**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**
| **ý** | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                   |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **For the fiscal year ended December 31,  2005**                                                                                                  |
|       |       |                                                                                                                                                   |
| **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 asspecified in its charter)

 
| **Massachusetts**                         | ** ** | **04-2987600**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction             |       | (I.R.S.  Employer Identification No.) |
| of  incorporation or organization)        |       |                                  |
|                                      |       |                                  |
| **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 registered pursuant to Section 12(b) of theExchange Act:

**None.**

 

Securities registered pursuant to Section 12(g) of theExchange Act:

 

Common Stock, $.008 Par ValuePer Share

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasonedissuer as defined in Rule 405 of the Securities Act.  Yes o  No ý

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No ý

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.  ý

 

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

 

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

 

The aggregate market value of the registrant’s voting stock held bynon-affiliates of the registrant (without admitting that any person whoseshares are not included in such calculation is an affiliate) as of the lastbusiness day of the registrant’s most recently completed fourth fiscal quarter(based on the last reported sale price on the Nasdaq National Market of suchdate) was $ 37,856,102.

 

As of February 28, 2006, the registrant had10,816,029 shares 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:Certain information required in Part III of this Annual Report on Form 10-Kis incorporated from the Registrant’s Proxy Statement for the Annual Meeting ofStockholders to be held on May 11, 2006.

 

 

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**PART I**

 

**Special Note Regarding Forward-LookingStatements**

 

This Form 10-K contains express or impliedforward-looking statements within the meaning of the “safe harbor” provisionsof the Private Securities Litigation Reform Act of 1995 that relate to futureevents or our future financial performance. In some cases, you can identifyforward-looking statements by terminology, such as “may,” “will,” “should,” “could,”“expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “intend,”“potential” or “continue” or the negative of such terms or other comparableterminology, although not all forward-looking statements contain such terms. Inaddition, these forward-looking statements include, but are not limited to,statements regarding, among other things: (i) the expected factory and on-siteacceptance of the i2000 implanters ordered by SUMCO, (ii) attaining implanterimprovements to the degree and in the timeframe necessary to meet SUMCO’sexpectations, (iii) the timing and likelihood of revenue recognition on theimplanters ordered by SUMCO as well as the timing and likelihood of revenuerecognition and payment for SUMCO’s second order, (iv) the timing of SUMCO’sramping to production quantities on the i2000 implanter and the sustainedproduction worthiness of the i2000 implanter, (v) reliance on a small number oflarge customers, interest in and demand for, and market acceptance of, theCompany’s SIMOX-SOI technology including the Company’s implanters, (vi) theinvolvement generally of the silicon wafer manufacturing industry in the SOIwafer market, and the ability of the wafer manufacturer’s to producesufficiently low cost SIMOX SOI wafers utilizing both our SIMOX equipment andtechnology, as well as other equipment manufacturer’s tools (vii) the Company’sability to conduct its operations in a manner consistent with its current planand existing capital resources or otherwise to obtain additional implanterorders or to secure financing to continue as a going concern, (viii) the timingand likelihood of revenue recognition on orders for the Company’s implanters,(ix) the timing and impact of the Company’s decision to discontinue its wafermanufacturing and sales operation, (x) the Company’s belief that wafermanufacturers will become the primary suppliers of SIMOX-SOI wafers to thechipmaking industry, (xi) the throughput and production capacity of the i2000implanter for manufacturing 300-mm SIMOX-SOI wafers, attaining implanterimprovements to the degree and in the timeframe necessary to meet customerexpectations, and the ability of the i2000 implanter to achieve acceptableproduction yields, (xii) the Company’s plan to focus on supplying implanters towafer manufacturers, (xiii) the Company’s expectations regarding future ordersfor i2000 implanters, and the likelihood and timing of revenue recognition onsuch sales, (xiv) the Company’s expectation regarding future willingness ofwafer manufacturers to purchase equipment from the Company, (xv) thetechnological advancements and the adoption rate of SOI technology, and (xvi)the Company’s expectation of having sufficient cash for operations. Suchfactors and uncertainties include but are not limited to those set forth belowin “Business Risk Factors” and elsewhere throughout this Form 10-K. Allinformation set forth in this Form 10-K is as of the date of this Form 10-Kand Ibis undertakes no duty to update this information, unless required by law.

 

**Item 1.****           BUSINESS**

 

**Introduction**

 

Ibis Technology Corporation (“Ibis”)develops, manufactures and markets SIMOX-SOI implantation equipment for theworldwide semiconductor industry. SIMOX, which stands for **S**eparationby **IM**plantation of **Ox**ygen,is a form of silicon-on-insulator, or SOI, technology that creates aninsulating oxide barrier below the top surface of a silicon wafer throughimplantation and annealing. Our proprietary oxygen implanters produce SIMOX-SOIwafers by implanting oxygen atoms just below the surface of a silicon wafer tocreate a very thin layer of silicon dioxide between the thin operating regionof the transistor at the surface and the underlying 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/or increases the lossof power during circuit operation. The buried layer of silicon dioxide alsohelps to reduce the heat generated by the transistors. Through this process ourcustomers can produce integrated circuits, which we believe, offer significantadvantages over circuits constructed on conventional silicon wafers. We believethat these advantages include:

 

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•                  substantiallyimproved speed for microprocessors and other logic integrated circuits,

•                  reducedpower consumption,

•                  reducedsoft error rate,

•                  highertemperature operating environment, and

•                  lowertemperature operation

 

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

 

•                  serversand workstations,

•                  portableand desktop computers,

•                  entertainmentdevices such as TVs and game consoles,

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

•                  harsh-environmentelectronics.

 

When Ibis began operations in 1988, much of ourrevenue was derived from research and development contracts and sales of wafersfor military applications. Over the years, there was a shift in revenue tosales of SIMOX-SOI wafers for commercial applications and the nature of ourbusiness had evolved through stages where previously our revenue was at timesprimarily derived from selling wafers for evaluation purposes, and at othertimes it was primarily derived from equipment sales. This often occurs whendeveloping and promoting a fundamental new technology, especially as it relatesto the semiconductor industry embracing any change that affects fabricationoperations. In mid 2004 we exited the wafer manufacturing business toconcentrate our efforts on supplying equipment and process technology to ourequipment customers, the major silicon manufacturers. We did this havingadvanced our primary goal of establishing SIMOX-SOI as a leading SOI technologywith the potential to be the low cost, high volume offering. We now intend towork with the major wafer manufacturers to support the market acceptance of300mm SIMOX technology through continuing process research and development inconjunction with our customers. We believe this effort will directly supportthe wafer manufacturers’ decision to purchase our equipment.

 

Our fundamental SIMOX-SOI technology has beendeveloped, refined, and tested over the last dozen years. In 2002, Ibisintroduced the current-generation of SIMOX-SOI technology, which included oursecond generation oxygen implanter (i2000ä) andthe modified low dose (“MLD”) SIMOX wafer process which was licensed to us byIBM. The i2000’s flexibility, automation and operator-friendly controls allowthis tool to produce a wide range of SIMOX-SOI wafer products using differentmanufacturing processes, including Advantox® MLD and Advantox MLD-UTwafers. We believe the ability of the i2000 implanter to produce twelve-inch(or 300mm) SIMOX-SOI wafers using different processes from standard to thelatest MLD process positions us to capitalize on the growing SOI market. Inearly 2004 we received an order valued at approximately $7.0 million for ani2000 SIMOX oxygen implanter from a major silicon wafer manufacturer. Duringthe third quarter of 2004 this tool was accepted by the customer. In early January 2005we received a $6 million order for an i2000 SIMOX oxygen implanter from SUMCO,another major silicon wafer manufacturer. This system was factory accepted andshipped in the second quarter 2005 and we received final customer acceptance ofthis tool at the customer’s site in March 2006. As the first productioni2000 SUMCO has put into place, the tool has gone through extensive on siteevaluation at elevated final acceptance specifications that will lay the groundwork for potential futureorders.  In October of 2005 wereceived a second order valued at $7 million for an i2000 SIMOX implanter fromSUMCO and negotiated a master purchase agreement that will govern the generalcommercial terms of potential future orders from SUMCO. We believe we will beable to ship this implanter in the second quarter of 2006 with final customeracceptance taking place in the third or fourth quarter of 2006. Revenuerecognition for this implanter will be based on final customer acceptance attheir facility, the timing of which may vary depending on a number of factors,including performance of the tool.

 

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We believe that strategic alliances withexisting and potential customers will continue to play an important role indeveloping a worldwide commercial market for SIMOX-SOI wafers and implanters.We currently have agreements with IBM, Shin Etsu and SUMCO.

 

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

 

We were incorporated in Massachusetts in October 1987and commenced operations in January 1988. Our executive offices arelocated at 32 Cherry Hill Drive, Danvers, Massachusetts 01923 and our telephonenumber is (978) 777-4247. Our web site is located at www.ibis.com.*.*We make our periodic reports on Form 10-K,Form 10-Q and Form 8-K (and any amendments to those reports)available on the web site, free of charge, as soon as reasonably practicableafter these reports are filed with or furnished to the Securities and ExchangeCommission. We have not incorporated by reference into this document theinformation on our web site and you should not consider it to be a part of thisdocument. Our web site address is included in the document as an inactivetextual reference only. The public can also obtain access to such reports at the Securitiesand Exchange Commission’s Public Reference Room at 450 Fifth Street, NW,Washington, DC 20549, by calling the SEC at 1-800-SEC-0330 or by accessing theSEC’s website, which is www.sec.gov. Unless the context otherwiserequires, the terms “Ibis”, “we”, “us”, and “our” refer to Ibis TechnologyCorporation.

 

#### **Our Strategies**

 

Ibis’ primary objective is to be the dominantsupplier of oxygen implantation equipment to the world’s silicon wafermanufacturers so they can, in turn, efficiently and cost-effectively supply SOIwafers to the global semiconductor industry. Our primary emphasis is onimplanter sales and support. We also plan on continuing process development forSIMOX-SOI wafers in partnership with our equipment customers to hasten theadoption and broaden the market acceptance of SIMOX-SOI. Key elements of ourstrategies 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 failure errors, whichare changes in logic state due to exposure to radiation. In addition, heatgeneration caused by current leakage has become a major problem at the 90 nmfeature size and will continue to increase in importance at the 65 and 45 nmtechnology nodes as production comes on stream over the next four years. In ourexperience, these manufacturers prefer to satisfy the demand with minimal additionsor modifications to their existing equipment base. We believe that SIMOX-SOItechnology is a leading alternative inaddressing these requirements and that there will be a continuous migration ofSOI wafer manufacturing into the major silicon wafer suppliers. We reachthis conclusion for a number of reasons. First, we believe that tremendousprice pressure exists on commodity type products, such as silicon wafers.Because the starting wafer represents a significant component of the SOI wafercost, silicon wafer manufacturers should have a natural cost structureadvantage leading to a higher gross margin, and therefore can manage suchpricing pressures better than stand-alone SOI producers that do not alsoproduce the silicon wafer itself. Second, we expect that the pricing pressureswill encourage silicon wafer manufacturers to seek out higher margin products,like SOI wafers, to increase their margins. Third, we believe that siliconwafer manufacturers have traditionally developed proprietary intellectual propertyin silicon materials science, which can be applied to designing optimalstarting wafers for SOI

 

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production. This should give them anadvantage in both minimizing wafer cost and maximizing SOI wafer quality andyield.  Fourth, our experience suggeststhat silicon wafer manufacturers already have a well-developed infrastructurefor the manufacture, sale and marketing of large volumes of substrates. Lastly,we believe that there is greater efficiency in producing the SOI wafer as partof the wafer manufacturers existing product flow, specifically avoiding theneed to re-package, re-clean, re-inspect and re-ship substrates twice, once asstarting silicon wafers, and a second time as SOI wafers. Therefore, as aresult of these trends, we expect our ultimate customers will be drawnprincipally from these silicon wafer manufacturers and we plan to focus amajority of our technical and marketing resources on the leading silicon wafermanufacturers and our major key customers in the semiconductor industry who arethe leaders in the adoption of SOI technology. We expect that implanter salesto *chipmakers* should be minimal, andfocused on SOI processes, which the chipmaker wishes to keep proprietary, suchas selective (or patterned) SIMOX, or other specialty substrates.

 

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

 

•                  *Enhancing and Extending Current Product Offerings.*We intend to continue to use our resources and our strategic partners’technical expertise to improve our existing equipment products, expand our coreproduct functionality, add products to our existing product line and furtheradvance our process technology. Our implanter research and development programsare aimed at improving quality, and increasing throughput which results inreducing the cost of SIMOX-SOI wafers.

 

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

 

**Marketing, Sales and Customers**

 

Over the last several years, Ibis had focusedon integrating SIMOX-SOI wafers into commercial applications. We believe thatcommercial shipments of our wafers had been used principally for evaluationpurposes or pilot production in products, including microprocessors, gatearrays, ASICs (application specific integrated circuits), and memories (DRAMs,SRAMs, etc.). We believe that one of our customers is providing SIMOX-SOIwafers for commercial production and that a number of our potential customersare sampling SIMOX wafers or are developing prototype products.

 

Our primary focus today is on getting the siliconwafer manufacturers to embrace SIMOX-SOI technology. Currently, where we havesucceeded, we have accomplished this through joint research and developmentprograms, the use of sales representative agreements, and the provision ofSIMOX-SOI wafer foundry services to our customers. We intend to assist thewafer manufacturers in becoming the producers of SIMOX-SOI wafers by sellingand servicing oxygen implanters along with continuing to improve SIMOX waferprocessing technology via our SIMOX process engineering group.

 

In August 2004, upon exiting the wafermanufacturing business Ibis cancelled its Sales Representative Agreement withMEMC for SIMOX SOI wafers. We believe that by canceling this agreement we haveopened new market opportunities with the other silicon wafer manufacturers forthe sale of our i2000 oxygen implanters. We also believe this has allowed Ibisto work closely as an independent, non-competitive resource with several of theleading wafer manufacturers regarding SIMOX-SOI process improvements.

 

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The following table sets forth, in thousands ofdollars, the amount of revenue derived from our significant customers duringthe fiscal years ended December 31, 2003, 2004 and 2005, as well as thepercent of our revenue represented by these customers’ purchases (inthousands):

 
| ** **       | ** ** | **2003**    | ** ** | **2004**    | ** ** | **2005**    | ** ** |
|------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Customer**     | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| IBM              |       | $           | 8,564      |        | 91         | %           | $          | 384 |   | 5 | % | $ | 74 |   | 12 | % |
| Simgui           |       | $           | 526        |        | 6          | %           | $          | 5 |   | — |   | — |   | — |   |
| SEH              |       | —      |       | —      |       | $           | 7,000      |   | 88 | % | — |   | — |   |
| Nissin  Electric |       | —      |       | —      |       | —      |       | — |   | 279 |   | 46 | % |
| Tokyo  Iovenus   |       | —      |       | —      |       | —      |       | — |   | 162 |   | 27 | % |
|                  |            |             |            |             |            |             |            |  |  |  |  |  |  |  |  |  |

 

The revenue from IBM in 2005 is for service and parts.The revenue from Nissin in 2005 was from license royalties and the revenue fromTokyo Iovenus in 2005 was from the sale of parts. The revenue from SEH in 2004is for the sale of an i2000 oxygen implanter for approximately $7.0 million.The revenue from IBM in 2003 resulted primarily from the sale of an i2000oxygen implanter at a sale price of approximately $8.0 million. Revenues fromSimgui in 2003 represent license technology and certain parts.

 

Sales to overseas customers in 2003, 2004 and 2005were 9%, 95%, and 81% of total revenue, respectively. In 2003 sales to Chinawere 6%**,** of total revenue, whichwas primarily attributable to Simgui. In 2004, sales to Japan were 95% of totalrevenue, which was primarily attributable to Shin Etsu Handotai (“SEH”). In2005 sales to Japan were 81% of total revenue, which was primarily attributedto Nissin Electric Co. Ltd., license royalties.

 

#### **Strategic Alliances**

#### ** **

Ibis has entered into a number of strategicalliances that we believe enable us to better address our target market, toadvance our technology more effectively, and to match our technicaldevelopments and expansion to the needs of our key customers. We believe thatstrategic alliances with existing and potential customers will continue to playan important role in developing a worldwide commercial market for our SIMOX-SOIimplanters.

 

We have a long-standing relationship with SUMCO whichbegan as a sales distribution arrangement, progressed to a joint research anddevelopment effort, and ultimately evolved into SUMCO’s purchase of an Ibis1000 oxygen implanter in order to establish a Japanese-based manufacturingfacility for SIMOX-SOI wafers. This implanter was installed in SUMCO’s wafermanufacturing facility in Chiba, Japan in July 2001. In 1999, we completedan agreement to license our standard and Advantox SIMOX-SOI wafer fabricationprocess to SUMCO.  Under this agreementwe received an initial royalty fee and are entitled to future royalties basedon a percentage of SUMCO’s sales of Advantox SIMOX-SOI wafers that aremanufactured using the licensed process. More recently, SUMCO has ordered ani2000 SIMOX oxygen implanter which is presently undergoing customer acceptanceat their facility. In addition, a second i2000 SIMOX oxygen implanter wasordered by SUMCO in October of 2005 and is expected to be shipped duringthe second quarter of 2006.

 

In January 2003, we announced the signing of aJoint Development Agreement with IBM. The objective of the agreementwas to develop an enhanced, MLD processfor the manufacture of SIMOX-SOI wafers, which areused as the starting material in the manufacture of advanced integratedcircuits (“ICs”). Aimed at producing lower-cost, higher quality SIMOX-SOIwafers with thinner top silicon layers, the joint development work was beingconducted at both Ibis and IBM. We believe that both companies broughtextensive expertise and experience regarding SIMOX-SOI technology to the jointeffort. IBM, a pioneer in the development and adoption of SOI technology,developed the original MLD process for high quality, low cost SIMOX-SOI wafers.IBM then licensed Ibis to manufacture SIMOX-SOI wafers using theproduction-proven MLD process for sale to IBM and all other Ibis customers. Ourimplanters can operate using both the MLD process and other processes as well,including non-proprietary processes.

 

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

 

**Research and Development**

 

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

 

The proprietary i2000 was designed to supportthe volume production of high quality SIMOX-SOI 300 mm wafers for the globalsemiconductor industry. The i2000 duplicates the process environment of theIbis 1000. To minimize process risks; however, it incorporates a number offeatures designed to improve throughput and reduce costs. These includeincreased beam current, faster wafer handling, off-hub wafer cooling, andmodular construction, which we believe will enable improved serviceability anddiagnostics, while simplifying the assembly and shipping of the machine. We also believe that the simpler beam linedesign of the i2000 also offers extensive capabilities, facilitating themanufacture of the Advantox product portfolio. We believe that takentogether, these features significantly increase productivity of the i2000 overthe Ibis 1000.  Finally, the i2000 isdesigned to be far more fab friendly than the Ibis 1000. It is designed to bebulkhead or ballroom mounted in the clean room, offers front-opening unifiedpod (FOUP) capability and meets SEMI safety and ergonomic guidelines. We alsobelieve that the i2000’s improved automation and operator-friendly controlswill improve product yield and afford ease-of-use. Our plans are to improve thei2000 in terms of both quality (reduced particles) and quantity (increasedthroughput) of as-implanted SIMOX wafers, in order to provide continuousimprovement to the cost of ownership for our customers.

 

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

 

•                  Refining techniques to produce SIMOX-SOIwafers of higher quality. In the fall of 2004 we announced a 3x to 4x reductionin the silicon roughness of the SIMOX MLD;

•**                 **Jointly developing a technology formanufacturing high resistivity SIMOX-SOI wafers for mixed signal and radiofrequency (“RF”) applications with a major silicon wafer manufacturer. Withthis alliance, we developed advancements in SIMOX wafer manufacturing,including reduced wafer cost, scalability to 300 mm and stability of thematerial’s high resistivity characteristic through thermal cycling common inintegrated circuit manufacturing. We filed a joint patent application with SEHentitled *Method of Producing a HighResistivity SIMOX Silicon Substrate* in May 2003. As of December 31,2005 this patent is still pending;****

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

•                  Responding to specific customerrequirements and emerging industry trends, such as the development of ourAdvantox MLD-UT (ultra thin) product line to address requirements for fullydepleted devices. The term “fully depleted” describes a MOS 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.

 

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During the fiscal years ended December 31,2003, 2004 and 2005, Ibis’ internally funded research and development expenseswere approximately $5.4 million, $5.3 million and $6.0 million or 57%, 67% and995% of our revenues, respectively.

 

**Competition**

 

We believe we face three general sources ofcompetition: (1) direct SIMOX-SOI competition, (2) competing SOItechnologies, and (3) competing non-SOI technologies.

 

Among direct SIMOX-SOI competitors, webelieve we are presently the only manufacturer of SIMOX-SOI implanters. To ourknowledge, Hitachi, Ltd. of Japan had been the only other company manufacturingSIMOX implanters and has sold a limited number of tools in prior years. Webelieve that in early 2004, Hitachi exited this business. We are not aware ofplans by any of the major ion implant manufacturers including Hitachi to designand develop oxygen ion implanters, but they may already have such plans, or maydevelop them in the future. We believe that it would take one to three years todevelop such an implanter.

