**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

(MarkOne)

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

**                                                Forthe fiscal year ended December 31, 2006**

 

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**                                                Forthe transition period              to     **

 

**Commissionfile number:  0-23150**

**IBIS TECHNOLOGY CORPORATION**

**(Exact name of registrant as specified in its charter)**

 

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

 

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

None.

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

Common Stock,$.008 Par Value Per Share

(Title of class)

Indicate by check mark ifthe registrant is a well-known seasoned issuer as defined in Rule 405 of theSecurities Act.Yeso  No  x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.  Yes o  No  x

Indicate by check mark whether the registrant (1) hasfiled all reports 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  x  No  o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.           x

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

Large Accelerated Filer  o  AcceleratedFiler  o  Non-AcceleratedFiler  x  

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

Theaggregate market value of the registrant’s voting and non-voting common equityheld by non-affiliates of the registrant (without admitting that any personwhose shares are not included in such calculation is an affiliate) computed byreference to the price at which the common equity was last sold, or the averagebid and asked price of such common equity, as of the last business day of theregistrant’s most recently completed fourth fiscal quarter (based on the lastreported sale price on the Nasdaq National Market of such date) was $16,154,912.

As of February 28, 2007, the registrant had 12,315,481of common stock outstanding.

 

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**DOCUMENTS INCORPORATED BY REFERENCE**

The following documents (or parts thereof) are incorporated byreference into the following parts of this Form 10-K: Certain informationrequired in Part III of this Annual Report on Form 10-K is incorporated fromthe Registrant’s Proxy Statement for the Annual Meeting of Stockholders to beheld on May 10, 2007.

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**PART I**

**SpecialNote Regarding Forward-Looking Statements**

This Form 10-Kcontains express or implied forward-looking statements within the meaning ofthe “safe harbor” provisions of the Private Securities Litigation Reform Act of1995 that relate to future events or our future financial performance. In somecases, you can identify forward-looking statements by terminology, such as “may,”“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”“project,” “predict,” “intend,” “potential” or “continue” or the negative ofsuch terms or other comparable terminology, although not all forward-lookingstatements contain such terms. In addition, these forward-looking statementsinclude, but are not limited to, statements regarding, among other things: (i) 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, (ii) reliance ona small number of large customers,****interest in and demand for, and marketacceptance of, the Company’s SIMOX-SOI technology including the Company’simplanters, (iii)****attaining implanterimprovements to the degree and in the timeframe necessary to meet customersexpectations, (iv) the timing and likelihood of revenue recognition on theimplanters ordered by the Company’s customers, (v) the customer qualificationand timing of SUMCO’s ramping to production quantities on the i2000 implanterand the sustained production worthiness of the i2000 implanter, (vi) theCompany’s ability to retain key executives and employees, (vii) the involvement generally of thesilicon wafer manufacturing industry in the SOI wafer market, and the abilityof the wafer manufacturers to produce sufficiently low cost SIMOX-SOI wafersutilizing both our SIMOX equipment and technology, as well as other equipmentmanufacturers tools, (viii) the Company’s belief that wafer manufacturers willbecome the primary suppliers of SIMOX-SOI wafers to the chipmaking industry,(ix) the throughput and production capacity of the i2000 implanter formanufacturing 300-mm SIMOX-SOI wafers, attaining implanter improvements to thedegree and in the timeframe necessary to meet customer expectations, and theability of the i2000 implanter to achieve acceptable production yields, (x) theCompany’s plan to focus on supplying implanters to wafer manufacturers, (xi)the Company’s expectations regarding future orders for i2000 implanters, andthe likelihood and timing of revenue recognition on such sales, (xii) theCompany’s expectation regarding future willingness of wafer manufacturers topurchase equipment from the Company, (xiii) the technological advancements andthe adoption rate of SOI technology, and (xiv) the Company’s expectation ofhaving sufficient cash for operations. Such factors and uncertainties includebut are not limited to those set forth below in “Business Risk Factors” andelsewhere throughout this Form 10-K. All information set forth in this Form10-K is as of the date of this Form 10-K and Ibis undertakes no duty to updatethis information, unless required by law.

**Item 1.    BUSINESS**

**Introduction**

Ibis Technology Corporation (“Ibis”) develops,manufactures and markets SIMOX-SOI implantation equipment for the worldwidesemiconductor 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 through implantationand annealing. Our proprietary oxygen implanters produce SIMOX-SOI wafers byimplanting oxygen atoms just below the surface of a silicon wafer to create avery thin layer of silicon dioxide between the thin operating region of thetransistor at the surface and the underlying silicon wafer itself. The buriedlayer of silicon dioxide acts as an insulator for the devices fabricated on thesurface of the silicon wafer and reduces the electrical current leakage whichotherwise slows integrated circuit performance, and/or increases the loss ofpower during circuit operation. The buried layer of silicon dioxide also helpsto reduce the heat generated by the transistors. Through this process ourcustomers can produce integrated circuits, which we believe, offer significantadvantages over circuits constructed on conventional silicon wafers. We believethat these advantages include:

·                  substantiallyimproved speed for microprocessors and other logic integrated circuits,

·                  reduced powerconsumption,

·                  reduced softerror rate,

·                  Compatibilitywith a higher temperature operating environment, and

·                  lowertemperature operation

We believe thesecharacteristics make SIMOX-SOI wafers, and the finished integrated circuits,well-suited for many commercial applications, including:

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·                  servers andworkstations,

·                  portable anddesktop computers,

·                  entertainmentdevices such as TVs and game consoles,

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

·                  harsh-environmentelectronics.

When Ibis beganoperations in 1988, much of our revenue was derived from research anddevelopment contracts and sales of wafers for military applications. Over theyears, there was a shift in revenue to sales of SIMOX-SOI wafers for commercialapplications and the nature of our business had evolved through stages wherepreviously our revenue was at times primarily derived from selling wafers forevaluation purposes, and at other times it was primarily derived from equipmentsales. This often occurs when developing and promoting a fundamental newtechnology, especially as it relates to the semiconductor industry embracingany change that affects fabrication operations. In mid-2004 we exited the wafermanufacturing business to concentrate our efforts on supplying equipment andprocess technology to our equipment customers, the major silicon manufacturers.We did this having advanced our primary goal of establishing SIMOX-SOI as aleading SOI technology with the potential to be the low cost, high volumeoffering. We now intend to work with the major wafer manufacturers to supportthe market acceptance of 300mm SIMOX technology through continuing processresearch and development in conjunction with our customers. We believe thiseffort will directly support the wafer manufacturers’ decision to purchase ourequipment.

Our fundamentalSIMOX-SOI technology has been developed, refined, and tested over the lastdozen years. In 2002, Ibis introduced the current-generation of SIMOX-SOItechnology, which included our second 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-UT wafers. We believe theability of the i2000 implanter to produce twelve-inch (or 300mm) SIMOX-SOIwafers using different processes from standard to the latest MLD processpositions us to capitalize on the growing SOI market. In early 2004 we receivedan order valued at approximately $7.0 million for an i2000 SIMOX oxygenimplanter from a major silicon wafer manufacturer. During the third quarter of2004 this tool was accepted by the customer. In early January 2005 we receiveda $6.0 million order for an i2000 SIMOX oxygen implanter from SUMCO, anothermajor silicon wafer manufacturer. During the first quarter of 2006, this toolwas accepted by the customer. In October of 2005 we received a second ordervalued at $7 million for an i2000 SIMOX implanter from SUMCO and negotiated amaster purchase agreement that will govern the general commercial terms ofpotential future orders from SUMCO. We shipped this implanter in April of 2006with final customer acceptance and associated revenue recognition taking placein the August of 2006.

Wewere incorporated in Massachusetts in October 1987 and commenced operations inJanuary 1988. Our executive offices are located at 32 Cherry Hill Drive,Danvers, Massachusetts 01923 and our telephone number is (978) 777-4247. Ourweb site is located at www.ibis.com.*.*Wemake our periodic reports on Form 10-K, Form 10-Q and Form 8-K (and anyamendments to those reports) available on the web site, free of charge, as soonas reasonably practicable after these reports are filed with or furnished tothe Securities and Exchange Commission. We have not incorporated by referenceinto this document the information on our web site and you should not considerit to be a part of this document. Our web site address is included in thedocument as an inactive textual reference only. The public can also obtain access to suchreports at the Securities and Exchange Commission’s Public Reference Room at450 Fifth Street, NW, Washington, DC 20549, by calling the SEC at1-800-SEC-0330 or by accessing the SEC’s website, which is www.sec.gov.Unless the context otherwise requires, the terms “Ibis”, “we”, “us”, and “our”refer to Ibis Technology Corporation.

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#### **OurStrategies**

Ibis’ primary objective is to be the dominant supplierof oxygen implantation equipment to the world’s silicon wafer manufacturers sothey can, in turn, efficiently and cost-effectively supply SOI wafers to theglobal semiconductor industry. Our primary emphasis is on implanter sales andsupport. We also plan on continuing process development for SIMOX-SOI wafers inpartnership with our equipment customers to hasten the adoption and broaden themarket acceptance of SIMOX-SOI. Key elements of our strategies for achievingthis objective include:

·                  *Capitalizing on Fundamental Trends in SemiconductorManufacturing.* We believe that semiconductor manufacturers face anincreasing demand for faster integrated circuit speed, reduced power consumption,smaller feature size and immunity to soft failure errors, which are changes inlogic state due to exposure to radiation. In addition, heat generation causedby current leakage has become a major problem at the 90 nm feature size andwill continue to increase in importance at the 65 and 45 nm technology nodes asproduction comes on stream over the next four years. In our experience, thesemanufacturers prefer to satisfy the demand with minimal additions ormodifications to their existing equipment base. We believe that SIMOX-SOItechnology is a leading alternative 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 intellectualproperty in silicon materials science, which can be applied to designingoptimal starting wafers for SOI production. This should give them an advantagein both minimizing wafer cost and maximizing SOI wafer quality and yield.  Fourth, our experience suggests that siliconwafer manufacturers already have a well-developed infrastructure for themanufacture, sale and marketing of large volumes of substrates. Lastly, webelieve that there is greater efficiency in producing the SOI wafer as part ofthe wafer manufacturers existing product flow, specifically avoiding the needto re-package, re-clean, re-inspect and re-ship substrates twice, once asstarting silicon wafers, and a second time as SOI wafers. Therefore, as aresult of these trends, we expect our ultimate customers will be drawnprincipally from these silicon wafer manufacturers and we plan to focus amajority of our technical and marketing resources on the leading silicon wafermanufacturers and our major key customers in the semiconductor industry who arethe leaders in the adoption of SOI technology. We expect that implanter salesto *chipmakers* should be minimal, andfocused on SOI processes, which the chipmaker wishes to keep proprietary, suchas selective (or patterned) SIMOX, or other specialty substrates.

·                  *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, weentered 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 equipment manufacturingcapacity accordingly. We currently have capacity to build approximately 10implanters per year in our existing manufacturing space.

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**Marketing, Sales and Customers**

Over the last several years, Ibis had focused onintegrating 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.

