that essentially lays a new foundationfor substantially all other processes they have spent billions of dollars anddecades of time developing. Accordingly, we believe it takes anywhere from 12 to 36 months for acustomer to proceed from initial sampling through R&D to initialproduction, which is not unlike the standard process for qualifying any newwafer material.  These steps apply eachtime there is a change in the customer’s fabrication process, such as afeature-size change or new material.  Todate, most of our customers have purchased wafers for the purpose ofcharacterizing and evaluating the wafers, developing prototype products or forpilot production, and consequently historical sales are not necessarily anindication of future operations.

 

At December 31, 2003, Ibis owned eight Ibis 1000implanters, available to produce up to 200 mm SIMOX wafers and two i2000’savailable to produce 300 mm SIMOX wafers. We also have one additional i2000 implanter under construction that weintend to ship to fulfill the recent order we received from a major siliconwafer supplier. During the fourth quarter ended December 31, 2003, a number ofunexpected events occurred which impacted our 200 mm and smaller wafer sizeproduction line including the line’s projected cash flow generation and ourprojected utilization of the assets within our revised plans. These eventsincluded:

 

•                                          Ourbusiness prospects for 200 mm SIMOX wafers did not materialize in the fourthquarter as expected, and in part as a result of this we do not now anticipatesignificant 200 mm wafer business in the future;

•                                          Ourexisting and potential wafer customers are rapidly transitioning to the 300 mmwafer size and 92% of our wafer sales during fiscal year 2003 were for 300 mmSIMOX wafers;

•                                          Apotential buyer completed their evaluation of a portion of our wafer productionline and determined that weak demand for 200 mm and smaller SIMOX wafers didnot warrant an investment or purchase of this proportion at the present time;and

•                                          Wedo not believe there are any material prospects for Ibis 1000 equipment salesoverseas currently.

 

Based on these events and their impact on current andfuture projected cash flows, our subsequent impairment analysis under theprovisions of SFAS No. 144, Accounting for Impairment or Disposal of Long-LivedAssets resulted in an impairment charge of

 

23

----

 

$11,051,324 for our 200 mm and smaller SIMOX wafer production line,which is principally comprised of Ibis 1000 implanters and associated machineryand equipment not expected to be utilized or sold. The remaining carryingamount of assets for this line is now approximately $865,000.

 

We will continue to review our assumptions about ourlong-lived assets on a periodic basis for potential impairment in futurequarters.  We cannot be sure that ourimplanters or other long-lived assets will not become impaired in the future.In addition, the impairment factors evaluated by Management may change insubsequent periods, given the current trends of the business environment.

 

Ibis has experienced quarterly and annual fluctuationsin revenue and results of operations due to various factors, including thetiming of receipt of equipment orders and dependence on a limited number ofcustomers.  Our current major wafercustomer tends to order fluctuating quantities of wafers on an irregular basis.This means that this customer, who may account for a significant portion of ournet revenue in any given quarter, may not place any orders in the succeedingquarter or quarters. Most of our other wafer customers are sampling SIMOXwafers or are developing prototype products and tend to order small quantitiesof wafers on an irregular basis. Furthermore, orders can be revised orcancelled at any time prior to delivery. These ordering patterns resulted in adecrease in 300 mm SIMOX wafer sales during the fourth quarter ended December31, 2003 and we expect to continue to experience fluctuations in revenue andoperating results due to shifts in customer demands during various stages ofthe SIMOX-SOI sales cycle. In addition, 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 for that quarter. We recognize implanter revenue in accordance with SAB 101, whichincludes, among other criteria, the shipment and factory acceptance of theimplanter at the customer’s location. As a result, deferral of revenue will extend longer due to meeting thesecriteria.

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that have a significantimpact on the results we report in our financial statements. Some of ouraccounting policies require us to make difficult and subjective judgments,often as a result of the need to make estimates of matters that are inherentlyuncertain. Our most critical accounting policies include: revenue recognition,inventory valuation and reserves, accounts receivable reserves and the assessmentof long-lived asset impairment. Actual results may differ from these estimatesunder different assumptions or conditions. Below, we discuss these policies further, as well as the estimates andjudgments involved.

 

***Revenue Recognition. ***We recognize revenue from wafer product sales,equipment sales and the sales of spare parts when all of the following criteriahave been met:  (1) evidence exists thatthe customer is bound to the transaction; (2) the product has been delivered tothe customer and, when applicable, the product has been installed and acceptedby the customer; (3) the sales price to the customer has been fixed or isdeterminable; and (4) collectibility of the sale price is reasonablyassured.  We typically recognize revenuefrom wafer sales upon shipment and recognize revenue from implanter sales uponacceptance at the customer’s site. Provisions for estimated sales returns andallowances are made at the time the products are sold.  Revenue derived from contracts and servicesis recognized upon performance.  Significant management judgments and estimates must be made and used inconnection with revenue recognized in any period.  Management analyzes various factors, including a review ofspecific transactions, historical experience, credit worthiness of customersand current market and economic conditions. Changes in judgments based upon these factors could impact the timingand amount of revenue and cost recognized.

 

***Inventory Valuation and Reserves. ***Our policy for the valuation of inventory, includingthe determination of obsolete or excess inventory, requires us to estimate thefuture demand for our products within specific time horizons, generally twelvemonths or less. If our estimated demand for specific products is greater thanactual demand and we fail to reduce manufacturing output accordingly, we couldbe required to record additional inventory reserves, which would have anegative impact on our gross margin. We reserve for a

 

24

----

 

possible over supply ofwafers utilizing inventory aging records and for obsolescence when engineeringchanges or other technological advances indicate that obsolescence hasoccurred.  We also adjust the valuationof inventory when estimated actual cost is significantly different thanstandard cost and value inventory at the lower of cost or market. Onceestablished, any write-downs of inventory are considered permanent adjustmentsto the cost basis of the inventory.

 

***Accounts Receivable Reserves. ***Accounts receivable are reduced by anallowance for amounts that may become uncollectible in the future.  The estimated allowance for uncollectibleamounts is based primarily on a specific analysis of accounts in the receivableportfolio and a general reserve based on the aging of receivables andhistorical write-off experience.  Whilemanagement believes the allowance to be adequate, if the financial condition ofour customers were to deteriorate, resulting in impairment of their ability tomake payments, additional allowances may be required and could materiallyimpact our financial position and results of operations.

 

***Valuation of Long-Lived Assets. ***Ibis reviews the valuation of long-livedassets, including property and equipment and licenses, under the provisions ofSFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.  Management is required to assess therecoverability of its long-lived assets whenever events and circumstancesindicate that the carrying value may not be recoverable.  Factors we consider important that couldtrigger an impairment review include the following:

 

•                                          Significantunderperformance relative to expected historical or projected future operatingresults;

•                                          Significantchanges in the manner of our use of the acquired assets or the strategy of ouroverall business;

•                                          Significantnegative industry or economic trends;

•                                          Significantdecline in our stock price for a sustained period; and

•                                          Ourmarket capitalization relative to book value.

 

In accordance with SFAS No. 144, when we determinethat the carrying value of applicable long-lived assets may not be recoverablebased upon the existence of one or more of the above indicators of impairment,we evaluate whether the carrying amount of the asset exceeds the sum of theundiscounted cash flows expected to result from the use and eventualdisposition of that asset.  If such acircumstance exists, we would measure an impairment loss to the extent thecarrying amount of the particular long-lived asset or group exceeds its fairvalue.  We would determine the fairvalue based on a projected discounted cash flow method using a discount ratedetermined by our management to be commensurate with the risk inherent in ourcurrent business model. We adopted SFAS No. 144 during the first quarter of 2002and during the fourth quarter of 2003 we recognized an impairment charge of$11,051,324 for our 200 mm and smaller SIMOX wafer production line.

 

**Results of Operations**

 

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

 

***Wafer Product Sales***.  Wafer product sales increased to $8,995,475for the fiscal year ended December 31, 2003, an increase of $1,349,168 or 18%from $7,646,307 for the fiscal year ended December 31, 2002.  Early in 2002, Ibis introduced ourcurrent-generation oxygen implanter, the i2000, and for the first time we beganshipping 300 mm SIMOX wafers produced on that implanter shortly thereafter. Theincrease in wafer product sales is due to increased 300 mm SIMOX wafer demandfrom one customer in the United States. Sales of 300 mm wafers for the fiscal year ended December 31, 2003accounted for approximately 92% of our total wafer sales compared to 44% lastyear. This increase was offset by decreased wafer sales by Ibis in Europe, asone of our customers in the optical components arena discontinued a portion oftheir operations which utilized SIMOX wafers. Wafer sales to customers in thePacific Rim also decreased as there are now multiple SIMOX-SOI wafer supplierslocated there. Increased direct SIMOX-SOI competition would adversely effectour SIMOX wafer sales; however, our current strategy is to be the dominantsupplier of SIMOX implanters to the world’s silicon wafer manufacturers so theycan, in turn, efficiently and cost-effectively supply SOI wafers to the globalsemiconductor industry.  In addition, webelieve these wafer manufacturers could be potential equipment customers ofours.

 

25

----

 

***Contract and Other Revenue***.  Contract and other revenue for the fiscalyear ended December 31, 2003 was $660,429 compared to $282,979 for the fiscalyear ended December 31, 2002, an increase of $377,450 or 133%.  This increase is attributable to revenuerecognized from the transfer of wafer technology to a customer pursuant to alicense agreement.  Royalty fees onlicensed equipment technology also increased but these were offset by adecrease in government contract work.

 

***Equipment Revenue.***  Equipment revenue increased to $8,781,907for the fiscal year ended December 31, 2003 from $6,102,748 for the fiscal yearended December 31, 2002, an increase of $2,679,159 or 44%.  Equipment revenue in 2003 includedapproximately $8 million from the sale of an i2000 implanter compared to thefiscal year ended December 31, 2002 which included approximately $5 millionfrom the sale of an Ibis 1000 implanter to a customer in China.  Field service revenue accounted for $280,450or 3% of equipment revenue for the fiscal year ended December 31, 2003 ascompared to $289,295 or 5% of equipment revenue for the fiscal year endedDecember 31, 2002.  Sales of spare partsaccounted for $508,551 or 6% of equipment revenue for the fiscal year endedDecember 31, 2003 as compared to $813,453 or 13% of equipment revenue for thefiscal year ended December 31, 2002. Sales of spare parts fluctuate dependingon the number of tools sold and when the associated warranty expires.

*** ***

***Total Sales and Revenue.***  Total sales and revenue for the fiscal yearended December 31, 2003 was $18,437,811, an increase of $4,405,777 or 31% from$14,032,034 for the fiscal year ended December 31, 2002.

*** ***

***Total Cost of Sales and Revenue.***  Cost of wafer product sales for the fiscalyear ended December 31, 2003 was $15,541,778, as compared to $ 14,456,781 forthe fiscal year ended December 31, 2002, an increase of $1,084,997 or 8%.  This is attributable to increased sales of300 mm wafers along with increased fixed costs mainly depreciation andamortization of 300 mm equipment and the under absorption of overhead expenses.Decreased overhead expenses due to cost savings initiatives offset theseincreases, as well as lower 300 mm wafer material costs. Cost of contract andother revenue for the fiscal year ended December 31, 2003 was $44,579, ascompared to $115,141 for the fiscal year ended December 31, 2002, a decrease of$70,562 or 61% due to a decrease in work performed on governmentcontracts.  Cost of equipment revenuefor the fiscal year ended December 31, 2003 was $4,331,044, as compared to $3,868,197for the fiscal year ended December 31, 2002, an increase of $462,847 or12%.  This increase is due to highercosts recognized on the sale of the i2000 implanter this year compared to theIbis 1000 in the prior year. In addition, although variable overhead expensesdecreased due to cost savings initiatives, we experienced an under absorptionof overhead due to lack of implanter demand. As a result of the foregoing, thetotal cost of sales and revenue for the fiscal year ended December 31, 2003 was$ 19,917,401 as compared to $18,440,119 for the fiscal year ended December 31,2002, an increase of $1,477,282, or 8%. The gross margin for all sales was a negative 8% for the fiscal yearended December 31, 2003 as compared to a negative 31% for the fiscal year endedDecember 31, 2002.  This improvement inthe gross margin for all sales is attributable to a 55% gross margin achievedon the i2000 implanter sale, as well as improved margins on wafer sales due tohigher average selling prices of 300 mm wafers.

 

***General and Administrative Expenses***.  General and administrative expenses for thefiscal year ended December 31, 2003 were $2,337,463 (13% of total revenue) ascompared to $2,174,198 (15% of total revenue) for the fiscal year endedDecember 31, 2002, an increase of $163,265 or 8%.  This is primarily a result of increased professional services andpremiums on Director’s & Officers liability insurance which were offset bydecreased payroll and payroll related expenses due to cost savings initiatives.

 

***Marketing and Selling Expenses. ***Marketing and selling expenses for thefiscal year ended December 31, 2003 were $1,235,798 (7% of total revenue) ascompared to $1,509,792 (11% of total revenue) for the fiscal year endedDecember 31, 2002, a decrease of $273,994 or 18%.  The decrease in marketing and selling expenses is primarily aresult of decreases in payroll and payroll related expenses, travel andpromotional expenses due to cost savings initiatives.