 

We also believe that SUMCO, Wacker(Siltronic), Komatsu and Simgui are manufacturing or marketing SIMOX wafers. Weexpect that the availability of SIMOX-SOI wafers from silicon wafermanufacturers will help address customer concerns about adequate sources ofsupply and their desire to purchase all of their silicon wafer requirements(e.g., bulk silicon, epitaxial, strained silicon and SOI wafers) from the samecompany. Our objective is to be the dominant supplier of SIMOX implanters tothe world’s silicon wafer manufacturers so they can, in turn, efficiently andcost-effectively supply SOI wafers to the global semiconductor industry. Inaddition, we believe that these wafer manufacturers would be potentialequipment customers for our implanters.

 

The second source of competition for us is thedevelopment of alternative SOI materials. The approach that most directlycompetes with SIMOX is thin-film bonded SOI wafers. The majority of SOI wafersare produced with this technology. SOITEC, a French-based company that spun offfrom LETI, a French government research lab, uses a bonded method. Thethin-film bonded approach uses two silicon wafers, one or both having athermally-grown oxide layer, which are first bonded together to form thesilicon/silicon dioxide/silicon structure. A majority of one of the wafers isremoved or separated from the double-wafer structure, and the remaining portionserves as the device layer of the SOI wafer. The most popular method is totransfer the thin layer using wafer splitting techniques, allowing the rest ofthe wafer to be reclaimed and reused. Regions of stress are first created usingimplantation and/or epitaxial growth. 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 can result in an inherentlylower manufacturing cost in higher volume production. We also believe that, atthis stage in the market’s development, multiple SOI suppliers will helpaccelerate the adoption of SOI technology.

 

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

 

The semiconductor industry has demonstratedits resourcefulness in improving materials through creative circuit design andmanufacturing techniques, thereby extending the useful life of conventionalsubstrates, and we cannot be sure that it will not continue to do so. Therelatively lower cost of these substrates provides an incentive to thesemiconductor industry to improve existing material without moving to new, moreadvanced substrates. In addition, complex variations of more conventionalapproaches, such as elaborate circuit structures built on conventional siliconsubstrates, and compound materials (such as silicon-germanium,

 

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gallium-arsenide, indium phosphide, etc.), are other alternativesubstrate choices. Strained silicon is a technology that can be used toincrease the operating speed of computer chips, such as microprocessors. Straincan be applied locally (at the fab) or globally (at the wafer manufacturer). Itcan be applied to bare wafers, SIMOX SOI wafers or Bonded SOI wafers. Thespacing between silicon atoms is stretched – or strained - farther apart,allowing holes or electrons to flow with less resistance, leading to chips thatare faster, as reported by IBM. The emergence of strained silicon inwafer-materials technology will lead to comparisons with SOI, among otheremerging wafer-materials technologies. Although both strained silicon and SOI canbe wafer-material technologies that increase chip speed, they work in different– and complementary – ways and if combined can provide additional benefits.

 

Strained silicon increases transistor speed byincreasing the mobility of holes or electrons traveling through the topsilicon. On the other hand, SOI increases transistor speed by reducingparasitic capacitances associated with source and drain junctions. Therefore,we believe strained silicon and SOI (as applied to either SIMOX or Bonded SOI)are complementary and mutually enhancing - not competing – technologies,although one technology may be adopted without the other. We believe the realwave of the future will be combining these two complementary technologies, muchlike the way copper interconnects, low k dielectric materials and SOIsubstrates have been combined.

 

**Backlog**

 

Ibis’ backlog consists primarily of equipmentrevenue expected to be recognized during 2006.

 
| ** **               | ** ** | **As of February 28,** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **2005**                    | ** ** | **2006** | ** ** |
|                     |       |                        |       |   |   |
| Equipment related orders |       | $                           | 6,042,000  |   | $ | 13,000,000 |   |
|                          |            |                             |            |  |  |  |  |

 

All customer orders are subject tomodification or cancellation by the customers. Backlog can, and often doesfluctuate significantly based upon, among other matters, the timing and receiptof orders and subsequent tool shipments. Therefore, variations in backlog maynot represent a fair indication of future business trends.

 

**Patents and Proprietary Rights**

 

Ibis’s success is dependent in part uponcertain proprietary technologies and core intellectual property. Ibis has beenawarded a number of patents and has a number of pending patent applications.For example, we added three patents to our intellectual property portfolioduring 2003 and 2004 and seven patents during 2005 and we have more than adozen patents pending relating to our proprietary i2000 oxygen implanter or theSIMOX fabrication process. Additionally, we diligently monitor our research anddevelopment process to identify inventions that warrant pursuing patentprotection.

 

Notwithstanding our patent portfoliostrategy, we rely largely upon trade secret protection and confidentiality andproprietary information agreements to safeguard our proprietary technology.Towards this end, all of our employees currently are required to executeconfidentiality agreements pursuant to which they agree to assign to us allpatent rights and technical or other information developed by them during theiremployment with us and also agree not to disclose any trade secret orconfidential information without our prior written consent.

 

Despite the efforts we take to protect ourproprietary technologies and core intellectual property, the use ofcontractual, statutory and common law protections offer only limitedprotections. We cannot ensure that patents will issue from our pendingapplications or from any future applications or that, if issued, any claimsallowed will be sufficiently broad to protect our technology. In addition, wecannot ensure that any patents that

 

 

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have been or may be issued will not be challenged, invalidated orcircumvented or that any rights granted by those patents would protect ourproprietary rights. Failure of any patents to protect our technology may makeit easier for our competitors to offer equivalent or superior technology. Inaddition, unauthorized parties may attempt to copy or otherwise misappropriateaspects of our products or services, or to obtain or use information that weregard as proprietary. Even if a competitor’s products were to infringe patentsowned or licensed by us, it would be very costly for us to enforce our rightsin an enforcement action, which would also divert funds and resources whichotherwise could be used in our operations. Furthermore, third parties may alsoindependently develop similar technology without breach of our proprietaryrights.

 

In addition to our efforts to developproprietary technology, historically we have also supplemented andcommercialized our intellectual property through the grant and receipt oflicenses. For example, Ibis has an exclusive worldwide sublicense to theproprietary beam scanning system developed and patented by a consultant to usduring the development of the Ibis 1000. Our beam scanning system sublicenseagreement also grants us certain rights to further sublicense the beam scanningsystem for certain applications other than oxygen implantation. Pursuant tothese rights, we have entered into four non-exclusive sublicense agreementsthat permit the respective sub-licensees to manufacture, use and sell implantationmachines incorporating the beam scanning system so long as such machines arenot designed for the production of oxygen implanted wafers. Each sub-licenseehas paid us a non-refundable option fee upon signing an agreement and aninitial license fee when it exercised its option to use the licensedtechnology. In addition, each sub-licensee will pay a royalty fee with respectto each implantation machine using this beam scanning system manufactured, usedor sold after its option fee and initial license fee has been applied. Licensefees received by us from sub-licenses are to be shared on a substantially equalbasis with the licensor of the beam scanning system. As of December 31,2005, Ibis had received approximately $2.3 million in net license fees, afterdeducting amounts paid to the licensor.

 

Ibis also obtained in 1994 an exclusivelicense to technology that facilitates the presentation to wafers of ion beamsdeveloped by Superion Limited, a United Kingdom corporation. Through December 31,2005, Ibis has paid $0.6 million for license fees for implantation machinesthat have been manufactured by us. Under the terms of this agreement, SuperionLimited has retained the right to utilize the technology for uses not involvingoxygen implantation of silicon or other semiconductor materials.  During 2001, this agreement was modified toincorporate i2000 implantation machines. Ibis also entered into a sublicenseagreement during 2001 which gives our customer a royalty-bearing, non-exclusivelicense to utilize this technology for ion implantation machines, excludingoxygen implanters.

 

During 1999, we completed an agreement tolicense our standard and Advantox SIMOX-SOI wafer fabrication process to SUMCO.The agreement consisted of an initial royalty fee. Future royalties shall bepayable based on a percentage of SUMCO’s SIMOX-SOI wafers sold which aremanufactured using the licensed process.

 

Furthermore, in 2000, we licensed from IBM the rightto manufacture and sell SIMOX-SOI wafers, using IBM’s proprietary MLD SIMOXprocess, to IBM and to all our other customers. Under the royalty-bearinglicense agreement, we were able to use IBM’s process to produce MLD SIMOX-SOIwafers which we marketed as Advantox MLD. Advantox MLD wafers were broadlymarketed to integrated circuit manufacturers looking to accelerate their SOIadoption process. Under the agreement we granted IBM rights to our patentsutilized in the modified low dose, or MLD process. Although we believe thatother SIMOX-SOI wafer processing methods exist and are being used today, ourexisting or potential equipment customers that intend to use the MLD process tomanufacture SIMOX-SOI wafers would be required to license this technologydirectly from IBM. Two major silicon wafer manufacturers have already licensedthis technology from IBM and others have developed their own SIMOX processes.No assurances can be given that the remaining equipment customers that intendto use the MLD process and IBM would come to terms acceptable to both partiesin a timely manner, or at all. These MLD process license issues may effect thetiming of placement of customer orders in the future if customers plan tolicense this technology.

 

Finally, during 2001 we licensed our Advantox50 and 150 SIMOX wafer fabrication processes to Simgui. Ibis received theinitial license fee from Simgui in January 2003, and the technologytransfer took

 

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place in the first quarter ended March 31, 2003. License revenueof approximately $0.5 million was recognized in that quarter.

 

**Government Regulation**

 

Ibis is subject to a variety of federal,state and local environmental regulations related to the storage, treatment,discharge or disposal of chemicals used in its operations and to the exposureof our personnel to occupational hazards. Although we believe that we have allpermits necessary to conduct our business, the failure to comply with presentor future regulations could result in fines being imposed on us, suspension ofproduction, or a cessation of operations. Our future activities may result inour being subject to additional regulations. Such regulations could require usto acquire significant equipment or to incur other substantial expenses tocomply with regulations. Any failure by us to control the use of, or torestrict 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 its oxygen implanters fromstandard components and from components manufactured in-house or by other vendorsaccording to our design specifications. Most raw materials and components notproduced by us are available from more than one supplier. However, certain rawmaterials, components and subassemblies are obtained from a limited group ofsuppliers and at least one major subsystem is a long lead time, sole sourcecomponent. Semiconductor equipment is a growth industry and is very cyclical innature, so if our suppliers experience an increase in demand from othersemiconductor equipment manufacturers with much higher volumes than us, thelead-time and/or price for some of our components may increase. Although wehave sought to reduce our dependence on these limited source suppliers and wehave not experienced significant production delays due to unavailability ordelay in procurement of component parts or raw materials to date, increasedmarket demand for the materials supplied by, or disruption or termination of,certain of these sources could occur and such increased demand, disruptions, ortermination could have a material adverse effect on our business and results ofoperations.

 

**Employees**

 

As of December 31, 2005, we employed 45persons on a full-time basis. None of our employees are represented by a laborunion and we believe our relations with our employees are good.

 

**Item 1A. RISK FACTORS**

 

***TheCommercial Market for SIMOX-SOI Technology is Still Developing and May NeverFully Develop.***

 

The sources of our revenue have shifted fromprimarily research and development contracts and sales of SIMOX-SOI wafers forcommercial applications to sales and support of oxygen implantation equipment.We are aware of only a few commercial manufacturers that are using SIMOX-SOIwafers in low volume production for a limited number of products. Theperformance advantages of SIMOX-SOI wafers may never be realized commerciallyand a commercial market for SIMOX-SOI wafers may never fully develop which in

 

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turn would adversely affect the sales of our oxygen implanters. Thefailure of major semiconductor manufacturers and /or major silicon wafermanufacturers to adopt SIMOX-SOI technology would adversely affect, and mayprevent, the adoption of this technology by others.

 

***WeHave Significant Losses and May Never Be Able to Sustain Profitability.***

 

We experienced net losses of $21.4 million,$10.9 million and $9.2 million in 2003, 2004 and 2005, respectively. As of December 31,2005, we had an accumulated deficit of $82.0 million. Net losses may continuefor the foreseeable future. Although we have had profitable quarterly operatingresults from time to time, we may not be able to achieve sustainedprofitability.

 

***We May NeedSubstantial Additional Capital to Continue Operations in the Future.***

 

The Company’s management believes that it will havesufficient cash resources including the cash on hand expected to be receivedfrom final customer acceptance of the SUMCO implanter which was received in March 2006for the implanter shipped in June 2005 to support current operations forthe next twelve months.Withthe receipt of the order received from SUMCO in October 2005, which theCompany believes it can ship during the second quarter of 2006,****and presuming that customer acceptance and full payment ofthat order occurs during 2006, the Company believes it will have sufficientcash to support current operating levels through at least the next eighteenmonths from the date of this filing. However, this expectation is based on our current operating plan andgeneral sales outlook, each of which may change rapidly. We intend to continueto invest in our research, development and manufacturing capabilities. TheCompany expects to continue to explore equity offerings and other forms offinancing and anticipate that we may be required to raise additional capital inthe future in order to finance future growth and our research and developmentprograms. Changes in technology or sales growth beyond currently establishedcapabilities may require further investment. As a result, we may need to raisesubstantial additional capital in the future. We have previously financed ourworking capital requirements through:

 

•                equityfinancings, including warrant and option exercises,

•                equipmentlines of credit,

•                aworking capital line of credit,

•                aterm loan,

•                sale-leasebackarrangements,

•                collaborativerelationships,

•                waferproduct and equipment sales, and

•                governmentcontracts.

 

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

 

***Currently, We Rely on Sales toa Limited Number of Customers.***

 

Ibis expects that we will continue to rely ona relatively small number of customers as sources of revenue in the foreseeablefuture.  The loss of one or more of thesemajor customers and our failure to obtain other sources of offsetting revenuewould have a material adverse impact on our business and hinder our ability tocontinue as a going concern. In addition, any downturn in these customers’business or the industry

 

 

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in which these customers operate could result in a significant decreasein any sales of our implanters to these customers, which would have an adverseeffect on our business.

 

***Revenue Recognition and CashPayments from Customers Depend on a Manufacturing and Customer Qualificationand Acceptance Process that is Complex, Lengthy and Costly.***

 

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

 

***We Rely Heavily on Sales to a Small Number of Significant Customers,Which May Cause Sales to Vary Significantly from Quarter to Quarter CausingOur Operating Results to Fluctuate.***

 

We derive a large portion of our sales of wafermanufacturing equipment from a small number of significant customers. Thefollowing table sets forth, in thousands of dollars, the amount of revenuederived from our significant customers during the fiscal years ended December 31,2003, 2004 and 2005, as well as the percent of our revenue represented by thesecustomers’ purchases (in thousands):

 
| ** **       | ** ** | **2003**    | ** ** | **2004**    | ** ** | **2005**    | ** ** |
|------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Customer**     | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| IBM              |       | $           | 8,564      |        | 91         | %           | $          | 384 |   | 5 | % | $ | 74 |   | 12 | % |
| Simgui           |       | $           | 526        |        | 6          | %           | $          | 5 |   | — |   | — |   | — |   |
| SEH              |       | —      |       | —      |       | $           | 7,000      |   | 88 | % | — |   | — |   |
| Nissin  Electric |       | —      |       | —      |       | —      |       | — |   | $ | 279 |   | 46 | % |
| Tokyo  Iovenus   |       | —      |       | —      |       | —      |       | — |   | $ | 162 |   | 27 | % |

 

Revenue from IBM in 2005 is for service and parts.The revenue from Nissin in 2005 was from license royalties and the revenue fromTokyo Iovenus in 2005 was from the sale of parts. Revenue from SEH in 2004 isfor the sale of an i2000 oxygen implanter for approximately $7.0 million. Revenuefrom IBM in 2003 resulted primarily from the sale of an i2000 oxygen implanterat a sale price of approximately $8.0 million. Revenues from Simgui in 2003represent the sale of license technology and certain parts.

 

***WeExpect Our Quarterly Revenue and Operating Results to Fluctuate Significantly.***

 

We anticipate that our revenue and operatingresults are likely to vary significantly from quarter to quarter in theforeseeable 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 price has been volatile and if we fail to meetexpectations of public market analysts or investors, the price of our commonstock would likely

 

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decrease. Further, customers may cancel or revise orders at any timeprior to delivery. These ordering patterns most likely will result insignificant quarterly fluctuations in our revenue and operating results, andaccordingly in our share price. In addition, because we have only sold alimited number of implanters to date on an irregular basis, the recognition ofrevenue from the sale of even one implanter is likely to result in asignificant increase in the revenue for that quarter. A number of otherfactors, many of which are discussed in more detail in other risk factors, mayalso cause variations in our results of operations and share price, including:

 

•                                          lackof orders,

•                                          cancellationsof orders and shipment delays and rescheduling,

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

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

 

A high percentage of our expenses areessentially fixed in the short term. As a result, if we experience delays ingenerating and recognizing revenue, our quarterly operating results are likelyto be seriously harmed. Due to this, as well as to the cyclicality of thesemiconductor industry and other factors, we believe that quarter-to-quartercomparisons of our operating results will not be meaningful. You should notrely on our results for one quarter as any indication of our future performance.

 

***Competitorsand Competing Technologies May Render Some or All of Our Products orFuture Products Noncompetitive or Obsolete; Potential Write-down for Impairedor Obsolete Assets.***

 

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

 

During the fiscal year ended December 31,2004, we discontinued our wafer manufacturing business and incurred charges forseverance and equipment disposition of $2.1 million, contributing to the lossfrom discontinued operations of $5.3 million. During the fiscal year ended December 31,2003, we recognized an impairment loss of $11.1 million for our 200 mm andsmaller SIMOX wafer production line which has subsequently been recorded aspart of the loss from discontinued operations in 2003 of $17.6 million. (SeeItem 7. - Management’s Discussion and Analysis of Financial Condition andResults of Operations). In addition, if semiconductor manufacturers fail toadopt SIMOX technology during the current or subsequent process cycle (suchcycles typically last two to three years), widespread adoption of SIMOXtechnology may never materialize, our technology may become obsolete and we maybe required to recognize an additional material impairment loss in the future.

 

In addition, although we are aware of no other companymanufacturing oxygen implant equipment, other major semiconductor implantequipment manufacturers could develop a less expensive oxygen implanter withsuperior technology. Our ability to compete with other manufacturers ofsemiconductor implanters,

 

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manufacturersof competing SOI wafers, as well as with bulk silicon, epitaxial, strainedsilicon and compound materials wafer manufacturers, will depend on numerousfactors within and outside our control, including:

 

•                thesuccess and timing of our product introductions and those of our competitors,

•                productdistribution,

•                customersupport,

•                sufficiencyof funding available to us, and

•                theprice, quality and performance of competing products and technologies.

 

***WeMust Continually Improve Existing Products, Design and Sell New Products andManage the Costs of Research and Development in Order to Compete Effectively.***

 

The semiconductor industry is characterizedby rapid technological change, evolving industry standards and continuousimprovements in products and required customer specifications. Due to theconstant changes in our markets, our future success depends on our ability toimprove our manufacturing processes, improve existing products and develop newproducts. For example, our oxygen implanters must remain competitive on thebasis of cost of ownership, process performance and evolving customer needs. Toremain competitive we must continually introduce oxygen implanters with highercapacity, better production yields and the ability to process larger wafersizes.

 

The commercialization of new productsinvolves, among other requirements, substantial expenditures in research anddevelopment, production and marketing. We may be unable to successfully designor manufacture these new products and may have difficulty penetrating newmarkets. Because it is generally not possible to predict the amount of timerequired and the costs involved in achieving certain research, development andengineering objectives, actual development costs may exceed budgeted amountsand estimated product development schedules may be extended. Our business maybe materially and adversely affected if:

 

•                weare unable to improve our existing products on a timely basis,

•                ournew products are not introduced on a timely basis,

•                weincur budget overruns or delays in our research and development efforts, or

•                ournew products experience reliability or quality problems.

 

***TheSales Cycle for Our Oxygen Implanter Equipment is Lengthy and Complex and WeHave Only Received Limited Orders for Our Oxygen Implanter Equipment.***

 

Our customers expend significant efforts in evaluatingand qualifying our implanters before they place orders with us.  Since we began selling implanters in 1996, wehave only sold a total of eight Ibis 1000 oxygen implanters at an average saleprice of approximately $4.0 million each and four i2000 oxygen implanters(including the order received in October 2005) at a selling price between$6.0 and $8.0 million. The sales cycle typically goes from equipmentdemonstration, equipment specification negotiations, formal quotation, contractnegotiations and receipt of order and could take up to one year or longer. Inaddition, our potential equipment customers that would like to use the MLDprocess, owned by IBM, to manufacture SIMOX-SOI wafers using our implanterswould be required to license this technology directly from IBM. We believe twosilicon wafer manufacturers have already licensed this technology from IBM andothers have developed their own SIMOX processes. Our potential equipmentcustomers may wish to secure this license prior to giving us an order forequipment and these negotiations between IBM and our customer are beyond ourcontrol and no assurances are given that our customers and IBM would come toterms acceptable to both parties in a timely manner, or at all. These MLDprocess license issues may effect the timing of placement of customer orders inthe future if customers plan to license this technology. We do not expect tosell more than a limited number of implanters in the near future. The sale ofone implanter would generally represent a substantial portion of our annualrevenue. Accordingly, the delay in the receipt of orders, manufacture ordelivery of even one unit or the

 

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modification, change orcancellation of any such order would have a material adverse effect on ourquarterly and annual results of operations.