Ourprimary focus today is on getting the silicon wafer manufacturers to embraceSIMOX-SOI technology. Currently, where we have succeeded, we have accomplishedthis through joint research and development programs, the use of salesrepresentative agreements, and the provision of SIMOX-SOI wafer foundryservices to our customers. We intend to assist the wafer manufacturers inbecoming the producers of SIMOX-SOI wafers by selling and servicing oxygenimplanters along with continuing to improve SIMOX wafer processing technologyvia our SIMOX process engineering group.

InAugust 2004, upon exiting the wafer manufacturing business Ibis cancelled itsSales Representative Agreement with MEMC for SIMOX SOI wafers. We believe thatby canceling this agreement we have opened new market opportunities with theother silicon wafer manufacturers for the sale of our i2000 oxygen implanters.We also believe this has allowed Ibis to work closely as an independent,non-competitive resource with several of the leading wafer manufacturersregarding SIMOX-SOI process improvements.

The following table setsforth, in thousands of dollars, the amount of revenue derived from oursignificant customers during the fiscal years ended December 31, 2004, 2005 and2006, as well as the percent of our revenue represented by these customers’purchases (in thousands):

 

|                 | ** ** | **2004**    | ** ** | **2005**    | ** ** | **2006**    | ** ** |
|-----------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Customer**    | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| IBM             |       | $           | 384        |        | 5          | %           | $          | 74 |   | 12 | % | $ | 4 |   | — |   |
| Simgui          |       | $           | 5          |        | —     |        | —     |   | — |   | $ | 10 |   | — |   |
| SEH             |       | $           | 7,000      |        | 88         | %           | —     |   | — |   | — |   | — |   |
| Nissin Electric |       | —      |       | —      |       | 279         |       | 46 | % | $ | 369 |   | 3 | % |
| Tokyo Iovenus   |       | —      |       | —      |       | 162         |       | 27 | % | $ | 92 |   | 1 | % |
| SUMCO           |       | —      |       | —      |       | —      |       | — |   | $ | 13,325 |   | 95 | % |
| Axcelis         |       | —      |       | —      |       | —      |       | — |   | $ | 175 |   | 1 | % |
|                 |            |             |            |             |            |             |            |  |  |  |  |  |  |  |  |  |

 

The revenue fromSUMCO in 2006 was for the purchase of two i2000 implanters for a total of approximately$13 million, and for the relocation of one of these systems from their Nodafacility to Yonezawa. The revenue from Nissin in 2006 was from licenseroyalties, the revenue from Tokyo Iovenus in 2006 was from the sale of parts,and the revenue from Axcelis in 2006 was for the purchase of a license option.The revenue from IBM in 2005 was for service and parts, the revenue from Nissinin 2005 was from license royalties, and the revenue from Tokyo Iovenus in 2005was from the sale of parts. The revenue from SEH in 2004 was for the sale of ani2000 oxygen implanter for approximately $7.0 million.

Sales to overseascustomers in 2004, 2005 and 2006 were 95%, 81% and 99% of total revenue,respectively. In 2004, sales to Japan were 95% of total revenue, which wasprimarily attributable to Shin Etsu Handotai (“SEH”). In 2005 sales to Japanwere 81% of total revenue, which was primarily attributed to Nissin ElectricCo. Ltd., license royalties. In 2006, sales to Japan were 99% of total revenuewhich was primarily attributed to SUMCO Corporation, implanter sales.

#### **StrategicAlliances**

Ibishas entered into a number of strategic alliances that we believe enable us tobetter address our target market, to advance our technology more effectively,and to match our technical developments and expansion to the needs of our keycustomers. We believe that strategic alliances with existing and potential

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customers willcontinue to play an important role in developing a worldwide commercial marketfor our SIMOX-SOI implanters.

We have along-standing relationship with SUMCO which began as a sales distributionarrangement, progressed to a joint research and development effort, andultimately evolved into SUMCO’s purchase of an Ibis 1000 oxygen implanter inorder to establish a Japanese-based manufacturing facility for SIMOX-SOIwafers. This implanter was installed in SUMCO’s wafer manufacturing facility inChiba, Japan in July 2001. In 1999, we completed an agreement to license ourstandard and Advantox SIMOX-SOI wafer fabrication process to SUMCO.  Under this agreement we received an initialroyalty fee and are entitled to future royalties based on a percentage of SUMCO’ssales of Advantox SIMOX-SOI wafers that are manufactured using the licensedprocess. In January 2005 and October 2005, SUMCO ordered i2000 SIMOX oxygenimplanters which were subsequently shipped, and for which final customeracceptance was received in 2006. Revenue was also recognized for both i2000supon final acceptance during 2006.

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

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

**Researchand Development**

Ibis has activeresearch and development programs in both equipment and wafer processtechnology. For the past four years a primary focus has been developingimplanter technology and advanced process capability to produce 300 mm SIMOXwafers. This required the development of a new generation oxygen implanter, thei2000, and the procurement and qualification of annealing, cleaning, andmetrology tools for completing the full SIMOX process at 300 mm.

Theproprietary i2000 was designed to support the volume production of high qualitySIMOX-SOI 300 mm wafers for the global semiconductor industry. To minimizeprocess risks the i2000 duplicates the process environment of the Ibis 1000.However, it incorporates a number of features designed to improve throughputand reduce costs. These include increased beam current, faster wafer handling,off-hub wafer cooling, and modular construction, which we believe will enableimproved serviceability and diagnostics, while simplifying the assembly andshipping of the machine. Wealso believe that the simpler beam line design of the i2000 also offersextensive capabilities, facilitating the manufacture of the Advantox productportfolio. We believe that taken together, these features significantlyincrease productivity of the i2000 over the Ibis 1000.  Finally, the i2000 is designed to be far morefab friendly than the Ibis 1000. It is designed to be bulkhead or ballroommounted in the clean room, offers front-opening unified pod (FOUP) capabilityand meets SEMI safety and ergonomic guidelines. We also believe that the i2000’simproved automation and operator-friendly controls will improve product yieldand afford ease-of-use. Our plans are to improve the i2000 in terms of bothquality (reduced particles) and quantity (increased throughput) of as-implantedSIMOX wafers, in order to provide continuous improvement to the cost ofownership for our customers.

Our wafertechnology R&D has concentrated on enhancing the range of potentialcommercial applications for Ibis’ SIMOX-SOI wafers by:

·                  Refining techniques to produce SIMOX-SOI wafers ofhigher quality. In the fall of 2004 we announced a 3x to 4x reduction in thesilicon roughness of the SIMOX MLD;

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·                  Jointly developing a technology for manufacturing high resistivitySIMOX-SOI wafers for mixed signal and radio frequency (“RF”) applications witha major silicon wafer manufacturer. With this alliance, we developedadvancements in SIMOX wafer manufacturing, including reduced wafer cost,scalability to 300 mm and stability of the material’s high resistivitycharacteristic through thermal cycling common in integrated circuitmanufacturing. We filed a joint patent application with SEH entitled *Method of Producing a High Resistivity SIMOX SiliconSubstrate* in May 2003. As of December 31, 2006 thispatent has been granted**;****

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

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

Duringthe fiscal years ended December 31, 2004, 2005 and 2006, Ibis’ internallyfunded research and development expenses were approximately $5.3 million, $6.0million and $5.4 million or 67%, 995% and 39% of our revenues, respectively.

**Competition**

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

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

Wealso believe that SUMCO, and Simgui are manufacturing or marketing SIMOXwafers. We expect 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 sourceof competition for us is the development of alternative SOI materials. Theapproach that most directly competes with SIMOX is thin-film bonded SOI wafers.The majority of SOI wafers are produced with this technology. SOITEC, aFrench-based company that spun off from LETI, a French government research lab,uses a bonded method. The thin-film bonded approach uses two silicon wafers,one or both having a thermally-grown oxide layer, which are first bondedtogether to form the silicon/silicon dioxide/silicon structure. A majority ofone of the wafers is removed or separated from the double-wafer structure, andthe remaining portion serves as the device layer of the SOI wafer. The mostpopular method is to transfer the thin layer using wafer splitting techniques,allowing the rest of the wafer to be reclaimed and reused. Regions of stressare first created using implantation and/or epitaxial growth prior to thebonding step. The wafer is split along the stress interface by the applicationof heat (SOITEC’s Smartcut® 

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process), a gas jet (Silicon Genesis’ process), or a water jet (Canon’sELTRAN® process).  SEH also offers a thinSOI Unibond® wafer manufactured with the SmartCut® process, which is licensedfrom SOITEC. Our evidence to date suggests that both SIMOX and bonded wafersperform equally well. We believe, however, that the SIMOX process can result inan inherently lower manufacturing cost in higher volume production. We alsobelieve that, at this stage in the market’s development, multiple SOI supplierswill help accelerate the adoption of SOI technology.

The third sourceof competition is derived from alternative non-SOI technologies designed toobtain benefits similar to those of SOI, including improvements to existingtechnologies. Significant resources are continually expended to improveepitaxial and conventional bulk silicon wafers.

Thesemiconductor industry has demonstrated its resourcefulness in improvingmaterials through creative circuit design and manufacturing techniques, therebyextending the useful life of conventional substrates, and we cannot be surethat it will not continue to do so. The relatively lower cost of thesesubstrates provides an incentive to the semiconductor industry to improveexisting material without moving to new, more advanced substrates. In addition,complex variations of more conventional approaches, such as elaborate circuitstructures built on conventional silicon substrates, and compound materials(such as silicon-germanium, gallium-arsenide, indium phosphide, etc.), areother alternative substrate choices. Strained silicon and silicon superlattices are technologies that can be used to increase the operating speed ofcomputer chips, such as microprocessors. Strain can be applied locally (at thefab) or globally (at the wafer manufacturer). These technologies can be appliedto bare wafers, SIMOX SOI wafers or Bonded SOI wafers. The spacing betweensilicon atoms is stretched — or strained - farther apart, allowing holes orelectrons to flow with less resistance, leading to chips that are faster, asreported by IBM. Silicon superlattices are thin layers inserted in the channelregion of the transistor that provide low impedance for current flowhorizontally in the channel region just below the gate, and higher impedancefor vertical current flow into the regions further below the surface. Theemergence of strained silicon and silicon superlattices in wafer-materialstechnology will lead to comparisons with SOI, among other emerging wafer-materialstechnologies. Although strained silicon, superlattices and SOI arewafer-material technologies that increase chip speed, they work in different —and complementary — ways and if combined can provide additional benefits.

Strained siliconand silicon superlattices increase transistor speed by increasing the mobilityof holes or electrons traveling through the channel region near the siliconsurface. On the other hand, SOI increases transistor speed by reducingparasitic capacitances associated with source and drain junctions. Therefore,we believe strained silicon, silicon superlattices, and SOI (as applied througheither SIMOX or Bonded SOI) are complementary and mutually enhancing - notcompeting — technologies, although one technology may be adopted without theother. Similarly, in the area of reducing wasteful power, high-k dielectricswith metal gates and SOI address different sources of wasteful powerconsumption. The high-k dielectric/metal gate combinations lower power lossesby reducing charge leakage through the gate dielectric. (While the gatedielectric may be similar or even identical for all transistor types, differentmetals/metal stacks are used for NMOS vs. PMOS gates to ensure they performsimilarly as they did with doped polysilicon gates in larger geometrynodes.)  SOI lowers power losses byblocking the conduction paths to the bulk silicon and between adjacentdevices.  We believe the real wave of thefuture will be combining these complementary technologies — strained silicon/siliconsuperlattice + high-k gate dielectric/metal gates + SOI — to create the highestspeed, lowest-power competitive combinations, much like the way copperinterconnects, low k dielectric materials and SOI substrates have beencombined.