 

***Research and Development Expenses. ***Internally funded research and developmentexpenses decreased by $876,971 or 14% to $5,380,868 (29% of total revenue) forthe fiscal year ended December 31, 2003 from $6,257,839 (45% of total revenue)for the

 

26

----

 

fiscal year endedDecember 31, 2002.  This is primarily aresult of decreased payroll, payroll related costs and consulting expenses dueto cost savings initiatives.

 

***Impairment of Long-Lived Assets. ***During the fourth quarter ended December 31, 2003,a number of unexpected developments occurred which impacted our 200 mm andsmaller wafer size production line, including changes in the line’s projectedcash flow generation and our projected utilization of the assets within ourrevised plans. As a result of our subsequent impairment analysis underthe provisions of SFAS No. 144, Accounting for Impairment or Disposal ofLong-Lived Assets we recognized an impairment charge of $11,051,324 for our 200mm and smaller SIMOX wafer production line. The remaining carrying amount ofassets for this line is now approximately $865,000.

*** ***

***Other Income.* **Total other income for the fiscal year ended December 31,2003 was $27,510 as compared to $254,991 for the fiscal year ended December 31,2002, a decrease of $227,481 or 89%. The decrease in total other income is primarily attributable todecreased interest income earned as a result of lower cash balances and areduction in interest rates along with increased interest expense due to afinancing arrangement entered into during the second quarter of 2003.

 

Ibis had federal net operating loss and generalbusiness credit carryovers of approximately $60,473,000 and $1,323,000,respectively, at December 31, 2003, that may be used to offset future taxableincome, if any, through 2023.    Statenet operating loss and credit carryovers of $41,890,000 and $1,667,000,respectively, have varying expiration dates. Deferred tax assets and relatedvaluation allowance of $3,165,000 related to the net operating loss carryoverresults from the exercise of employee stock options, the tax benefit of which,when recognized, will be accounted for as a credit to additional paid-incapital rather than a reduction of income tax expense.  Net operating loss carryovers and other taxattributes may be limited in the event of certain changes in ownership interests.

 

***Fiscal Year Ended December 31, 2002 Compared to Fiscal YearEnded December 31, 2001***

 

***Product Sales***.  Wafer product sales increased to $7,646,307for the fiscal year ended December 31, 2002, an increase of $2,255,447 or 42%from $5,390,860 for the fiscal year ended December 31, 2001.  Early in 2002, Ibis introduced ourcurrent-generation oxygen implanter, the i2000, and for the first time we beganshipping 300 mm SIMOX wafers produced on that implanter. The increase inproduct sales is primarily attributable to sales of 300 mm SIMOX wafers by Ibisin the United States and the Pacific Rim. For the fiscal year ended December31, 2002, sales of 300 mm wafers accounted for approximately 44% of our totalwafer product sales. This increases was offset by decreased wafer sales by Ibisin Europe, as a result of continued adverse business conditions for one of ourlargest wafer customers that is in the optical components arena.

 

***Contract and Other Revenue***.  Contract and other revenue for the fiscalyear ended December 31, 2002 was $282,979 compared to $518,379 for the fiscalyear ended December 31, 2001, a decrease of $235,400 or 45%, which is due todecreased government contract work.

 

***Equipment Revenue.***  Equipment revenue increased to $6,102,748for the fiscal year ended December 31, 2002 from $1,525,317 for the fiscal yearended December 31, 2001, an increase of $4,577,431 or 300%.  Equipment revenue in 2002 includedapproximately $5,000,000 of revenue recognized from the sale of an Ibis 1000 toour customer in China. This implanter was shipped in December 2001, however,revenue was recognized upon customer site acceptance which occurred during thethird quarter of 2002. Equipment revenue for 2001 consisted solely of parts andservice revenue.  Field service revenueaccounted for $289,295 or 5% of equipment revenue for the fiscal year endedDecember 31, 2002 as compared to $914,188 or 60% of equipment revenue for thefiscal year ended December 31, 2001. Sales of spare parts accounted for $813,453 or 13% of equipment revenuefor the fiscal year ended December 31, 2002 as compared to $611,129 or 40% ofequipment revenue for the fiscal year ended December 31, 2001.

*** ***

***Total Sales and Revenue.***  Total sales and revenue for the fiscal yearended December 31, 2002 was $14,032,034, an increase of $6,597,478 or 89% from$7,434,556 for the fiscal year ended December 31, 2001. Approximately $5million of this increase is due to the revenue recognized from the sale of anIbis 1000 implanter to a customer in China and the remainder is due to sales of300 mm SIMOX wafers by Ibis.

 

27

----

 

***Total Cost of Sales and Revenue.***  Cost of wafer product sales for the fiscalyear ended December 31, 2002 was $14,456,781, as compared to $8,209,540 for thefiscal year ended December 31, 2001, an increase of $6,247,241 or 76%.  This increase is mainly attributable to theincrease in fixed costs associated with production, which include depreciation,amortization and occupancy costs. Equipment repair and maintenance, outsidetesting services and royalty expenses incurred on the MLD process alsoincreased.  In addition, the optimumproduction yield on our 300 mm wafer products had not yet been realized whichresulted in higher costs.  Cost ofcontract and other revenue for the fiscal year ended December 31, 2002 was$115,141, as compared to $376,371 for the fiscal year ended December 31, 2001,a decrease of $261,230 or 69%.  Cost ofequipment revenue for the fiscal year ended December 31, 2002 was $3,868,197,as compared to $1,502,356 for the fiscal year ended December 31, 2001, anincrease of $2,365,841 or 158%.  Thisincrease is due to costs recognized on the sale of an Ibis 1000 implanter to acustomer in China. There were no implanter sales during the fiscal year endedDecember 31, 2001. As a result of the foregoing, the total cost of sales andrevenue for the fiscal year ended December 31, 2002 was $18,440,119 as comparedto $10,088,267 for the fiscal year ended December 31, 2001, an increase of$8,351,852, or 83%.  The gross marginfor all sales was a negative 31% for the fiscal year ended December 31, 2002 ascompared to a negative 36% for the fiscal year ended December 31, 2001.  The negative gross margin in 2002 for allsales is attributable to increased wafer costs and less than optimal productionyields on new products, which were partially offset by a 37% gross margin onequipment revenue.

 

***General and Administrative Expenses***.  General and administrative expenses for thefiscal year ended December 31, 2002 were $2,174,198 (15% of total revenue) ascompared to $2,273,077 (31% of total revenue) for the fiscal year endedDecember 31, 2001, a decrease of $98,879 or 4%.  This is a result of a decrease in legal fees of approximately$350,000 offset by salaries and related expenses.

 

***Marketing and Selling Expenses. ***Marketing and selling expenses for thefiscal year ended December 31, 2002 were $1,509,792 (11% of total revenue) ascompared to $1,812,891 (24% of total revenue) for the fiscal year ended December31, 2001, a decrease of $303,099 or 17%. The decrease in marketing and selling expenses is a result of a decreasein salaries and related expenses and advertising.

 

***Research and Development Expenses. ***Internally funded research and developmentexpenses increased by $1,138,824 or 22% to $ 6,257,839 (45% of total revenue)for the fiscal year ended December 31, 2002 from $5,119,015 (69% of totalrevenue) for the fiscal year ended December 31, 2001.  This increase is primarily due to increased depreciation on fixedassets, specifically the Ibis 1000 R & D tool and i2000 test stands, aswell as increased consulting services.

 

***Other Income.* **Total other income for the fiscal year ended December 31,2002 was $254,991 as compared to $2,265,031 for the fiscal year ended December31, 2001, a decrease of $2,010,040 or 89%. The decrease in total other income is attributable to non-recurringincome recognized in 2001 amounting to approximately $1.4 million which is theresult of an expired wafer production capacity option and decreased interestincome earned as a result of lower average cash balances and a reduction ininterest rates.

*** ***

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

** **

As of December 31, 2003,Ibis had cash and cash equivalents of $14,174,716, including the receipt of proceedsof approximately $12.6 million from a public offering of 1,000,000 shares ofcommon stock at $13.25 per share in October 2003.  The shares were included in a shelf registration statement filedwith the Securities and Exchange Commission on September 2, 2003 and declaredeffective on October 3, 2003. Net proceeds from the offering will be usedprimarily to fund research and development, capital expenditures and workingcapital.

 

During the fiscal yearended December 31, 2003, Ibis used $8,138,561 of cash for operating activitiesas compared to $3,491,435 in 2002. Depreciation and amortization expense forthe fiscal years ended December 31, 2003 and 2002 was $6,771,680 and$6,264,549, respectively.  This accountedfor 37% and 45% of total revenue, respectively. Due to the capital-intensivenature of Ibis’ business and the recent expansion of our 300 mm SIMOX waferproduction line, Management expects that depreciation and

 

28

----

 

amortization willcontinue to be a significant portion of our expenses.  However, the reduction of $10,850,011 in the carrying amount ofour 200 mm and smaller wafer size equipment should result in a decrease in ourannual depreciation of approximately $2.6 million. To date, Ibis’ workingcapital requirements have been funded primarily through debt and equityfinancings. The principal uses of cash during the fiscal year ended December31, 2003 were to fund operations and additions to property and equipment whichtotaled $1,632,447. At December 31, 2003, Ibis had commitments to purchaseapproximately $279,692 in material to be used for wafer manufacturing or forthe i2000 implanter currently under construction, and approximately $4,745 incapital equipment purchases.

 

In September 2001, Ibisentered into a $4.5 million equipment lease line with Heller Financial’sCommercial Equipment Finance Group.  Thelease line was used to finance the purchase of process equipment for waferproduction, primarily 300 mm wafers. This line was fully drawn down in two sale-leaseback transactions,bearing interest at approximately 8% with a term of three years, and a monthlynet payment of approximately $131,000. Ibis has a fair market value purchase option at the end of the leaseterm.  The lease-line is secured by theunderlying assets and all other property and equipment of Ibis.

 

Our existing cashresources are believed to be sufficient to support our current operating planfor the next twelve months. Forecasting future revenue, on a quarter-by-quarterbasis, remains exceedingly difficult and significant variations quarter toquarter, are likely. We expect to continue to explore equity offerings andother forms of financing and anticipate that we may be required to raiseadditional capital in the future in order to finance future growth and ourresearch and development programs.

 

**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 Section303(a)(4)(ii).

 

At December 31, 2003, our outstanding contractualobligations included:

 
|                                 |   | **Payment  due by period** |      |
|--------------------------------------|--------|----------------------------|-----------|
| **Contractual Obligations**          |   | **Total**                  |      | **Less than  1 year** |   | **1  year** |   | **2  years** |   | **3-5  years** |   | **More  than  5 years** |   |
| Capital  Lease Obligations           |   | $                          | 1,185,746 |   | $ | 1,185,746 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Operating  Lease Obligations         |   | 1,767,236                  |      | 781,365 |   | 567,458 |   | 418,413 |   | — |   | — |   |
| Purchase  Obligations                |   | 4,745                      |      | 4,745 |   | — |   | — |   | — |   | — |   |
| Minimum  Royalty Payment Obligations |   | 20,000                     |      | 10,000 |   | 10,000 |   | — |   | — |   | — |   |
| Total                                |   | $                          | 2,977,727 |   | $ | 1,981,856 |   | $ | 577,458 |   | $ | 418,413 |   | $ | — |   | $ | — |   |

 

Additional informationregarding our financial commitments at December 31, 2003 is provided in theNotes to our Financial Statements. See “Notes to Financial Statements, Note 8,Commitments and Contingencies”.

** **

**Effects Of Inflation**

** **

Ibis believes that overthe past three years inflation has not had a significant impact on our sales oroperating results.

 

** **

**New Accounting Pronouncements**

** **

Statement of FinancialAccounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections,” is effectivefor fiscal years beginning May 15, 2002 or later and rescinds FASB StatementNo. 4, Reporting Gains and Losses from Extinguishment of Debt, FASB StatementNo. 64, Extinguishments of Debt Made 

 

29

----

 

to Satisfy Sinking-FundRequirements, and FASB Statement No. 44, Accounting for Intangible Assets ofMotor Carriers. This Statement Amends FASB Statement No. 4 and FASB StatementNo. 13, Accounting for Leases, to eliminate an inconsistency between therequired accounting for sale-leaseback transactions. This Statement also amendsother existing authoritative pronouncements to make various technicalcorrections, clarify meanings, or describe their applicability under changedconditions. Ibis adopted SFAS 145 during the first quarter of 2003 without amaterial impact on our financial condition or results of operations.

** **

Statement of Financial Accounting Standards No. 146,“Accounting for Costs Associated with Exit or Disposal Activities,” iseffective for exit or disposal activities that are initiated after December 31,2002.  This Statement addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and requires companies to recognize costs associated with exit ordisposal activities when they are incurred rather than at the date of commitmentto an exit or disposal plan. Ibis adopted SFAS 146 during the first quarter of2003 without a material impact on our financial condition or results ofoperations.