 

***OurImplanters and Associated Technology are Subject to Export Regulations, WhichCould Prevent or Delay the Sale of Such Products in Foreign Countries.***

 

Certain technologies associated with ourimplanters are subject to export regulations administered by the U.S.Department of Commerce. Accordingly, we may be required to secure U.S. exportlicenses with respect to sales of implanters or transfers of technologies toend users in certain foreign countries. This requirement could result insignificant delays in, or the prevention of, sales of implanters or transfersof technology or other such technical data to customers in certain foreigncountries. For example, the sale of an Ibis 1000 implanter and thecorresponding transfer of technology to Simgui required an export license whichtook approximately one year to secure. There can be no assurance that ifnecessary, we will be able to secure such licenses in the future in a timelymanner, or at all.

 

***TheLoss of Key Members of Our Scientific and Management Staff Could Delay and May Preventthe Achievement of Our Research, Development and Business Objectives.***

 

Our Chief Executive Officer, Martin J. Reid,our Executive Vice President, and Chief Operating Officer, Charles McKenna andother current officers and key members of our scientific staff are responsiblefor areas such as product development and improvements, and processimprovements research, which are important to our specialized scientificbusiness. The loss of, and failure to promptly replace, any member of thisgroup could significantly delay and may prevent the achievement of ourresearch, development and business objectives. While we have entered into anemployment agreement with our Chief Executive Officer, under certaincircumstances he may be able to terminate his employment with us. Furthermore,although our employees are subject to certain confidentiality andnon-competition obligations, our key personnel may terminate their employmentat any time and may become employed by a competitor. The current composition ofIbis management and of its board of directors is subject to change and shouldnot be unduly relied upon.

 

***Recent Changes in AccountingStandards Regarding Stock Option Plans Could Limit the Desirability of GrantingStock Options, Which Could Harm Our Ability to Attract and Retain Employees,and Could Also Negatively Impact Our Results of Operations.***

 

On December 2004, the Financial AccountingStandards Board issued FASB Statement No. 123R, Share Based Payment, whichrequires all companies to treat the fair value of stock options granted toemployees as an expense. As a result of this standard, effective for periodsbeginning after January 1, 2006, we and other companies are required to recorda compensation expense equal to the fair value of each stock option granted. Weare currently assessing our valuation options allowed in this standard. Thischange in accounting standards reduces the attractiveness of granting stockoptions because of the additional expense associated with these grants, whichwould negatively impact our results of operations. Nevertheless, stock optionsare an important employee recruitment and retention tool, and we may not beable to attract and retain key personnel if we reduce the scope of our employeestock option program. Accordingly, even though we have not quantified theimpact of the implementation of this standard will have on our financialcondition and results of operations at this time, the result will have anegative impact on our earnings starting with the accounting period beginningJanuary 1, 2006. In addition, the new standard could negatively impact ourability to use stock options as an employee recruitment and retention tool inthe future.

 

***We May NotBe Able to Successfully Produce Our Products on a Large-Scale.***

 

We have limited manufacturing experience andhave only manufactured limited quantities of oxygen implanters. 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

 

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production in commercial quantities may create technical and financialchallenges for us. Any difficulty or delay in constructing additionalimplanters, if needed, could have a material adverse effect on our business.

 

***OurLatest Products Have Not Been Used in Large-Scale Long-Term Production and TheyMay Not Be Able to Perform at the Availability Levels Expected forContinuous (7 Days per Week / 24 Hours per Day) Operation. (and; They May BeSubject to Unknown and Undetected Hardware or Software Failures).***

 

Semiconductor equipment is subject to stringent mean time betweenfailure (MBTF) and similar quality and reliability requirements. Although ourequipment has previously been used in our own production environment formanufacturing SIMOX SOI wafers, and has been used in limited manufacturing runsin our customers sites, as our equipment is exposed to long-term extendedproduction processing on an automated basis, previously unknown and undetectedhardware or software failures or combinations thereof may occur. Such failurescould adversely affect our relationship with our customers.

 

***We May NotBe Able to Use All of Our Existing or Future Manufacturing Capacity at aProfitable Level.***

 

At times we may have the capacity to producemore oxygen implantation machines than we have orders for at such times. Duringsuch idle time we would continue to be responsible for the fixed costs of ourfacility and maintaining personnel, which could have a material adverse effecton our business.

 

***We May NotSuccessfully Form or Maintain Desirable Strategic Alliances.***

 

We believe we will need to form or maintainalliances with strategic partners for the manufacturing, marketing anddistribution of our products. We may enter into these strategic alliances tosatisfy customer demand and to address possible customer concerns regarding ourbeing a sole source supplier. The limited number of reliable sources of supplyother than Ibis may adversely affect or delay the integration of SIMOX-SOIwafers in mainstream commercial applications. We may not be successful inmaintaining alliances or in forming and maintaining other alliances, includingsatisfying our contractual obligations with our strategic partners, and ourpartners may not devote adequate resources to manufacture, market anddistribute these products successfully or may attempt to compete with us.

 

***We May HaveDifficulty Obtaining the Materials and Components Needed to Produce OurProducts.****** At Least One Major Component Has Only OneSource.***

 

Ibis manufactures its oxygen implanters fromstandard components and from components manufactured in-house or by othervendors according to our design specifications. Most raw materials andcomponents not produced by us are available from more than one supplier.However, certain raw materials, components and subassemblies are obtained froma limited group of suppliers and at least one major component has a solesource. If we are unable to obtain such materials and components on a timelybasis, or at all, our ability to complete orders could be significantly delayedand our business and results from operations could be materially and adverselyaffected. Semiconductor equipment is a growth industry and is very cyclical innature, so if our suppliers experience an increase in demand from othersemiconductor equipment manufacturers with much higher volumes than us, thelead-time and/or price for some of our components may increase. Although wehave sought to reduce our dependence on these limited source suppliers and wehave not experienced significant production delays due to unavailability ordelay in procurement of component parts or raw materials to date, increasedmarket demand for materials from, or disruption or termination of, certain ofthese sources could occur and such increased demand, disruptions, ortermination could have a material adverse effect on our business and results ofoperations.

 

***We May NotBe Able to Protect Our Patents and Proprietary Technology.***

 

Our ability to compete effectively with othercompanies will depend, in part, on our ability to maintain the proprietarynature of our technology. Although we have been awarded or have filedapplications for a number of patents in the U.S. and foreign countries, thosepatents may not provide meaningful protection, or

 

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pending patents may not be issued. Our competitors in both the U.S. andforeign countries, many of which have substantially greater resources and havemade substantial 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:

 

•                subjectus to significant liabilities to third parties,

•                requiredisputed rights to be licensed from third parties, or

•                requireus to cease selling our products.

 

We also rely in large part on unpatentedproprietary technology and others, including strategic partners, mayindependently develop the same or similar technology or otherwise obtain accessto our proprietary technology. To protect our rights in these areas, wecurrently 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 our technologyinfringes on their proprietary rights. Any infringement claims, even if withoutmerit, can be time consuming and expensive to defend and may divert management’sattention and resources. If successful, they could also require us to enterinto costly royalty or licensing agreements. A successful claim of productinfringement against us and our inability to license the infringed or similartechnology could adversely affect our business.

 

***IfWe Do Not Comply With All Applicable Environmental Regulations, We Could beSubject to Fines and Other Sanctions.***

 

We are subject to a variety of federal, stateand local environmental regulations related to the storage, treatment,discharge or disposal of chemicals used in our operations and to the exposureof our personnel to occupational hazards. Although we believe that we have allpermits necessary to conduct our business, the failure to comply with presentor future regulations could result in fines being imposed on us, suspension ofproduction or a cessation of operations. Our future activities may result inour being subject to additional regulations. Such regulations could require usto acquire significant equipment or to incur other substantial expenses tocomply with regulations. Our failure to control the use of, or to restrictadequately the discharge of, hazardous substances or properly control otheroccupational hazards could subject us to substantial financial liabilities.

 

***Our Stock Price is Highly Volatile.***

 

The market prices for securities of high techcompanies have been volatile. This volatility has significantly affected themarket prices for these securities for reasons frequently unrelated to theoperating performance of the specific companies. These broad marketfluctuations may adversely affect the market price of our common stock. Themarket price for our common stock has fluctuated significantly. Since January 1,1999, our stock price has fluctuated from a high of $135.00 to a low of $1.14.It is likely that the market price of our stock will continue to fluctuate inthe future. Events or factors that may have a significant impact on ourbusiness and on the market price of our common stock include the following:

 

•                  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,

•                  thetiming of receipt of orders and / or customer acceptance from major customers,

•                  productmix,

•                  productobsolescence,

 

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•                shiftsin customer demand,

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

•                marketacceptance of new and enhanced versions of our implanters,

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

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

•                thecyclical nature of the semiconductor industry, and

•                generalmarket conditions.

 

***Concentrated Ownership ofShares by One Shareholder Could Affect the Price of Our Common Stock.***

 

**As of February 28,2006, our largest known shareholder, Intrinsic Value Asset Management, Inc.(“IVAM”) owns 2,305,389 shares, or approximately 21.5% of our outstandingshares.  At present, IVAM’s ownership mayhave the effect of delaying, deferring or preventing a change in control of ourcompany, or may directly or indirectly effect a change in control of ourcompany.  Moreover, the disposition byIVAM of a substantial amount of its shares of our common stock in the openmarket could have an adverse impact on the market for our common stock.**

 

***Securities Litigation CouldResult in Substantial Cost and Divert the Attention of Key Personnel, WhichCould Seriously Harm Our Business.***

 

Five class action securities lawsuits havebeen filed in the United States District Court in the District of Massachusettsagainst Ibis and its President and CEO: Martin Smolowitz v. Ibis TechnologyCorporation., et al., Civ. No. 03-12613 (RCL) (D. Mass.); Fred Den v. IbisTechnology Corporation., et al., Civ. No. 04-10060 (RCL) (D. Mass.);Weinstein v. Ibis Technology Corporation., et al., Civ. No. 04-10088 (RCL)(D. Mass.); George Harrison v. Ibis Technology Corporation., et al., Civ. No. 04-10286(RCL) (D. Mass.); and Eleanor Pitzer v. Ibis Technology Corporation., et al,Civ. No. 04-10446 (RCL) (D. Mass.). On June 4, 2004, the Courtentered an order consolidating these actions under the caption In re IbisTechnology Securities Litigation, C.A. 04-10446 RCL. On July 6, 2004, aconsolidated amended class action complaint was filed which alleges, amongother things, that the Company violated federal securities laws by allegedlymaking misstatements to the investing public relating to demand for certainIbis products and intellectual property issues relating to the sale of thei2000 oxygen implanter. The plaintiffs are seeking unspecified damages. On August 5,2004, we filed a motion to dismiss the consolidated amended complaint on thegrounds, among others, that it failed to state a claim on which the reliefcould be granted. On September 25, 2005 the Magistrate Judge issued areport and recommendation that our motion be granted in part and denied inpart. We and the plaintiffs have both filed partial objections to the reportand recommendation with Court, and after briefing of these objections iscomplete, the Court will determine whether to adopt the report and recommendationin whole or in part. While we believe that the plaintiffs’ allegations arewithout merit, and we intend to vigorously defend against the suits, there canbe no guarantee as to how they ultimately will be resolved.

 

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

 

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

 

***Future Issuances of PreferredStock May Diminish the Rights of Our Common Stockholders.***

 

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

 

***Anti-takeover Provisions in OurCharter and Bylaws and Provisions of Massachusetts Law Could Make a Third-PartyAcquisition of Us Difficult.***

 

Our restated articles of organization, asamended, and restated bylaws and the Massachusetts Business Corporation Lawcontain certain provisions that may make a third-party acquisition of usdifficult, including:

 

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

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

**•****               **a 75%super-majority shareholder vote to amend certain provisions of our articles oforganization and bylaws***.***

 

***Limitations on Effectiveness of Controls.***

 

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

 

***Evolving Regulation of Corporate Governance and PublicDisclosure May Result in Additional Expenses and Continuing Uncertainty.***

 

**Changinglaws, regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002 and related SECregulations as well as the listing standards of the Nasdaq Stock Market, arecreating uncertainty for public companies. We continually evaluate and monitordevelopments with respect to new and proposed rules and cannot predict orestimate the amount of the additional costs we may incur or the timing of suchcosts. These new or changed laws, regulations and standards are subject tovarying interpretations, in many cases due to their lack of specificity, and asa result, their application in practice may evolve over time as new guidance isprovided by regulatory and governing**

** **

**20**

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** **

**bodies. This could resultin continuing uncertainty regarding compliance matters and higher costsnecessitated by ongoing revisions to disclosure and governance practices. Weare committed to maintaining high standards of corporate governance and publicdisclosure. As a result, we have invested resources to comply with evolvinglaws, regulations and standards.  Thisinvestment may result in increased general and administrative expenses and adiversion of management time and attention from revenue-generating activitiesto compliance activities. If our efforts to comply with new or changed laws,regulations and standards differ from the activities intended by regulatory orgoverning bodies due to ambiguities related to practice, regulatory authoritiesmay initiate legal proceedings against us and we may be harmed.**

 

**Item 2.****           DESCRIPTION OF PROPERTY**

 

Ibis’ corporate office and manufacturing siteis located at a leased facility in Danvers, Massachusetts. Previously ourbusiness segments were divided between two facilities, with implantationequipment design and manufacture conducted in one location and SIMOX waferproduction conducted in the other. With the discontinuance of our wafermanufacturing business we have consolidated the Equipment manufacturingbusiness and the wafer processing research and development effort intoapproximately 32,000 square feet which includes a modernized cleanroom thatcontains metrology equipment, cleaning equipment and an implantation equipmentmanufacturing and service area. The lease on the building we vacated expired onMay 31, 2005 and the lease on the space we currently occupy will expire onDecember 31, 2006, and contains an option to renew for five years. Theconsolidation of our operations into one facility effectively reduced ouroverall leased space by 40,000 square feet leaving approximately 32,000 squarefeet. We are currently in negotiations with our landlord to renew the lease for5 years.

 

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

 

Five class action securities lawsuits havebeen filed in the United States District Court in the District of Massachusettsagainst Ibis and its President and CEO: Martin Smolowitz v. Ibis TechnologyCorporation., et al., Civ. No. 03-12613 (RCL) (D. Mass.); Fred Den v. IbisTechnology Corporation., et al., Civ. No. 04-10060 (RCL) (D. Mass.);Weinstein v. Ibis Technology Corporation., et al., Civ. No. 04-10088 (RCL)(D. Mass.); George Harrison v. Ibis Technology Corporation., et al., Civ. No. 04-10286(RCL) (D. Mass.); and Eleanor Pitzer v. Ibis Technology Corporation., et al,Civ. No. 04-10446 (RCL) (D. Mass.). On June 4, 2004, the Courtentered an order consolidating these actions under the caption In re IbisTechnology Securities Litigation, C.A. 04-10446 RCL. On July 6, 2004, aconsolidated amended class action complaint was filed which alleges, amongother things, that the Company violated federal securities laws by allegedlymaking misstatements to the investing public relating to demand for certainIbis products and intellectual property issues relating to the sale of thei2000 oxygen implanter. The plaintiffs are seeking unspecified damages. On August 5,2004, we filed a motion to dismiss the consolidated amended complaint on thegrounds, among others, that it failed to state a claim on which the reliefcould be granted. On September 25, 2005 the Magistrate Judge issued areport and recommendation recommending that our motion be granted in part anddenied in part. We and the plaintiffs have both filed partial objections to thereport and recommendation with Court, and after briefing of these objections iscomplete the Court will determine whether to adopt the report andrecommendation in whole or in part. While we believe that the plaintiffs’allegations are without merit, and we intend to vigorously defend against thesuits, there can be no guarantee as to how they ultimately will be resolved.

 

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

 

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

 

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

 

# **No matters were submitted tostockholders during the fourth quarter of the year ended December 31,2005.**

 

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# **PART II**

# ** **

**Item 5.****           MARKET FOR THEREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

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

###### ** **

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

 
| ** **      | ** ** | **Common Stock** | ** ** |
|-----------------|------------|------------------|------------|
| ** **      | ** ** | **High**         | ** ** | **Low** | ** ** |
|            |       |             |       |   |   |
| 2004:           |       |             |       |   |   |
| First  Quarter  |       | $                | 16.15      |   | $ | 10.02 |   |
| Second  Quarter |       | $                | 12.50      |   | $ | 5.12 |   |
| Third  Quarter  |       | $                | 6.15       |   | $ | 3.11 |   |
| Fourth  Quarter |       | $                | 5.60       |   | $ | 2.12 |   |
| 2005:           |       |             |       |   |   |
| First  Quarter  |       | $                | 4.14       |   | $ | 2.20 |   |
| Second  Quarter |       | $                | 2.27       |   | $ | 1.14 |   |
| Third  Quarter  |       | $                | 2.63       |   | $ | 1.67 |   |
| Fourth  Quarter |       | $                | 3.55       |   | $ | 1.23 |   |

 

**Stockholders**

 

As of February 28, 2006, there were approximately144 stockholders of record of the 10,816,029 outstanding shares of Common Stockand approximately 5,457 beneficial owners of the Common Stock.

 

**Dividends**

 

Ibis has never declared or paid any dividendsand does not anticipate paying such dividends on its Common Stock in theforeseeable future.  Ibis currentlyintends to retain any future earnings for use in its business. The payment ofany future dividends will be determined by the Board of Directors in light ofconditions then existing, including our financial condition and requirements,future prospects, restrictions in financing agreements, business conditions andother factors deemed relevant by the Board of Directors.

 

**Item 6.****           SELECTED FINANCIAL DATA**

 

The selected financial data presented belowunder the captions “Statement of Operations Data” and “Balance Sheet Data” for,and as of the end of each of the years in the five-year period ended December 31,2005, are derived from the financial statements of Ibis, which have beenaudited by KPMG LLP, independent registered public accounting firm. The auditedbalance sheets at December 31**,**2005 and 2004and the related statements of operations, stockholders equity and cash flowsfor each of the years in the three-year period ended December 31, 2005 andthe independent registered public accounting firm’s report thereon, areincluded elsewhere in this Annual Report on Form 10-K. The data set forthbelow should be read in conjunction with Ibis’ financial statements, therelated notes thereto and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included elsewhere in this Annual Reporton Form 10-K. The historical results are not necessarily indicative of theoperating results to be expected in the future.