**Backlog**

Asof February 28, 2007 Ibis did not have any orders for implanters as compared toFebruary 28, 2006 where the backlog showed $13 million in implanter orders.This $13 million in backlog was recognized as revenue in 2006 upon customeracceptance. All customer orders are subject to modification or cancellation bythe customers. Backlog can, and often does fluctuate significantly based upon,among other matters, the timing and receipt of orders and subsequent toolshipments. Therefore, variations in backlog may not represent a fair indicationof future business trends.

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**Patentsand Proprietary Rights**

Ibis’s success is dependent in part upon certainproprietary technologies and core intellectual property. Ibis has been awardeda number of patents and has a number of pending patent applications. Forexample, we added three patents to our intellectual property portfolioduring 2004, seven patents during 2005 and five, including internationalpatents, during 2006. We have several more patents pending relating to ourproprietary i2000 oxygen implanter or the SIMOX fabrication process.Additionally, we diligently monitor our research and development process toidentify inventions that warrant pursuing patent protection.

Notwithstanding our patent portfolio strategy, werely largely upon trade secret protection and confidentiality and proprietaryinformation agreements to safeguard our proprietary technology. Towards thisend, all of our employees currently are required to execute confidentialityagreements pursuant to which they agree to assign to us all patent rights andtechnical or other information developed by them during their employment withus and also agree not to disclose any trade secret or confidential informationwithout 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 have been or may be issued will not bechallenged, invalidated or circumvented or that any rights granted by thosepatents would protect our proprietary rights. Failure of any patents to protectour technology may make it easier for our competitors to offer equivalent orsuperior technology. In addition, unauthorized parties may attempt to copy orotherwise misappropriate aspects of our products or services, or to obtain oruse information that we regard as proprietary. Even if a competitor’s productswere to infringe patents owned or licensed by us, it would be very costly forus to enforce our rights in an enforcement action, which would also divertfunds and resources which otherwise could be used in our operations.Furthermore, third parties may also independently develop similar technologywithout breach of our proprietary rights.

In addition to our efforts to develop proprietarytechnology, historically we have also supplemented and commercialized ourintellectual property through the grant and receipt of licenses. For example, Ibishas an exclusive worldwide sublicense to the proprietary beam scanning systemdeveloped and patented by a consultant of ours during the development of theIbis 1000. Our beam scanning system sublicense agreement also grants us certainrights to further sublicense the beam scanning system for certain applicationsother than oxygen implantation. Pursuant to these rights, we have entered intofour non-exclusive sublicense agreements that permit the respectivesub-licensees to manufacture, use and sell implantation machines incorporatingthe beam scanning system so long as such machines are not designed for theproduction of oxygen implanted wafers. Each sub-licensee has paid us anon-refundable option fee upon signing an agreement and pays an initial licensefee when it exercises its option to use the licensed technology. In addition,each sub-licensee will pay a royalty fee with respect to each implantationmachine using this beam scanning system manufactured, used or sold after itsoption fee and initial license fee has been applied. License fees received byus from sub-licenses are to be shared on a substantially equal basis with thelicensor of the beam scanning system. As of December 31, 2006, Ibis hadreceived approximately $2.8 million in net license fees, after deductingamounts paid to the licensor.

Ibisalso obtained in 1994 an exclusive license to technology that facilitates thepresentation of wafers to ion beams developed by Superion Limited, a UnitedKingdom corporation. Through December 31, 2006, Ibis has paid $0.6 million forlicense fees for implantation machines that have been manufactured by us. Underthe terms of this agreement, Superion Limited has retained the right to utilizethe technology for uses not involving oxygen implantation of silicon or othersemiconductor materials.  During 2001,this agreement was modified to incorporate i2000 implantation machines. Ibisalso entered into a sublicense agreement during 2001 which gives our customer aroyalty-bearing, non-exclusive license to utilize this technology for ionimplantation machines, excluding oxygen implanters.

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

Furthermore, in2000, we licensed from IBM the right to manufacture and sell SIMOX-SOI wafers,using IBM’s proprietary MLD SIMOX process, to IBM and to all our othercustomers. Under the royalty-bearing license agreement, we were able to use IBM’sprocess to produce MLD SIMOX-SOI wafers which we 

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marketed as Advantox MLD. Advantox MLD wafers were broadly marketed tointegrated circuit manufacturers looking to accelerate their SOI adoptionprocess. Under the agreement we granted IBM rights to our patents utilized inthe modified low dose, or MLD process. Although we believe that other SIMOX-SOIwafer processing methods exist and are being used today, our existing orpotential equipment customers that intend to use the MLD process to manufactureSIMOX-SOI wafers would be required to license this technology directly fromIBM. Two major silicon wafer manufacturers have already licensed thistechnology from IBM and others have developed their own SIMOX processes. Noassurances can be given that the remaining equipment customers that intend touse the MLD process and IBM would come to terms acceptable to both parties in atimely 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 Advantox 50 and 150 SIMOX wafer fabricationprocesses to Simgui. Ibis received the initial license fee from Simgui inJanuary 2003, and the technology transfer took place in the first quarter endedMarch 31, 2003. License revenue of approximately $0.5 million was recognized inthat quarter.

**GovernmentRegulation**

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

Certaintechnologies associated with Ibis’ implanters are subject to export regulationsadministered by the U.S. Department of Commerce.  Accordingly, Ibis may be required to secureU.S. export licenses with respect to sales of implanters or transfers oftechnologies to end users in certain foreign countries. There can be noassurance that if necessary, Ibis will be able to secure such licenses in atimely manner, or at all.

**Manufacturingand Supplies**

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

**Employees**

Asof December 31, 2006, we employed 45 persons on a full-time basis. On January5, 2007 in conjunction with the company’s overall cost reduction efforts, wereduced the work force by 6 people leaving 39 employees. Of these 39 remainingemployees, 12 currently are consulting at a neighboring business for a minimumof six months under a staffing services agreement executed in January 2007 withthat business. Additionally, certain executive and senior level managementpersonnel received salary reductions that ranged from 10% to 50% of theirsalaries. These reductions are anticipated to remain in place until marketconditions warrant further review. None of our employees are represented by alabor union and we believe our relations with our employees are good.

 

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**Item1A.  RISK FACTORS**

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

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

***We Have Relied Heavily on Salesto One Customer.******We Expect to Rely on Sales to a Limited Number of Customers WhichMay Cause Sales to Vary Significantly from Quarter to Quarter Causing OurOperating Results to Fluctuate****.*

We have derived all of our sales of wafermanufacturing equipment from one customer over the last two years. The detailsfor the last three years can be seen in section 1 under the title: Marketing,Sales and Customers in this 10K. Ibis expects that we will continue to rely ona relatively small number of customers as sources of revenue in the foreseeablefuture.  The loss of one or more of thesemajor customers and our failure to obtain other sources of offsetting revenuewould have a material adverse impact on our business and hinder our ability tocontinue as a going concern. In addition, any downturn in these customers’business or the industry in which these customers operate could result in asignificant decrease in any sales of our implanters to these customers, whichwould have an adverse effect on our business.

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

The Company’s management believes that it will havesufficient cash resources to support current operations until at least June2008 with the receipt ofthe proceeds of approximately $2.2 million from the first closing of theCompany’s sale of common stock and warrants pursuant to a financing agreementmade on February 16, 2007 with Special Situations Funds. This expectationhowever, is based on the Company’s current operating plan and general salesoutlook, each of which may change rapidly. Subject to stockholder approval, weagreed to sell additional securities at a second closing at which we willreceive approximately $3.1 million in additional proceeds, providing sufficientcash to support current operations until at least December 2008. If we fail toobtain stockholder approval for the issuance of the additional shares pursuantto the purchase agreement, we may need to seek additional alternative financingto fund future operations, which we may be unable to obtain on favorable termsor in a timely fashion.

We intend to continue toinvest in our research, development and manufacturing capabilities. Changes intechnology or sales growth beyond currently established capabilities mayrequire further investment. As a result, we may need to raise substantialadditional capital in the future. We have previously financed our workingcapital requirements through:

·      equityfinancings, including warrant and option exercises,

·      equipmentlines of credit,

·      aworking capital line of credit,

·      a termloan,

·      sale-leasebackarrangements,

·      collaborativerelationships,

·      waferproduct and equipment sales, and

·      government contracts.

There can be no assurance,however, that our actual needs will not exceed expectations or that we will beable to fund our operations on a long-term basis in the absence of othersources. There also can be no assurance that any additional required longerterm financing will be available through additional bank borrowings, debt orequity offerings or otherwise, or that if such financing is available, that itwill be available on terms acceptable to us. If future financing is notavailable or is not available on a timely basis or on acceptable terms, we maynot be able to fund our future needs, which would seriously harm our businessand results of operations and

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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.

***The issuance of shares in connection with theFebruary 2007 financing and the exercise of the related warrants will dilutethe value of our shares of common stock and could cause the price of our sharesof common stock to decline.***

Prior to the February 2007 financing, there were 10,915,481 sharesoutstanding and there were 370,786 shares of common stock reserved for issuanceunder our equity incentive and stock purchase plans.  In connection with the first closing of thetwo tranche financing with Special Situation Funds, we issued 1,400,000 sharesof common stock and 1,124,434 warrants to purchase shares of common stock,including warrants to purchase 74,434****shares ofcommon stock issued to TN Capital Equities, Ltd., which served as placementagent.  In addition, we are solicitingstockholder approval to sell an additional 1,978,377 shares of common stock andwarrants to purchase 1,588,966****shares ofcommon stock, including 105,185****to theplacement agent, at a second closing. The second closing is expected to occur after our annual meeting, whichis scheduled to be held on May 10, 2007. As a result of the first closing, Special Situation Funds beneficiallyowns approximately 19.9% of our capital stock and, subject to stockholderapproval, will beneficially own approximately 37% of our capital stock uponconsummation of the second tranche.

The exercise of the warrants and the issuance of the common stock andwarrants pursuant to the second closing will result in dilution in the value ofthe shares of our outstanding common stock and the voting power representedthereby. In addition, the exercise price of the warrants may be lowered underthe price adjustment provisions in the event of a “dilutive issuance,” that is,if we issue common stock at any time prior to their maturity at a per shareprice below such conversion or exercise price, either directly or in connectionwith the issuance of securities that are convertible into, or exercisable for,shares of our common stock. A reduction in the exercise price may result in theissuance of a significant number of additional shares upon the exercise of thewarrants.