** **

In November 2002, the FASB issued Interpretation No.45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others”, whichclarifies disclosure and recognition/measurement requirements related tocertain guarantees.  The disclosurerequirements are effective for financial statements issued after December 15,2002 and the recognition/measurement requirements are effective on aprospective basis for guarantees issued or modified after December 31,2002.  The application of therequirements of FIN 45 did not have a material impact on Ibis’ financialposition or results of operations.

 

Statement of FinancialAccounting Standards No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB Statement No. 123,”is effective for fiscal years ending after December 15, 2002. This Statementamends FASB Statement No. 123, Accounting for Stock-Based Compensation”, toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, this Statement amends the disclosure requirements of Statement 123 torequire prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used on reported results. Ibis adopted SFAS 148 during thefirst quarter of 2003 without a material impact on our financial condition orresults of operations.

 

In January 2003, the FASBissued Interpretation (“FIN”) No. 46, “Consolidation of Variable InterestEntities” (“FIN 46”) and, in December 2003, issued a revision to thatinterpretation (“FIN 46R”).  FIN 46Rreplaces FIN 46 and addresses consolidation by business enterprises of variableinterest entities that possess certain characteristics.  A variable interest entity (“VIE”) isdefined as (a) an ownership, contractual or monetary interest in an entitywhere the ability to influence financial decisions is not proportional to theinvestment interest, or (b) an entity lacking the invested capital sufficientto fund future activities without the support of a third party.  FIN 46R establishes standards fordetermining under what circumstances VIEs should be consolidated with theirprimary beneficiary, including those to which the usual condition forconsolidation does not apply.  Ibis’adoption of FIN 46R did not have a material effect on our financial position orresults of operations.

 

In April 2003, the FASBissued Statement No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities” (“SFAS 149”), which amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts (collectively referred to asderivatives) and for hedging activities under FASB Statement No. 133,Accounting for Derivative Instruments and Hedging Activities.  SFAS 149 is effective prospectively forcontracts entered into or modified after June 30, 2003, except as stated belowand for hedging relationships designated after June 30, 2003.  The provisions of this Statement that relateto Statement 133 Implementation Issues that have been effective for fiscalquarters that began prior to June 15, 2003, should continue to be applied inaccordance with their respective effective dates.  In addition, paragraphs 7 (a) and 23 (a), which relate to forwardpurchases or sales of when-issued securities or other securities that do notyet exist, should be applied to both existing contracts and new contractsentered into after June 30, 2003.  Theadoption of this Statement did not have a material impact on Ibis’ financialcondition or results of operations.

 

30

----

 

In May 2003, the FASB issued Statement No. 150,“Accounting for Certain Financial Instruments with Characteristics of BothLiabilities and Equity” (“SFAS 150”), which establishes standards for how anissuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  SFAS 150 is effective for financial instruments entered into ormodified after May 31, 2003, and otherwise is effective at the beginning of thefirst interim period beginning after June 15, 2003, except for mandatoryredeemable  preferred financial instrumentsof nonpublic companies.  It is to beimplemented by reporting the cumulative effect of a change in accountingprinciple for financial instruments created before the issuance date of theStatement and still existing at the beginning of the interim period ofadoption.  Restatement is notpermitted.  The adoption of thisStatement did not have a material impact on Ibis’ financial condition orresults of operations.

** **

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

 

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

 

31

----

**Item 8.    FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**IBISTECHNOLOGY CORPORATION**

 

**Indexto Financial Statements and Financial Statement Schedule**

 
| Financial  Statements:                                                                                      |   |
|-------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                        |   |
| Independent Auditors’ Report                                                                           |   |
| Balance Sheets as of December 31, 2002 and  2003                                                            |   |
| Statements of Operations for the Years  Ended December 31, 2001, 2002 and 2003                              |   |
| Statements of Stockholders’ Equity for the  Years Ended December 31, 2001, 2002 and 2003               |   |
| Statements of Cash Flows for the Years Ended December 31, 2001, 2002  and 2003                              |   |
| Notes to Financial Statements                                                                               |   |
|                                                                                                        |   |
| Schedule:                                                                                                   |   |
| Schedule  II — Valuation and Qualifying Accounts for the Years Ended December 31, 2001,  2002 and 2003 |   |

 

32

----

 

**INDEPENDENT AUDITORS’REPORT**

 

The Board of Directors and Stockholders

Ibis Technology Corporation:

 

We haveaudited the accompanying balance sheets of Ibis Technology Corporation as ofDecember 31, 2002 and 2003, and the related statements of operations,stockholders’ equity and cash flows for each of the years in the three-yearperiod ended December 31, 2003. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Ibis Technology Corporation atDecember 31, 2002 and 2003, and the results of its operations and its cashflows for each of the years in the three-year period ended December 31, 2003,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

 
|                  | /s/   KPMG LLP |   |
|-----------------------|-------------------------------|--------|
|                  |                          |
| Boston, Massachusetts |                          |
| January 30, 2004      |                          |

 

33

----

 

**IBISTECHNOLOGY CORPORATION**

 

**BALANCE SHEET****S**

 

**December31, 2002 and 2003**

 
|                                                                                                                    |   | **2002**    |       | **2003**    |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|
| **Assets**                                                                                                              |   |        |       |        |   |
| **Current assets:**                                                                                                     |   |        |       |        |   |
| Cash and cash equivalents                                                                                               |   | $           | 11,745,918 |        | $      | 14,174,716 |   |
| Accounts receivable, trade, net (notes 3  and 15)                                                                       |   | 1,598,560   |       | 123,548     |   |
| Unbilled revenue                                                                                                        |   | —      |       | 528,581     |   |
| Inventories (note 4)                                                                                                    |   | 1,231,559   |       | 1,758,449   |   |
| Deferred costs (note 10)                                                                                                |   | 2,621,580   |       | —      |   |
| Prepaid expenses and other current assets                                                                               |   | 112,729     |       | 247,602     |   |
| Total current assets                                                                                                    |   | 17,310,346  |       | 16,832,896  |   |
| Property and equipment (notes 5, 6 and 8)                                                                               |   | 51,728,659  |       | 40,584,764  |   |
| Less: Accumulated depreciation and  amortization                                                                        |   | (19,233,900 | )          | (23,743,179 | )      |
| Net property and equipment                                                                                              |   | 32,494,759  |       | 16,841,585  |   |
| Patents and other assets, net (note 7)                                                                                  |   | 1,893,854   |       | 1,668,558   |   |
| Total assets                                                                                                            |   | $           | 51,698,959 |        | $      | 35,343,039 |   |
|                                                                                                                    |   |        |       |        |   |
| **Liabilities and Stockholders’ Equity**                                                                           |   |        |       |        |   |
| **Current liabilities:**                                                                                                |   |        |       |        |   |
| Capital lease obligation, current (note 8)                                                                              |   | $           | 1,501,415  |        | $      | 1,184,399 |   |
| Accounts payable                                                                                                        |   | 897,212     |       | 404,512     |   |
| Accrued liabilities (note 9)                                                                                            |   | 2,394,601   |       | 2,384,915   |   |
| Deferred revenue (note 10)                                                                                              |   | 6,966,325   |       | 252,000     |   |
| Total current liabilities                                                                                               |   | 11,759,553  |       | 4,225,826   |   |
| Capital lease obligation, non-current (note  8)                                                                         |   | 1,184,400   |       | —      |   |
| Total liabilities                                                                                                       |   | 12,943,953  |       | 4,225,826   |   |
|                                                                                                                    |   |        |       |        |   |
| **Commitments and contingencies (notes 5, 8,  10 and 15)**                                                              |   |        |       |        |   |
|                                                                                                                    |   |        |       |        |   |
| **Stockholders’ equity (notes 13 and 14):**                                                                        |   |        |       |        |   |
| Undesignated preferred stock, $.01 par  value. Authorized 2,000,000 shares; none issued Common stock, $.008 par  value. |   | —      |       | —      |   |
| Authorized 50,000,000 shares; issued and  outstanding 9,474,940 shares and 10,651,170 in 2002 and 2003, respectively    |   | 75,799      |       | 85,209      |   |
| Additional paid-in capital                                                                                              |   | 79,101,032  |       | 92,903,618  |   |
| Accumulated deficit                                                                                                     |   | (40,421,825 | )          | (61,871,614 | )      |
| Total stockholders’ equity                                                                                         |   | 38,755,006  |       | 31,117,213  |   |
| Total liabilities and stockholders’ equity                                                                         |   | $           | 51,698,959 |        | $      | 35,343,039 |   |

 

See accompanyingnotes to financial statements.

# ** **

34

----

 

# **IBISTECHNOLOGY CORPORATION**

 

**STATEMENTS OFOPERATION****S**

 

# **Yearsended December 31, 2001, 2002 and 2003**

 
|                                                         |   | **2001**    |       | **2002**    |   | **2003**    |   |
|--------------------------------------------------------------|--------|-------------|------------|-------------|--------|-------------|--------|
|                                                         |   |        |       |        |   |        |   |
| Wafer product sales                                          |   | $           | 5,390,860  |        | $      | 7,646,307   |   | $ | 8,995,475 |   |
| Contract and other revenue (note 11)                         |   | 518,379     |       | 282,979     |   | 660,429     |   |
| Equipment revenue                                            |   | 1,525,317   |       | 6,102,748   |   | 8,781,907   |   |
| Total sales and revenue (note 15)                            |   | 7,434,556   |       | 14,032,034  |   | 18,437,811  |   |
|                                                         |   |        |       |        |   |        |   |
| Cost of product sales                                        |   | 8,209,540   |       | 14,456,781  |   | 15,541,778  |   |
| Cost of contract and other revenue                           |   | 376,371     |       | 115,141     |   | 44,579      |   |
| Cost of equipment revenue                                    |   | 1,502,356   |       | 3,868,197   |   | 4,331,044   |   |
| Total cost of sales and revenue                              |   | 10,088,267  |       | 18,440,119  |   | 19,917,401  |   |
|                                                         |   |        |       |        |   |        |   |
| Gross profit (loss)                                          |   | (2,653,711  | )          | (4,408,085  | )      | (1,479,590  | )      |
|                                                         |   |        |       |        |   |        |   |
| Operating expenses:                                          |   |        |       |        |   |        |   |
| General and administrative                                   |   | 2,273,077   |       | 2,174,198   |   | 2,337,463   |   |
| Marketing and selling                                        |   | 1,812,891   |       | 1,509,792   |   | 1,235,798   |   |
| Research and development                                     |   | 5,119,015   |       | 6,257,839   |   | 5,380,868   |   |
| Impairment of long-lived assets (note 6)                     |   | —      |       | —      |   | 11,051,324  |   |
| Total operating expenses                                     |   | 9,204,983   |       | 9,941,829   |   | 20,005,453  |   |
|                                                         |   |        |       |        |   |        |   |
| Loss from operations                                         |   | (11,858,694 | )          | (14,349,914 | )      | (21,485,043 | )      |
|                                                         |   |        |       |        |   |        |   |
| Other income (expense):                                      |   |        |       |        |   |        |   |
| Interest income                                              |   | 826,302     |       | 266,370     |   | 80,511      |   |
| Interest expense                                             |   | (4,997      | )          | (11,379     | )      | (58,399     | )      |
| Other (note 16)                                              |   | 1,443,726   |       | —      |   | 5,398       |   |
| Total other income                                           |   | 2,265,031   |       | 254,991     |   | 27,510      |   |
|                                                         |   |        |       |        |   |        |   |
| Loss before income taxes                                     |   | (9,593,663  | )          | (14,094,923 | )      | (21,457,533 | )      |
|                                                         |   |        |       |        |   |        |   |
| Income tax expense (benefit) (note 12)                       |   | 1,256       |       | 1,256       |   | (7,744      | )      |
|                                                         |   |        |       |        |   |        |   |
| Net loss                                                     |   | $           | (9,594,919 | )           | $      | (14,096,179 | )      | $ | (21,449,789 | ) |
|                                                         |   |        |       |        |   |        |   |
| Net loss per common share:                                   |   |        |       |        |   |        |   |
| Basic                                                        |   | $           | (1.15      | )           | $      | (1.53       | )      | $ | (2.21 | ) |
| Diluted                                                      |   | $           | (1.15      | )           | $      | (1.53       | )      | $ | (2.21 | ) |
|                                                         |   |        |       |        |   |        |   |
| Weighted average number of common  shares  outstanding: |   |        |       |        |   |        |   |
| Basic                                                        |   | 8,378,262   |       | 9,207,922   |   | 9,727,513   |   |
| Diluted                                                      |   | 8,378,262   |       | 9,207,922   |   | 9,727,513   |   |

 

See accompanyingnotes to financial statements.