 

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| ** **                                                    | ** ** | **Years Ended December 31,**              | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                    | ** ** | **2001**                                       | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except for per  share data)** | ** ** |
| **Statement  of Operations Data:**                            |       |                                           |       |   |   |   |   |   |   |   |   |
|                                                          |       |                                           |       |   |   |   |   |   |   |   |   |
| Contract and  other revenue                                   |       | $                                              | 518        |   | $ | 283 |   | $ | 660 |   | $ | 391 |   | $ | 324 |   |
| Equipment  revenue                                            |       | 1,525                                          |       | 6,103 |   | 8,782 |   | 7,535 |   | 278 |   |
| Total  revenue (2)                                            |       | 2,043                                          |       | 6,386 |   | 9,442 |   | 7,926 |   | 602 |   |
| Cost of contract  and other revenue                           |       | 376                                            |       | 115 |   | 45 |   | 15 |   | — |   |
| Cost of  equipment revenue                                    |       | 1,502                                          |       | 3,868 |   | 4,331 |   | 4,722 |   | 750 |   |
| Total cost  of revenue                                        |       | 1,878                                          |       | 3,983 |   | 4,376 |   | 4,737 |   | 750 |   |
| Gross profit  (loss)                                          |       | 165                                            |       | 2,403 |   | 5,066 |   | 3,189 |   | (148 | ) |
| Operating  expenses:                                          |       |                                           |       |   |   |   |   |   |   |   |   |
| General and  administrative                                   |       | 2,273                                          |       | 2,174 |   | 2,337 |   | 2,221 |   | 2,217 |   |
| Marketing  and selling                                        |       | 1,813                                          |       | 1,510 |   | 1,236 |   | 1,521 |   | 1,319 |   |
| Research and  development                                     |       | 5,119                                          |       | 6,258 |   | 5,381 |   | 5,329 |   | 5,993 |   |
| Total  operating expenses                                     |       | 9,205                                          |       | 9,942 |   | 8,954 |   | 9,071 |   | 9,529 |   |
| Loss from  operations                                         |       | (9,040                                         | )          | (7,539 | ) | (3,888 | ) | (5,882 | ) | (9,677 | ) |
| Total other  income                                           |       | 2,265                                          |       | 255 |   | 27 |   | 242 |   | 218 |   |
| Income  (loss) before income taxes                            |       | (6,775                                         | )          | (7,284 | ) | (3,861 | ) | (5,640 | ) | (9,459 | ) |
| Income tax  expense (benefit)                                 |       | 1                                              |       | 1 |   | (8 | ) | 1 |   | 1 |   |
| Loss from  continuing operations                              |       | (6,776                                         | )          | (7,285 | ) | (3,853 | ) | (5,641 | ) | (9,460 | ) |
| Discontinued  operations: (2)                                 |       |                                           |       |   |   |   |   |   |   |   |   |
| Loss from  discontinued operations                            |       | (2,819                                         | )          | (6,811 | ) | (17,597 | ) | (3,179 | ) | — |   |
| Gain (loss)  on disposal                                      |       | —                                         |       | — |   | — |   | (2,099 | ) | 215 |   |
| Income  (loss) from discontinued operations                   |       | (2,819                                         | )          | (6,811 | ) | (17,597 | ) | (5,278 | ) | 215 |   |
| Net loss                                                      |       | $                                              | (9,595     | ) | $ | (14,096 | ) | $ | (21,450 | ) | $ | (10,919 | ) | $ | (9,245 | ) |
| Loss from  continuing operations per common share (1)    |       | $                                              | (0.81      | ) | $ | (0.79 | ) | $ | (0.40 | ) | $ | (0.53 | ) | $ | (0.88 | ) |
| Net loss per  common share (1)                                |       | $                                              | (1.15      | ) | $ | (1.53 | ) | $ | (2.21 | ) | $ | (1.02 | ) | $ | (0.86 | ) |
| Weighted  average common shares outstanding basic and diluted |       | 8,378                                          |       | 9,208 |   | 9,728 |   | 10,666 |   | 10,738 |   |

 
| ** **                            | ** ** | **As of December 31,** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **2001**                    | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(In thousands)**          | ** ** |
| **Balance  Sheet Data:**              |       |                        |       |   |   |   |   |   |   |   |   |
| Working  capital                      |       | $                           | 11,232     |   | $ | 5,551 |   | $ | 12,607 |   | $ | 12,415 |   | $ | 5,145 |   |
| Total assets                          |       | 54,920                      |       | 51,699 |   | 35,343 |   | 22,283 |   | 19,992 |   |
| Long-term  debt, less current portion |       | 2,718                       |       | 1,184 |   | — |   | — |   | — |   |
| Total  liabilities                    |       | 14,560                      |       | 12,944 |   | 4,226 |   | 1,863 |   | 8,695 |   |
| Stockholders’  equity            |       | 40,360                      |       | 38,755 |   | 31,117 |   | 20,420 |   | 11,297 |   |
|                                       |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

**(2) Historically, muchof the Company’s revenue was derived from research and development contractsand sales of wafers for military and commercial applications.  In mid-2004, we discontinued the wafermanufacturing portion of our business in order to focus exclusively on ourequipment business. Wafer product sales, as well as wafer revenue reported insubsequent periods, are reported net of associated costs, as loss fromdiscontinued operations. We will maintain a research and development effortrelating to wafers for our equipment improvement programs.  This revision to our business strategy couldmaterially affect the comparability of the information reflected in the aboveselected financial data.**

 

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

 

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

 

**OVERVIEW**

 

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

 

Initially, much of our revenue was derived fromresearch and development contracts and sales of wafers for militaryapplications. Over the years, the Company decided to focus its businessoperations and sales strategy on the manufacture and sale of our implanterequipment products and de-emphasized the sale of wafers given that, among otherthings, we believed that the wafer manufacturing companies were in the bestposition to manufacture SIMOX-SOI wafers using our implanter equipment in lightof their expertise and operating efficiencies. As we announced on July 21,2004, we exited the wafer manufacturing business. Wafer product sales, as wellas wafer revenue reported in subsequent periods, are reported net of associatedcosts, as loss from discontinued operations on our income statement. TheCompany believes that its decision to discontinue the wafer business permitsbroader strategic collaboration efforts between Ibis and the wafermanufacturers.

 

The Company’s final disposal plans relative to theclosure of the wafer manufacturing operation resulted in a loss from disposalof inventory and certain production assets from discontinued operations ofapproximately $2.1 million. This loss combined with the negative margin incurredby the wafer manufacturing business in 2004 of approximately $3.2 millionresulted in the total loss from discontinued operations of approximately $5.3million. Our wafer business had been highly concentrated on providing wafersfor the Company’s largest customer, and was characterized by volatileproduction volumes and costs associated with periodic changes and continuingimprovements to the process. Our major wafer customer had tended to orderfluctuating quantities of wafers on an irregular basis. This customer alsocould revise or cancel orders at any time prior to delivery. This meant thatthis customer, who had accounted for a significant portion of our net revenuein the past, could have reduced or decided not to place any orders in thesucceeding quarter or quarters. Furthermore, most of our other wafer customersat the time were sampling SIMOX wafers or were in the process of developingprototype products and had also tended to order small quantities of wafers onan irregular basis. These customers could also revise or cancel orders at anytime prior to delivery. Because of this unpredictability, and because it wasalso likely that additional capital investments would have had to be made tokeep our wafer manufacturing process up to date (among other factors), wedecided to discontinue the wafer manufacturing portion of the business in July 2004and to focus exclusively on our equipment business. We will maintain a researchand development effort relating to wafers for our equipment improvement programs.

 

We believe that a migration of SOI wafer manufacturinginto the major silicon wafer suppliers is taking place. We reach thisconclusion for a number of reasons. First, we believe that tremendous pricepressure exists on commodity type products, such as silicon wafers, and thispressure is already eroding future price expectations of SOI wafers. Becausethe starting wafer represents a significant component of the SOI wafer cost, webelieve that silicon wafer manufacturers should have a natural cost structureadvantage leading to a higher gross margin, and therefore should be able tomanage such price pressure better than stand-alone

 

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SOI producers that do not also produce the silicon wafer itself. Second,we expect that the price pressure will encourage silicon wafer manufacturers toseek out higher margin products, like SOI wafers, to increase their margins.Third, we believe that silicon wafer manufacturers have traditionally developedproprietary intellectual property in silicon materials science, which can beapplied to designing optimal starting wafers for SOI production. We believethat this should give them an advantage in both minimizing wafer cost andmaximizing SOI wafer quality and yield. Fourth, our experience suggests thatsilicon wafer manufacturers already have a well-developed infrastructure formanufacturing, sale and marketing of large volumes of substrates. Lastly, webelieve that there is greater efficiency in producing the SOI wafer as part ofthe wafer manufacturers existing product flow, specifically avoiding the needto repackage, re-clean, re-inspect and re-ship substrates twice, once asstarting silicon wafers, and a second time as SOI wafers. Therefore, as aresult of these trends, we expect our ultimate customers will be drawn fromthese silicon wafer manufacturers and we plan to focus a majority of ourtechnical and marketing resources on the sale of implanters to the leadingsilicon wafer manufacturers and our key customers in the semiconductor industrywho we believe are the leaders in the adoption of SOI technology. We expectthat implanter sales to chipmakers should be minimal, and that these sales willbe focused on SOI processes that the chipmaker wishes to keep proprietary, suchas selective (or patterned) SIMOX, or other specialty substrates.

 

Our fundamental SIMOX-SOI technology has beendeveloped, refined, and tested over the last dozen years. In 2002, weintroduced the current generation of SIMOX-SOI technology, that included oursecond-generation oxygen implanter (i2000ä),and the MLD wafer process which was licensed to us by IBM. We believe that thei2000’s flexibility, automation and operator-friendly controls allow this toolto produce a wide range of SIMOX-SOI wafer products using a range ofmanufacturing processes, including Advantox® MLD and Advantox MLD-UTwafers. We also believe the ability of the i2000 implanter to producetwelve-inch (or 300 mm) SIMOX-SOI wafers coupled with the MLD process positionsus to capitalize on the growing SOI market. In 1999, we commenced a program todesign and develop the i2000, introduced it in March 2002 and beganshipping 300 mm wafers implanted from this machine shortly thereafter.Customers who purchase the i2000 can utilize more than one SIMOX wafermanufacturing processes on the implanter including the IBM MLD process, whenlicensed, as well as other SIMOX-SOI wafer manufacturing processes that do notrequire the IBM license.

 

Because we have sold only a limited number of implantersto date on an irregular basis, the recognition of revenue from the sale of evenone implanter is likely to result in a significant increase in the revenueduring that quarter. We recognize implanter revenue in accordance with SAB 104,which includes, among other criteria, the shipment and final customeracceptance of the implanter at the customer’s location. As a result, deferralof implanter revenue will be recorded on our balance sheet until the Company isable to meet these criteria.

 

In January 2005, we announced the booking (i.e.receipt) of an order for one Ibis i2000 SIMOX implanter from SUMCO, a leadinginternational silicon wafer manufacturer. This system was factory accepted andshipped in the second quarter 2005 and we received final customer acceptance ofthis tool at the customer’s site in March 2006. In October of 2005 wereceived a second order for an i2000 SIMOX implanter from SUMCO and negotiateda master purchase agreement that will govern the general commercial terms offuture orders from SUMCO. We believe we will be able to ship this implanter inthe second quarter of 2006 with final customer acceptance taking place in thethird or fourth quarter of 2006. Revenue recognition for this implanter will bebased on final customer acceptance at their facility, the timing of which mayvary depending on a number of factors, including performance of the tool.

 

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**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 on matters that are inherentlyuncertain. Our most critical accounting policies include: revenue recognition,inventory valuation and reserves, accounts receivable reserves and theassessment of long-lived asset impairment. Actual results may differ from theseestimates under different assumptions or conditions. Below, we discuss thesepolicies further, as well as the estimates and judgments involved.

 

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

 

***InventoryValuation and Reserves****. *Our policy for the valuation ofinventory, including the determination of obsolete or excess inventory,requires us to forecast the future demand for our products within specific timehorizons, generally twelve months or less. If our forecasted demand forspecific products is greater than actual demand and we fail to reducemanufacturing output accordingly, we could be required to record additionalinventory reserves, which would have a negative impact on our gross margin. Wehave reserved for obsolescence when engineering changes or other technologicaladvances indicate that obsolescence has occurred. With the discontinuance ofthe wafer manufacturing business and the write-off of all wafer inventory, thereserves required are now focused on equipment based, or related inventory.

 

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

 

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

 

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•                  Significant underperformance relative toexpected historical or projected future operating results,

•                  Significant changes in the manner of ouruse of the acquired assets or the strategy of our overall business,

•                  Significant negative industry or economictrends,

•                  Significant decline in our stock pricefor a sustained period, and

•                  Our market capitalization relative tobook value.

 

In accordance with SFAS No. 144, when we determine that thecarrying value of applicable long-lived assets may not be recoverable basedupon the existence of one or more of the above indicators of impairment, weevaluate whether the carrying amount of the asset or asset group exceeds thesum of the undiscounted cash flows expected to result from the use and eventualdisposition of that asset or asset group. If such a circumstance exists, wewould measure an impairment loss to the extent the carrying amount of theparticular long-lived asset or group exceeds its fair value. We would determinethe fair value based on a projected discounted cash flow method using adiscount rate determined by our management to be commensurate with the riskinherent in our current business model. We adopted SFAS No. 144 during thefirst quarter of 2002 and during the fourth quarter of 2003 we recognized animpairment charge of $11.1 million for our 200 mm and smaller SIMOX waferproduction line. We determined the fair market value of the assets as describedabove. The remaining value of this line, along with other assets associatedwith wafer manufacturing were recorded as a loss from discontinued operationsin 2004 that resulted in a charge of $5.3 million comprised of disposal costsof $2.1 million and losses associated with the wafer manufacturing operation of$3.2 million. The impairment charge of $11.1 million was composed of $10.9million for Property and Equipment and $.2 million for Inventory related to theCompany’s smaller size wafer manufacturing business. The Property and Equipmenthad an acquired value of $24.2 million, accumulated depreciation of $12.5million, and net book value of $11.7 million. An impairment charge of $10.9reduced this to a carrying value of $.8 million. We have physically scrappedthe majority of the equipment included in the assets upon which the impairmentcharge was based, on discontinuance of the wafer operation where this equipmentwas used. The remaining book value of the assets held for sale of $0.1 millionwere written off during 2005. The value of the wafer manufacturing equipmenthas been reduced to zero on the balance sheet as of December 31, 2005. Weare continuing to attempt to sell at nominal values several remaining pieces ofequipment that third parties have indicated interest in. 

 

**Results of Operations**

 

***Fiscal Year Ended December 31, 2005Compared to Fiscal Year Ended December 31, 2004***

 

***Contract and Other Revenue***.  Contract and other revenue for the fiscalyear ended December 31, 2005 was $0.3 million compared to $0.4 million forthe fiscal year ended December 31, 2004, a decrease of $0.1 million, or17%. This decrease is attributable to a reduction in royalty fees related toequipment technology in the year ended December 31, 2005.

 

***Equipment Revenue.***  Equipment revenue represents revenue recognizedfrom the sale of implanters, spare parts and field service revenue. Equipmentrevenue decreased to $0.3 million for the fiscal year ended December 31,2005 from $7.5 million for the fiscal year ended December 31, 2004, adecrease of $7.2 million, or 96%. Equipment revenue in 2005 included noimplanter revenue. The implanter revenue recognized in the

 

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fiscal year ended December 31, 2004 was for $7.0 million. Fieldservice revenue accounted for $0.1 million, or 34% of equipment revenue for thefiscal year ended December 31, 2005 as compared to $0.4 million, or 5% ofequipment revenue for the fiscal year ended December 31, 2004. Sales ofspare parts accounted for $0.2 million, or 66% of equipment revenue for thefiscal year ended December 31, 2005 as compared to $0.2 million, or 2% ofequipment revenue, for the fiscal year ended December 31, 2004. Sales ofspare parts fluctuate depending on customer demand and when the warrantiesexpire on individual pieces of equipment. Warranty expense is calculated on ouranticipated replacement costs for equipment accepted by our customers over aone or two year contract period.

 

***Total Sales and Revenue.***  Total sales and revenue for the fiscal yearended December 31, 2005 was $0.6 million, a decrease of $7.3 million, or92%, from $7.9 million for the fiscal year ended December 31, 2004, asdescribed above.

 

***Total Cost of Sales and Revenue***. Cost of contract and other revenue consists of labor and materialsexpended during the twelve month period. There were no contract costs or costsfor other revenue during the period.

 

Cost of equipment revenue represents the cost ofequipment, the cost for spare parts, and the cost of labor incurred for fieldservice. Cost of equipment revenue for the fiscal year ended December 31,2005 was $0.8 million, as compared to $4.7 million for the fiscal year ended December 31,2004, a decrease of $3.9 million, or 84%. This decrease is primarily due to thefact that no implanters were sold during the period ended December 31,2005.

 

The total cost of sales and revenue for the fiscalyear ended December 31, 2005 was $0.8 million, as compared to $4.7 millionfor the fiscal year ended December 31, 2004, a decrease of $3.9 million,or 84%. The gross margin for all sales was a negative 25% for the fiscal yearended December 31, 2005, as compared to a positive gross margin of 40% forthe fiscal year ended December 31, 2004. This decrease in the gross marginfor all sales is attributable to no implanter gross margin for the fiscal yearended December 31, 2005 as compared to the approximate gross margin of 50%for the i2000 implanter sale recognized in the fiscal year ended December 31,2004 as well as the unabsorbed manufacturing costs and the decrease in cost ofinventory reserves.

 

***General and AdministrativeExpenses***. General and administrative expenses for the fiscal year ended December 31,2005 were $2.2 million as compared to $2.2 million for the fiscal year ended December 31,2004, or no net change. This is due to decreased securities compliance,decreased premiums on Director’s & Officers liability insurance anddecreased tax expenses of $0.1 million each offset by increased professionalservices, increased payroll and payroll related expenses and increases in othermiscellaneous expenses of $0.1 million each.

 

***Marketing and SellingExpenses. ***Marketingand selling expenses for the fiscal year ended December 31, 2005 were $1.3million as compared to $1.5 million for the fiscal year ended December 31,2004, a decrease of $0.2 million, or 13%. The decrease in marketing and sellingexpenses is a result of decreased payroll and payroll related expenses of $0.1million and decreased miscellaneous expenses of $0.1 million.

 

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***Research and DevelopmentExpenses. ***Internallyfunded research and development expenses increased by $0.7 million, or 12% to$6.0 million for the fiscal year ended December 31, 2005 from $5.3 millionfor the fiscal year ended December 31, 2004. This increase is representsthe wafer research and development costs of $0.6 million that were previouslypart of the cost of sales during the time we manufactured wafers for sale, butare now supporting equipment development; as well as increased repair andmaintenance of $ 0.2 million and increased R&D material expenses of $0.2million which were offset by the reduction in depreciation expenses associatedwith consolidation of our facilities of $0.3 million.

 

***Other Income.***** **Totalother income for the fiscal year ended December 31, 2005 and fiscal yearended December 31, 2004 were $200,000 in each year. Changes within totalother income relate to the expiration in the period ended December 31,2004 of a wafer volume option of $0.2 million that was associated with an assetobtained by the wafer production group from a wafer customer. This volumeoption was to be used on orders received over a one-year period. Since the timeexpired, and no orders were received, the Company reduced its liability andrecognized the amount in income, as no further obligation exists. This wasoffset by the increase in interest income of $0.1 million in the period ended December 31,2005 due to increased interest rates, and reduced interest expense and othermiscellaneous expenses of $0.1 million.

 

***Discontinued Operations. *** The loss ondisposal in 2004 was $2.1 million and consisted of $0.9 million in net fixedasset impairments, $1.2 million in inventory impairments and employee severancepay of $78 thousand. In 2005, the Company recognized a gain on disposal of $0.2million consisting primarily of the sale of excess equipment, sale of wafermaterials previously written off and an accrual adjustment related to salestax.

 

***Taxes.****           *Ibis had federal net operating loss and generalbusiness credit carryovers of approximately $88.8 million and $1.3 million,respectively, at December 31, 2005, that may be used to offset futuretaxable income through 2025, subject to the Company’s profitability over thattime and limits that certain ownership changes, as defined in the InternalRevenue Code, have regarding the amount of net operating loss carryforwardsthat can be utilized annually to offset future taxable income. State netoperating loss and credit carryovers of $63.4 million and $1.3 million,respectively, have varying expiration dates. Net deferred tax assets include$3.2 million related to the net operating loss carryover results from theexercise of employee stock options, the tax benefit of which, when recognized,will be accounted for as a credit to additional paid-in capital rather than areduction of income tax expense. Net operating loss carryovers and other taxattributes may be limited in the event of certain changes in ownershipinterests.

 

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

 

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

 

***Equipment Revenue.***  Equipment revenue represents revenuerecognized from the sale of implanters, spare parts and field service revenue.Equipment revenue decreased to $7.5 million for the fiscal year ended December 31,2004 from $8.8 million for the fiscal year ended December 31, 2003, adecrease of $1.3 million,

 

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or 14%. Equipment revenue in 2003 included approximately $8.0 millionfrom the i2000 implanter we shipped to our largest customer late in 2002 andwhich was accepted in the fiscal year ended December 31, 2003. Theimplanter revenue recognized in the fiscal year ended December 31, 2004was for $7.0 million. Field service revenue accounted for $0.4 million, or 5%of equipment revenue for the fiscal year ended December 31, 2004 ascompared to $0.3 million, or 3% of equipment revenue for the fiscal year ended December 31,2003. Sales of spare parts accounted for $0.2 million, or 2% of equipmentrevenue for the fiscal year ended December 31, 2004 as compared to $0.5million, or 6% of equipment revenue, for the fiscal year ended December 31,2003. Sales of spare parts fluctuate depending on customer demand and when thewarranties expire on individual pieces of equipment. Warranty expense iscalculated on our anticipated replacement costs for equipment accepted by ourcustomers over a one or two year contract period.

 

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

 

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

 

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

 

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

 

***General and Administrative Expenses***.  General and administrative expenses for thefiscal year ended December 31, 2004 were $2.2 million (28% of totalrevenue) as compared to $2.3 million (25% of total revenue) for the fiscal yearended December 31, 2003, a decrease of $0.1 million, or 5%. This is due todecreased professional services of $0.1 million, decreased premiums on Director’s &Officers liability insurance of $0.1 million and decreased payroll and payrollrelated expenses of $0.1 million which were offset by increased securitiescompliance costs related to the class action of $0.1 million, increasedcomputer expenses of $45 thousand, and increased service charges of $33thousand for the letter of credit related to the sale of the i2000 implanter.