The warrants do not establish a “floor” that would limit reductions insuch conversion price or exercise price. The downward adjustment of theexercise price of these warrants could result in further dilution in the valueof the shares of our outstanding common stock and the voting power representedthereby.

No prediction can be made as to the effect, if any, that future salesof shares of our common stock, or the availability of shares for future sale,will have on the market price of our common stock prevailing from time to time.Sales of substantial amounts of shares of our common stock in the publicmarket, or the perception that such sales could occur, may adversely affect themarket price of our common stock and may make it more difficult for us to sellour equity securities in the future at a time and price which we deemappropriate.

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

***We Have Significant Losses and MayNever Be Able to Sustain Profitability.***

Weexperienced net losses of $10.9 million, $9.2 million and net income of $0.4million in 2004, 2005 and 2006, respectively. As of December 31, 2006, we hadan accumulated deficit of $81.6 million. Net losses may continue for theforeseeable future. Although we have had profitable quarterly operating resultsfrom time to time, we may not be able to achieve sustained profitability.

***RevenueRecognition and Cash Payments from Customers Depend on a Manufacturing andCustomer Qualification and Acceptance Process that is Complex, Lengthy andCostly.***

In the semiconductor industry customers regularlyrequire equipment manufacturers to qualify the equipment at the customer’ssite. The time required to customer-qualify an implanter at a customer’s siteis very difficult to predict because the qualification process for each of ourimplanters is complex, lengthy and 

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costly and varies depending on the customer’s varying specifications.The manufacturing and qualification process for each implanter requires us toconstruct and the customer qualify the machine at our premises, disassemble themachine for transportation, and reassemble and re-qualify it at the customer’spremises. During this qualification period, we invest significant resources anddedicate substantial production and technical personnel to achieve acceptanceof the implanter. A customer will not accept the implanter until it hassuccessfully produced wafers to exact specifications at the customer’spremises. Even very small differences in the customer’s environment orinitially imperceptible changes that may occur to the implanter during thetransportation and reassembly of the implanter at the customer’s site can causea large percentage of wafers produced by the implanter to be rejected, whichwould delay the acceptance of the implanter by the customer. Historically, wehave experienced delays in achieving customer acceptance. Delays ordifficulties in our manufacturing and qualification process could increasemanufacturing and warranty costs and adversely affect our relationships withour customers. In addition, because we do not recognize revenue on the sale ofan implanter until it is delivered and qualified by the customer, any delay inqualification would result in a delay in our ability to recognize revenue fromthe sale and receipt of final payment. Historically it has taken approximatelynine to eighteen months from our receipt of our order to build, ship and obtaincustomer acceptance of our implanters.

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

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

·                                          lackof orders,

·                                          cancellationsof orders and shipment delays and rescheduling,

·                                          new productintroductions, which often result in a mismatching of research and developmentexpenses and recognition of revenue, and

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

Ahigh percentage of our expenses are essentially fixed in the short term. As aresult, if we experience delays in generating and recognizing revenue, ourquarterly operating results are likely to be seriously harmed. Due to this, aswell as to the cyclicality of the semiconductor industry and other factors, webelieve that quarter-to-quarter comparisons of our operating results will notbe meaningful. You should not rely on our results for one quarter as anyindication of our future performance.

***Competitors and CompetingTechnologies May Render Some or All of Our Products or Future ProductsNoncompetitive or Obsolete Which Would Result in a Write-down for Impaired orObsolete 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

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advantages of SIMOX-SOI wafers which in turn woulddiminish the demand for our oxygen implanters. Further, in addition to theSIMOX implanter other equipment must be purchased and implemented in order tocomplete the SIMOX wafer manufacturing process. This other equipment caninvolve substantial cost that can increase the overall cost of SIMOX-SOIwafers.

Ifsemiconductor manufacturers fail to adopt SIMOX technology during the currentor subsequent process cycle (such cycles typically last two to three years),widespread adoption of SIMOX technology may never materialize, our technologymay become obsolete and we may be required to recognize an additional materialimpairment loss in the future.

In addition, although we are aware of no othercompany manufacturing oxygen implant equipment, other major semiconductorimplant equipment manufacturers could develop a less expensive oxygen implanterwith superior technology. Our ability to compete with other manufacturers ofsemiconductor implanters, manufacturers of competing SOI wafers, as well aswith bulk silicon, epitaxial, strained silicon and compound materials wafermanufacturers, will depend on numerous factors 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

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

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

Thesemiconductor industry is characterized by rapid technological change, evolvingindustry standards and continuous improvements in products and requiredcustomer specifications. Due to the constant changes in our markets, our futuresuccess depends on our ability to improve our manufacturing processes, improveexisting products and develop new products. For example, our oxygen implantersmust remain competitive on the basis of cost of ownership, process performanceand evolving customer needs. To remain competitive we must continuallyintroduce oxygen implanters with higher capacity, better production yields andthe ability to process larger wafer sizes.

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

·      we areunable 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

·      our new products experience reliability orquality problems.

***The Sales Cycle for Our OxygenImplanter Equipment is Lengthy and Complex and We Have Only Received LimitedOrders for Our Oxygen Implanter Equipment. Certain Third Party LicensingAgreements May Cause Significant Delays.***

Our customers expend significant efforts in evaluatingand qualifying our implanters before they place orders with us.  Since we began selling implanters in 1996, wehave only sold a total of eight Ibis 1000 oxygen implanters at an average saleprice of approximately $4.0 million each and four i2000 oxygen implanters at aselling price between $6.0 and $8.0 million. The sales cycle typically goesfrom equipment demonstration, equipment specification negotiations, formalquotation, contract negotiations and receipt of order and could take up to oneyear or longer. In addition, our potential equipment customers that would liketo use the MLD process, owned by IBM, to manufacture SIMOX-SOI wafers using ourimplanters would be required to license this technology directly from IBM. Webelieve two silicon wafer manufacturers have already licensed this technologyfrom IBM and others have developed their own SIMOX processes. Our potentialequipment

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customers may wish to secure this license prior togiving us an order for equipment and these negotiations between IBM and ourcustomer are beyond our control and no assurances are given that our customersand IBM would come to terms acceptable to both parties in a timely manner, orat all. These MLD process license issues may affect the timing of placement ofcustomer orders in the future if customers plan to license this technology. Wedo not expect to sell more than a limited number of implanters in the nearfuture. The sale of one implanter would generally represent a substantialportion of our annual revenue. Accordingly, the delay in the receipt of orders,manufacture or delivery of even one unit or the modification, change orcancellation of any such order would have a material adverse effect on ourquarterly and annual results of operations.

***Our Implanters and AssociatedTechnology are Subject to Export Regulations, Which Could Prevent or Delay theSale of Such Products in Foreign Countries.***

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

***The Loss of Key Members of OurScientific and Management Staff Could Delay and May Prevent the Achievement ofOur Research, Development and Business Objectives.***

OurExecutive Chairman, Martin J. Reid, our Chief Executive Officer and President,Charles McKenna and other current officers and key members of our scientificstaff are responsible for areas such as product development and improvements,and process improvement research, which are important to our specializedscientific business. The loss of, and failure to promptly replace, any memberof this group could significantly delay and may prevent the achievement of ourresearch, development and business objectives. While we have entered into anemployment agreement with our Chairman, under certain circumstances he may beable to terminate his employment with us. Furthermore, although our employeesare subject to certain confidentiality and non-competition obligations, our keypersonnel may terminate their employment at any time and may become employed bya competitor. The current composition of Ibis management and of its board ofdirectors is subject to change and should not be unduly relied upon.

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

On December 2004, the Financial Accounting Standards Board issuedFASB Statement No. 123R, Share Based Payment, which requires all companies totreat the fair value of stock options granted to employees as an expense. As aresult of this standard, effective for periods beginning after January 1, 2006,we and other companies are required to record a compensation expense equal tothe fair value of each stock option granted. This amounted to an expense of$0.4 million in the fiscal year ending December 31, 2006. FAS123 (R)requirements reduce the attractiveness of granting stock options because of theadditional expense associated with these grants, which have impacted and willcontinue to negatively impact our results of operations. Nevertheless, stockoptions are an important employee recruitment and retention tool, and we maynot be able to attract and retain key personnel if we reduce the scope of ouremployee stock option program. In addition, this accounting standard couldnegatively impact our ability to use stock options as an employee recruitmentand retention tool in the future.

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

Wehave limited manufacturing experience and have only manufactured limitedquantities of oxygen implanters. To be successful, our products must bemanufactured in commercial quantities, at acceptable costs. We may not be ableto make the transition to high volume commercial production successfully.Future

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production incommercial quantities may create technical and financial challenges for us. Anydifficulty or delay in constructing additional implanters, if needed, couldhave a material adverse effect on our business.

***Our Latest Products Have Not BeenUsed in Large-Scale Long-Term Production and Consequently They May Not Be Ableto Perform at the Availability Levels Expected for Continuous (7 Days per Week/ 24 Hours per Day) Operation. (and May Be Subject to Unknown and UndetectedHardware or Software Failures).***

Semiconductor equipmentis subject to stringent mean time between failure (MBTF) and similar quality andreliability requirements. Although our equipment has previously been used inour own production environment for manufacturing SIMOX SOI wafers, and has beenused in limited manufacturing runs in our customers sites, as our equipment isexposed to long-term extended production processing on an automated basis,previously unknown and undetected hardware or software failures or combinationsthereof may occur. Such failures could adversely affect our relationship withour customers.

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

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

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

Webelieve we will need to form or maintain alliances with strategic partners forthe manufacturing, marketing and distribution of our products. We may enterinto these strategic alliances to satisfy customer demand and to addresspossible customer concerns regarding our being a sole source supplier. Thelimited number of reliable sources of supply other than Ibis may adverselyaffect or delay the integration of SIMOX-SOI wafers in mainstream commercialapplications. We may not be successful in maintaining alliances or in formingand maintaining other alliances, including satisfying our contractualobligations with our strategic partners, and our partners may not devoteadequate resources to manufacture, market and distribute these productssuccessfully or may attempt to compete with us.

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

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

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

Ourability to compete effectively with other companies will depend, in part, onour ability to maintain the proprietary nature of our technology. Although we havebeen awarded or have filed applications for a number of patents in the U.S. andforeign countries, those patents may not provide meaningful protection, orpending patents may not be issued. Our competitors in both the U.S. and foreigncountries, many of which have substantially greater resources and have madesubstantial investments in competing technologies, may have or may obtainpatents that will prevent, limit or interfere with our ability to make and sellour products or infringe on our patents. The defense and prosecution of patentsuits is both costly and time-consuming, even if

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the outcome isfavorable to us. In addition, there is an inherent unpredictability regardingobtaining and enforcing patents. An adverse outcome in the defense of a patentsuit could:

·      subjectus to significant liabilities to third parties,

·      requiredisputed rights to be licensed from third parties, or

·      require us to cease selling our products.

Wealso rely in large part on unpatented proprietary technology and others, includingstrategic partners, may independently develop the same or similar technology orotherwise obtain access to our proprietary technology. To protect our rights inthese areas, we currently require all of our employees to enter intoconfidentiality agreements. However, these agreements may not providemeaningful protection for our trade secrets, know-how or other proprietaryinformation in the event of any unauthorized use, misappropriation ordisclosure of such trade secrets, know-how or other proprietary information.