 

35

----

 

**IBISTECHNOLOGY CORPORATION**

 

**STATEMENTS OF STOCKHOLDERS’EQUITY**

 

**Yearsended December 31, 2001, 2002 and 2003**

 
|                                                   |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Deficit** |   | **Total  Stockholders’  Equity** |        |
|--------------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|--------------------------|--------|---------------------------------------|-------------|
|                                                   |   |              |   |                             |   |                     |   |                                  |        |
| **Balances at December 31, 2000**                      |   | $                 | 66,742 |                             | $      | 66,183,143               |   | $                                     | (16,730,727 | ) | $ | 49,519,158 |   |
|                                                   |   |              |   |                             |   |                     |   |                                  |        |
| Exercise of stock options                              |   | 250               |   | 73,259                           |   | —                   |   | 73,509                                |        |
| Employee Stock Purchase Plan                           |   | 305               |   | 361,821                          |   | —                   |   | 362,126                               |        |
| Net loss                                               |   | —            |   | —                           |   | (9,594,919               | )      | (9,594,919                            | )           |
|                                                   |   |              |   |                             |   |                     |   |                                  |        |
| **Balances at December 31, 2001**                      |   | 67,297            |   | 66,618,223                       |   | (26,325,646              | )      | 40,359,874                            |        |
|                                                   |   |              |   |                             |   |                     |   |                                  |        |
| Exercise of stock options                              |   | 1                 |   | 1                                |   | —                   |   | 2                                     |        |
| Common stock issued, net of issuance costs             |   | 8,000             |   | 12,105,469                       |   | —                   |   | 12,113,469                            |        |
| Employee Stock Purchase Plan                           |   | 501               |   | 377,339                          |   | —                   |   | 377,840                               |        |
| Net loss                                               |   | —            |   | —                           |   | (14,096,179              | )      | (14,096,179                           | )           |
|                                                   |   |              |   |                             |   |                     |   |                                  |        |
| **Balances at December 31, 2002**                      |   | 75,799            |   | 79,101,032                       |   | (40,421,825              | )      | 38,755,006                            |        |
|                                                   |   |              |   |                             |   |                     |   |                                  |        |
| Exercise of stock options                              |   | 989               |   | 986,814                          |   | —                   |   | 987,803                               |        |
| Common stock issued, net ofissuance costs  of $696,571 |   | 8,000             |   | 12,545,429                       |   | —                   |   | 12,553,429                            |        |
| Employee Stock Purchase Plan                           |   | 421               |   | 270,343                          |   | —                   |   | 270,764                               |        |
| Net loss                                               |   | —            |   | —                           |   | (21,449,789              | )      | (21,449,789                           | )           |
|                                                   |   |              |   |                             |   |                     |   |                                  |        |
| **Balances at December 31, 2003**                      |   | $                 | 85,209 |                             | $      | 92,903,618               |   | $                                     | (61,871,614 | ) | $ | 31,117,213 |   |

 

See accompanying notes to financialstatements.

 

36

----

 

**IBISTECHNOLOGY CORPORATION**

 

**STATEMENTS OF CASH FLOWS**

 

**Yearsended December 31, 2001, 2002 and 2003**

 
|                                                                                   |   | **2001**    |       | **2002**   |   | **2003**    |   |
|----------------------------------------------------------------------------------------|--------|-------------|------------|------------|--------|-------------|--------|
| **Cash flows from operating activities:**                                              |   |        |       |       |   |        |   |
| Net loss                                                                               |   | $           | (9,594,919 | )          | $      | (14,096,179 | )      | $ | (21,449,789 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:           |   |        |       |       |   |        |   |
| Depreciation and amortization                                                          |   | 3,632,664   |       | 6,264,549  |   | 6,771,680   |   |
| Gain on sale of equipment                                                              |   | 26,274      |       | —     |   | —      |   |
| Impairment of long-lived assets                                                        |   | —      |       | —     |   | 10,850,011  |   |
| Changes in operating assets and  liabilities:                                          |   |        |       |       |   |        |   |
| Accounts receivable, trade                                                             |   | (4,555,698  | )          | 4,167,054  |   | 1,475,012   |   |
| Unbilled revenue                                                                       |   | 510,500     |       | —     |   | (528,581    | )      |
| Inventories                                                                            |   | (2,755,511  | )          | 303,953    |   | (526,890    | )      |
| Deferred costs                                                                         |   | (2,474,264  | )          | (147,316   | )      | 2,621,580   |   |
| Prepaid expenses and other current assets                                              |   | 115,573     |       | 97,801     |   | (134,873    | )      |
| Accounts payable                                                                       |   | 77,220      |       | (226,968   | )      | (492,700    | )      |
| Accrued liabilities and deferred revenue                                               |   | 3,512,921   |       | 145,671    |   | (6,724,011  | )      |
| Net cash used in operating activities                                                  |   | (11,505,240 | )          | (3,491,435 | )      | (8,138,561  | )      |
| **Cash flows from investing activities:**                                              |   |        |       |       |   |        |   |
| Additions to property and equipment, net                                               |   | (6,373,781  | )          | (8,688,796 | )      | (1,632,447  | )      |
| Other assets                                                                           |   | (26,037     | )          | (117,781   | )      | (110,774    | )      |
| Net cash used in investing activities                                                  |   | (6,399,818  | )          | (8,806,577 | )      | (1,743,221  | )      |
| **Cash flows from financing activities:**                                              |   |        |       |       |   |        |   |
| Payments of capital lease obligations                                                  |   | (341,171    | )          | (1,535,178 | )      | (1,501,416  | )      |
| Proceeds from sale-leaseback transaction                                               |   | 4,532,094   |       | —     |   | —      |   |
| Proceeds from sales of common stock, net of  issuance costs                            |   | —      |       | 12,113,469 |   | 12,553,429  |   |
| Exercise of stock options, warrants and  Employee Stock Purchase Plan                  |   | 435,635     |       | 377,840    |   | 1,258,567   |   |
| Net cash provided by financing activities                                              |   | 4,626,558   |       | 10,956,131 |   | 12,310,580  |   |
| Net decrease (increase) in cash and cash  equivalents                                  |   | (13,278,500 | )          | (1,341,881 | )      | 2,428,798   |   |
| Cash and cash equivalents, beginning of  year                                          |   | 26,366,299  |       | 13,087,799 |   | 11,745,918  |   |
| Cash and cash equivalents, end of year                                                 |   | $           | 13,087,799 |       | $      | 11,745,918  |   | $ | 14,174,716 |   |
|                                                                                   |   |        |       |       |   |        |   |
| Supplemental disclosures of cash flow  information:                                    |   |        |       |       |   |        |   |
| Cash paid during the year for interest                                                 |   | $           | 4,997      |       | $      | 11,379      |   | $ | 58,399 |   |
| Supplemental disclosures of non-cash  investing and financing activities:              |   |        |       |       |   |        |   |
| Capital lease obligations incurred                                                     |   | $           | 973,164    |       | $      | —      |   | $ | — |   |
| Transfer of internally constructed  equipment from inventory to property and equipment |   | $           | 12,152,858 |       | $      | —      |   | $ | — |   |

 

Seeaccompanying notes to financial statements.

 

37

----

 

**IBISTECHNOLOGY CORPORATION**

 

**NOTES TO FINANCIALSTATEMENTS**

# ** **

# **December31, 2002 and 2003**

# ** **

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

 

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

 

**(2) Summary ofSignificant Accounting Policies**

 

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

 

Cashequivalents represent highly liquid investments with original maturities ofthree months or less.

 

**(b) *Inventories***

 

Inventoriesare stated at the lower of cost or market. Cost is determined using thefirst-in, first-out (“FIFO”) cost method.

 

**(c) *Property and Equipment and Impairment of Long-LivedAssets***

 

Property andequipment is stated at cost. Depreciation is provided using the straight-linemethod over the estimated useful lives of the respective assets, ranging fromthree to eight years. Amortization is provided using the straight-line methodover the life of the lease, ranging from three and one-half to five years.

 

The Companyreviews its long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  Recoverability of assetsto be held and used is measured by a comparison of the carrying amount of anasset to future net undiscounted cash flows expected to be generated by theasset.  If such assets are considered tobe impaired, the impairment to be recognized is measured by the degree to whichthe carrying amount of the assets exceeds the fair value of the assets.

 

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

 

Other assetsconsist principally of deposits, prepaid royalties and licenses. Patents andprepaid royalties are amortized over five years using the straight-linemethod.  Licenses are amortized overseven years using the straight-line method.

 

**(e) *Revenue Recognition***

 

The Companyrecognizes revenue from wafer product sales, equipment sales and the sales ofspare parts when all of the following criteria have been met:  (1) evidence exists that the customer isbound to the transaction; (2) the product has been delivered to the customerand, when applicable, the product has been installed and accepted by thecustomer; (3) the sales price to the customer has been fixed or isdeterminable; and (4) collectibility of the sale price is reasonablyassured.  The Company typicallyrecognizes revenue from wafer sales upon shipment and recognizes revenue fromimplanter sales upon acceptance at the customer’s site. Provisions forestimated sales returns and allowances are made at the time the products aresold.  Revenue derived from contractsand services is recognized upon performance.

 

38

----

 

Contractrevenue is recognized on the percentage-of-completion method. Provisions foranticipated losses are made in the period in which such losses becomedeterminable.  Unbilled revenue undercustomer contracts represents revenue earned under the percentage-of-completionmethod but not yet billable under the terms of the contract.  These amounts are billable based on theterms of the contract, which can include shipment of the product, achievementof milestones or completion of the contract.

 

Governmentcontracts are performed under negotiated overhead rates and are subject toaudit and retroactive adjustments of amounts paid to the Company.

 

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

 

Research anddevelopment costs are charged to expense as incurred. Research and developmentcosts funded by contracts are included as a component of cost of contractrevenue.

 

**(g) *Net Income (Loss) Per Common Share***

 

Net income(loss) per share of common stock is computed based upon the weighted averagenumber of shares outstanding during each period and including the dilutiveeffect, if any, of stock options and warrants. SFAS 128 requires thepresentation of basic and diluted earnings (loss) per share for all periodspresented.  As the Company was in a netloss position for each of the years in the three-years ended December 31, 2003,common stock equivalents of 224,856, 39,644 and 94,706 for the years endedDecember 31, 2001, 2002 and 2003, respectively, were excluded from the dilutedloss per share calculation as they would be antidilutive. As a result, dilutedloss per share is the same as basic loss per share for 2001, 2002 and 2003.

 

Thereconciliation of the denominators of the basic and diluted net income (loss)per common share for the Company’s net income (loss) is as follows:

 
|                                                                              |   | **Years  Ended December 31,** |       |
|-----------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                              |   | **2001**                      |       | **2002** |   | **2003** |   |
| Basic net loss                                                                    |   | $                             | (9,594,919 | ) | $ | (14,096,179 | ) | $ | (21,449,789 | ) |
| Weighted average common shares  outstanding-basic                                 |   | 8,378,262                     |       | 9,207,922 |   | 9,727,513 |   |
| Net additional common shares upon assumed  exercise of stock options and warrants |   | —                        |       | — |   | — |   |
| Weighted average common shares outstanding  diluted                               |   | 8,378,262                     |       | 9,207,922 |   | 9,727,513 |   |
| Net loss per common share                                                         |   |                          |       |   |   |   |   |
| Basic                                                                             |   | $                             | (1.15      | ) | $ | (1.53 | ) | $ | (2.21 | ) |
| Diluted                                                                           |   | $                             | (1.15      | ) | $ | (1.53 | ) | $ | (2.21 | ) |

 

**(h) *Issuance Costs***

 

Common stockissuance costs are netted against additional paid-in capital.

 

39

----

 

**(i) *Use of Estimates***

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period. Actual results may differ from theseestimates.  Management exercisesjudgment and relies on estimates in recognizing revenue, valuing inventory,accruing certain liabilities, and assessing long-lived asset impairment,estimated useful lives of long-lived assets, inventory obsolescence andaccounts receivable reserves.