 

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

 

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

 

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

 

***Discontinued Operations. ***Discontinued operations generated sales of $4.0million and $9.0 million in 2004 and 2003, respectively, and operating lossesof $3.2 million and $17.6 million respectively. The 2003 operating loss relatedto discontinued operations includes $11.1 million impairment charge related towafer manufacturing inventory and fixed assets. The loss on disposal in 2004was $2.1 million and consisted of $0.9 million in net fixed asset impairments,$1.2 million in inventory impairments, and employee severance pay of $78thousand.

 

***Taxes. ***Ibis had federal net operating loss and general businesscredit carryovers of approximately $82.6 million and $1.3 million,respectively, at December 31, 2004, that may be used to offset futuretaxable income, if any, through 2024, subject to the Company’s profitabilityover that time and limits that certain ownership changes, as defined in theInternal Revenue Code, have regarding the amount of net operating losscarryforwards that can be utilized annually to offset future taxable income.State net operating loss and credit carryovers of $63.9 million and $1.5million, respectively, have varying expiration dates. Net deferred tax assetsinclude $3.2 million related to the net operating loss carryover results fromthe exercise of employee stock options, the tax benefit of which, whenrecognized, will be accounted for as a credit to additional paid-in capitalrather than a reduction of income tax expense. Net operating loss carryoversand other tax attributes may be limited in the event of certain changes inownership interests.

 

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#### **Liquidity and CapitalResources**

#### ** **

As of December 31, 2005, Ibis had cash and cashequivalents of $6.9 million, including the down payment of $2.5 million for thesecond i2000 SIMOX implanter order received from SUMCO in the fourth quarter of2005.

 

During the fiscal year ended December 31, 2005,Ibis used $1.2 million of cash for operating activities of continuingoperations as compared to $3.3 million in 2004. To date, Ibis’ working capitalrequirements have been funded primarily through debt (capital leases) andequity financings. The principal uses of cash during the fiscal year ended December 31,2005 were to fund operations and additions to property and equipment whichtotaled $0.1 million. At December 31, 2005, Ibis had commitments topurchase approximately $0.4 million in material to be used for the i2000implanter currently under construction and general operating expenses.

 

As part of our cash management plan, the Companyinitiated additional cost savings measures during 2003 and 2004. This includedthe layoff of twenty-nine employees. In the third quarter of 2004 the Companyannounced that it was discontinuing the wafer manufacturing portion of thebusiness. This resulted in the layoff of an additional seventeen employees withexpected and realized cost savings of approximately $0.3 million per quarter.Our headcount for the year ended December 31, 2005 was 45 employees.

 

In September 2001, Ibis entered into a $4.5million equipment lease line with Heller Financial’s Commercial EquipmentFinance Group. The lease line was used to finance the purchase of processequipment for wafer production, primarily 300 mm wafers. This line was fullydrawn down in two sale-leaseback transactions, bearing interest atapproximately 8% with a term of three years, and a monthly net payment of approximately$0.1 million. Ibis had a fair market value purchase option at the end of thelease term. The lease-line ended in the third quarter of 2004 and the Companyexercised the fair market value purchase option at the negotiated buyout priceof $0.9 million. The Company intends to use the majority of the equipment tosupport its ongoing process development efforts.

 

TheCompany’s management believes that it will have sufficient cash resourcesincluding the cash on hand expected to be received from final customeracceptance of the SUMCO implanter which was received in March 2006 for theimplanter shipped in June 2005, to support current operations for the nexttwelve months. With the receipt of the order received from SUMCO in October 2005,which the Company believes it can ship during the second quarter of 2006,****and presuming that customer acceptance and full payment ofthat order occurs during 2006, the Company believes it will have sufficientcash to support current operating levels through at least the next eighteenmonths. This expectation however, is based on the Company’s current operatingplan and general sales outlook, each of which may change rapidly. The Companyintends to continue to invest in research and development and it’smanufacturing capabilities. Changes in technology or sales growth beyondcurrently established capabilities may require further investment. Moreover,although Ibis is encouraged by the receipt of a second order from SUMCO for ani2000 implanter and the opportunity to work with leading wafer manufacturerslike SUMCO to develop further both the i2000 implanter and to improve the SIMOXprocess, SOI technology is still in an early stage. Further adoption of thetechnology and timing of future equipment orders are dependent on thecontinuing qualification of implanters and improvement programs at the devicemanufacturers, among other factors. Although no assurances can be given, theCompany expects to ship the system in the second quarter of 2006 and collect50% of the purchase price of the system, or $3.5 million. Revenue recognitionand receipt of the final 15% of the purchase price will be based

 

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on final customer acceptanceat the customer’s facility, which is expected to occur in the third or fourthquarter of this year. The timing of final acceptance and revenue recognitionmay vary depending on a number of additional factors, which include among otherthings tool performance at the customer site, and no guarantees can be givenwith respect to whether or when the Company will recognize revenue on thistransaction The timing of future orders is important but difficult topredict because customers can delay orders and/or request orders and/or requestearly shipment, either of which could cause the need for additional cashrequirements. Forecasting future revenue, on a quarter-by-quarter basis,remains exceedingly difficult and significant variations quarter to quarter,are likely. The Company expects to continue to explore equity offerings andother forms of financing and anticipates that we may be required to raiseadditional capital in the future in order to finance future growth and ourresearch and development programs. There can be no assurance, however, that ouractual needs will not exceed expectations or that we will be able to fund ouroperations on a long-term basis in the absence of other sources. There also canbe no assurance that any additional required longer term financing will beavailable through additional bank borrowings, debt or equity offerings orotherwise, or that if such financing is available, that it will be available onterms acceptable to us.

 

**Off-Balance Sheet Arrangements**

 

**We do not have any off-balance sheet arrangements as defined inRegulation S-K Section 303(a)(4)(ii).**

 

**Contractual Obligations**

 

We have no significant contractualobligations not fully recorded on our Balance Sheets or fully disclosed in theNotes to our Financial Statements.  Wehave no off-balance sheet arrangements as defined in Regulation S-K Section 303(a)(4)(ii).

 

At December 31, 2005, our outstandingcontractual obligations included:

 
| ** **                           | ** ** | **Payment due by period** | ** ** |
|--------------------------------------|------------|---------------------------|------------|
| **Contractual Obligations**          | ** ** | **Total**                 | ** ** | **Less than  1 year** | ** ** | **1  year** | ** ** | **2  years** | ** ** | **3-5  years** | ** ** | **More  than  5 years** | ** ** |
| Minimum  Operating Lease Payments    |       | $                         | 391,366    |   | $ | 384,386 |   | $ | 4,424 |   | $ | 852 |   | $ | 1,704 |   | $ | — |   |
| Minimum  Royalty Payment Obligations |       | 20,000                    |       | 10,000 |   | 10,000 |   | — |   | — |   | — |   |
| Total                                |       | $                         | 411,366    |   | $ | 394,386 |   | $ | 14,424 |   | $ | 852 |   | $ | 1,704 |   | $ | — |   |

 

Additional information regarding ourfinancial commitments at December 31, 2005 is provided in the Notes to ourFinancial Statements. See “Notes to Financial Statements, Note 8, Commitmentsand Contingencies”.

 

**Effects Of Inflation**

 

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

 

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**New Accounting Pronouncements**

 

In December 2004, theFASB issued FASB Statement No. 123 (revised 2004), *“Shared-Based Payment**Statement123(R)”.* Statement 123(R) addresses the accounting forshare-based payment transactions in which an enterprise receives employeeservices in exchange for (a) equity instruments of the enterprise or (b) liabilitiesthat are based on the fair value of the enterprise’s equity instruments or thatmay be settled by the issuance of such equity instruments. Statement 123(R)requires an entity to recognize the grant-date fair-value of stock options andother equity-based compensation issued to employees in the income statement.The revised Statement generally requires that an entity account for thosetransactions using the fair-value-based method, and eliminates the intrinsicvalue method of accounting in APB Opinion No. 25, *“Accounting for Stock Issued to Employees”,*which was permitted under Statement 123, as originally issued.

 

The revised Statementrequires entities to disclose information about the nature of the share-basedpayment transactions and the effects of those transactions on the financialstatements. Statement 123(R) is effective for public companies that do not fileas small business issuers as of the beginning of the first interim or annualreporting period that begins after December 31, 2005 (i.e., first quarter2006 for the Company). All public companies must use either the modifiedprospective or the modified retrospective transition method. Early adoption ofthis Statement for interim or annual periods for which financial statements orinterim reports have not been issued is encouraged. The Company is currentlyevaluating the impact of the adopting of this statement.

 

In November 2004, theFASB issued Statement No. 151, *“InventoryCosts”*, to amend the guidance in Chapter 4, *“Inventory Pricing”*, of FASB AccountingResearch Bulletin No. 43, *“Restatementand Revision of Accounting Research Bulletins.”*Statement No. 151clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). The Statement requiresthat those items be recognized as current-period charges. Additionally,Statement 151 requires that allocation of fixed production overheads to thecosts of conversion be based on the normal capacity of the productionfacilities. Statement No. 151 is effective for fiscal years beginningafter June 15, 2005. The Company has determined that there is noadditional impact from the adoption of this Statement.

 

# **Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT 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.

 

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**FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**IBISTECHNOLOGY CORPORATION**

 

**Item 8.  Index to Financial Statements andFinancial Statement Schedule**

 
| Financial Statements:                                                                                           | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                            |       |
| Report of Independent Registered Public  Accounting Firm                                                        |       |
| Balance Sheets as of December 31, 2004  and 2005                                                           |       |
| Statements of Operations for the Years  Ended December 31, 2003, 2004 and 2005                             |       |
| Statements of Stockholders’ Equity for the  Years Ended December 31, 2003, 2004 and 2005              |       |
| Statements of Cash Flows for the Years  Ended December 31, 2003, 2004 and 2005                             |       |
| Notes to Financial Statements                                                                                   |       |
|                                                                                                            |       |
| Schedule:                                                                                                       |       |
| Report of Independent Registered Public Accounting  Firm on Financial Statement Schedule                        |       |
| Schedule II - Valuation and Qualifying Accounts for the Years  Ended December 31, 2003, 2004 and 2005 |       |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

The Board of Directors and Stockholders

Ibis Technology Corporation:

 

We have audited the accompanying balancesheets of Ibis Technology Corporation as of December 31, 2004 and 2005,and the related statements of operations, stockholders’ equity, and cash flowsfor each of the years in the three-year period ended December 31,2005.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includesassessing accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialposition of Ibis Technology Corporation at December 31, 2004 and 2005, andthe results of its operations and its cash flows for each of the years in thethree-year period ended December 31, 2005, in conformity with U.S.generally accepted accounting principles.

 

 
|                                          | /s/ KPMG LLP |   |
|-----------------------------------------------|--------------|--------|
|                                          |
| Boston, Massachusetts                         |
| February 17, 2006, except as             |
| to note 3  which is as of March 14, 2006 |

 

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**IBISTECHNOLOGY CORPORATION**

 

**BALANCE SHEETS**

 

**December 31,2004 and 2005**

 

 
| ** **                                                                                                             | ** ** | **2004**    | ** ** | **2005**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Assets**                                                                                                             |       |        |       |        |       |
| **Current assets:**                                                                                                    |       |        |       |        |       |
| Cash and  cash equivalents                                                                                             |       | $           | 7,726,072  |        | $          | 6,856,874 |   |
| Accounts  receivable, trade, net (notes 4 and 16)                                                                      |       | 221,779     |       | 90,878      |       |
| Inventories,  net (note 5)                                                                                             |       | 5,625,167   |       | 6,276,650   |       |
| Prepaid  expenses and other current assets.                                                                            |       | 573,400     |       | 615,702     |       |
| Assets held  for sale                                                                                                  |       | 131,416     |       | —      |       |
| Total  current assets                                                                                                  |       | 14,277,834  |       | 13,840,104  |       |
| Property and equipment (notes 6, 8 and 18)                                                                             |       | 33,660,086  |       | 26,448,906  |       |
| Less: Accumulated  depreciation and amortization                                                                       |       | (27,335,477 | )          | (21,352,154 | )          |
| Net property  and equipment                                                                                            |       | 6,324,609   |       | 5,096,752   |       |
| Patents and other assets, net (note 7)                                                                                 |       | 1,680,197   |       | 1,055,532   |       |
| Total assets                                                                                                           |       | $           | 22,282,640 |        | $          | 19,992,388 |   |
|                                                                                                                   |       |        |       |        |       |
| **Liabilities and Stockholders’ Equity**                                                                          |       |        |       |        |       |
| **Current liabilities:**                                                                                               |       |        |       |        |       |
| Accounts  payable                                                                                                      |       | $           | 392,875    |        | $          | 230,871 |   |
| Accrued  liabilities (notes 9 and 10)                                                                                  |       | 1,417,904   |       | 1,201,695   |       |
| Deferred  revenue (note 11)                                                                                            |       | 52,000      |       | 7,263,000   |       |
| Total  current liabilities                                                                                             |       | 1,862,779   |       | 8,695,566   |       |
| Total  liabilities                                                                                                     |       | 1,862,779   |       | 8,695,566   |       |
|                                                                                                                   |       |        |       |        |       |
| **Commitments and contingencies (notes 8, 11  and 16)**                                                                |       |        |       |        |       |
|                                                                                                                   |       |        |       |        |       |
| **Stockholders’ equity (notes 14 and 15):**                                                                       |       |        |       |        |       |
| Undesignated  preferred stock, $.01 par value  Authorized 2,000,000 shares; none issued                                |       | —      |       | —      |       |
| Common  stock, $.008 par value                                                                                         |       |        |       |        |       |
| Authorized  50,000,000 shares; issued and outstanding 10,719,595 shares and 10,816,029 in  2004 and 2005, respectively |       | 85,757      |       | 86,528      |       |
| Additional  paid-in capital                                                                                            |       | 93,124,259  |       | 93,245,754  |       |
| Accumulated  deficit                                                                                                   |       | (72,790,155 | )          | (82,035,460 | )          |
| Total  stockholders’ equity                                                                                       |       | 20,419,861  |       | 11,296,822  |       |
| Total  liabilities and stockholders’ equity                                                                       |       | $           | 22,282,640 |        | $          | 19,992,388 |   |

 

See accompanying notes tofinancial statements.

 

38

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# **IBIS TECHNOLOGY CORPORATION**

# ** **

**STATEMENTS OF OPERATIONS**

 

# **Years ended December 31, 2003, 2004 and 2005**

# ** **

| ** **                                           | ** ** | **2003**    | ** **  | **2004**   | ** ** | **2005**    | ** ** |
|------------------------------------------------------|------------|-------------|-------------|------------|------------|-------------|------------|
|                                                 |       |        |        |       |       |        |       |
| Contract and  other revenue (note 12)                |       | $           | 660,429     |       | $          | 390,975     |       | $ | 324,621 |   |
| Equipment  revenue.                                  |       | 8,781,907   |        | 7,535,270  |       | 277,684     |       |
| Total sales  and revenue (note 16)                   |       | 9,442,336   |        | 7,926,245  |       | 602,305     |       |
|                                                 |       |        |        |       |       |        |       |
| Cost of  contract and other revenue                  |       | 44,579      |        | 15,370     |       | —      |       |
| Cost of  equipment revenue                           |       | 4,331,044   |        | 4,721,673  |       | 750,472     |       |
| Total cost  of sales and revenue                     |       | 4,375,623   |        | 4,737,043  |       | 750,472     |       |
|                                                 |       |        |        |       |       |        |       |
| Gross profit  (loss)                                 |       | 5,066,713   |        | 3,189,202  |       | (148,167    | )          |
|                                                 |       |        |        |       |       |        |       |
| Operating  expenses:                                 |       |        |        |       |       |        |       |
| General and  administrative                          |       | 2,337,463   |        | 2,221,167  |       | 2,216,748   |       |
| Marketing  and selling                               |       | 1,235,798   |        | 1,520,508  |       | 1,318,979   |       |
| Research and  development                            |       | 5,380,868   |        | 5,329,528  |       | 5,993,350   |       |
| Total  operating expenses                            |       | 8,954,129   |        | 9,071,203  |       | 9,529,077   |       |
|                                                 |       |        |        |       |       |        |       |
| Loss from  operations                                |       | (3,887,416  | )           | (5,882,001 | )          | (9,677,244  | )          |
|                                                 |       |        |        |       |       |        |       |
| Other income  (expense):                             |       |        |        |       |       |        |       |
| Interest  income                                     |       | 80,511      |        | 110,385    |       | 208,818     |       |
| Interest  expense                                    |       | (58,399     | )           | (34,718    | )          | (536        | )          |
| Other (note  16)                                     |       | 5,398       |        | 166,418    |       | 9,671       |       |
| Total other  income                                  |       | 27,510      |        | 242,085    |       | 217,953     |       |
|                                                 |       |        |        |       |       |        |       |
| Loss from  continuing operations before income taxes |       | (3,859,906  | )           | (5,639,916 | )          | (9,459,291  | )          |
|                                                 |       |        |        |       |       |        |       |
| Income tax  expense (benefit) (note 13)              |       | (7,744      | )           | 1,256      |       | 1,256       |       |
| Loss from  continuing operations                     |       | (3,852,162  | )           | (5,641,172 | )          | (9,460,547  | )          |
|                                                 |       |        |        |       |       |        |       |
| Discontinued  operations (note 18):                  |       |        |        |       |       |        |       |
| Loss from  discontinued operations                   |       | (17,597,627 | )           | (3,178,529 | )          | —      |       |
| Gain (loss)  on disposal                             |       | —      |        | (2,098,840 | )          | 215,242     |       |
| Income  (loss) from discontinued operations          |       | (17,597,627 | )           | (5,277,369 | )          | 215,242     |       |
|                                                 |       |        |        |       |       |        |       |
| Net loss                                             |       | $           | (21,449,789 | )          | $          | (10,918,541 | )          | $ | (9,245,305 | ) |
|                                                 |       |        |        |       |       |        |       |
| Earnings  (loss) per share:                          |       |        |        |       |       |        |       |
| Basic                                                |       |        |        |       |       |        |       |
| Continuing  operations                               |       | $           | (0.40       | )          | $          | (0.53       | )          | $ | (0.88 | ) |
| Discontinued  operations                             |       | (1.81       | )           | (0.49      | )          | (0.02       | )          |
|                                                 |       |        |        |       |       |        |       |
| Net loss                                             |       | $           | (2.21       | )          | $          | (1.02       | )          | $ | (0.86 | ) |
|                                                 |       |        |        |       |       |        |       |
| Diluted                                              |       |        |        |       |       |        |       |
| Continuing  operations                               |       | $           | (0.40       | )          | $          | (0.53       | )          | $ | (0.88 | ) |
| Discontinued  operations                             |       | (1.81       | )           | (0.49      | )          | 0.02        |       |
|                                                 |       |        |        |       |       |        |       |
| Net loss                                             |       | $           | (2.21       | )          | $          | (1.02       | )          | $ | (0.86 | ) |
|                                                 |       |        |        |       |       |        |       |
| Weighted  average common shares outstanding          |       |        |        |       |       |        |       |
| Basic                                                |       | 9,727,513   |        | 10,665,842 |       | 10,737,924  |       |
| Diluted                                              |       | 9,727,513   |        | 10,665,842 |       | 10,737,924  |       |

 

See accompanying notes tofinancial statements.