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

***If We Do Not Comply With AllApplicable Environmental Regulations, We May be Subject to Fines and OtherSanctions.***

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

***Our Stock Priceis Highly Volatile.***

The market prices forsecurities of high tech companies have been volatile. This volatility hassignificantly affected the market prices for these securities for reasonsfrequently unrelated to the operating performance of the specific companies.These broad market fluctuations may adversely affect the market price of ourcommon stock. The market price for our common stock has fluctuatedsignificantly. Since January 1, 1999, our stock price has fluctuated from ahigh of $135.00 to a low of $1.14. It is likely that the market price of ourstock will continue to fluctuate in the future. Events or factors that may havea significant impact on our business and on the market price of our commonstock include the following:

·                  quarterlyfluctuations in operating results,

·                  difficultyin forecasting future results,

·                  announcementsby us or our present or potential competitors,

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

·                  the timing ofreceipt of orders and / or customer acceptance from major customers,

·                  product mix,

·                  productobsolescence,

·                  shifts incustomer demand,

·                  our ability tomanufacture and ship products on a cost-effective and timely basis,

·                  marketacceptance of new and enhanced versions of our implanters,

·                  the evolving andunpredictable nature of the markets for the products incorporating SIMOX-SOIwafers,

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

·                  thecyclical nature of the semiconductor industry, and

·      generalmarket conditions.

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***Concentrated Ownership of Shares by One Shareholder and Its AffiliatesCould Affect the Price of Our Common Stock.***

As of February 28,2007, our largest known shareholders include Special Situations Fund III QP,L.P and affiliates (“SSF”), which own an aggregate of 1,400,000 shares, orapproximately 11% of our outstanding shares, as well as warrants to purchase anadditional 1,050,000 shares.  Subject to stockholder approval at the Company’s upcoming annualstockholders meeting, SSF may acquire an additional 1,978,377 shares andwarrants to purchase an additional 1,483,781 shares.  At present, SSF’s ownership may have theeffect of delaying, deferring or preventing a change in control of our company,or may directly or indirectly effect a change in control of our company. Moreover, the disposition by SSF of a substantial amount of its shares of ourcommon stock in the open market could have an adverse impact on the market forour common stock.

***SecuritiesLitigation Could Result in Substantial Cost and Divert the Attention of KeyPersonnel, Which Could Seriously Harm Our Business.***

Five class action securities lawsuits have been filed in the UnitedStates District Court in the District of Massachusetts against Ibis and itsPresident and CEO: Martin Smolowitz v. Ibis Technology Corporation., et al.,Civ. No. 03-12613 (RCL) (D. Mass.); Fred Den v. Ibis Technology Corporation.,et al., Civ. No. 04-10060 (RCL) (D. Mass.); Weinstein v. Ibis TechnologyCorporation., et al., Civ. No. 04-10088 (RCL) (D. Mass.); George Harrison v.Ibis Technology Corporation., et al., Civ. No. 04-10286 (RCL) (D. Mass.); andEleanor Pitzer v. Ibis Technology Corporation., et al, Civ. No. 04-10446 (RCL)(D. Mass.).On June 4, 2004, the Court entered an order consolidating theseactions under the caption In re Ibis Technology Securities Litigation, C.A.04-10446 RCL. On July 6, 2004, a consolidated amended class action complaintwas filed which alleges, among other things, that the Company violated federalsecurities laws by allegedly making misstatements to the investing publicrelating to demand for certain Ibis products and intellectual property issuesrelating to the sale of the i2000 oxygen implanter. The plaintiffs are seekingunspecified damages. On August 5, 2004, we filed a motion to dismiss theconsolidated amended complaint on the grounds, among others, that it failed tostate a claim on which the relief could be granted. On September 22, 2005 theMagistrate Judge issued a report and recommendation that our motion be grantedin part and denied in part. By Memorandum and Order dated March 31, 2006, theCourt adopted the Report and Recommendation of the Magistrate Judge, grantingin part and denying in part the Company’s motion to dismiss. As a result of theCourt’s Order, plaintiffs filed a Conformed Consolidated Amended Complaint,which the Company answered on July 5, 2006. On October 2, 2006, the Companyannounced that it had reached an agreement in principle to settle the fiveclass action securities lawsuits subject to, and contingent upon thenegotiation and execution of a formal settlement agreement and final courtapproval after notice to the class. The proposed settlement, which provides fora payment to the plaintiffs of $1.9 million and is to be funded entirely by theCompany’s insurance carrier, is not expected to have a material adverse effecton our business, results of operations or financial condition.

Ibis remains a nominal defendant in a shareholder derivative actionfiled in February 2004 against certain of its directors and officers: Louis F.Matheson, Jr. v. Martin J. Reid et al., Civ. Act. No. 04-10341 (RCL). Thecomplaint alleges, among other things, that the alleged conduct challenged inthe securities cases pending against Ibis in Massachusetts (described above)constitutes a breach of the defendants’ fiduciary duties to Ibis. The complaintseeks unspecified money damages and other relief ostensibly on behalf of Ibis.On June 4, 2004, the Court entered an order staying this matter pending theentry of a final order on any motion filed by the Company to dismiss theconsolidated class action complaint referenced above.  On May 1, 2006, the parties jointly moved tocontinue the administrative stay of the Derivative Action until finaldisposition of all claims in the Consolidated Action, which the Court grantedon July 26, 2006. This continuing litigation may be time-consuming, expensiveand disruptive to normal business operations, and the outcome of litigation isdifficult to predict.

***FutureIssuances of Preferred Stock May Diminish the Rights of Our CommonStockholders.***

Our board of directors has the authority to approvethe issue of up to 2.0 million shares of preferred stock and to determine theprice, rights, privileges and other terms of these shares. The board ofdirectors may exercise this authority without the approval of the stockholders.The rights of the holders of common stock may be adversely affected by therights of the holders of any preferred stock that may be issued in the future.

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***Anti-takeoverProvisions in Our Charter and Bylaws and Provisions of Massachusetts Law CouldMake an Acquisition of the Business by a Third-Party Difficult.***

Our restatedarticles of organization, as amended, and restated bylaws and the MassachusettsBusiness Corporation Law contain certain provisions that may make a third-partyacquisition of us difficult, including:

·                  a classifiedboard of directors, with three classes of directors each serving a staggeredthree-year term,

·                  the ability of theboard of directors to issue preferred stock, and

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

***Limitations onEffectiveness of Controls.***

The Company’s management,including the Chief Executive Officer and President and the Chief FinancialOfficer, does not expect that our internal controls will prevent all errors andintentional misrepresentations.  Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met.  Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls 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 ofCorporate Governance and Public Disclosure May Result in Additional Expensesand Continuing Uncertainty.***

Changinglaws, regulations and standards relating to corporate governance and public disclosure,including the Sarbanes-Oxley Act of 2002 and related SEC regulations as well asthe listing standards of the NASDAQ Stock Market, are creating uncertainty forpublic companies. We continually evaluate and monitor developments with respectto new and proposed rules and cannot predict or estimate the amount of theadditional costs we may incur or the timing of such costs. These new or changedlaws, regulations and standards are subject to varying interpretations, in manycases due to their lack of specificity, and as a result, their application inpractice may evolve over time as new guidance is provided by regulatory andgoverning bodies. This could result in continuing uncertainty regardingcompliance matters and higher costs necessitated by ongoing revisions todisclosure and governance practices. We are committed to maintaining highstandards of corporate governance and public disclosure. As a result, we haveinvested resources to comply with evolving laws, regulations and standards.  This investment may result in increasedgeneral and administrative expenses and a diversion of management time andattention from revenue-generating activities to compliance activities. If ourefforts to comply with new or changed laws, regulations and standards differfrom the activities intended by regulatory or governing bodies due toambiguities related to practice, regulatory authorities may initiate legalproceedings against us and we may be harmed.

**Item 2.    PROPERTIES**

Ibis’corporate office and manufacturing site are located at a leased facility inDanvers, Massachusetts. The equipment manufacturing business and theengineering and wafer processing research and development efforts are housed inapproximately 32,000 square feet which includes a modernized cleanroom thatcontains metrology equipment, cleaning equipment and an implantation equipmentmanufacturing and service area. The lease on the space we currently occupy wasrenewed during 2006 and will expire on June 30, 2011, and contains an option torenew for five years.

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**Item 3.    LEGALPROCEEDINGS**

Five class action securities lawsuits have been filed in the UnitedStates District Court in the District of Massachusetts against Ibis and itsPresident and CEO: Martin Smolowitz v. Ibis Technology Corporation., et al.,Civ. No. 03-12613 (RCL) (D. Mass.); Fred Den v. Ibis Technology Corporation.,et al., Civ. No. 04-10060 (RCL) (D. Mass.); Weinstein v. Ibis TechnologyCorporation., et al., Civ. No. 04-10088 (RCL) (D. Mass.); George Harrison v.Ibis Technology Corporation., et al., Civ. No. 04-10286 (RCL) (D. Mass.); andEleanor Pitzer v. Ibis Technology Corporation., et al, Civ. No. 04-10446 (RCL)(D. Mass.).On June 4, 2004, the Court entered an order consolidating theseactions under the caption In re Ibis Technology Securities Litigation, C.A.04-10446 RCL. On July 6, 2004, a consolidated amended class action complaintwas filed which alleges, among other things, that the Company violated federalsecurities laws by allegedly making misstatements to the investing publicrelating to demand for certain Ibis products and intellectual property issuesrelating to the sale of the i2000 oxygen implanter. The plaintiffs are seekingunspecified damages. On August 5, 2004, we filed a motion to dismiss theconsolidated amended complaint on the grounds, among others, that it failed tostate a claim on which the relief could be granted. On September 22, 2005 theMagistrate Judge issued a report and recommendation that our motion be grantedin part and denied in part. By Memorandum and Order dated March 31, 2006, theCourt adopted the Report and Recommendation of the Magistrate Judge, grantingin part and denying in part the Company’s motion to dismiss. As a result of theCourt’s Order, plaintiffs filed a Conformed Consolidated Amended Complaint,which the Company answered on July 5, 2006. On October 2, 2006, the companyannounced that it had reached an agreement in principle to settle the fiveclass action securities lawsuits subject to, and contingent upon thenegotiation and execution of a formal settlement agreement and final courtapproval after notice to the class. The proposed settlement, which provides fora payment to the plaintiffs of $1.9 million and is to be funded entirely by theCompany’s insurance carrier, is not expected to have a material adverse effecton our business, results of operations or financial condition.