 

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

 

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

 

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

 

The Companyaccounts for its stock option plans under the recognition and measurementprinciples of APB Opinion No. 25, Accounting for Stock Issued to Employees, andrelated Interpretations.  No stock-basedcompensation cost is reflected in net income for these plans, as all optionsgranted under these plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant.  The following table illustrates the effect on net income (loss)and earnings (loss) per share if the Company had applied the fair valuerecognition provisions of FASB Statement No. 123, Accounting for Stock BasedCompensation, to stock based compensation.

 
|                                                                                                             |   | **Year Ended  December 31,** |        |
|------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-------------|
|                                                                                                             |   | **2001**                     |        | **2002** |   | **2003** |   |
| Net loss, as reported                                                                                            |   | $                            | (9,594,919  | ) | $ | (14,096,179 | ) | $ | (21,449,789 | ) |
| Add:   Stock-based employee compensation expense included in reported net  loss, net of related tax effects |   | (3,336,839                   | )           | (2,362,591 | ) | (2,726,741 | ) |
| Pro-forma net loss                                                                                               |   | $                            | (12,931,758 | ) | $ | (16,458,770 | ) | $ | (24,176,530 | ) |
| Net loss per share:                                                                                              |   |                         |        |   |   |   |   |
| Basic – as reported                                                                                         |   | $                            | (1.15       | ) | $ | (1.53 | ) | $ | (2.21 | ) |
| Basic – pro-forma                                                                                           |   | $                            | (1.54       | ) | $ | (1.79 | ) | $ | (2.49 | ) |
| Diluted – as reported                                                                                       |   | $                            | (1.15       | ) | $ | (1.53 | ) | $ | (2.21 | ) |
| Diluted – pro-forma                                                                                         |   | $                            | (1.54       | ) | $ | (1.79 | ) | $ | (2.49 | ) |

 

The fair valueof each stock option is estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted-average assumptions:

 
|                                                            |   | **December  31,**  |   |
|-----------------------------------------------------------------|--------|--------------------|--------|
|                                                            |   | **2001**           |   | **2002** |   | **2003** |   |
|                                                            |   | **Stock  Options** |   | **ESPP** |   | **Stock  Options** |   | **ESPP1** |   | **ESPP2** |   | **Stock  Options** |   | **ESPP1** |   | **ESPP2** |   |
| Risk-free interest rate                                         |   | 3.62%              |   | 4.74% |   | 2.21% |   | 1.74% |   | 1.60% |   | 3.10% |   | 1.19% |   | 1.01% |   |
| Expected dividend yield                                         |   | —             |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Expected volatility                                             |   | 108.17%            |   | 132.5% |   | 114.06% |   | 87.6% |   | 103.3% |   | 97.99% |   | 103.34% |   | 81.01% |   |
| Expected life (years)                                           |   | 3                  |   | .5 |   | 3 |   | .5 |   | .5 |   | 3 |   | .5 |   | .5 |   |
| Weighted average fair value of options  granted during the year |   | $7.13              |   | $5.36 |   | $5.32 |   | $2.80 |   | $2.06 |   | $4.42 |   | $2.05 |   | $1.83 |   |

 

40

----

 

Pro forma netloss reflects only options granted in 1995 through 2003.  Therefore, the full impact of calculatingcompensation costs for stock options under SFAS No. 123 is not reflectedbecause compensation costs for options granted prior to January 1, 1995 are notconsidered.

 

**(l) *New Accounting Pronouncements***

 

Statement ofFinancial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”),issued in June 2001, addresses financial accounting and reporting for businesscombinations which were initiated after June 30, 2001. This Statement alsoapplies to all business combinations accounted for using the purchase methodfor which the date of acquisition is July 1, 2001, or later.

 

Statement ofFinancial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”(“SFAS 142”), issued in June 2001, addresses financial accounting and reportingfor acquired goodwill and intangible assets. The provisions of SFAS 142 are required to be applied starting withfiscal years beginning after December 15, 2001. Early application is permittedfor entities with fiscal years beginning after March 15, 2001, provided thatthe first interim financial statements have not previously been issued.Impairment losses for goodwill and indefinite-lived intangible assets thatarise due to the initial application of this Statement (resulting from atransitional impairment test) are to be reported as resulting from a change inaccounting principle.

 

Statement ofFinancial Accounting Standards No. 143, “Accounting For Asset RetirementObligations” (“SFAS 143”), issued in August 2001, addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and for the associated retirement costs.  SFAS 143 which applies to all entities thathave a legal obligation associated with the retirement of a tangible long-livedasset is effective for fiscal years beginning after June 15, 2001.

 

Statement ofFinancial Accounting Standards No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (“SFAS 144”), issued in October 2001, addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets.  SFAS 144, which applies to allentities, is effective for fiscal years beginning after December 15, 2001.

 

The Companyadopted SFAS’ 141, 142, 143 and 144 during the first quarter of 2002 without amaterial impact on its financial condition or results of operations.

 

Statement ofFinancial Accounting Standards No. 145, “Rescission of FASB Statements No. 4,44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,”effective for fiscal years beginning May 15, 2002 or later that rescinds FASBStatement No. 4, Reporting Gains and Losses from Extinguishment of Debt, FASBStatement No. 64, Extinguishments of Debt Made to Satisfy Sinking-FundRequirements, and FASB Statement No. 44 Accounting for Intangible Assets ofMotor Carriers.  This Statement AmendsFASB Statement No. 4 and FASB Statement No. 13, Accounting for Leases, toeliminate an inconsistency between the required accounting for sale-leasebacktransactions.  This Statement alsoamends other existing authoritative pronouncements to make various technicalcorrections, clarify meanings, or describe their applicability under changedconditions.  Implementation of SFAS No.145 did not have a material impact on the Company’s financial condition orresults of operations.

 

41

----

 

Statement ofFinancial Accounting Standards No. 146, “Accounting for Costs Associated withExit or Disposal Activities,” effective for exit or disposal activities thatare initiated after December 31, 2002. This Statement addresses financial accounting and reporting for costsassociated with exit or disposal activities and requires companies to recognizecosts associated with exit or disposal activities when they are incurred ratherthan at the date of commitment to an exit or disposal plan. Implementation ofSFAS No. 146 did not have a material impact on the Company’s financialcondition or results of operations.

 

In November2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others”, which clarifies disclosure and recognition/measurementrequirements related to certain guarantees. The disclosure requirements are effective for financial statementsissued after December 15, 2002 and the recognition/measurement requirements areeffective on a prospective basis for guarantees issued or modified afterDecember 31, 2002.  The application ofthe requirements of FIN 45 did not have a material impact on the Company’sfinancial position or results of operations.

 

Statement ofFinancial Accounting Standards No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of FASB Statement No. 123,”is effective for fiscal years ending after December 15, 2002. This Statementamends FASB Statement No. 123, “Accounting for Stock-Based Compensation”, toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation. Inaddition, this Statement amends the disclosure requirements of Statement 123 torequire prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used on reported results. Implementation of SFAS No. 148did not have a material impact on the Company’s financial condition or resultsof operations.

 

In January2003, the FASB issued Interpretation (“FIN”) No. 46, “Consolidation of VariableInterest Entities” (“FIN 46”) and, in December 2003, issued a revision to thatinterpretation (“FIN 46R”).  FIN 46Rreplaces FIN 46 and addresses consolidation by business enterprises of variableinterest entities that possess certain characteristics.  A variable interest entity (“VIE”) isdefined as (a) an ownership, contractual or monetary interest in an entitywhere the ability to influence financial decisions is not proportional to theinvestment interest, or (b) an entity lacking the invested capital sufficientto fund future activities without the support of a third party.  FIN 46R establishes standards fordetermining under what circumstances VIEs should be consolidated with theirprimary beneficiary, including those to which the usual condition forconsolidation does not apply.  TheCompany’s adoption of FIN 46R did not have a material effect on its financialposition or results of operations.

 

In April 2003,the FASB issued Statement No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities” (“SFAS 149”), which amends and clarifiesfinancial accounting and reporting for derivative instruments, includingcertain derivative instruments embedded in other contracts (collectivelyreferred to as derivatives) and for hedging activities under FASB Statement No.133, Accounting for Derivative Instruments and Hedging Activities.  SFAS 149 is effective prospectively forcontracts entered into or modified after June 30, 2003, except as stated belowand for hedging relationships designated after June 30, 2003.  The provisions of this Statement that relateto Statement 133 Implementation Issues that have been effective for fiscalquarters that began prior to June 15, 2003, should continue to be applied inaccordance with their respective effective dates.  In addition, paragraphs 7 (a) and 23 (a), which relate to forwardpurchases or sales of when-issued securities or other securities that do notyet exist, should be applied to both existing contracts and new contractsentered into after June 30, 2003.  Theadoption of this Statement did not have a material impact on the Company’sfinancial condition or results of operations.

 

42

----

 

In May 2003,the FASB issued Statement No. 150, “Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”),which establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  SFAS 150 is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning after June 15,2003, except for mandatory redeemable preferred financial instruments ofnonpublic companies.  It is to beimplemented by reporting the cumulative effect of a change in accountingprinciple for financial instruments created before the issuance date of theStatement and still existing at the beginning of the interim period ofadoption.  Restatement is notpermitted.  The adoption of thisStatement did not have a material impact on the Company’s financial conditionor results of operations.

 

**(3) AccountsReceivable**

 

Accountsreceivable consisted of the following at December 31:

 
|                                  |   | **2002** |      | **2003** |   |
|---------------------------------------|--------|----------|-----------|----------|--------|
|                                  |   |     |      |     |   |
| Accounts receivable, trade            |   | $        | 1,663,560 |     | $      | 188,548 |   |
| Less: Allowance for doubtful accounts |   | (65,000  | )         | (65,000  | )      |
|                                  |   | $        | 1,598,560 |     | $      | 123,548 |   |

 

**(4) Inventories**

 

Inventoriesconsisted of the following at December 31:

 
|              |   | **2002** |      | **2003** |   |
|-------------------|--------|----------|-----------|----------|--------|
|              |   |     |      |     |   |
| Raw materials     |   | $        | 810,740   |     | $      | 1,464,434 |   |
| Work in process   |   | 94,090   |      | 177,715  |   |
| Finished goods    |   | 326,729  |      | 116,300  |   |
| Total inventories |   | $        | 1,231,559 |     | $      | 1,758,449 |   |

 

**(5) Property andEquipment**

 

Property andequipment consisted of the following at December 31:

 
|                     |   | **2002**   |       | **2003**  |   |
|--------------------------|--------|------------|------------|-----------|--------|
|                     |   |       |       |      |   |
| Machinery and equipment  |   | $          | 34,966,085 |      | $      | 30,082,295 |   |
| Furniture and fixtures   |   | 395,017    |       | 416,260   |   |
| Leasehold improvements   |   | 4,640,194  |       | 5,399,063 |   |
| Construction in progress |   | 11,727,363 |       | 4,687,146 |   |
|                     |   | $          | 51,728,659 |      | $      | 40,584,764 |   |

 

Fixed assetssubject to capital leases at December 31, 2002 and 2003 were $4,564,835.  Accumulated depreciation for fixed assetssubject to capital leases was $1,879,020 and $3,380,435 in 2002 and 2003,respectively.

 

Constructionin progress includes implanters under construction that the Company intends touse in its wafer production facility or sell to customers and other expansionprojects. 

 

43

----

 

At December31, 2003, the Company had commitments to purchase approximately $279,692 inmaterial or subassemblies to be used in normal operations and approximately$4,745 in capital equipment purchase commitments.

 

**(6) Impairment ofLong-lived Assets**

 

At December31, 2003, the Company owned eight Ibis 1000 implanters, available to produce upto 200 mm SIMOX wafers and two i2000’s available to produce 300 mm SIMOXwafers.  During the fourth quarter endedDecember 31, 2003, a number of unexpected events occurred which impacted theCompany’s 200 mm and smaller wafer size production line including the line’sprojected cash flow generation and the Company’s projected utilization of theassets within its revised plans. These events included:

 

•                  The Company’sbusiness prospects for 200 mm SIMOX wafers did not materialize in the fourthquarter as expected, and in part as a result of this it does not now anticipatesignificant 200 mm wafer business in the future;

•                  Ibis’ existingand potential wafer customers are rapidly transitioning to the 300 mm wafersize and 92% of its wafer sales during fiscal year 2003 were for 300 mm SIMOXwafers;

•                  A potentialbuyer completed their evaluation of a portion of Ibis’ wafer production lineand determined that weak demand for 200 mm and smaller SIMOX wafers did notwarrant an investment or purchase of this proportion at the present time; and

•                  The Company doesnot believe there are any material prospects for Ibis 1000 equipment salesoverseas currently.

 

Based on theseevents and their impact on current and future projected cash flows, theCompany’s subsequent impairment analysis under the provisions of SFAS No. 144,Accounting for Impairment or Disposal of Long-Lived Assets resulted in animpairment charge of $11,051,324 for its 200 mm and smaller SIMOX wafer productionline, which is principally comprised of Ibis 1000 implanters and associatedmachinery and equipment not expected to be utilized or sold. The remainingcarrying amount of assets for this line is now approximately $865,000.

 

**(7) Other Assets**

 

In December2000, the Company entered into a royalty-bearing license agreement which givesthe Company the right to manufacture SIMOX-SOI wafers using the licensedprocess.  Warrants were issued inconnection with this agreement.  Thecost of the license agreement, including cash paid and the fair value of thewarrants issued, is $2,280,000 and is included in other assets at December 31,2002 and December 31, 2003, net of accumulated amortization of $651,428 and$977,143, respectively (see note 14 (c)).

 

44

----

 

**(8) Commitments andContingencies**

 

**(a) *Leases***

 

In December2003, the Company renewed its non-cancelable operating lease for its office andmanufacturing facility with a new term expiring in 2006 and a five-year renewaloption.  In April 2000, the Companyentered into a non-cancelable operating lease for an additional manufacturingfacility expiring in 2005 with a five-year renewal option.  This lease was amended in September 2001 bywhich Ibis secured an additional 20,000 square feet of adjacent space forfuture expansion. The Company also leases certain equipment undernon-cancelable operating leases expiring through 2006, as well as equipmentused in operations under non-cancelable capital leases expiring through 2004.