 

39

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**IBISTECHNOLOGY CORPORATION**

 

**STATEMENTS OF STOCKHOLDERS’ EQUITY**

 

**Yearsended December 31, 2003, 2004 and 2005**

 
| ** **                                              | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total  Stockholders’  Equity** | ** **  |
|---------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|---------------------------------------|-------------|
|                                                    |       |              |       |                             |       |                     |       |                                  |        |
| **Balances  at December 31, 2002**                 |       | $                 | 75,799     |                             | $          | 79,101,032               |       | $                                     | (40,421,825 | ) | $ | 38,755,006 |   |
|                                                    |       |              |       |                             |       |                     |       |                                  |        |
| Exercise of  stock options                              |       | 989               |       | 986,814                          |       | —                   |       | 987,803                               |        |
| Common stock  issued, net of issuance costs of $696,571 |       | 8,000             |       | 12,545,429                       |       | —                   |       | 12,553,429                            |        |
| Employee  Stock Purchase Plan                           |       | 421               |       | 270,343                          |       | —                   |       | 270,764                               |        |
| Net loss                                                |       | —            |       | —                           |       | (21,449,789              | )          | (21,449,789                           | )           |
|                                                    |       |              |       |                             |       |                     |       |                                  |        |
| **Balances  at December 31, 2003**                 |       | 85,209            |       | 92,903,618                       |       | (61,871,614              | )          | 31,117,213                            |        |
|                                                    |       |              |       |                             |       |                     |       |                                  |        |
| Exercise of  stock options                              |       | 4                 |       | 3,056                            |       | —                   |       | 3,060                                 |        |
| Employee  Stock Purchase Plan                           |       | 544               |       | 217,585                          |       | —                   |       | 218,129                               |        |
| Net loss                                                |       | —            |       | —                           |       | (10,918,541              | )          | (10,918,541                           | )           |
|                                                    |       |              |       |                             |       |                     |       |                                  |        |
| **Balances  at December 31, 2004**                 |       | 85,757            |       | 93,124,259                       |       | (72,790,155              | )          | 20,419,861                            |        |
| ** **                                              |       |              |       |                             |       |                     |       |                                  |        |
| Exercise of  stock options                              |       | —            |       | 8,550                            |       | —                   |       | 8,550                                 |        |
| Employee  Stock Purchase Plan                           |       | 771               |       | 112,945                          |       | —                   |       | 113,716                               |        |
| Net loss                                                |       | —            |       | —                           |       | (9,245,305               | )          | (9,245,305                            | )           |
|                                                    |       |              |       |                             |       |                     |       |                                  |        |
| **Balances  at December 31, 2005**                 |       | $                 | 86,528     |                             | $          | 93,245,754               |       | $                                     | (82,035,460 | ) | $ | 11,296,822 |   |

 

See accompanying notes tofinancial statements

 

40

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**IBISTECHNOLOGY CORPORATION**

 

**STATEMENTS OF CASH FLOWS**

 

# **Years ended December 31, 2003, 2004 and 2005**

 
| ** **                                                                             | ** ** | **2003**    | ** **  | **2004**   | ** ** | **2005**    | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|-------------|------------|
| **Cash  flows from operating activities:**                                             |       |        |        |       |       |        |       |
| Net loss.                                                                              |       | $           | (21,449,789 | )          | $          | (10,918,541 | )          | $ | (9,245,305 | ) |
| Less: income  (loss) from discontinued operations                                      |       | (17,597,627 | )           | (5,277,369 | )          | 215,242     |       |
| Loss from  continuing operations                                                       |       | (3,852,162  | )           | (5,641,172 | )          | (9,460,547  | )          |
| Adjustments  to reconcile net loss to net cash used in operating activities:           |       |        |        |       |       |        |       |
| Depreciation  and amortization.                                                        |       | 1,510,460   |        | 1,962,716  |       | 1,746,989   |       |
| Changes in  operating assets and liabilities:                                          |       |        |        |       |       |        |       |
| Accounts  receivable, trade                                                            |       | 426,286     |        | 6,340      |       | 117,023     |       |
| Unbilled  revenue                                                                      |       | (528,581    | )           | 528,581    |       | —      |       |
| Inventories                                                                            |       | —      |        | 141,404    |       | (651,483    | )          |
| Deferred  costs                                                                        |       | 2,621,580   |        | —     |       | —      |       |
| Prepaid  expenses and other current assets                                             |       | (67,116     | )           | 92,600     |       | (42,302     | )          |
| Accounts  payable                                                                      |       | (133,468    | )           | 184,893    |       | (162,004    | )          |
| Accrued  liabilities and deferred revenue                                              |       | (6,150,171  | )           | (613,114   | )          | 7,240,174   |       |
| Net cash  used in operating activities of continuing operations                        |       | (6,173,172  | )           | (3,337,752 | )          | (1,212,150  | )          |
| **Cash  flows from investing activities:**                                             |       |        |        |       |       |        |       |
| Additions to  property and equipment, net                                              |       | (30,133     | )           | (721,002   | )          | (149,648    | )          |
| Additions to  assets held for sale                                                     |       | —      |        | (131,416   | )          | —      |       |
| Other assets                                                                           |       | (110,774    | )           | (102,815   | )          | 247,988     |       |
| Net cash  provided (used) in investing activities of continuing operations             |       | (140,907    | )           | (955,233   | )          | 98,340      |       |
| **Cash  flows from financing activities:**                                             |       |        |        |       |       |        |       |
| Proceeds  from sales of common stock, net of issuance costs                            |       | 12,553,429  |        | —     |       | —      |       |
| Exercise of  stock options, warrants and Employee Stock Purchase Plan                  |       | 1,258,567   |        | 221,189    |       | 122,266     |       |
| Net cash provided  by financing activities of continuing operations                    |       | 13,811,996  |        | 221,189    |       | 122,266     |       |
| **Cash  flows of discontinued operations:**(Revised See Note  18):                     |       |        |        |       |       |        |       |
| Operating cash  flows                                                                  |       | (1,965,389  | )           | (1,524,213 | )          | 45,297      |       |
| Investing  cash flows                                                                  |       | (1,602,314  | )           | 331,764    |       | 77,049      |       |
| Financing  cash flows                                                                  |       | (1,501,416  |        | (1,184,399 | )          | —      |       |
| Net cash  provided (used) in discontinued operations                                   |       | (5,069,119  | )           | (2,376,848 | )          | 122,346     |       |
| Net increase  (decrease) in cash and cash equivalents                                  |       | 2,428,798   |        | (6,448,644 | )          | (869,198    | )          |
| Cash and  cash equivalents, beginning of year                                          |       | 11,745,918  |        | 14,174,716 |       | 7,726,072   |       |
| Cash and  cash equivalents, end of year                                                |       | $           | 14,174,716  |       | $          | 7,726,072   |       | $ | 6,856,874 |   |
|                                                                                   |       |        |        |       |       |        |       |
| Supplemental  disclosures of cash flow information:                                    |       |        |        |       |       |        |       |
| Cash paid  during the year for interest                                                |       | $           | 58,399      |       | $          | 34,718      |       | $ | 536 |   |
| Transfer of  internally constructed equipment from property and equipment to inventory |       | $           | —      |       | $          | 3,674,903   |       | $ | — |   |

 

See accompanying notes tofinancial statements.

 

41

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**IBISTECHNOLOGY CORPORATION**

 

**NOTES TO FINANCIAL STATEMENTS**

 

# **December 31, 2004 and 2005**

# ** **

**(1) Natureof Business and Organization**

 

Ibis Technology Corporation (the “Company”)was incorporated in October 1987 for the purpose of supplyingsilicon-on-insulator (SOI) wafers formed by SIMOX (Separation by Implantationof Oxygen) technology. SIMOX-SOI wafers were manufactured by the Company usinga specialized oxygen ion implanter, which was developed and manufactured by theCompany and is integrated with other specialized processes and characterizationequipment. The Company is the leading manufacturer of high current oxygenimplanters and began selling these oxygen implanters in 1996.

 

**(2) Summary of Significant AccountingPolicies**

 

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

 

Cash equivalents represent highly liquidinvestments with original maturities of three months or less.

 

**(b) *Inventories***

 

Inventories are stated at the lower of costor market. Cost is determined using the first-in, first-out (“FIFO”) costmethod.

 

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

 

Property and equipment is stated at cost.Depreciation is provided using the straight-line method over the estimateduseful lives of the respective assets, ranging from three to eight years.Amortization of leasehold improvements is provided using the straight-linemethod over the lesser of the life of the lease, or the estimated useful lifeof the asset.

 

The Company reviews its long-lived assets forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset or asset group may not be recoverable.Recoverability of assets to be held and used is assessed by a comparison of thecarrying amount of an asset to future net discounted cash flows expected to begenerated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured by the degree to which the carryingamount of the assets exceeds the fair value of the assets.

 

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

 

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

 

**(e) *Revenue Recognition***

 

The Company historically recognized revenuefrom equipment sales and the sales of spare parts when all of the followingcriteria have been met: (1) evidence exists that the customer is bound tothe transaction; (2) the product has been delivered to the customer and,when applicable, the product has been installed and accepted by the customer; (3) thesales price to the customer has been fixed or is determinable; and (4) collectibilityof the sale price is reasonably assured. The Company 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 contracts and services is recognized upon

 

42

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performance. Provisions for anticipated losses are made in the periodin which such losses become determinable

 

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

 

Research and development costs are charged toexpense as incurred.

 

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

 

Net income (loss) pershare of common stock is computed based upon the weighted average number ofshares outstanding during each period and including the dilutive effect, ifany, of stock options and warrants. SFAS 128 requires the presentation of basicand diluted earnings (loss) per share for all periods presented. As the Companywas in a net loss position for each of the years in the three-years ended December 31,2005, common stock equivalents of 94,706, 133,092 and 74,590 for the yearsended December 31, 2003, 2004 and 2005, respectively, were excluded fromthe diluted loss per share calculation as they would be antidilutive. As aresult, diluted loss per share is the same as basic loss per share for 2003,2004 and 2005.

 

The reconciliation ofthe denominators of the basic and diluted net income (loss) per common sharefor the Company’s net income (loss) is as follows:

 
| ** **                                                     | ** ** | **Years Ended December 31,** | ** **  |
|----------------------------------------------------------------|------------|-----------------------------------|-------------|
| ** **                                                     | ** ** | **2003**                          | ** **  | **2004** | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | **Diluted**                       | ** **  | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** |
| Loss from:                                                     |       |                              |        |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                          |       | $                                 | (3,852,162  | ) | $ | (3,852,162 | ) | $ | (5,641,172 | ) | $ | (5,641,172 | ) | $ | (9,460,547 | ) | $ | (9,460,547 | ) |
| Discontinued operations                                        |       | (17,597,627                       | )           | (17,597,627 | ) | (5,277,369 | ) | (5,277,369 | ) | 215,242 |   | 215,242 |   |
| Net Loss                                                       |       | $                                 | (21,449,789 | ) | $ | (21,449,789 | ) | $ | (10,918,541 | ) | $ | (10,918,541 | ) | $ | (9,245,305 | ) | $ | (9,245,305 | ) |
| Weighted average common shares outstanding                     |       | 9,727,513                         |        | 9,727,513 |   | 10,665,842 |   | 10,665,842 |   | 10,737,924 |   | 10,737,924 |   |
|                                                           |       |                              |        |   |   |   |   |   |   |   |   |   |   |
| Potential common share equivalents                             |       | —                            |        |   |   | — |   |   |   | — |   |   |   |
| Weighted average shares outstanding                            |       | 9,727,513                         |        |   |   | 10,665,842 |   |   |   | 10,737,924 |   |   |   |
| Earnings (loss) per common share and common share  equivalents |       |                              |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                          |       | $                                 | (0.40       | ) | $ | (0.40 | ) | $ | (0.53 | ) | $ | (0.53 | ) | $ | (0.88 | ) | $ | (0.88 | ) |
| Discontinued operations                                        |       | (1.81                             | )           | (1.81 | ) | (0.49 | ) | (0.49 | ) | 0.02 |   | 0.02 |   |
| Net loss                                                       |       | $                                 | (2.21       | ) | $ | (2.21 | ) | $ | (1.02 | ) | $ | (1.02 | ) | $ | (0.86 | ) | $ | (0.86 | ) |

 

**h) *Issuance Costs***

 

Common stock issuance costs are nettedagainst additional paid-in capital.

 

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

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting period. Actual results maydiffer from these estimates. Management exercises judgment and relies onestimates in recognizing revenue,

 

43

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valuinginventory, 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***

 

Financial instruments of the Company consistof cash and cash equivalents, accounts receivable, accounts payable and accruedliabilities. The carrying amount of these financial instruments approximatesfair value.

 

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

 

The Company accounts for its stock option plans underthe recognition and measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees. No stock-based compensation cost isreflected in net income for these plans, as all options granted under theseplans had an exercise price equal to the market value of the underlying commonstock on the date of grant. The following table illustrates the effect on net loss and loss pershare if the Company had applied the fair value recognition provisions of SFASStatement No. 123, Accounting for Stock Based Compensation (“Statement 123”),to stock based compensation.

 
| ** **                                                                                                 | ** ** | **Year Ended December 31,** | ** **  |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                                                 | ** ** | **2003**                         | ** **  | **2004** | ** ** | **2005** | ** ** |
| Net loss, as  reported                                                                                     |       | $                                | (21,449,789 | ) | $ | (10,918,541 | ) | $ | (9,245,305 | ) |
| Add:  Stock-based employee compensation expense included in reported net loss, net  of related tax effects |       | (2,726,741                       | )           | (1,284,491 | ) | (717,379 | ) |
| Pro-forma  net loss                                                                                        |       | $                                | (24,176,530 | ) | $ | (12,203,032 | ) | $ | (9,962,684 | ) |
| Net loss per  share:                                                                                       |       |                             |        |   |   |   |   |
| Basic – as  reported                                                                                  |       | $                                | (2.21       | ) | $ | (1.02 | ) | $ | (0.86 | ) |
| Basic –  pro-forma                                                                                    |       | $                                | (2.49       | ) | $ | (1.14 | ) | $ | (0.93 | ) |
| Diluted – as  reported                                                                                |       | $                                | (2.21       | ) | $ | (1.02 | ) | $ | (0.86 | ) |
| Diluted –  pro-forma                                                                                  |       | $                                | (2.49       | ) | $ | (1.14 | ) | $ | (0.93 | ) |

 

The fair value of each stock option isestimated on the date of grant using the Black-Scholes option-pricing modelwith the following weighted-average assumptions:

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

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

 

44

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| ** **                                                      | ** ** | **2005**           | ** ** |
|-----------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                      | ** ** | **Stock  Options** | ** ** | **ESPP1** | ** ** | **ESPP2** | ** ** |
| Risk-free  interest rate                                        |       | 2.98               | %          | 2.91 | % | 3.79 | % |
| Expected  dividend yield                                        |       | —             |       | — |   | — |   |
| Expected  volatility                                            |       | 94.82              | %          | 112.00 | % | 86.28 | % |
| Expected  life (years)                                          |       | 4                  |       | .5 |   | .5 |   |
| Weighted  average fair value of options granted during the year |       | $                  | 1.05       |   | $ | 0.47 |   | $ | 0.44 |   |
|                                                                 |            |                    |            |  |  |  |  |  |  |  |

 

Pro forma net loss reflects only options granted in1995 through 2005. Therefore, the full impact of calculating compensation costsfor stock options under SFAS No. 123 is not reflected because compensationcosts for options granted prior to January 1, 1995 are not considered.

 

**(l) *Reclassifications***

 

Certainprior year amounts have been reclassified to conform to current yearpresentation. These reclassifications had no effect on the Company’s reportednet loss or financial position.

 

**(m)  *New AccountingPronouncements***

 

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

 

The revised Statementrequires entities to disclose information about the nature of the share-basedpayment transactions and the effects of those transactions on the financialstatements.

 

Statement 123(R) iseffective for public companies that do not file as small business issuers as ofthe beginning of the first interim or annual reporting period that begins afterDecember 15, 2005 (i.e., first quarter 2006 for the Company). All publiccompanies must use either the modified prospective or the modifiedretrospective transition method. Early adoption of this Statement for interimor annual periods for which financial statements or interim reports have notbeen issued is encouraged. The Company is currently evaluating the impact ofthe adoption of this Statement.

 

In August 2001, theFASB issued Statement No. 143, “Accounting for Conditional AssetRetirement Obligations” which states “An entity shall recognize the fair valueof a liability for an asset retirement obligation in the period in which it isincurred if a reasonable estimate of fair value can be made.”  FASBInterpretation No. 47 is an interpretation of FASB Statement No. 143 which clarifies thatthe term *conditional asset retirement obligation* refers to a legal obligation to perform anasset retirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity. The obligation to perform the asset retirement activity isunconditional even though uncertainty exists about the timing and (or) methodof settlement. Thus, the timing and (or) method of settlement may beconditional on a future event. Accordingly, an entity is required to recognizea liability for

 

45

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the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonably estimated. Thefair value of a liability for the conditional asset retirement obligationshould be recognized when incurred—generally upon acquisition, construction, ordevelopment and (or) through the normal operation of the asset. Uncertaintyabout the timing and (or) method of settlement of a conditional assetretirement obligation should be factored into the measurement of the liabilitywhen sufficient information exists. Statement No.143 acknowledges that in somecases, sufficient information may not be available to reasonably estimate the fairvalue of an asset retirement obligation. This Interpretation also clarifieswhen an entity would have sufficient information to reasonably estimate thefair value of an asset retirement obligation. Statement No. 143 is effective forfiscal years beginning after December 15, 2005. The Company has determinedthat there is no additional impact from the adoption of this Statement.

 

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

 

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

#### ** **

Historically, the Company has financed its operationsand met its capital requirements through funds generated from operations, theissuance of common stock, equipment lines of credit, a working capital line ofcredit, a term loan, sales-leaseback arrangements and collaborativearrangements. In July 2004, the Company discontinued its wafermanufacturing business, which was characterized by volatile production volumesand costs associated with periodic changes and continuing improvements in theprocess. Because of this unpredictability, and because it was also likely that additionalcapital investments would have to be made to keep the wafer manufacturingprocess up to date, the Company decided to discontinue the wafer manufacturingportion of the business in 2004 and to focus exclusively on the equipmentmanufacturing business.  The Company willmaintain a research and development effort focused on continuous improvement ofthe equipment capabilities and for supporting the Company’s equipment customers’needs.

 

As part of our cash management plan the Companyinitiated additional cost savings measures during 2003 and 2004, including thelayoff of twenty-nine employees. In addition to eliminating future lossesexpected from the wafer segment of the business the discontinuance of the wafermanufacturing operations resulted in the layoff of seventeen employees withexpected and realized cost savings of approximately $0.3 million per quarter.Our headcount for the year ended December 31, 2005 was 45 employees.

 

As of December 31, 2005, the Company had cash andcash equivalents of $6.9 million, including the down payment of $2.5 millionfor the second i2000 SIMOX implanter order received from SUMCO in the fourthquarter of 2005. During the fiscal year ended December 31, 2005, Ibis used$1.2 million of cash for operating activities of continuing operations ascompared to $3.3 million in 2004. The principal uses of cash during the fiscalyear ended December 31, 2005 were to fund operations and additions toproperty and equipment which totaled $0.1 million. At December 31, 2005,Ibis had commitments to purchase approximately $0.4 million in material to beused for the i2000 implanter currently under construction and general operatingexpenses.

 

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In September 2001, Ibis entered into a $4.5million equipment lease line with Heller Financial’s Commercial EquipmentFinance Group. The lease line was used to finance the purchase of processequipment for wafer production, primarily 300 mm wafers. This line was fullydrawn down in two sale-leaseback transactions, bearing interest atapproximately 8% with a term of three years, and a monthly net payment ofapproximately $0.1 million. Ibis had a fair market value purchase option at theend of the lease term. The lease-line ended in the third quarter of 2004 andthe Company exercised the fair market value purchase option at the negotiatedbuyout price of $0.9 million. The Company intends to use the majority of theequipment to support its ongoing process development efforts.

 

The Company’s management believes that it will havesufficient cash resources including the cash on hand expected to be receivedfrom final customer acceptance of the SUMCO implanter which was received in March 2006for the implanter shipped in June 2005 to support current operations forthe next twelve months. This expectation however, is based on the Company’scurrent operating plan and general sales outlook, each of which may changerapidly. The Company intends to continue to invest in research, development andmanufacturing capabilities. Changes in technology or sales growth beyondcurrently established capabilities may require further investment. Moreover,although Ibis is encouraged by the receipt of a second order from SUMCO for ani2000 implanter and the opportunity to work with leading wafer manufacturerslike SUMCO to develop further both the i2000 implanter and to improve the SIMOXprocess, SOI technology is still in an early stage. Further adoption of thetechnology and the timing of future equipment orders are dependent on thecontinuing qualification of implanters and improvement programs at the devicemanufacturers, among other factors. Although no assurances can be given, the Company expectsto ship the second SUMCO order in the second quarter of 2006 and collect 50% of the purchase price ofthe system, or $3.5 million. Revenue recognition and receipt of the final 15%of the purchase price will be based on final customer acceptance at thecustomer’s facility, which is expected to occur in the third or fourth quarterof this year. Factory acceptance and final customer acceptance of this systemwill require incrementally higher wafer throughput, which may involve some riskof delay. The timing of final acceptance and revenue recognition may varydepending on a number of additional factors, which include among other thingstool performance at the customer site, and no guarantees can be given withrespect to whether or when the Company will recognize revenue on thistransaction. The timing of future orders is important and difficult to predictbecause customers can delay orders and/or request early shipment, either ofwhich could cause the need for additional cash requirements. Forecasting futurerevenue, on a quarter-by-quarter basis, remains exceedingly difficult and significantvariations quarter to quarter, are likely. The Company expects to continue toexplore equity offerings and other forms of financing and anticipates that wemay be required to raise additional capital in the future in order to financefuture growth and our research and development programs. There can be noassurance, however, that our actual needs will not exceed expectations or thatwe will be able to fund our operations on a long-term basis in the absence ofother sources. There also can be no assurance that any additional requiredlonger term financing will be available through additional bank borrowings,debt or equity offerings or otherwise, or that if such financing is available,that it will be available on terms acceptable to us.