Ibis remains a nominal defendant in ashareholder derivative action filed in February 2004 against certain of itsdirectors and officers: Louis F. Matheson, Jr. v. Martin J. Reid et al., Civ.Act. No. 04-10341 (RCL). The complaint alleges, among other things, that thealleged conduct challenged in the securities cases pending against Ibis inMassachusetts (described above) constitutes a breach of the defendants’ fiduciaryduties to Ibis. The complaint seeks unspecified money damages and other reliefostensibly on behalf of Ibis. On June 4, 2004, the Court entered an orderstaying this matter pending the entry of a final order on any motion filed bythe Company to dismiss the consolidated class action complaint referencedabove.  On May 1, 2006, the partiesjointly moved to continue the administrative stay of the Derivative Actionuntil final disposition of all claims in the Consolidated Action, which theCourt granted on July 26, 2006. This continuing litigation may betime-consuming, expensive and disruptive to normal business operations, and theoutcome of litigation is difficult to predict.

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

Nomatters were submitted to stockholders during the fourth quarter of the yearended December 31, 2006.

 

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**PART II**

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

###### **MarketInformation**

Ibis’ Common Stock began trading on May 20, 1994 onthe Nasdaq SmallCap Market and on the Boston Stock Exchange. Prior to May 20,1994, there was no public market for the Common Stock or any other securitiesof Ibis.  On April 4, 1996, Ibiscommenced trading on the Nasdaq National Market and is currently trading on theNasdaq Global Market. Our Common Stock is traded under the symbol “IBIS.” Thefollowing table sets forth, for the periods so indicated the high and low saleprices for the Common Stock as reported by the Nasdaq National Market or NasdaqGlobal Market, as applicable.
| ** **     | ** ** | **Common Stock** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **High**              | ** ** | **Low** | ** ** |
|           |       |                  |       |   |   |
| 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 |   |
| 2006:          |       |                  |       |   |   |
| First Quarter  |       | $                     | 4.50       |   | $ | 2.58 |   |
| Second Quarter |       | $                     | 3.78       |   | $ | 2.20 |   |
| Third Quarter  |       | $                     | 3.65       |   | $ | 1.99 |   |
| Fourth Quarter |       | $                     | 3.56       |   | $ | 1.32 |   |

 

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**StockPerformance Graph**

Thefollowing graph compares the annual cumulative total stockholders return(assuming reinvestment of dividends) from investing $100 on December 31, 2001and plotted at the end of each fiscal year thereafter, in each of (i) theCompany’s Common Stock, (ii) the Nasdaq Stock Market, and (iii) the MediaGeneral Financial Services SIC Code Index 3674-Semiconductors, RelatedDevices-which consists of other companies on the Common Stock, and no dividendsare included in the representation of the Company’s performance. The stockprice performance on the graph below is not necessarily indicative of futureprice performance.

**COMPARISON OF CUMULATIVETOTAL RETURN OF ONE OR MORE**

**COMPANIES, PEER GROUPS,INDUSTRY INDEXES AND/OR BROAD MARKETS**

FISCAL YEARENDING
| **COMPANY/INDEX/MARKET**       | ** ** | ** ** | ** ** | **12/31/2001** | ** ** | **12/31/2002** | ** ** | **12/31/2003** | ** ** | **12/31/2004** | ** ** | **12/30/2005** | ** ** | **12/29/2006** | ** ** |
|--------------------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| Ibis Technology Corp           |       | 100.00     |       | 31.61          |       | 75.66          |       | 25.02          |       | 23.54          |       | 9.95           |       |
| Semiconductors, Related Device |       | 100.00     |       | 47.05          |       | 88.54          |       | 67.76          |       | 74.28          |       | 73.99          |       |
| NASDAQ Market Index            |       | 100.00     |       | 69.75          |       | 104.88         |       | 113.70         |       | 116.19         |       | 128.12         |       |

 

The Graph is not “solicitingmaterial” under Regulation 14A or 14C of the rules promulgated under theSecurities Exchange Act of 1934, is not deemed filed with the Securities andExchange Commission and is not to be incorporated by reference in any filing ofthe Company under the Securities Act of 1933, as amended, or the Exchange Actwhether made before or after the date hereof and irrespective of any generalincorporation language in any such filing. Information used in the graph wasobtained from Hemscott, Inc., a source believed to be reliable, but the companyis not responsible for any errors or omissions in such information

**Stockholders**

As of February 28, 2007, there were approximately 141 stockholders ofrecord of the 12,315,481 outstanding shares of Common Stock and approximately4,940 beneficial owners of the Common Stock.

**Dividends**

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

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**RecentSales of Unregistered Securities**

InFebruary 2007, Ibis issued 1,400,000 shares of common stock and warrants topurchase 1,050,000 shares of common stock pursuant to a purchase agreemententered into by the Company with Special Situation Funds to provide financingfor its operations.  The issuance was inconnection with the first closing of a two-trance financing.  The second closing, which is subject to stockholder approval, isexpected to occur after our annual meeting, which is expected to be held on May10, 2007. The securities were sold in a private placement pursuant toRegulation D of the Securities Act. Ibis has agreed to file a registrationstatement covering the resale of the shares of common stock acquired by theinvestors and shares of common stock issuable upon exercise of the warrantsacquired by the investors.  Thewarrants are immediately exercisable for a term of five years at an exerciseprice of $1.50 per share.

Asconsideration for its services as placement agent in connection with theFebruary 2007 financing, Ibis paid TN Capital Equities, Ltd. a cash fee equalto 5% of the gross proceeds received by the company at the first closing.  In addition, Ibis issued warrants to purchase74,434 shares of common stock.  Thewarrants have a term of five years, are exercisable immediately and containregistration rights on the same terms and conditions as those issued to theinvestors in the financing.  Inconnection with the second closing, which is subject to stockholder approval,we will pay the placement agent additional cash fee and issue additionalwarrants, each equal to 5% of the gross proceeds received in the secondclosing.

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**Item 6.    SELECTED FINANCIAL DATA**

The selected financial data presented below under thecaptions “Statement of Operations Data” and “Balance Sheet Data” for, and as ofthe end of each of the years in the five-year period ended December 31, 2006,are derived from the financial statements of Ibis, which have been audited byKPMG LLP, independent registered public accounting firm. The audited balancesheets at December 31**,**2005 and 2006and the related statements of operations, stockholders equity and cash flowsfor each of the years in the three-year period ended December 31, 2006 and theindependent registered public accounting firm’s report thereon, are includedelsewhere in this Annual Report on Form 10-K. The data set forth below shouldbe read in conjunction with Ibis’ financial statements, the related notesthereto and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included elsewhere in this Annual Report on Form 10-K.The historical results are not necessarily indicative of the operating resultsto be expected in the future.
| ** **                                                          | ** ** | **Years Ended December 31,**                                 | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2002**                                                                    | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except for per share data)** | ** ** |
| **Statement of Operations Data:**                    | ** ** | ** **                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| License and  other revenue                                          |       | $                                                                           | 283        |   | $ | 660 |   | $ | 391 |   | $ | 324 |   | $ | 560 |   |
| Equipment  revenue                                                  |       | 6,103                                                                       |       | 8,782 |   | 7,535 |   | 278 |   | 13,427 |   |
| Total revenue (2)                                                   |       | 6,386                                                                       |       | 9,442 |   | 7,926 |   | 602 |   | 13,987 |   |
| Cost of license  and other revenue                                  |       | 115                                                                         |       | 45 |   | 15 |   | — |   | — |   |
| Cost of  equipment revenue                                          |       | 3,868                                                                       |       | 4,331 |   | 4,722 |   | 750 |   | 5,893 |   |
| Total cost of revenue                                               |       | 3,983                                                                       |       | 4,376 |   | 4,737 |   | 750 |   | 5,893 |   |
| Gross profit (loss)                                                 |       | 2,403                                                                       |       | 5,066 |   | 3,189 |   | (148 | ) | 8,094 |   |
| Operating  expenses:                                                |       |                                                                        |       |   |   |   |   |   |   |   |   |
| General and administrative                                          |       | 2,174                                                                       |       | 2,337 |   | 2,221 |   | 2,217 |   | 2,401 |   |
| Marketing and selling                                               |       | 1,510                                                                       |       | 1,236 |   | 1,521 |   | 1,319 |   | 1,096 |   |
| Research and development                                            |       | 6,258                                                                       |       | 5,381 |   | 5,329 |   | 5,993 |   | 5,396 |   |
| Total operating expenses                                            |       | 9,942                                                                       |       | 8,954 |   | 9,071 |   | 9,529 |   | 8,893 |   |
| Loss from operations                                                |       | (7,539                                                                      | )          | (3,888 | ) | (5,882 | ) | (9,677 | ) | (799 | ) |
| Total other  income                                                 |       | 255                                                                         |       | 27 |   | 242 |   | 218 |   | 1,205 |   |
| Income (loss)  before income taxes                                  |       | (7,284                                                                      | )          | (3,861 | ) | (5,640 | ) | (9,459 | ) | 406 |   |
| Income tax  expense (benefit)                                       |       | 1                                                                           |       | (8 | ) | 1 |   | 1 |   | 1 |   |
| Income (loss)  from continuing operations                           |       | (7,285                                                                      | )          | (3,853 | ) | (5,641 | ) | (9,460 | ) | 405 |   |
| Discontinued  operations (2):                                       |       |                                                                        |       |   |   |   |   |   |   |   |   |
| Loss from  discontinued operations                                  |       | (6,811                                                                      | )          | (17,597 | ) | (3,179 | ) | — |   | — |   |
| Loss on disposal                                                    |       | —                                                                      |       | — |   | (2,099 | ) | 215 |   | — |   |
| Income (loss)  from discontinued operations                         |       | (6,811                                                                      | )          | (17,597 | ) | (5,278 | ) | 215 |   | — |   |
| Net income  (loss)                                                  |       | $                                                                           | (14,096    | ) | $ | (21,450 | ) | $ | (10,919 | ) | $ | (9,245 | ) | $ | 405 |   |
| Income (loss)  from continuing operations per common share (1) |       | $                                                                           | (0.79      | ) | $ | (0.40 | ) | $ | (0.53 | ) | $ | (0.88 | ) | $ | 0.04 |   |
| Net income  (loss) per common share (1)                             |       | $                                                                           | (1.53      | ) | $ | (2.21 | ) | $ | (1.02 | ) | $ | (0.86 | ) | $ | 0.04 |   |
| Weighted average  common shares outstanding basic                   |       | 9,208                                                                       |       | 9,728 |   | 10,666 |   | 10,738 |   | 10,853 |   |
| Weighted average common  shares outstanding                         |       | 9,208                                                                       |       | 9,728 |   | 10,666 |   | 10,738 |   | 10,980 |   |

 
| ** **                            | ** ** | **As of December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| ** **                            | ** ** | **2002**                              | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                            | ** ** | **(In thousands)**               | ** ** |
| **Balance  Sheet Data:**              |       |                                  |       |   |   |   |   |   |   |   |   |
| Working capital                       |       | $                                     | 5,551      |   | $ | 12,607 |   | $ | 12,415 |   | $ | 5,145 |   | $ | 7,494 |   |
| Total assets                          |       | 51,699                                |       | 35,343 |   | 22,283 |   | 19,992 |   | 13,789 |   |
| Long-term debt,  less current portion |       | 1,184                                 |       | — |   | — |   | — |   | — |   |
| Total  liabilities                    |       | 12,944                                |       | 4,226 |   | 1,863 |   | 8,695 |   | 1,534 |   |
| Stockholders’  equity            |       | 38,755                                |       | 31,117 |   | 20,420 |   | 11,297 |   | 12,255 |   |
|                                       |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)             Computedon the basis described for net earnings (loss) per common share in Note 2(g) ofNotes to Financial Statements.