 

In September2001 Ibis entered into a $4.5 million equipment lease line.  The lease line was used to finance thepurchase of process equipment for wafer production of primarily 300mm wafers ina sale-leaseback transaction bearing interest at approximately 8% with a termof three years and a monthly net payment of approximately $131,000.  Ibis has a fair market value purchase optionat the end of the lease term. The lease-line is secured by the underlying assetsand all other property and equipment of Ibis. The gain of approximately $36,000under the sale and leaseback has been deferred and will be amortized as areduction of depreciation expense over the life of the lease. The unamortizedamount of this gain at December 31, 2002 and 2003 was $21,425 and $9,110respectively.

 

The Companyhas no significant contractual obligations not fully recorded on its BalanceSheets or fully disclosed in the Notes to its Financial Statements.  The Company has no off-balance sheetarrangements as defined in Regulation S-K Section 303(a)(4)(ii).

 

At December31, 2003, the Company’s 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** |   |
|                                |   |                       |      |   |   |   |   |   |   |   |   |   |   |
| Capital Lease Obligations           |   | $                          | 1,185,746 |   | $ | 1,185,746 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Operating Lease Obligations         |   | 1,767,236                  |      | 781,365 |   | 567,458 |   | 418,413 |   | — |   | — |   |
| Purchase Obligations                |   | 4,745                      |      | 4,745 |   | — |   | — |   | — |   | — |   |
| Minimum Royalty Payment Obligations |   | 20,000                     |      | 10,000 |   | 10,000 |   | — |   | — |   | — |   |
| Total                               |   | $                          | 2,977,727 |   | $ | 1,981,856 |   | $ | 577,458 |   | $ | 418,413 |   | $ | — |   | $ | — |   |

 

Interest was calculated using an imputed interest rate of 8%.

 

Rent expensewas approximately $623,000, $723,000 and $742,000 for the years ended December31, 2001, 2002 and 2003 respectively.

 

45

----

 

**(b) *Contingencies***

 

Four classaction securities lawsuits have been filed in the United States District Courtin the District of Massachusetts against Ibis Technology and its President andCEO: Martin Smolowitz v. Ibis Technology Corp., et al., Civ. No. 03-12613 (RCL)(D. Mass.); Fred Den v. Ibis Technology Corp., et al., Civ. No. 04-10060 (RCL)(D. Mass.); Weinstein v. Ibis Technology Corp., et al., Civ. No. 04-10088 (RCL)(D. Mass.); and George Harrison v. Ibis Technology Corp., et al., Civ. No.04-10286 (RCL) (D. Mass.). The actions allege, among other things, that theCompany violated the federal securities laws by allegedly making misstatementsto the investing public relating to demand for certain Ibis products andintellectual property issues relating to the sale of the i2000 oxygenimplanter. The plaintiffs are seeking unspecified damages. While the Companybelieves that the allegations are without merit, and intend to vigorouslydefend against the suits, there can be no guarantee as to how they ultimatelywill be resolved. The Company has been named as a nominal defendant in ashareholder derivative action filed in February 2004 against certain of itsdirectors and officers.  The complaintalleges, among other things, that the alleged conduct challenged in thesecurities cases pending against the Company in Massachusetts (described above)constitutes a breach of the defendants’ fiduciary duties to the Company.  The complaint seeks unspecified moneydamages and other relief ostensibly on behalf of the Company. Litigation may betime-consuming, expensive and disruptive to normal business operations, and theoutcome of litigation is difficult to predict. An unfavorable resolution ofthis litigation could have a material adverse effect on its business, resultsof operations and financial condition.

 

**(9) AccruedLiabilities**

 

Currentaccrued liabilities were as follows at December 31:

 
|                    |   | **2002** |      | **2003** |   |
|-------------------------|--------|----------|-----------|----------|--------|
|                    |   |     |      |     |   |
| Accrued vacation        |   | $        | 464,257   |     | $      | 195,638 |   |
| Accrued warranty        |   | 925,453  |      | 593,969  |   |
| Accrued payroll         |   | 418,817  |      | 266,281  |   |
| Accrued equipment costs |   | 439,640  |      | 799,183  |   |
| Accrued expenses        |   | 146,434  |      | 529,844  |   |
| Total                   |   | $        | 2,394,601 |     | $      | 2,384,915 |   |

 

**(10) Deferred Revenue**

 

In April 2000,the Company received funding from a customer for a capacity reservation.  This capacity reservation allowed thiscustomer to utilize a purchase credit toward an additional implanter, wafersand spare parts.  In November 2002, theCompany shipped an i2000 implanter to this customer and in December 2002, theCompany received a majority of the proceeds from this sale, net of the capacityreservation applied. This amount was included in deferred revenue and revenuefrom this shipment was recognized during the second quarter ended June 30, 2003upon acceptance at the customer’s site. The costs associated with this shipmentwere included in deferred costs and were recognized upon customer acceptance.

 

Deferredrevenue also includes prepaid wafer sales and license and royalty fees.

 

**(11) LicenseAgreements**

 

The Companyobtained an exclusive sublicense in the field of oxygen implantation to theproprietary beam scanning system developed by a consultant to the Companyduring the development of the first Ibis 1000 implanter.  The beam scanning system sublicenseagreement also grants the Company certain rights to further sublicense thetechnology for certain applications. The Company received $243,382, $100,461 and $178,562 in 2001, 2002 and2003, respectively, for non-refundable option fees or royalty fees inaccordance with non-exclusive sublicense agreements.

 

46

----

 

**(12) Income Taxes**

 

Income taxexpense consists of state income taxes for each year.  The difference between the actual income tax provision and theexpected tax benefit, (computed by applying the U.S. statutory corporate taxrate to earnings before taxes) is primarily due to the full valuation allowancerecorded for net operating losses and other deferred tax assets.

 

The taxeffects of temporary differences that give rise to significant portions ofdeferred tax assets and liabilities are presented below at December 31:

 
|                                                                    |   | **2002**    |       | **2003**    |   |
|-------------------------------------------------------------------------|--------|-------------|------------|-------------|--------|
| Deferred tax assets:                                                    |   |        |       |        |   |
| Net operating loss carryovers                                           |   | $           | 20,468,000 |        | $      | 24,541,000 |   |
| Accruals not currently deductible for tax  purposes                     |   | 250,000     |       | 1,768,000   |   |
| General business tax credit carryovers                                  |   | 1,967,000   |       | 2,990,000   |   |
| Impairment reserves                                                     |   | —      |       | 4,720,000   |   |
| Other                                                                   |   | 630,000     |       | 28,000      |   |
| Less: Valuation allowance                                               |   | (22,332,000 | )          | (32,275,000 | )      |
| Net deferred tax assets                                                 |   | 983,000     |       | 1,772,000   |   |
| Deferred tax liabilities:                                               |   |        |       |        |   |
| Property and equipment, principally due to  differences in depreciation |   | (983,000    | )          | (1,613,000  | )      |
| Patents                                                                 |   | —      |       | (159,000    | )      |
|                                                                    |   | $           | —     |        | $      | — |   |

 

As a result ofthe losses incurred to date by the Company, a 100% valuation allowance has beenapplied against the Company’s net deferred tax assets.  The Company has provided a full valuationallowance for its deferred tax assets as of December 31, 2002 and 2003 since,based on the management’s assessment, it is more likely than not that theCompany’s deferred tax asset will not be realized.  The net change in the total valuation allowance was an increaseof $6,829,000 and $9,943,000 for the years ended December 31, 2002 and 2003,respectively.

 

The Companyhad federal net operating loss and general business credit carryovers ofapproximately $60,473,000 and $1,323,000, respectively, at December 31, 2003,that may be used to offset future taxable income, if any, through 2023.  State net operating loss and creditcarryovers of $41,890,000 and $1,667,000, respectively, have varying expirationdates. Deferred tax assets and related valuation allowance of $3,165,000related to the net operating loss carryover results from the exercise ofemployee stock options, the tax benefit of which, when recognized, will beaccounted for as a credit to additional paid-in capital rather than a reductionof income tax expense.  Net operatingloss carryovers and other tax attributes may be limited in the event of certainchanges in ownership interests.

# ** **

**(13) Capitalization**

 

The Companyhas 50,000,000 shares of common stock and 2,000,000 shares of preferred stock(“Undesignated Preferred Stock”) authorized. At December 31, 2003**,**123,561,1,131,393, and 200,000 common shares were reserved for issuance uponexercise of options outstanding or available for grant under the Company’s 1993Employee, Director and Consultant Stock Option Plan, 1997 Employee, Directorand Consultant Stock Option Plan, and for exercises of warrants, respectively.

 

In October2003, Ibis completed a public offering of 1,000,000 shares of common stock at$13.25 per share, including an over allotment option exercised by theunderwriter. Net proceeds to the Company were approximately $12.6 million.

 

47

----

 

In March 2002,Ibis completed a public offering of 900,000 shares of Common Stock at $13 pershare, and on April 1, 2002, 100,000 shares were exercised as an over allotmentoption by the underwriter.  Net proceedsto the Company were approximately $12.1 million.

 

**(14) Stock Plans andWarrants**

 

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

 

In December1993, the Board of Directors and stockholders approved the adoption of theCompany’s 1993 Employee, Director and Consultant Stock Option Plan whichprovided for the issuance of options to purchase up to 250,000 shares of commonstock to employees, consultants and non-employee directors.  In May 1996, the stockholders increased to750,000 shares the aggregate number of shares that may be granted under thisplan.

 

In October1997, the Board of Directors approved the adoption of the Company’s 1997Employee, Director and Consultant Stock Option Plan (the “1997 Plan”) whichprovides for the issuance of options to purchase up to 750,000 shares of commonstock of the Company to employees, consultants and non-employee directors.  The stockholders approved the Plan at theMay 1998 Annual Stockholders Meeting. In February 2001, the Board of Directors approved an amendment to the1997 Plan to increase the aggregate number of shares reserved for issuance to1,350,000. The stockholders approved this amendment at the May 2001 AnnualStockholders Meeting.

 

A summary ofstock option activity under the plans is as follows:

 
|                                     |   | **Number  of  shares** |   | **Weighted  average  exercise price  of shares** |   |
|------------------------------------------|--------|------------------------|--------|--------------------------------------------------|--------|
| Options outstanding at December 31, 2000 |   | 777,272                |   | $                                                | 22.08  |   |
| Granted                                  |   | 273,272                |   | 10.24                                            |   |
| Exercised                                |   | (40,330                | )      | 8.51                                             |   |
| Cancelled                                |   | (37,048                | )      | 28.58                                            |   |
| Options outstanding at December 31, 2001 |   | 973,166                |   | $                                                | 19.08  |   |
| Granted                                  |   | 225,150                |   | 7.24                                             |   |
| Exercised                                |   | —                 |   | —                                           |   |
| Cancelled                                |   | (15,812                | )      | 16.61                                            |   |
| Options outstanding at December 31, 2002 |   | 1,182,504              |   | $                                                | 16.86  |   |
| Granted                                  |   | 245,076                |   | 7.41                                             |   |
| Exercised                                |   | (123,667               | )      | 7.99                                             |   |
| Cancelled                                |   | (131,659               | )      | 17.97                                            |   |
| Options outstanding at December 31, 2003 |   | 1,172,254              |   | $                                                | 15.69  |   |
|                                     |   |                   |   |                                             |   |
| Options exercisable at December 31, 2003 |   | 639,143                |   | $                                                | 19.47  |   |

 

48

----

 

The followingtable summarizes information concerning outstanding and exercisable options asof December 31, 2003:

 
|                                              |   | **Options  Outstanding** |   | **Options  Exercisable**                                    |   |
|---------------------------------------------------|--------|--------------------------|--------|-------------------------------------------------------------|--------|
| **Range of  exercise prices**                     |   | **Number  outstanding**  |   | **Weighted  average  remaining  contractual  life (years)** |   | **Weighted  average  outstanding  option price** |   | **Number  exercisable** |   | **Weighted  average  exercise price** |   |
| $       .08 -  6.00 |   | 227,500                  |   | 8.7                                                         |   | $ | 5.46 |   | 25,725 |   | $ | 5.96 |   |
| $     6.01 - 9.00        |   | 166,880                  |   | 6.8                                                         |   | $ | 7.87 |   | 84,355 |   | $ | 7.79 |   |
| $   9.01 - 13.50                   |   | 486,849                  |   | 6.5                                                         |   | $ | 10.31 |   | 305,084 |   | $ | 10.61 |   |
| $ 13.51 - 20.26                                   |   | 73,825                   |   | 6.9                                                         |   | $ | 18.22 |   | 49,454 |   | $ | 17.97 |   |
| $ 20.27 - 30.37                                   |   | 11,250                   |   | 5.9                                                         |   | $ | 24.08 |   | 9,750 |   | $ | 24.11 |   |
| $ 30.38 - 45.55                                   |   | 46,250                   |   | 5.9                                                         |   | $ | 36.34 |   | 44,750 |   | $ | 36.20 |   |
| $ 45.56 - 68.32                                   |   | 156,700                  |   | 6.0                                                         |   | $ | 46.43 |   | 117,775 |   | $ | 46.43 |   |
| $ 68.33 - 98.71                                   |   | 3,000                    |   | 6.2                                                         |   | $ | 83.06 |   | 2,250 |   | $ | 83.06 |   |
|                                              |   | 1,172,254                |   |                                                        |   |   |   | 639,143 |   |   |   |

 

 

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

 

On February24, 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. Under theterms of the Purchase Plan, employees may elect to have up to 15% of their baseearnings withheld to purchase these shares during each offering period, whichis a six-month period.