 

47

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**(4) Accounts Receivable**

 

Accounts receivable consisted of thefollowing at December 31:

 
| ** **                            | ** ** | **2004** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |
| Accounts receivable, trade            |       | $        | 59,458     |     | $          | 36,250 |   |
| Less: Allowance for doubtful accounts |       | (25,000  | )          | (25,000  | )          |
| Accounts receivable, other            |       | 187,321  |       | 79,628   |       |
|                                  |       | $        | 221,779    |     | $          | 90,878 |   |

 

**(5) Inventories**

 

Inventories consisted of the following at December 31:

 
| ** **                 | ** ** | **2004**  | ** ** | **2005**  | ** ** |
|----------------------------|------------|-----------|------------|-----------|------------|
|                       |       |      |       |      |       |
| Raw  materials             |       | $         | 3,622,501  |      | $          | 1,790,923 |   |
| Work in  process           |       | 57,330    |       | 1,980,513 |       |
| Finished  goods            |       | 1,945,336 |       | 2,505,214 |       |
| Total  equipment inventory |       | $         | 5,625,167  |      | $          | 6,276,650 |   |

 

Equipment inventory at December 31, 2005 consists of i2000 partsand/or implanters under construction or otherwise available for resale. Withthe discontinuance of the wafer operation in the third quarter of 2004, allwafer inventory was written off to the loss from discontinued operations withthe exception of the 300 mm raw wafers valued at $0.8 million, that wasreclassified as prepaid expenses in 2004 and other assets to be used for futureR&D and implanter qualifications. The balance remaining of these 300 mm rawwafers at December 31, 2005 is $0.4 million.

 

At December 31, 2005, the Company had commitments to purchaseapproximately $0.4 million in material to be used for the i2000 implanter underconstruction and general operating expenses.

 

**(6) Property and Equipment**

 

Property and equipment consisted of thefollowing at December 31:

 
| ** **                | ** ** | **2004**  | ** ** | **2005**  | ** ** |
|---------------------------|------------|-----------|------------|-----------|------------|
|                      |       |      |       |      |       |
| Machinery  and equipment  |       | $         | 27,662,517 |      | $          | 21,160,832 |   |
| Furniture  and fixtures   |       | 416,260   |       | 408,593   |       |
| Leasehold  improvements   |       | 5,575,038 |       | 4,733,443 |       |
| Construction  in progress |       | 6,271     |       | 146,038   |       |
|                      |       | $         | 33,660,086 |      | $          | 26,448,906 |   |

 

The Company discontinued its wafermanufacturing business in July 2004 (see note 18). As a result the Companyrecorded a net fixed asset impairment charge to the loss from discontinuedoperations of $0.9 million.

 

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**(7) Other Assets**

 

In December 2000, the Company enteredinto a royalty-bearing license agreement which gives the Company the right tomanufacture SIMOX-SOI wafers using the licensed process. Warrants were issuedin connection with this agreement. The cost of the license agreement, includingcash paid and the fair value of the warrants issued, is $2.3 million and isincluded in other assets at December 31, 2004 and December 31, 2005,net of accumulated amortization of $1.3 million and $1.6 million, respectively(see note 15 (c)). The warrants associated with this transaction expired in December 2005unexercised.

 

In the third quarter of 2004, with thediscontinuance of the wafer operation, all wafer inventory was written off tothe loss from discontinued operations with the exception of 300mm raw wafersthat were reclassified as prepaid expenses to be used for future R&D andimplanter qualifications. The amount of these wafers in other assets at December 31,2004 was approximately $0.3 million. These were consumed during 2005 resultingin the balance of zero at December 31, 2005.

 

**(8) Commitments and Contingencies**

 

**(a) *Leases***

 

Ibis’ corporate office and manufacturing siteis located at a leased facility in Danvers, Massachusetts. Previously ourbusiness segments were divided between two facilities, with implantationequipment design and manufacture conducted in one location and SIMOX waferproduction conducted in the other. With the discontinuance of our wafermanufacturing business we have consolidated the Equipment manufacturingbusiness and the wafer processing research and development effort intoapproximately 32,000 square feet which includes a modernized clean room thatcontains metrology equipment, cleaning equipment and an implantation equipmentmanufacturing and service area. The lease on the building we vacated expired onMay 31, 2005 and the lease on the space we currently occupy will expire onDecember 31, 2006, and contains an option to renew for five years. Theconsolidation of our operations into one facility effectively reduced ouroverall leased space by 40,000 square feet leaving approximately 32,000 squarefeet. We are currently in negotiations with our landlord to renew the lease for5 years.

 

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

 

49

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At December 31, 2005, the Company’scontractual obligations included:

 
| ** **                           | ** ** | **Payment due by period** | ** ** |
|--------------------------------------|------------|---------------------------|------------|
| **Contractual Obligations**          | ** ** | **Total**                 | ** ** | **Less than  1 year** | ** ** | **1  year** | ** ** | **2  years** | ** ** | **3-5  years** | ** ** | **More  than  5 years** | ** ** |
| Minimum  Operating Lease Payments    |       | $                         | 391,366    |   | $ | 384,386 |   | $ | 4,424 |   | $ | 852 |   | $ | 1,704 |   | — |   |
| Minimum  Royalty Payment Obligations |       | 20,000                    |       | 10,000 |   | 10,000 |   | — |   | — |   | — |   |
| Total                                |       | $                         | 411,366    |   | $ | 394,386 |   | $ | 14,424 |   | $ | 852 |   | $ | 1,704 |   | $ | — |   |
|                                      |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Rent expense was approximately $742,000,$702,000 and $489,000 for the years ended December 31, 2003, 2004 and 2005respectively.

 

**(b) Contingencies**

 

Five class action securities lawsuits havebeen filed in the United States District Court in the District of Massachusettsagainst Ibis and its President and CEO: Martin Smolowitz v. Ibis TechnologyCorporation., et al., Civ. No. 03-12613 (RCL) (D. Mass.); Fred Den v. IbisTechnology Corporation., et al., Civ. No. 04-10060 (RCL) (D. Mass.);Weinstein v. Ibis Technology Corporation., et al., Civ. No. 04-10088 (RCL)(D. Mass.); George Harrison v. Ibis Technology Corporation., et al., Civ. No. 04-10286(RCL) (D. Mass.); and Eleanor Pitzer v. Ibis Technology Corporation., et al,Civ. No. 04-10446 (RCL) (D. Mass.). On June 4, 2004, the Courtentered an order consolidating these actions under the caption In re IbisTechnology Securities Litigation, C.A. 04-10446 RCL. On July 6, 2004, aconsolidated amended class action complaint was filed which alleges, amongother things, that the Company violated federal securities laws by allegedlymaking misstatements to the investing public relating to demand for certainIbis products and intellectual property issues relating to the sale of thei2000 oxygen implanter. The plaintiffs are seeking unspecified damages. On August 5,2004, we filed a motion to dismiss the consolidated amended complaint on thegrounds, among others, that it failed to state a claim on which the reliefcould be granted. On September 25, 2005, the Magistrate Judge issued areport and recommendation recommending that our motion be granted in part anddenied in part. We and the plaintiffs have both filed partial objections to thereport and recommendation with the court, and after briefing of theseobjections is complete the court will determine whether to adopt the report andrecommendation in whole or part. While we believe that the plaintiffs’allegations are without merit, and we intend to vigorously defend against thesuits, there can be no guarantee as to how they ultimately will be resolved.

 

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

 

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

 

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**(9) Accrued Liabilities**

 

Current accruedliabilities were as follows at December 31:

 
| ** **        | ** ** | **2004** | ** ** | **2005** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
|              |       |     |       |     |       |
| Accrued  vacation |       | $        | 107,177    |     | $          | 125,468 |   |
| Accrued  warranty |       | 708,830  |       | 653,133  |       |
| Accrued  payroll  |       | 92,762   |       | 76,195   |       |
| Accrued  expenses |       | 509,135  |       | 346,899  |       |
| Total             |       | $        | 1,417,904  |     | $          | 1,201,695 |   |

 

**(10) Accrued Warranty**

 

At the time that revenue is recognized for the sale ofan implanter a liability for warranty is also established. An estimate of thewarranty cost is made based on the number of years involved and the Company’sprior experience. As material and labor is used during the warranty period theliability is reduced based on these charges. At the end of the warranty termthe balance in the liability is eliminated and adjusted through cost of sales,the account charged at inception. A reconciliation of warranty liability forthe period ended December 31, 2003 and December 31, 2005 is asfollows:

 
| Warranty  balance December 31, 2002 |   | $        | 925,453 |   |
|------------------------------------------|--------|----------|---------|--------|
| Expense incurred – 2003             |   | (499,942 | )       |
| Initiated – 2003                    |   | 608,000  |    |
| Expired – 2003                      |   | (439,542 | )       |
| Warranty balance December 31, 2003  |   | $        | 593,969 |   |
| Expense incurred – 2004             |   | (125,080 | )       |
| Initiated – 2004                    |   | 400,000  |    |
| Expired – 2004                      |   | (160,059 | )       |
| Warranty balance December 31, 2004  |   | $        | 708,830 |   |
| Expense incurred –2005              |   | (31,061  | )       |
| Initiated – 2005                    |   | —   |    |
| Expired – 2005                      |   | (24,636  | )       |
| Warranty balance December 31, 2005  |   | $        | 653,133 |   |

 

**(11) Deferred Revenue**

 

Deferred revenue includes prepaid license androyalty fees in the amount of $52,000 at December 31, 2004 and $13,000 at December 31,2005. Also included in deferred revenue at December 31, 2005 was$7,250,000 in deposits from the two i2000 implanter orders from SUMCO.

 

**(12) License Agreements**

 

The Company obtained an exclusive sublicense in thefield of oxygen implantation to the proprietary beam scanning system developedby a consultant to the Company during the development of the first Ibis 1000implanter. The beam scanning system sublicense agreement also grants theCompany certain rights to further sublicense the technology for certainapplications. The Company received $0.2 million, $0.4 million and $0.3 millionin 2003, 2004 and 2005, respectively, for non-refundable option fees or royaltyfees in accordance with non-exclusive sublicense agreements.

 

**(13) Income Taxes**

 

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

 

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| ** ** | ** ** | **Year Ended December 31,** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2005** | ** ** |
| Current:   |       |                             |       |   |   |   |   |
| Federal    |       | $                                | (9,000     | ) | $ | — |   | $ | — |   |
| State      |       | 1,256                            |       | 1,256 |   | 1,256 |   |
| Deferred:  |       |                             |       |   |   |   |   |
| Federal    |       | —                           |       | — |   | — |   |
| State      |       | —                           |       | — |   | — |   |
| Total      |       | $                                | (7,744     | ) | $ | 1,256 |   | $ | 1,256 |   |

 

Income tax expense (benefit) differs from theamount computed by applying the statutory federal income tax rate of 34% to theloss before income taxes from continuing operations as follows:

 
| ** **                                      | ** ** | **2003**  | ** ** | **2004**  | ** ** | **2005**   | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
|                                            |       |      |       |      |       |       |       |
| Computed “expected”  tax benefit      |       | $         | (1,312,368 | )         | $          | (1,917,571 | )          | $ | (3,216,586 | ) |
| State income  taxes, net of federal tax benefit |       | 829       |       | 829       |       | 829        |       |
| Other                                           |       | (9,000    | )          | —    |       | —     |       |
| Losses not  tax benefited                       |       | 1,312,795 |       | 1,917,998 |       | 3,217,013  |       |
|                                            |       | $         | (7,744     | )         | $          | 1,256      |       | $ | 1,256 |   |

 

The tax effects of temporary differences thatgive rise to significant portions of deferred tax assets and liabilities arepresented below at December 31:

 
| ** **                                                              | ** ** | **2004**    | ** ** | **2005**    | ** ** |
|-------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Deferred tax  assets:                                                   |       |        |       |        |       |
| Net  operating loss carryovers                                          |       | $           | 34,154,000 |        | $          | 36,193,000 |   |
| Accruals not  currently deductible for tax purposes                     |       | 1,884,000   |       | 1,731000    |       |
| General  business tax credit carryovers                                 |       | 2,779,000   |       | 2,599,000   |       |
| Impairment  reserves                                                    |       | 1,557,000   |       | 2,017,000   |       |
| Other                                                                   |       | 11,000      |       | 11,000      |       |
| Less:  Valuation allowance                                              |       | (36,859,000 | )          | (40,700,000 | )          |
| Total  deferred tax assets                                              |       | 3,526,000   |       | 1,851,000   |       |
| Deferred tax  liabilities:                                              |       |        |       |        |       |
| Property and  equipment, principally due to differences in depreciation |       | (3,334,000  | )          | (1,675,000  | )          |
| Patents                                                                 |       | (192,000    | )          | (176,000    | )          |
| Net deferred  tax assets                                                |       | $           | —     |        | $          | — |   |

 

Total valuation allowance increased by $4.6 million and $3.8 millionfor the years ended December 31, 2004 and 2005, respectively. The Companyhas recorded a valuation allowance against its net deferred tax assets of 2004and 2005, since management believes that, after considering all the availableobjective evidence, both positive and negative, historical and prospective,with the greater weight given to historical evidence, it is more likely thannot that these assets will not be realized in the foreseeable future.

 

52

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The Company had federal net operating lossand general business credit carryovers of approximately $88.8 million and $1.3million, respectively, at December 31, 2005, with varying expiration datesthrough 2025, that may be used to offset future taxable income. State netoperating loss and credit carryovers of $63.4 million and $1.3 million,respectively, have varying expiration dates. Included in the total deferred taxassets, offset by the valuation allowance was $3.2 million related to the netoperating loss carry forward resulting from the exercise of employee stockoptions, the tax benefit of which, when recognized, will be accounted for as acredit to additional paid-in capital rather than a reduction of income taxexpense.

 

Ownershipchanges, as defined in the Internal Revenue Code, may limit the amount of netoperating loss carry forwards that can be utilized annually to offset futuretaxable income.  The Company anticipatesthat these limitations will have no material impact on their ability to utilizethe affected loss carry forwards in future years.  Subsequent ownership changes could furtherimpact the limitation in future years.

 

**(14) Capitalization**

 

The Company has 50,000,000 shares of commonstock and 2,000,000 shares of preferred stock (“Undesignated Preferred Stock”)authorized. At December 31, 2005**,**75,610 common shares were reserved forissuance upon exercise of options outstanding under the Company’s 1993Employee, Director and Consultant Stock Option Plan. At December 31, 2005,the Company also had 1,430,843 common shares reserved for issuance uponexercise of options outstanding or available for grant under the Company’s 1997Employee, Director and Consultant stock option plan. At December 31, 2005,the Company had 268,091 common shares reserved for issuance under the Company’s2000 Employee Stock Purchase Plan.

 

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

 

**(15) Stock Plans and Warrants**

 

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

 

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

 

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

 

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

 
| ** **                                     | ** ** | **Number  of  shares** | ** ** | **Weighted  average  exercise price  of shares** | ** ** |
|------------------------------------------------|------------|------------------------|------------|--------------------------------------------------|------------|
| Options  outstanding at December 31, 2002 |       | 1,182,504              |       | $                                                | 16.86      |   |
| Granted                                        |       | 245,076                |       | 7.41                                             |       |
| Exercised                                      |       | (123,667               | )          | 7.99                                             |       |
| Cancelled                                      |       | (131,659               | )          | 17.97                                            |       |
| Options  outstanding at December 31, 2003 |       | 1,172,254              |       | $                                                | 15.69      |   |
| Granted                                        |       | 242,700                |       | 4.99                                             |       |
| Exercised                                      |       | (550                   | )          | 5.56                                             |       |
| Cancelled                                      |       | (66,169                | )          | 9.78                                             |       |
| Options  outstanding at December 31, 2004 |       | 1,348,235              |       | $                                                | 14.06      |   |
| Granted                                        |       | 304,500                |       | 1.46                                             |       |
| Exercised                                      |       | —                 |       | —                                           |       |
| Cancelled                                      |       | (331,473               | )          | 12.95                                            |       |
| Options  outstanding at December 31, 2005 |       | 1,321,262              |       | $                                                | 11.43      |   |
|                                           |       |                   |       |                                             |       |
| Options  exercisable at December 31, 2005 |       | 863,221                |       | $                                                | 15.85      |   |

 

The following table summarizes information concerning outstanding andexercisable options as of December 31, 2005:

 
| ** **                                            | ** ** | **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 |       | 556,250                 |       | 8.2                                                         |       | $ | 3.11 |   | 148,709 |   | $ | 5.02 |   |
| $ 6.01   -   9.00            |       | 179,555                 |       | 5.6                                                         |       | $ | 7.85 |   | 141,805 |   | $ | 7.84 |   |
| $ 9.01   - 13.50                       |       | 375,232                 |       | 3.4                                                         |       | $ | 10.30 |   | 362,732 |   | $ | 10.27 |   |
| $ 13.51 - 20.26                                  |       | 50,325                  |       | 4.1                                                         |       | $ | 18.43 |   | 50,075 |   | $ | 18.44 |   |
| $ 20.27 - 30.37                                  |       | 10,250                  |       | 3.7                                                         |       | $ | 24.10 |   | 10,250 |   | $ | 24.10 |   |
| $ 30.38 - 45.55                                  |       | 15,250                  |       | 3.7                                                         |       | $ | 37.73 |   | 15,250 |   | $ | 37.73 |   |
| $ 45.56 - 68.32                                  |       | 131,400                 |       | 3.3                                                         |       | $ | 46.44 |   | 131,400 |   | $ | 46.44 |   |
| $ 68.33 - 98.71                                  |       | 3,000                   |       | 4.2                                                         |       | $ | 83.06 |   | 3,000 |   | $ | 83.06 |   |
|                                                  |       | 1,321,262               |       |                                                        |       |   |   | 863,221 |   |   |   |

 

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

 

On February 24, 2000, the Board ofDirectors adopted the Ibis Technology Corporation 2000 Employee Stock PurchasePlan (the “Purchase Plan”) pursuant to which a total of 300,000 shares of theCompany’s Common Stock may be sold to eligible employees of the Company at a15% discount from the market value of the shares. The stockholders approved theplan at the May 2000 Annual Stockholders Meeting. On February 17,2005, the Board of Directors approved an amendment to the 2000 Employee StockPurchase Plan to increase by 300,000 shares the aggregate number of shares ofCommon stock that can be sold

 

54

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toeligible employees. The stockholders approved this amendment at the May 2005Annual Stockholders Meeting. Under the terms of the Purchase Plan, employeesmay elect to have up to 15% of their base earnings withheld to purchase theseshares during each offering period, which is a six-month period. The purchaseprice under the Purchase Plan is 85% of the lesser of the market price on thebeginning or the ending of the offering period. Approximately 55% of eligibleemployees participated in the Purchase Plan in the initial offering period, 52%in 2003, 51% in 2004, and 51% in 2005. During 2003, 2004, and 2005, the Companysold 52,563, 67,875 and 96,434 shares, respectively, to employees under the PurchasePlan.

 

**(c) *Warrants***

 

In December 2000, the Company issued warrants topurchase 200,000 shares of Common Stock at $22.30 per share in connection witha license agreement. The value of the warrants is included in other assets (seenote 7) and was calculated using the Black-Scholes option-pricing model withthe following assumptions: expected volatility of 93.69%, risk-free interestrate of 5.50%, and an expected life of 5 years. These warrants expiredunexercised on December 15, 2005.

 

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

 

The Company sells its implanters to a limitednumber of semiconductor manufacturers primarily in the United States and thePacific Rim.

 

Significant customer revenue is shown in dollar amounts and as apercentage of total revenue as follows:

 
| **Year Ended**          | ** ** | **Significant  Customers** | ** ** | **Amount** | ** ** | **%**  | ** ** |
|-------------------------|------------|----------------------------|------------|------------|------------|--------|------------|
|                    |       |                       |       |       |       |   |       |
| December 31,  2003 |       | 1                          |       | $          | 8,564,115  |   | 91         | % |
| December 31,  2004 |       | 1                          |       | $          | 7,000,000  |   | 88         | % |
| December 31,  2005 |       | —                     |       | $          | 0          |   | —     | % |

 

Accounts receivable fromsignificant customers was $0 at December 31, 2004 and 2005, reflecting nooutstanding balance billed and uncollected.

 

Export sales to unaffiliated customers in 2003, 2004 and 2005 were 9%,95% and 81% of total revenues, respectively.

 

During 2003, 2004 and 2005, the Company purchased substantially all ofits raw materials, components and subassemblies for its implanters from alimited group of suppliers. Disruption or termination of certain of thesesources could occur and such disruptions could have a material adverse effecton the Company’s business and results of operations.

 

**(17) Other Income**

 

In 2004, the Company recognized a gain inother income of approximately $200,000, which is the result of an expired wafervolume option that was associated with an asset obtained by the waferproduction group from a wafer customer. This volume option was to be used onorders received over a one year period. Since the time expired and no orderswere received, the Company reduced its liability and recognized the amount inincome, as no further obligation exists.