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(2)             Historically, much of the Company’s revenue wasderived from research and development contracts and sales of wafers formilitary and commercial applications. In mid-2004, we discontinued the wafermanufacturing portion of our business in order to focus exclusively on ourequipment business. Wafer product sales, as well as wafer revenue reported insubsequent periods, are reported net of associated costs, as loss fromdiscontinued operations. 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 DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

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

**OVERVIEW**

Ibis TechnologyCorporation (“Ibis”) was formed in October 1987 and commenced operations inJanuary 1988. Ibis’ initial activities consisted of producing and sellingSIMOX-SOI wafers and conducting research and development activities. Thiseffort led to the development of a proprietary oxygen implanter, the Ibis 1000,which we began selling in 1996, the next generation implanter, the i2000ä,which we began selling in 2002, and also to other proprietary processtechnology.

Initially, much of ourrevenue was derived from research and development contracts and sales of wafersfor military applications. Over the years, the Company decided to focus itsbusiness operations and sales strategy on the manufacture and sale of ourimplanter equipment products and de-emphasized the sale of wafers given that,among other things, we believed that the wafer manufacturing companies were inthe best position to manufacture SIMOX-SOI wafers using our implanter equipmentin light of their expertise and operating efficiencies. As we announced on July21, 2004, we exited the wafer manufacturing business. Wafer product sales, aswell as wafer revenue reported in subsequent periods, are reported net ofassociated costs, as loss from discontinued operations on our income statement.The Company believes that its decision to discontinue the wafer businesspermits broader strategic collaboration efforts between Ibis and the wafermanufacturers. We reach this conclusion for a number of reasons. First, webelieve that tremendous price pressure exists on commodity type products, suchas silicon wafers, and this pressure is already eroding future priceexpectations of SOI wafers. Because the starting wafer represents a significantcomponent of the SOI wafer cost, we believe that silicon wafer manufacturersshould have a natural cost structure advantage leading to a higher grossmargin, and therefore should be able to manage such price pressure better thanstand-alone SOI producers that do not also produce the silicon wafer itself.Second, we expect that the price pressure will encourage silicon wafermanufacturers to seek out higher margin products, like SOI wafers, to increasetheir margins. Third, we believe that silicon wafer manufacturers havetraditionally developed proprietary intellectual property in silicon materialsscience, which can be applied to designing optimal starting wafers for SOIproduction. We believe that this should give them an advantage in bothminimizing wafer cost and maximizing SOI wafer quality and yield. Fourth, ourexperience suggests that silicon wafer manufacturers already have awell-developed infrastructure for manufacturing, sale and marketing of largevolumes of substrates. Lastly, we believe that there is greater efficiency inproducing the SOI wafer as part of the wafer manufacturers existing productflow, specifically avoiding the need to repackage, re-clean, re-inspect andre-ship substrates twice, once as starting silicon wafers, and a second time asSOI wafers. Therefore, as a result of these trends, we expect our ultimatecustomers will be drawn from these silicon wafer manufacturers and we plan tofocus a majority of our technical and marketing resources on the sale ofimplanters to the leading silicon wafer manufacturers and our key customers inthe semiconductor industry who we believe are the leaders in the adoption ofSOI technology. We expect that implanter sales to chipmakers should be minimal,and that these sales will be focused on SOI processes that the chipmaker wishesto keep proprietary, such as selective (or patterned) SIMOX, or other specialtysubstrates.

Our fundamentalSIMOX-SOI technology has been developed, refined, and tested over the lastdozen years. In 2002, we introduced the current generation of SIMOX-SOItechnology, which included our second-generation oxygen implanter (i2000ä) andthe MLD wafer process which was licensed to us by IBM. We believe that thei2000’s flexibility, automation and operator-friendly controls allow this toolto produce a wide range of SIMOX-SOI wafer products using a range ofmanufacturing processes, including Advantox® MLD

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**IBISTECHNOLOGY CORPORATION**

**PART I -ITEM 2**

**MANAGEMENT’S DISCUSSION ANDANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS`**

** **

** **

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 began shipping300 mm wafers implanted from this machine shortly thereafter. Customers whopurchase the i2000 can utilize more than one SIMOX wafer manufacturing processon the implanter including the IBM MLD process, when licensed, as well as otherSIMOX-SOI wafer manufacturing processes that do not require the IBM license.

Because we havesold only a limited number of implanters to date on an irregular basis, therecognition of revenue from the sale of even one implanter is likely to resultin a significant increase in the revenue during that quarter. We recognizeimplanter revenue in accordance with SAB 104, which includes, among othercriteria, the shipment and final customer acceptance of the implanter at thecustomer’s location. As a result, deferral of implanter revenue will berecorded on our balance sheet until the Company is able to meet these criteria.

In January 2005, weannounced the booking (i.e. receipt and mutual agreement of terms) of an order forone Ibis i2000 SIMOX implanter from SUMCO, a leading international siliconwafer manufacturer. This system was factory accepted and shipped in the secondquarter 2005 and we received final customer acceptance of this tool at thecustomer’s site in March 2006. In October of 2005 we received a second orderfor an i2000 SIMOX implanter from SUMCO and negotiated a master purchaseagreement that will govern the general commercial terms of future orders fromSUMCO. This implanter was factory accepted by SUMCO at Ibis’ facility in thefirst quarter of 2006. The implanter was shipped in April 2006 and customeracceptance at the customer’s facility occurred in August 2006, with the revenuerecognized in the quarter ended September 30, 2006.

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**CriticalAccounting Policies**

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

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

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

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

·                  Significant underperformance relative to expectedhistorical or projected future operating results,

·                  Significant changes in the manner of our use of theacquired assets or the strategy of our overall business,

·                  Significant negative industry or economic trends,

·                  Significant decline in our stock price for a sustainedperiod, and

·                  Our market capitalization relative to book value.

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In accordance with SFASNo. 144, when we determine that the carrying value of applicable long-livedassets may not be recoverable based upon the existence of one or more of theabove indicators of impairment, we evaluate whether the carrying amount of theasset exceeds the sum of the undiscounted cash flows expected to result fromthe use and eventual disposition of that asset or asset group. If such acircumstance exists, we would measure an impairment loss to the extent thecarrying amount of the particular long-lived asset or group exceeds its fairvalue. We would determine the fair value based on a projected discounted cashflow method using a discount rate determined by our management to becommensurate with the risk inherent in our current business model. We adoptedSFAS No. 144 during the first quarter of 2002 and during the fourth quarter of2003 we recognized an impairment charge of $11.1 million for our 200 mm andsmaller SIMOX wafer production line. We determined the fair market value of theassets as described above. The remaining value of this line, along with otherassets associated with wafer manufacturing were recorded as a loss fromdiscontinued operations in 2004 that resulted in a charge of $5.3 millioncomprised of disposal costs of $2.1 million and losses associated with thewafer manufacturing operation of $3.2 million. The impairment charge of $11.1million was composed of $10.9 million for property and equipment and $.2million for inventory related to the Company’s smaller size wafer manufacturingbusiness. The property and equipment had an acquired value of $24.2 million,accumulated depreciation of $12.5 million, and net book value of $11.7 million.An impairment charge of $10.9 million reduced this to a carrying value of $.8million. We have physically scrapped the majority of the equipment included inthe assets upon which the impairment charge was based, on discontinuance of thewafer operation where this equipment was used. The remaining book value of theassets held for sale of $0.1 million, were written off during 2005. We arecontinuing to attempt to sell at nominal values several remaining pieces ofequipment that third parties have indicated interest in. 

**Resultsof Operations**

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

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

***Equipment Revenue.***  Equipment revenue represents revenuerecognized from the sale of implanters, spare parts and field service revenue.Equipment revenue increased to $13.4 million for the fiscal year ended December31, 2006 from $0.3 million for the fiscal year ended December 31, 2005, anincrease of $13.1 million. Equipment revenue in 2006 included revenuerecognized for two i2000 implanters for $13.0 million as compared to noimplanter revenue recognition in 2005.

Field servicerevenue accounted for $0.3 million, or 2% of equipment revenue for the fiscalyear ended December 31, 2006 as compared to $0.1 million, or 34% of equipmentrevenue for the fiscal year ended December 31, 2005. Sales of spare partsaccounted for $0.1 million, or 1% of equipment revenue for the fiscal year endedDecember 31, 2006 as compared to $0.2 million, or 66% of equipment revenue, forthe fiscal year ended December 31, 2005. Sales of spare parts fluctuatedepending on customer demand and when the warranties expire on individualpieces of equipment. Warranty expense is calculated on our anticipatedreplacement costs for equipment accepted by our customers over a one or twoyear contract period.

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***Total Sales and Revenue.***  Total sales and revenue for the fiscal yearended December 31, 2006 was $14.0 million, an increase of $13.4 million, from$0.6 million for the fiscal year ended December 31, 2005. The increase is dueto revenue recognition for two i2000 implanters of $13.0 million for the fiscalyear ended December 31, 2006 along with increased license revenue of $0.2million and increased service revenue of $0.2 million which was offset by adecrease in spare parts revenue of $0.1 million.

***TotalCost of Sales and Revenue***.  Cost oflicense and other revenue consists of labor and materials expended during thetwelve month period. There were no license costs or costs for other revenueduring the period.

Cost of equipmentrevenue represents the cost of equipment including manufacturing labor, thecost for spare parts, and the cost of labor incurred for field service. Cost ofequipment revenue for the fiscal year ended December 31, 2006 was $5.9 million,as compared to $0.8 million for the fiscal year ended December 31, 2005, anincrease of $5.1 million. This increase of $5.1 million was primarily due tothe costs associated with the recognition of revenue for the two i2000implanters during the period ended December 31, 2006.

The gross marginfor all sales was a positive 58% for the fiscal year ended December 31, 2006,as compared to a negative gross margin of 25% for the fiscal year endedDecember 31, 2005. This increase in the gross margin for all sales isattributable to the approximate gross margin of 55% for the two i2000 implantersales recognized in the fiscal year ended December 31, 2006 and $0.6 million reductionin cost from the expiration of warranties on two i2000 implanters in the fiscalyear ended December 31, 2006.

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

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

***Research and DevelopmentExpenses. ***Internally funded research and developmentexpenses decreased by $0.6 million, or 10% to $5.4 million for the fiscal yearended December 31, 2006 from $6.0 million for the fiscal year ended December31, 2005. This decrease was due to a reduction in wafer research anddevelopment costs of $0.3 million. In addition, reduced payroll and payrollrelated expenses of $0.3 million offset by $0.1 million associated with FAS123(R) stock based compensation expense contributed to these results forthe fiscal year ended December 31, 2006.