The purchase price under the Purchase Plan is 85% of the lesser of themarket price on the beginning or the ending of the offering period.Approximately 55% of eligible employees participated in the Purchase Plan inthe initial offering period, 65% in 2001, 74% in 2002 and 52% in 2003.  During 2001, 2002, and 2003, the Companysold 38,176, 62,702 and 52,563 shares, respectively, to employees under thePurchase Plan. The stockholders approved the Purchase Plan at the May 2000Annual Stockholders Meeting.

 

**(c) *Warrants***

 

During 2000,38,263 Warrants were exercised.  Sincesome of these Warrants were exercised on a cashless basis, 35,840 shares ofCommon Stock were issued.  At December31, 2000, there were additional warrants outstanding to purchase 1,392 sharesof common stock at $8.40 per share. These remaining warrants expired in 2001.

 

In December2000, the Company issued warrants to purchase 200,000 shares of common stock at$22.30 per share in connection with a license agreement.  The value of the warrants is included inother assets (see note 7) and was calculated using the Black-Scholesoption-pricing model with the following assumptions: expected volatility of93.69%, risk-free interest rate of 5.50%, and an expected life of 5 years.  At December 31, 2003, there were 200,000warrants outstanding.

 

49

----

 

**(15) Significant Customers and Concentrationof Business Risk**

 

The Companysells its products to a limited number of semiconductor and optical componentsmanufacturers primarily in the United States, the Pacific Rim and the UnitedKingdom.

 

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

 
| **Year Ended**    |   | **Significant  Customers** |   | **Amount** |       | **%**  |   |
|-------------------|--------|----------------------------|--------|------------|------------|--------|--------|
|              |   |                       |   |       |       |   |   |
| December 31, 2001 |   | 3                          |   | $          | 4,191,000  |   | 56%    |   |
| December 31, 2002 |   | 2                          |   | $          | 10,187,000 |   | 73%    |   |
| December 31, 2003 |   | 1                          |   | $          | 16,887,000 |   | 92%    |   |

 

Accountsreceivable from significant customers amounted to $769,000 and $27,000 atDecember 31, 2002 and 2003, respectively.

 

Export salesto unaffiliated customers in 2001, 2002 and 2003 were 52%, 56% and 7% of totalrevenues, respectively.

 

During 2001,2002 and 2003, the Company purchased substantially all of its conventional bulksilicon wafers and certain raw materials, components and subassemblies for itsimplanters from a limited group of suppliers. Disruption or termination ofcertain of these sources could occur and such disruptions could have a materialadverse effect on the Company’s business and results of operations.

 

**(16) Other Income**

 

In 2001, theCompany recognized a non-recurring gain in other income of approximately $1.4million, which is the result of an expired wafer production capacity optionthat was entered into in September 1995. Under this agreement, a customer advanced non-refundable cash to theCompany to ensure dedicated wafer production capacity over a five-year period.  As wafers were produced, amounts wererecognized in revenue over this five-year period, which ended December2000.  During 2001 Ibis completed itsnegotiations with this customer and decided not to extend the agreementfurther.  Accordingly, the remainingamount deferred under this agreement was recognized in income, as no furtherobligations exist.

 

50

----

 

**(17) IndustrySegments**

 

The Company adopted SFAS No. 131, “Disclosures about Segments of anEnterprise and Related Information” during 1998.  SFAS No. 131 established the standards for reporting informationabout operating segments in annual financial statements and requires selectedinformation about operating segments in interim financial reports issued tostockholders.

 

The Company’s reportable segments are SIMOX Wafer Products, SIMOXEquipment and Other Products or Services. For purposes of segment reporting, equipment spares and field servicerevenue are combined and reported as SIMOX Equipment. Government contracts, otherservices and license revenue are combined and reported as Other Products orServices.

 

The accounting policies of the operating segments are the same as thosedescribed in the summary of significant accounting policies.  The Company generally evaluates operatingperformance based on income or loss before interest and taxes.

 

The table below provides information for the years endedDecember 31, 2001, 2002 and 2003 pertaining to the Company’s threeindustry segments.

 
|                                                            |   | **SIMOX****Wafer  Products** |      | **SIMOX  Equipment** |   | **Other  Products  or Services** |   | **Total**   |    |
|-----------------------------------------------------------------|--------|------------------------------|-----------|----------------------|--------|----------------------------------|--------|-------------|---------|
| **Net Revenues**                                                |   |                         |      |                 |   |                             |   |        |    |
| Year Ended December 31, 2001                               |   | $                            | 5,390,860 |                 | $      | 1,525,317                        |   | $           | 518,379 |   | $ | 7,434,556 |   |
| Year Ended December 31, 2002                               |   | 7,646,307                    |      | 6,102,748            |   | 282,979                          |   | 14,032,034  |    |
| Year Ended December 31, 2003                               |   | 8,995,475                    |      | 8,781,907            |   | 660,429                          |   | 18,437,811  |    |
|                                                            |   |                         |      |                 |   |                             |   |        |    |
| **Operating Income  (Loss)**                                    |   |                         |      |                 |   |                             |   |        |    |
| Year Ended December 31, 2001                               |   | (5,690,297                   | )         | (4,037,328           | )      | 142,008                          |   | (9,585,617  | )       |
| Year Ended December 31, 2002                               |   | (8,952,392                   | )         | (3,391,162           | )      | 167,838                          |   | (12,175,716 | )       |
| Year Ended December 31, 2003*                              |   | (19,389,257                  | )         | (374,173             | )      | 615,850                          |   | (19,147,580 | )       |
|                                                            |   |                         |      |                 |   |                             |   |        |    |
| **Assets**                                                      |   |                         |      |                 |   |                             |   |        |    |
| December 31, 2001                                          |   | 32,179,004                   |      | 8,797,202            |   | 99,405                           |   | 41,075,611  |    |
| December 31, 2002                                          |   | 33,259,578                   |      | 5,501,872            |   | 546,948                          |   | 39,308,398  |    |
| December 31, 2003                                          |   | 18,721,316                   |      | 1,692,883            |   | 118,615                          |   | 20,532,814  |    |
|                                                            |   |                         |      |                 |   |                             |   |        |    |
| **Capital  Expenditures**                                       |   |                         |      |                 |   |                             |   |        |    |
| Year Ended December 31, 2001                               |   | 5,801,261                    |      | 335,949              |   | —                           |   | 6,137,210   |    |
| Year Ended December 31, 2002                               |   | 8,409,457                    |      | 134,089              |   | —                           |   | 8,543,546   |    |
| Year Ended December 31, 2003                               |   | 1,602,314                    |      | 8,891                |   | —                           |   | 1,611,205   |    |
|                                                            |   |                         |      |                 |   |                             |   |        |    |
| **Depreciation and Amortization****of  Property and Equipment** |   |                         |      |                 |   |                             |   |        |    |
| Year Ended December 31, 2001                               |   | 2,967,751                    |      | 536,670              |   | —                           |   | 3,504,421   |    |
| Year Ended December 31, 2002                               |   | 4,648,649                    |      | 1,478,767            |   | —                           |   | 6,127,416   |    |
| Year Ended December 31, 2003                               |   | 5,264,903                    |      | 1,393,269            |   | —                           |   | 6,658,172   |    |
|                                                                 |        |                              |           |                      |        |                                  |        |             |         |  |  |  |  |

 

----

* The year ended December 31, 2003 includes an impairment chargeof $11,051,324. See Note (6).

 

51

----

 

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

 
|                                                           |   | **Years  Ended December 31,** |       |
|----------------------------------------------------------------|--------|------------------------------------|------------|
| **Segment Reconciliation**                                     |   | **2001**                           |       | **2002** |   | **2003** |   |
| Loss  Before Income Taxes:                                     |   |                               |       |   |   |   |   |
| Total  operating loss for reportable segments                  |   | $                                  | (9,585,617 | ) | $ | (12,175,716 | ) | $ | (19,147,580 | ) |
| Corporate  general & administrative expenses               |   | (2,273,077                         | )          | (2,174,198 | ) | (2,337,463 | ) |
| Net other  income                                              |   | 2,265,031                          |       | 254,991 |   | 27,510 |   |
| Loss  before income taxes                                      |   | $                                  | (9,593,663 | ) | $ | (14,094,923 | ) | $ | (21,457,533 | ) |
|                                                           |   |                               |       |   |   |   |   |
| Assets:                                                        |   |                               |       |   |   |   |   |
| Total  assets for reportable segments                          |   | $                                  | 41,075,611 |   | $ | 39,308,398 |   | $ | 20,532,814 |   |
| Cash &  cash equivalents not allocated to segments         |   | 13,087,799                         |       | 11,745,918 |   | 14,174,716 |   |
| Other  unallocated assets                                      |   | 756,894                            |       | 644,643 |   | 635,509 |   |
| Total  assets                                                  |   | $                                  | 54,920,304 |   | $ | 51,698,959 |   | $ | 35,343,039 |   |
|                                                           |   |                               |       |   |   |   |   |
| Capital  Expenditures:                                         |   |                               |       |   |   |   |   |
| Total  capital expenditures for reportable segments            |   | $                                  | 6,137,210  |   | $ | 8,543,546 |   | $ | 1,611,205 |   |
| Corporate  capital expenditures                                |   | 236,571                            |       | 145,250 |   | 21,242 |   |
| Total  capital expenditures                                    |   | $                                  | 6,373,781  |   | $ | 8,688,796 |   | $ | 1,632,447 |   |
|                                                           |   |                               |       |   |   |   |   |
| Depreciation  and Amortization:                                |   |                               |       |   |   |   |   |
| Total  depreciation & amortization for reportable segments |   | $                                  | 3,504,421  |   | $ | 6,127,416 |   | $ | 6,658,172 |   |
| Corporate  depreciation & amortization                     |   | 128,243                            |       | 137,133 |   | 113,508 |   |
| Total  depreciation & amortization                         |   | $                                  | 3,632,664  |   | $ | 6,264,549 |   | $ | 6,771,680 |   |

 

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

 

The Table below provides information for the years 2001, 2002 and 2003.

 
|                               |   | **First  Quarter** |      | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |      |
|------------------------------------|--------|--------------------|-----------|---------------------|--------|--------------------|--------|---------------------|-----------|
| **2001**                           |   |               |      |                |   |               |   |                |      |
| Total sales and revenue            |   | $                  | 3,200,505 |                | $      | 1,256,418          |   | $                   | 1,443,827 |   | $ | 1,533,806 |   |
| Gross profit (loss)                |   | 1,089,664          |      | (957,856            | )      | (1,763,430         | )      | (1,022,089          | )         |
| Loss from operations               |   | (1,126,293         | )         | (3,300,621          | )      | (3,972,858         | )      | (3,458,922          | )         |
| Net loss                           |   | (785,158           | )         | (3,048,554          | )      | (2,405,480         | )      | (3,355,727          | )         |
| Net loss per common share          |   | (0.09              | )         | (0.37               | )      | (0.29              | )      | (0.40               | )         |
| **2002**                           |   |               |      |                |   |               |   |                |      |
| Total sales and revenue            |   | $                  | 1,625,346 |                | $      | 1,857,991          |   | $                   | 7,729,976 |   | $ | 2,818,721 |   |
| Gross profit (loss)                |   | (1,489,154         | )         | (1,556,248          | )      | 151,089            |   | (1,513,772          | )         |
| Loss from operations               |   | (3,846,027         | )         | (4,124,533          | )      | (2,337,936         | )      | (4,041,418          | )         |
| Net loss                           |   | (3,786,562         | )         | (4,027,840          | )      | (2,272,591         | )      | (4,009,186          | )         |
| Net loss per common share          |   | (0.44              | )         | (0.43               | )      | (0.24              | )      | (0.42               | )         |
| **2003**                           |   |               |      |                |   |               |   |                |      |
| Total sales and revenue            |   | $                  | 1,408,151 |                | $      | 11,721,989         |   | $                   | 4,036,823 |   | $ | 1,270,848 |   |
| Gross profit (loss)                |   | (1,603,774         | )         | 3,394,367           |   | (1,188,812         | )      | (2,081,371          | )         |
| Profit (loss) from operations      |   | (4,312,696         | )         | 1,222,977           |   | (3,138,648         | )      | (15,256,676         | )         |
| Net profit (loss)                  |   | (4,286,353         | )         | 1,226,026           |   | (3,162,837         | )      | (15,226,625         | )         |
| Net profit (loss) per common share |   | (0.45              | )         | 0.13                |   | (0.33              | )      | (1.46               | )         |

 

52

----

 

**Item 9.****                                                           CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not applicable.

 

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

###### ** **

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our reports filed with the Securitiesand Exchange Commission (“SEC”) is recorded, processed, summarized, andreported within the time periods specified in the SEC’s rules and forms, andthat such information is accumulated and communicated to our management,including our Chief Executive Officer (“CEO”) and Chief Financial Officer(“CFO”), as appropriate to allow timely decisions regarding requireddisclosure.