 

55

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**(18) Discontinued Operations**

 

In July 2004, theCompany announced its decision to discontinue its wafer manufacturing businessto concentrate its efforts on supplying equipment and process technology****to its equipment customers. As a result,the Company recorded an estimated loss on disposal of approximately $2.1million for the year ended December 31, 2004, consisting principally ofthe write off of 300 mm wafer inventory not expected to be used in the Company’songoing R&D efforts ($1.2 million) and the net impairment of wafermanufacturing assets expected to be sold ($0.9 million). In addition towrite-offs of wafer manufacturing assets, the Company also recognized $78thousand in severance costs associated with employee terminations. For theperiod ending December 31, 2005 the discontinued Operations generated anet gain of $0.2 million. The net gain of $0.2 million was the result of thereduction of $0.1 million of expenses associated with the closure of the waferoperation and $0.1 million from scrap recovery. The 2003 operating activitiesfor the Company’s wafer manufacturing business have been classified indiscontinued operations: gain (loss) from discontinued operations in theaccompanying statement of operations.

 

Discontinued operations generated sales of $9.0million and $4.0 million in 2003, and 2004 respectively, and operating lossesof $17.6 million and $3.2 million respectively. The 2003 operating loss relatedto discontinued operations includes an $11.1 million impairment charge relatedto wafer manufacturing inventory and fixed assets. In 2005, the Company hasseparately disclosed the operating, investing, and financing portions of thecash flows attributable to discontinued operations, which in prior periods werereported on a combined basis as a single amount.

 

**(19) Industry Segments**

 

The Company’s reportablesegments are SIMOX Equipment and Other Products or Services. For purposes ofsegment reporting, equipment spares and field service revenue are combined andreported as SIMOX Equipment. Government contracts, other services and licenserevenue are combined and reported as Other Products or Services.

 

The accounting policies of the operatingsegments are the same as those described in the summary of significantaccounting policies. The Company generally evaluates operating performancebased on income or loss before interest and taxes.

 

The table below provides information for the yearsended December 31, 2003, 2004 and 2005 pertaining to the Company’s twoindustry segments after the discontinuance of the wafer manufacturing business.

 
| ** **                        | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  or Services** | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|----------------------|------------|---------------------------------|------------|------------|------------|
| Net Revenues                      |       |                 |       |                            |       |       |       |
| Year Ended December 31, 2003 |       | $                    | 8,781,907  |                            | $          | 660,429    |       | $ | 9,442,336 |   |
| Year Ended December 31, 2004 |       | 7,535,270            |       | 390,975                         |       | 7,926,245  |       |
| Year Ended December 31, 2005 |       | 277,684              |       | 324,621                         |       | 602,305    |       |
|                              |       |                 |       |                            |       |       |       |
| Operating Income (Loss)           |       |                 |       |                            |       |       |       |
| Year Ended December 31, 2003 |       | (2,165,803           | )          | 615,850                         |       | (1,549,953 | )          |
| Year Ended December 31, 2004 |       | (4,036,440           | )          | 375,606                         |       | (3,660,834 | )          |
| Year Ended December 31, 2005 |       | (7,785,117           | )          | 324,621                         |       | (7,460,496 | )          |
|                                   |            |                      |            |                                 |            |            |            |  |  |  |

 

56

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| ** **                                                   | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  or Services** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|---------------------------------|------------|------------|------------|
| **Assets**                                                   |       |                 |       |                            |       |       |       |
| December 31,  2003                                      |       | 1,692,883            |       | 118,615                         |       | 1,811,498  |       |
| December 31,  2004                                      |       | 13,839,523           |       | 187,321                         |       | 14,026,844 |       |
| December 31,  2005                                      |       | 12,937,175           |       | 79,628                          |       | 13,016,803 |       |
|                                                         |       |                 |       |                            |       |       |       |
| **Capital  Expenditures**                                    |       |                 |       |                            |       |       |       |
| Year Ended December 31,  2003                           |       | 8,891                |       | —                          |       | 8,891      |       |
| Year Ended December 31,  2004                           |       | 713,349              |       | —                          |       | 713,349    |       |
| Year Ended December 31,  2005                           |       | 149,648              |       | —                          |       | 149,648    |       |
|                                                         |       |                 |       |                            |       |       |       |
| **Depreciation  and Amortization of Property and Equipment** |       |                 |       |                            |       |       |       |
| Year Ended December 31,  2003                           |       | 1,393,269            |       | —                          |       | 1,393,269  |       |
| Year Ended December 31,  2004                           |       | 1,884,687            |       | —                          |       | 1,884,687  |       |
| Year Ended December 31,  2005                           |       | 1,671,836            |       | —                          |       | 1,671,836  |       |

 

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

 
| ** **                                                          | ** ** | **Years Ended December 31,** | ** **  |
|---------------------------------------------------------------------|------------|-----------------------------------|-------------|
| **Segment Reconciliation**                                          | ** ** | **2003**                          | ** **  | **2004** | ** ** | **2005** | ** ** |
| Net Loss :                                                          |       |                              |        |   |   |   |   |
| Total  operating loss for reportable segments                       |       | $                                 | (1,549,953  | ) | $ | (3,660,834 | ) | $ | (7,460,496 | ) |
| Corporate  general & administrative expenses               |       | (2,337,463                        | )           | (2,221,167 | ) | (2,216,748 | ) |
| Net other  income                                                   |       | 27,510                            |        | 242,085 |   | 217,953 |   |
| Income tax  expense (benefit)                                       |       | (7,744                            | )           | 1,256 |   | 1,256 |   |
| Income  (loss) from discontinued operations                         |       | (17,597,627                       | )           | (5,277,369 | ) | 215,242 |   |
| Net loss                                                            |       | $                                 | (21,449,789 | ) | $ | (10,918,541 | ) | $ | (9,245,305 | ) |
|                                                                |       |                              |        |   |   |   |   |
| Assets:                                                             |       |                              |        |   |   |   |   |
| Total assets  for reportable segments                               |       | $                                 | 1,811,498   |   | $ | 14,026,844 |   | $ | 13,016,803 |   |
| Cash &  cash equivalents not allocated to segments         |       | 14,174,716                        |        | 7,726,072 |   | 6,856,874 |   |
| Other  unallocated assets                                           |       | 19,356,825                        |        | 529,724 |   | 118,711 |   |
| Total assets                                                        |       | $                                 | 35,343,039  |   | $ | 22,282,640 |   | $ | 19,992,388 |   |
|                                                                |       |                              |        |   |   |   |   |
| Capital Expenditures:                                               |       |                              |        |   |   |   |   |
| Total  capital expenditures for reportable segments                 |       | $                                 | 8,891       |   | $ | 713,349 |   | $ | 149,648 |   |
| Corporate  capital expenditures                                     |       | 21,242                            |        | 7,653 |   | — |   |
| Total  capital expenditures                                         |       | $                                 | 30,133      |   | $ | 721,002 |   | $ | 149,648 |   |
|                                                                |       |                              |        |   |   |   |   |
| Depreciation and Amortization:                                      |       |                              |        |   |   |   |   |
| Total  depreciation & amortization for reportable segments |       | $                                 | 1,393,269   |   | $ | 1,884,687 |   | $ | 1,671,836 |   |
| Corporate  depreciation & amortization                     |       | 117,191                           |        | 78,029 |   | 75,153 |   |
| Total  depreciation & amortization                         |       | $                                 | 1,510,460   |   | $ | 1,962,716 |   | $ | 1,746,989 |   |

 

57

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

 

The Table below provides information for theyears 2004 and 2005.

 
| ** **                                | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **2004**                                  |       |               |       |                |       |               |       |                |       |   |   |   |   |
| Total sales  and revenue                  |       | $                  | 207,908    |                | $          | 203,253            |       | $                   | 7,240,770  |   | $ | 274,314 |   |
| Gross profit  (loss)                      |       | (125,689           | )          | (174,382            | )          | 3,573,945          |       | (84,672             | )          |
| Profit  (loss) from continuing operations |       | (2,083,103         | )          | (2,058,633          | )          | 921,198            |       | (2,661,463          | )          |
| Net loss                                  |       | (3,481,155         | )          | (3,358,284          | )          | (1,677,961         | )          | (2,401,141          | )          |
| Net loss per  common share                |       | (0.33              | )          | (0.32               | )          | (0.16              | )          | (0.22               | )          |
| **2005**                                  |       |               |       |                |       |               |       |                |       |
| Total sales  and revenue                  |       | $                  | 166,655    |                | $          | 198,920            |       | $                   | 162,793    |   | $ | 73,937 |   |
| Gross profit  (loss)                      |       | (133,428           | )          | (23,227             | )          | 23,220             |       | (14,732             | )          |
| Profit  (loss) from continuing operations |       | (2,767,960         | )          | (2,643,174          | )          | (2,145,844         | )          | (2,120,266          | )          |
| Net loss                                  |       | (2,686,942         | )          | (2,644,903          | )          | (1,920,638         | )          | (1,992,822          | )          |
| Net loss per  common share                |       | (0.25              | )          | (0.25               | )          | (0.18              | )          | (0.19               | )          |

###### ** **

58

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

 

Not applicable.

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

###### ** **

**a)**              *Evaluation of Disclosure Controls and Procedures.*  As of the end of the period covered by thisreport, the Company carried out an evaluation, under the supervision and withthe participation of the Company’s management including the Company’s Presidentand Chief Executive Officer and Chief Financial Officer of the effectiveness ofthe design and operation of the company’s disclosure controls and procedures,as defined in Exchange Acts Rules 13a-15(e) and 15d-15(e). Based upon thatevaluation the Company’s President and Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures are effective in enabling the Company to record, process, summarize,and report information required to be included in the Company’s periodic SECfilings within the required time period.

 

**b)**              *Changes in Internal Controls over Financial Reporting.* Therewere no changes in the Company’s internal controls over financial reporting (asdefined in Rule 13a-15(f) under the Exchange Act) during the fourth quarter offiscal year 2005 that has materially affected, or would be reasonably likely tomaterially affect, the Company’s internal controls over financial reporting.

 
| **Item 9B.** | ** ** | **Other Information** |
|--------------|------------|-----------------------|

 

Not applicable.

 

**PART III**

 
| **Item 10.** | ** ** | **DIRECTORS AND OFFICERS  OF THE REGISTRANT** |
|--------------|------------|-----------------------------------------------|

###### ** **

The Response to this item is incorporated byreference from the discussion responsive thereto under the captions “Management”and “Section 16(a) Beneficial Ownership Reporting Compliance” in theCompany’s Proxy Statement for the 2006 Annual Meeting of Stockholders.

 
| **Item 11.** | ** ** | **EXECUTIVE COMPENSATION** |
|--------------|------------|----------------------------|

 

The response to this item is incorporated byreference from the discussion responsive thereto under the caption “ExecutiveCompensation” in the Company’s Proxy Statement for the 2006****AnnualMeeting of Stockholders.

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

 

The response to this item is incorporated byreference from the discussion responsive thereto under the caption “ShareOwnership” in the Company’s Proxy Statement for the 2006 Annual Meeting ofStockholders.

 
| **Item 13.** | ** ** | **CERTAIN RELATIONSHIPS  AND RELATED TRANSACTIONS** |
|--------------|------------|-----------------------------------------------------|

 

The response to this item is incorporated byreference from the discussion responsive thereto under the captions “CertainTransactions” and “Executive Compensation—Employment Contracts and Change ofControl Arrangements” in the Company’s Proxy Statement for the 2006 AnnualMeeting of Stockholders.

 
| **Item 14.** | ** ** | **PRINCIPAL ACCOUNTANT FEES AND SERVICES** |
|--------------|------------|--------------------------------------------|

 

The response to this item is incorporated byreference from the discussion responsive thereto under the caption “IndependentRegistered Public Accountants” “Audit and Non Audit Fees” in the Company’sProxy Statement for the 2006 Annual Meeting of Stockholders.

 

59

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

 

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

 

**(1) and (2)**                                         See“Index to Financial Statements and Financial Statement Schedule” at Item 8 tothis****Annual Report on Form 10-K.  Other financial statement schedules have notbeen included because they are not applicable or the information is included inthe financial statements or notes thereto.

 

**(3)**                                 Exhibits

 

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

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

 

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| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                            |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11               | -          | Equipment Purchase Master Agreement, dated  as of May 22, 1996, between Registrant, and IBM (Filed as Exhibit 10.1  to the Company’s Current Report on Form 8-K/A (File No.0-13078) filed on  September 12, 1996 and incorporated herein by reference).                                                                           |
| †10.12         | -          | Amended and Restated Ibis Technology  Corporation 1997 Employee, Director and Consultant Stock Option Plan (Filed  as Exhibit 99.1 to the Company’s Form S-8 (File No. 333-45247)  filed on January 30, 1998, as amended May 18, 2001 and June 17,  2004 and incorporated herein by reference).                         |
| 10.13               | -          | Form of Stock Option Agreement under  1997 Employee, Director and Consultant Stock Option Plan.                                                                                                                                                                                                                                                       |
| @10.14              | -          | Licensing and Development Agreement, dated June 9,  1998, between the Registrant and IBM (Filed as Exhibit 10.41 to the  Company’s Quarterly Report on Form 10-Q for the Quarter Ended June 30,  1998 and incorporated herein by reference)                                                                                       |
| 10.15               | -          | Sixth Amendment to Lease dated July 16,  1998, amending Lease Agreement dated December 22, 1987 between the  Company and Thomas J. Flatley d/b/a the Flatley Company (Filed as Exhibit 10.42  to the Company’s Quarterly Report on Form 10-Q for the Quarter Ended September 30,  1998 and incorporated herein by reference) |
| †10.16         | -          | Restated Change of Control Agreement, dated  March 24, 2005, between the Registrant and Martin J. Reid. (Filed as Exhibit  10.17 to the Company’s Annual Report on Form 10-K for the Year Ended December  31, 2004 and incorporated herein by reference).                                                                                             |
| @10.17              | -          | License Agreement dated July 1, 1999,  between the Registrant and Mitsubishi Materials Silicon Corporation (Filed as  Exhibit 10.45 to the Company’s Annual Report on Form 10-K for the  Year Ended December 31, 1999 and incorporated herein by reference)                                                                       |
| 10.18               | -          | Ibis Technology Corporation 2000 Employee  Stock Purchase Plan (Filed as Exhibit 99.1 to the Company’s Form S-8  (File No. 333-36706) filed on May 10, 2000, as amended May31, 2005  and incorporated herein by reference)                                                                                                        |
| @10.19              | -          | Advantox 150 License Agreement dated November 1,  2000, between the Registrant and Mitsubishi Materials Silicon Corporation  (Filed as Exhibit 10.48 to the Company’s Annual Report on Form 10-K  for the Year Ended December 31, 2000 and incorporated herein by  reference)                                                     |
| †10.20         | -          | Employment Agreement, dated November 12,  2003 between the Registrant and Martin J. Reid                                                                                                                                                                                                                                                              |
| @10.21              | -          | License Agreement dated December 15,  2000, between the Registrant and International Business Machines Corporation  (“IBM”) (Filed as Exhibit 10.50 to the Company’s Annual Report on Form 10-K  for the Year Ended December 31, 2000 and incorporated herein by  reference)                                            |
| 10.22               | -          | Patent License Agreement dated December 15,  2000, between the Registrant and IBM (Filed as Exhibit 10.51 to the  Company’s Annual Report on Form 10-K for the Year Ended December 31,  2000 and incorporated herein by reference)                                                                                                |

 

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| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                              |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                         |
| @10.23              |       | Amended and Restated License Agreement  dated November 14, 2002, between the Registrant and IBM (Filed as Exhibit 10.30  to the Company’s Annual Report on Form 10-K for the Year Ended December 31,  2002 and incorporated herein by reference)    |
| 10.24               |       | Amendment to the Patent License Agreement  dated November 14, 2002, between the Registrant and IBM (Filed as Exhibit 10.31  to the Company’s Annual Report on Form 10-K for the Year Ended December 31,  2002 and incorporated herein by reference) |
| †10.25         |       | Change of Control Agreement, dated March 24,  2005, between the Registrant and William J. Schmidt. (Filed as Exhibit 10.31  to the Company’s Annual Report on Form 10-K for the Year Ended December 31,  2004 and incorporated herein by reference) |
| 11                  | -          | Statement regarding computation of per  share income (loss)                                                                                                                                                                                                                  |
| 23                  | -          | Report and Consent on Financial Statement Schedule of  KPMG LLP                                                                                                                                                                                                         |
| 31.1                | -          | CEO Certification Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            |
| 31.2                | -          | CFO Certification Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            |
| 32.1                | -          | CEO Certification Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (18 U.S. Section 1350)                                                                                                                                                                |
| 32.2                | -          | CFO Certification Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (18 U.S. Section 1350)                                                                                                                                                                |

 

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

 

@            Confidential treatmentpreviously obtained from the Securities and Exchange Commission. The portionsof the document for which confidential treatment has been granted are marked “Confidential”and such confidential portions have been filed separately with the Securitiesand Exchange Commission.

 

†                  Managementcontract or compensatory plan, contract or arrangement.

 

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

 

(B) *Financial Statement Schedules*

 

Schedule II – Valuation and Qualifying Accounts

 

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###### **SIGNATURES**

###### ** **

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized, inDanvers, Massachusetts on March 29, 2006.

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

 

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

 
| **Signatures**                | ** **                             | **Title**                                  | ** **                         | **Date** |
|-------------------------------|----------------------------------------|--------------------------------------------|------------------------------------|----------|
|                          |                                   |                                       |                               |     |
| By:                           | /s/ ***Martin J. Reid***               |                                       | President, Chief Executive Officer |     | March 29, 2006 |
| Martin J.  Reid               |                                   | and Chairman (principal executive officer) |                               |     |
|                          |                                   |                                       | and Director                       |     |   |
|                          |                                   |                                       |                               |     |   |
| By:                           | /s/ ***William J. Schmidt***           |                                       | Chief Financial Officer,           |     | March 29, 2006 |
| William J.  Schmidt           |                                   | Treasurer, Clerk, (principal financial     |                               |     |
|                          |                                   |                                       | and accounting officer)            |     |   |
|                          |                                   |                                       |                               |     |   |
| By:                           | /s/ ***Dimitri A. Antoniadis, Ph.D.*** |                                       | Director                           |     | March 29, 2006 |
| Dimitri A.  Antoniadis, Ph.D. |                                   |                                       |                               |     |
|                          |                                   |                                       |                               |     |   |
| By:                           | /s/ ***Robert L. Gable***              |                                       | Director                           |     | March 29, 2006 |
| Robert L.  Gable              |                                   |                                       |                               |     |
|                          |                                   |                                       |                               |     |   |
| By:                           | /s/ ***Leslie B. Lewis***              |                                       | Director                           |     | March 29, 2006 |
| Leslie B.  Lewis              |                                   |                                       |                               |     |
|                          |                                   |                                       |                               |     |   |
| By:                           | /s/ ***Donald McGuinness***            |                                       | Director                           |     | March 29, 2006 |
| Donald  McGuinness            |                                   |                                       |                               |     |
|                          |                                   |                                       |                               |     |   |
| By:                           | /s/ ***Lamberto Raffaelli***           |                                       | Director                           |     | March 29, 2006 |
| Lamberto  Raffaelli           |                                   |                                       |                               |     |
|                          |                                   |                                       |                               |     |
| By:                           | /s/ ***Cosmo S. Trapani***             |                                       | Director                           |     | March 29, 2006 |
| Cosmo S.  Trapani             |                                   |                                       |                               |     |

 

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**SCHEDULE II**

 

**IBISTECHNOLOGY CORPORATION**

**VALUATION AND QUALIFYING ACCOUNTS**

 

**For theYears Ended December 31, 2003, 2004 and 2005**

 
| **Description**                     | ** ** | **Balance at  Beginning  of Period** | ** ** | **Reclass (1)** | ** ** | **Expense** | ** ** | **Amounts  Written Off** | ** ** | **Balance  at End of  Period** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|-----------------|------------|-------------|------------|--------------------------|------------|--------------------------------|------------|
|                                |       |                                 |       |            |       |        |       |                     |       |                           |       |
| Allowance  for Doubtful Accounts    |       |                                 |       |            |       |        |       |                     |       |                           |       |
| December 31,  2003             |       | 65,000                               |       | —          |       | —      |       | —                   |       | 65,000                         |       |
| December 31,  2004             |       | 65,000                               |       | —          |       | (37,470     | )          | (2,530                   | )          | 25,000                         |       |
| December 31,  2005             |       | 25,000                               |       | —          |       | —      |       | —                   |       | 25,000                         |       |
|                                |       |                                 |       |            |       |        |       |                     |       |                           |       |
| Reserve for  Inventory Obsolescence |       |                                 |       |            |       |        |       |                     |       |                           |       |
| December 31,  2003             |       | 959,000                              |       | —          |       | 524,000     |       | (47,000                  | )          | 1,436,000                      |       |
| December 31,  2004             |       | 1,436,000                            |       | 4,603,000       |       | 226,000     | ** ** | (2,493,000               | )**(2**)   | 3,772,000                      |       |
| December 31,  2005             |       | 3,772,000                            |       | —          |       | —      |       | (100,000                 | )          | 3,672,000                      |       |

 

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(1)          At December 31, 2003 equipment inventory and the related reserveswere included in construction in progress within property and equipment. Thebalances were reclassified to inventory in the second quarter of fiscal 2004 inconnection with the discontinuance of the wafer manufacturing business.

 

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

 

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