 

(a)Within 90 days prior to the filing of this Annual Report on Form 10-K, our CEOand CFO carried out an evaluation of the effectiveness of our disclosurecontrols and procedures. Based upon this evaluation, the CEO and CFO concludedthat our disclosure controls and procedures are effective in:

 

•                                          Accumulating and communicating information toour management, including the CEO and CFO, to allow timely decisions regardingrequired disclosure; and

•                                          Recording, processing, summarizing andreporting information required to be included in our periodic reports filedwith the SEC in a timely manner.

 

(b)There have been no significant changes in our internal controls or in otherfactors since the date of the evaluation of the CEO and CFO that couldsignificantly affect internal controls, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

**PARTIII**

 

**Item10.****                                                    DIRECTORSAND OFFICERS OF THE REGISTRANT**

 

The Response to this item is incorporated by reference from thediscussion responsive thereto under the captions “Management” and “Section 16(a)Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement forthe 2004 Annual Meeting of Stockholders.

 

**Item11.****                                                    EXECUTIVECOMPENSATION**

 

The response to this item is incorporated by reference from thediscussion responsive thereto under the caption “Executive Compensation” in theCompany’s Proxy Statement for the 2004****Annual Meeting of Stockholders.

 

**Item12.****                                                    SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The response to this item is incorporated by reference from thediscussion responsive thereto under the caption “Share Ownership” in theCompany’s Proxy Statement for the 2004 Annual Meeting of Stockholders.

 

**Item13.****                                                    CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The response to this item is incorporated by reference from thediscussion responsive thereto under the captions “Certain Transactions” and“Executive Compensation—Employment Contracts and Change of ControlArrangements” in the Company’s Proxy Statement for the 2004 Annual Meeting ofStockholders.

 

**Item14.****                                                    PRINCIPALACCOUNTANT FEES AND SERVICES**

 

The response to this item is incorporated by reference from thediscussion responsive thereto under the caption “Audit Fees” in the Company’sProxy Statement for the 2004 Annual Meeting of Stockholders.

 

53

----

 

**PARTIV**

 

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

 

**(a)**                                  Thefollowing documents are filed as part of this annual report on Form 10-K.

 

**(1)and (2)**    See “Index to FinancialStatements and Financial Statement Schedule” at Item 8 to this****AnnualReport on Form 10-K.  Other financialstatement schedules have not been included because they are not applicable orthe information is included in the financial statements or notes thereto.

 

**(3)**                                 Exhibits

 

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

 

54

----

 
| **Exhibit  Number** |   |   |   | **Description**                                                                                                                                                                                                                                                                                                                                   |
|---------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12               |   | -      |   | Equipment  Purchase Master Agreement, dated as of May 22, 1996, between Registrant, and  IBM (Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A  (File No.0-13078) filed on September 12, 1996 and incorporated herein by  reference).                                                                                |
| †10.13         |   | -      |   | Ibis  Technology Corporation 1997 Employee, Director and Consultant Stock Option  Plan (Filed as Exhibit 99.1 to the Company’s Form S-8 (File No. 333-45247)  filed on January 30, 1998 and incorporated herein by reference).                                                                                                          |
| @10.14              |   | -      |   | Task Order  dated April 10, 1998, between the Registrant and International Business  Machines Corporation (“IBM”) (Filed as Exhibit 10.40 to the Company’s  Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1998 and  incorporated herein by reference).                                                    |
| @10.15              |   | -      |   | Licensing  and Development Agreement, dated June 9, 1998, between the Registrant  and IBM (Filed as Exhibit 10.41 to the Company’s Quarterly Report on Form  10-Q for the Quarter Ended June 30, 1998 and incorporated herein by  reference)                                                                                       |
| 10.16               |   | -      |   | Sixth  Amendment to Lease dated July 16, 1998, amending Lease Agreement dated  December 22, 1987 between the Company and Thomas J. Flatley d/b/a the  Flatley Company (Filed as Exhibit 10.42 to the Company’s Quarterly Report on  Form 10-Q for the Quarter Ended September 30, 1998 and incorporated herein  by reference) |
| †10.17         |   | -      |   | Change of  Control Agreement, dated September 20, 1999, between the Registrant and  Martin J. Reid (Filed as Exhibit 10.43 to the Company’s Annual Report on Form  10-K for the Year Ended December 31, 1999 and incorporated herein by  reference)                                                                                |
| †10.18         |   | -      |   | Change of  Control Agreement, dated September 20, 1999, between the Registrant and  Debra L. Nelson (Filed as Exhibit 10.44 to the Company’s Annual Report on  Form 10-K for the Year Ended December 31, 1999 and incorporated herein  by reference)                                                                               |
| @10.19              |   | -      |   | 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)                                                                       |
| 10.20               |   | -      |   | Lease  Agreement, dated April 14, 2000, between the Registrant and Flatley  (Filed as Exhibit 10.46 to the Company’s Quarterly Report on Form 10-Q for  the Quarter Ended June 30, 2000 and incorporated herein by reference)                                                                                                      |
| 10.21               |   | -      |   | Ibis  Technology Corporation 2000 Employee Stock Purchase Plan (Filed as Exhibit  99.1 to the Company’s Form S-8 (File No. 333-36706) filed on May 10, 2000 and  incorporated herein by reference)                                                                                                                                           |
| @10.22              |   | -      |   | 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)                                                      |
| †10.23         |   | -      |   | Employment  Agreement, dated December 27, 2000 between the Registrant and Martin J.  Reid (Filed as Exhibit 10.49 to the Company’s Annual Report on Form 10-K for  the Year Ended December 31, 2000 and incorporated herein by reference)                                                                                          |
| @10.24              |   | -      |   | 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)                                             |
| 10.25               |   | -      |   | 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)                                                                                                 |

 

55

----

 
| **Exhibit  Number** |   |   |   | **Description**                                                                                                                                                                                                                                                                                                                                                              |
|---------------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.26               |   | -      |   | Stock  Purchase Warrant Agreement dated December 15, 2000, between the  Registrant and IBM (Filed as Exhibit 10.52 to the Company’s Annual Report on  Form 10-K for the Year Ended December 31, 2000 and incorporated herein  by reference)                                                                                                                   |
| 10.27               |   | -      |   | Amendment of  Lease Agreement dated September 25, 2001, between the Company and Thomas  J. Flatley d/b/a the Flatley Company.   (Filed as Exhibit 10.53 to the Company’s Quarterly Report on Form 10-Q  for the Quarter Ended September 30, 2001 and incorporated herein by  reference)                                                                  |
| 10.28               |   | -      |   | Master Lease  Agreement dated September 25, 2001, between the Company and Heller  Financial Leasing, Inc., including additional Collateral Rider and  Schedule A to Additional Collateral Rider. (Filed as Exhibit 10.54 to  the Company’s Quarterly Report on Form 10-Q for the Quarter Ended  September 30, 2001 and incorporated herein by reference) |
| 10.29               |   | -      |   | Amendment to  Warrant Agreement dated June 1, 2001 between the Company and  International Business Machines Corporation.   (Filed as Exhibit 10.55 to the Company’s Quarterly Report on Form 10-Q  for the Quarter Ended September 30, 2001 and incorporated herein by  reference)                                                                       |
| @10.30              |   |   |   | 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)                                                                                                                   |
| 10.31               |   |   |   | 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)                                                                                                                |
| 11                  |   | -      |   | Statement  regarding computation of per share income (loss)                                                                                                                                                                                                                                                                                                                  |
| 23                  |   | -      |   | Consent and  Report on Financial Statement Schedule of KPMG LLP                                                                                                                                                                                                                                                                                                         |
| 31.1                |   | -      |   | CEO  Certification Pursuant to Section 301 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                            |
| 31.2                |   | -      |   | CFO  Certification Pursuant to Section 301 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                            |
| 32.1                |   | -      |   | CEO  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (18 U.S. Section 1350)                                                                                                                                                                                                                                                               |
| 32.2                |   | -      |   | CFO  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (18 U.S. Section 1350)                                                                                                                                                                                                                                                               |

 

----

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

 

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

 

†                        Management contract orcompensatory plan, contract or arrangement.

 

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

 

(B) *FinancialStatement Schedules*

 

Schedule II — Valuation and Qualifying Accounts

 

**(b)**           Reports on Form 8-K

 

On October 17, 2003, we furnished to the SEC a report on Form 8-Kcontaining the October 17, 2003 press release related to our announcementof the public offering of 870,000 shares of our common stock.

 

56

----

 

On October 22, 2003, we furnished to the SEC a report on Form 8-Kcontaining the October 21, 2003 press release related to our announcementof the closing of its public offering of 1 million shares, including theoverallotment option.

 

On October 22, 2203, we furnished to the SEC a report on Form 8-Kcontaining the October 22, 2003 press release reporting Ibis’ thirdquarter ended September 30, 2003 financial results.

 

On December 15, 2003, we furnished to the SEC a report on Form 8-Kcontaining the December 15, 2003 press release announcing Ibis’ revisedoutlook for the fourth quarter ending on December 31, 2003 and that alsoprovided some comments on our wafer and equipment business operations.

 

57

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized, inDanvers, Massachusetts on March 2, 2004.

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

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed by the following persons on behalf of theregistrant and in the capacities indicated and on the dates indicated.

 
| **Signatures** |                                    | **Title** |                                       | **Date** |               |
|----------------|-----------------------------------------|-----------|--------------------------------------------|----------|--------------------|
|           |                                    |      |                                       |     |               |   |
| By:            | /s/ ***Martin J.  Reid***               |      | President, Chief Executive Officer         |     | March 2, 2004 |   |
|           | Martin J. Reid                          |      | and Chairman (principal executive officer) |     |               |   |
|           |                                    |      | and Director                               |     |               |   |
|           |                                    |      |                                       |     |               |   |
| By:            | /s/ ***Debra L.  Nelson***              |      | Chief Financial Officer,                   |     | March 2, 2004 |   |
|           | Debra L. Nelson                         |      | Treasurer, Clerk, (principal financial     |     |               |   |
|           |                                    |      | and accounting officer)                    |     |               |   |
|           |                                    |      |                                       |     |               |   |
| By:            | /s/ ***Dimitri A.  Antoniadis, Ph.D.*** |      | Director                                   |     | March 2, 2004 |   |
|           | Dimitri A. Antoniadis, Ph.D.            |      |                                       |     |               |   |
|           |                                    |      |                                       |     |               |   |
| By:            | /s/ ***Robert L.  Gable***              |      | Director                                   |     | March 2, 2004 |   |
|           | Robert L. Gable                         |      |                                       |     |               |   |
|           |                                    |      |                                       |     |               |   |
| By:            | /s/ ***Leslie B.  Lewis***              |      | Director                                   |     | March 2, 2004 |   |
|           | Leslie B. Lewis                         |      |                                       |     |               |   |
|           |                                    |      |                                       |     |               |   |
| By:            | /s/ ***Donald  McGuinness***            |      | Director                                   |     | March 2, 2004 |   |
|           | Donald McGuinness                       |      |                                       |     |               |   |
|           |                                    |      |                                       |     |               |   |
| By:            | /s/ ***Lamberto  Raffaelli***           |      | Director                                   |     | March 2, 2004 |   |
|           | Lamberto Raffaelli                      |      |                                       |     |               |   |
|           |                                    |      |                                       |     |               |   |
| By:            | /s/ ***Cosmo S.  Trapani***             |      | Director                                   |     | March 2, 2004 |   |
|           | Cosmo S. Trapani                        |      |                                       |     |               |   |

 

58

----

 

**SCHEDULE II**

 

**IBISTECHNOLOGY CORPORATION**

**VALUATIONAND QUALIFYING ACCOUNTS**

 

**Forthe Years Ended December 31, 2001, 2002 and 2003**

 
| **Description**                    |   | **Balance at  Beginning  of Period** |   | **Charged to  Expense** |   | **Amounts  Written Off** |   | **Balance at  End of  Period** |   |
|------------------------------------|--------|--------------------------------------|--------|-------------------------|--------|--------------------------|--------|--------------------------------|--------|
|                               |   |                                 |   |                    |   |                     |   |                           |   |
| Allowance for Doubtful Accounts    |   |                                 |   |                    |   |                     |   |                           |   |
| December 31, 2001             |   | 65,000                               |   | —                  |   | —                   |   | 65,000                         |   |
| December 31, 2002             |   | 65,000                               |   | —                  |   | —                   |   | 65,000                         |   |
| December 31, 2003             |   | 65,000                               |   | —                  |   | —                   |   | 65,000                         |   |
|                               |   |                                 |   |                    |   |                     |   |                           |   |
| Reserve for Inventory Obsolescence |   |                                 |   |                    |   |                     |   |                           |   |
| December 31, 2001             |   | 571,000                              |   | 313,000                 |   | 215,000                  |   | 669,000                        |   |
| December 31, 2002             |   | 669,000                              |   | 290,000                 |   | —                   |   | 959,000                        |   |
| December 31, 2003             |   | 959,000                              |   | 524,000                 |   | 47,000                   |   | 1,436,000                      |   |

 

S-1

----