***Other Income.***** **Total other income for the fiscal year ended December31, 2006 was $1.2 million as compared to $0.2 million for the fiscal year endedDecember 31, 2005, an increase of $1.0 million. The increase in total otherincome is attributed to $0.8 million received from the expiration of an optionto place an order for an additional implanter prior to the end of 2006. Inaddition, interest income increased by $0.1 million due to the increase ininterest rates and miscellaneous income increased by $0.1 million from thesales of excess material and equipment.

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***Discontinued Operations. *** There was no gain or loss shown for the fiscalyear ended December 31, 2006. For the fiscal year ended December 31, 2005, theCompany recognized a gain on disposal of $0.2 million consisting primarily ofthe sale of excess equipment, sale of wafer materials previously written offand an accrual adjustment related to sales tax.

***Taxes.****   *The Company had federal net operatingloss and general business credit carryovers of approximately $87.1 million and$1.2 million, respectively, at December 31, 2006, that may be used to offsetfuture taxable income through 2026. State net operating loss and creditcarryovers of $52.4 million and $1.2 million, respectively, have varyingexpiration dates. Included in the total deferred tax assets, offset by thevaluation allowance, was $3.2 million related to the net operating losscarryover resulting from the exercise of employee stock options the tax benefitof which, when recognized, will be accounted for as a credit to additionalpaid-in capital rather than a reduction of income tax expense. Net operatingloss carryovers and other tax attributes may be limited in the event of certainchanges in ownership interests. The Company recorded and paid Massachusetts andCalifornia excise and corporate tax which in aggregate was $1,256 for 2006.

***FiscalYear Ended December 31, 2005 Compared 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 for thefiscal year ended December 31, 2004, a decrease of $0.1 million, or 17%. Thisdecrease is attributable to a reduction in royalty fees related to equipmenttechnology in the year ended December 31, 2005.

***Equipment Revenue.***  Equipment revenue represents revenuerecognized from the sale of implanters, spare parts and field service revenue.Equipment revenue decreased to $0.3 million for the fiscal year ended December31, 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 fiscal year endedDecember 31, 2004 was for $7.0 million. Field service revenue accounted for $0.1million, or 34% of equipment revenue for the fiscal year ended December 31,2005 as compared to $0.4 million, or 5% of equipment revenue for the fiscalyear ended December 31, 2004. Sales of spare parts accounted for $0.2 million,or 66% of equipment revenue for the fiscal year ended December 31, 2005 ascompared to $0.2 million, or 2% of equipment revenue, for the fiscal year endedDecember 31, 2004. Sales of spare parts fluctuate depending on customer demandand when the warranties expire on individual pieces of equipment. Warrantyexpense is calculated on our anticipated replacement costs for equipmentaccepted by our customers over a one or two year contract period.

***Total Sales and Revenue.***  Total sales and revenue for the fiscal yearended December 31, 2005 were $0.6 million, a decrease of $7.3 million, or 92%,from $7.9 million for the fiscal year ended December 31, 2004, as describedabove.

***TotalCost of Sales and Revenue***.  Cost ofcontract and other revenue consists of labor and materials expended during thetwelve month period. There were no contract costs or costs for other revenueduring the period.

Cost of equipmentrevenue represents the cost of equipment, the cost for spare parts, and thecost of labor incurred for field service. Cost of equipment revenue for thefiscal year ended December 31, 2005 was

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$0.8 million, as comparedto $4.7 million for the fiscal year ended December 31, 2004, a decrease of $3.9million, or 84%. This decrease is primarily due to the fact that no implanterswere sold during the period ended December 31, 2005.

The total cost ofsales and 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, adecrease of $3.9 million, or 84%. The gross margin for all sales was a negative25% for the fiscal year ended December 31, 2005, as compared to a positivegross margin of 40% for the fiscal year ended December 31, 2004. This decreasein the gross margin for all sales is attributable to no implanter gross marginfor the fiscal year ended December 31, 2005 as compared to the approximategross margin of 50% for the i2000 implanter sale recognized in the fiscal yearended December 31, 2004 as well as the unabsorbed manufacturing costs and thedecrease in cost of inventory reserves.

***General and Administrative Expenses***.  General and administrative expenses for thefiscal year ended December 31, 2005 were $2.2 million as compared to $2.2million for the fiscal year ended December 31, 2004, or no net change. This isdue to decreased securities compliance, decreased premiums on Director’s &Officers liability insurance and decreased tax expenses of $0.1 million eachoffset by increased professional services, increased payroll and payrollrelated expenses and increases in other miscellaneous expenses of $0.1 millioneach.

***Marketing and Selling Expenses. ***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.

***Research and Development Expenses. ***Internally funded research and developmentexpenses increased by $0.7 million, or 12% to $6.0 million for the fiscal yearended December 31, 2005 from $5.3 million for the fiscal year ended December31, 2004. This increase represents the wafer research and development costs of$0.6 million that were previously part of the cost of sales during the time wemanufactured wafers for sale, but are now supporting equipment development; aswell as increased repair and maintenance of $ 0.2 million and increased R&Dmaterial expenses of $0.2 million which were offset by the reduction indepreciation expenses associated with consolidation of our facilities of $0.3million.

***Other Income.***** **Total other income for the fiscal year ended December31, 2005 and fiscal year ended December 31, 2004 were $200,000 in each year.Changes within total other income relate to the expiration in the period endedDecember 31, 2004 of a wafer volume option of $0.2 million that was associatedwith an asset obtained by the wafer production group from a wafer customer.This volume option was to be used on orders received over a one-year period.Since the time expired, and no orders were received, the Company reduced itsliability and recognized the amount in income, as no further obligation exists.This was offset by the increase in interest income of $0.1 million in theperiod ended December 31, 2005 due to increased interest rates, and reducedinterest expense and other miscellaneous expenses of $0.1 million.

***Discontinued Operations. *** The loss on disposal in 2004 was $2.1 millionand consisted of $0.9 million in net fixed asset impairments, $1.2 million ininventory impairments and employee severance pay of $78 thousand. In 2005, theCompany recognized a gain on disposal of $0.2 million consisting primarily ofthe

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sale of excessequipment, sale of wafer materials previously written off and an accrualadjustment related to sales tax.

***Taxes.****   *Ibis had federal net operating loss andgeneral business credit carryovers of approximately $88.8 million and $1.3million, 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. The Company recorded and paid Massachusetts and California exciseand corporate tax which in aggregate was $1,256 for 2005.

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

As of December 31,2006, Ibis had cash and cash equivalents of $4.8 million, including the finalpayment of $1.1 million for the second i2000 SIMOX implanter accepted by SUMCOin the fiscal year ended December 31, 2006.

During the fiscalyear ended December 31, 2006, Ibis used $2.1 million of cash for operatingactivities of continuing operations as compared to $1.2 million in 2005. Todate, Ibis’ working capital requirements have been funded primarily throughdebt (capital leases) and equity financings, including the February 2007financing discussed below. The principal uses of cash during the fiscal yearended December 31, 2006, as described in the Statement of Cash Flows on page 46of this 10K, were to fund operations and additions to property and equipment.At December 31, 2006, Ibis had commitments to purchase approximately $0.2million in material. Our headcount for the year ended December 31, 2006 was 45employees.

The Company’s management believes that it will have sufficient cashresources to support current operations until at least June 2008. Thisexpectation however, is based on the Company’s current operating plan andgeneral sales outlook, each of which may change rapidly. In January, 2007 theCompany announced that to conserve cash it was reducing its operating expensesby approximately 40% which involved cost cutting measures consisting ofheadcount reductions, consulting at a neighboring business for a minimumof six months under a staffing services agreement, salary reductions and reducing consumable expenses. On February 16,2007, the Company entered into a purchase agreement pursuant to which it agreedto sell unregistered shares of its common stock and warrants exercisable forcommon stock to Special Situation Funds for an aggregate purchase price of $5.3million in a two-tranche financing. The first closing, at which the Company received approximately $2.2million in proceeds, occurred on February 20, 2007.  Subject to stockholder approval, the Companyagreed to sell the remainder of the securities at a second closing, at whichthe Company will receive approximately $3.1 million in proceeds.  The second closing is expected to occur afterthe Company’s annual stockholder meeting, which is expected to be held on May10, 2007. With the successful conclusion of the second closing, the Company’smanagement believes it will have sufficient cash to support current operationsuntil at least December 2008. In connection with the transaction, the Companyalso entered into a registration rights agreement with the investors.  The Company will pay a placement fee to aplacement agent, which includes a cash fee equal to 5% of the gross proceedsand warrants exercisable for common stock with a dollar value equal to 5% ofthe gross proceeds.  A payment ofapproximately $100,000 was made and warrants to purchase 74,434****shares of common stock****were issued tothe placement agent in connection with the first closing**. **All of the securities will be soldin a private placement pursuant to Regulation D of the Securities Act.

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TheCompany intends to continue to invest in research and development and itsmanufacturing capabilities. Changes in technology or sales growth beyondcurrently established capabilities may require further investment. Furtheradoption of the technology and timing of future equipment orders are dependenton the continuing qualification of implanters and improvement programs at thedevice manufacturers, among other factors. At present time the Company has onlyone of the four major wafer manufacturers as its current customer. We currentlydo not have an order backlog for implanters. The timing of future orders isimportant and difficult to predict because customers can delay orders and/orrequest early shipment, either of which could cause the need for additionalcash requirements. Forecasting future revenue, on a quarter-by-quarter basis,remains exceedingly difficult and significant variations, quarter to quarter,are likely. Further, because some of the materials and components the Companyuses to build its implanter have long lead times, the Company may purchase someor all of those long lead items prior to receipt of an order by its customers.When this is the case, those parts and materials bear the risk of being subjectto excess and obsolescence. The Company expects to continue to explore equityofferings and other forms of financing and anticipates that we may be requiredto raise additional capital in the future in order to finance future growth andour research and development programs. There can be no assurance however thatour actual needs will not exceed expectations or that we will be able to fundour operations on a long-term basis in the absence of other sources. There alsocan be 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-BalanceSheet Arrangements**

We donot have any off-balance sheet arrangements as defined in Regulation S-KSection 303(a)(4)(ii).

**ContractualObligations**

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

AtDecember 31, 2006, our outstanding contractual obligations included:

 
| ** **                        | ** ** | **Payment due by period** | ** ** |
|-----------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations**  | ** ** | **Total**                                | ** ** | **Less than  1 year** | ** ** | **1  year** | ** ** | **2  years** | ** ** | **3-5  years** | ** ** | **More  than  5 years** | ** ** |
| Minimum  Operating Lease Payments |       | $                                        | 1,745,325  |   | $ | 412,015 |   | $ | 384,384 |   | $ | 383,432 |   | $ | 565,494 |   | $ | — |   |
|                                   |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Additionalinformation regarding our financial commitments at December 31, 2006 isprovided in the Notes to our Financial Statements. See “Notes to FinancialStatements, Note 8, Commitments and Contingencies”.

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**EffectsOf Inflation**

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

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**NewAccounting Pronouncements**

In July 2006, the Financial AccountingStandards Board (FASB) issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109” (FIN 48), which clarifies the accounting and disclosure foruncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversityin practice associated with certain aspects of the recognition and measurementrelated to accounting for income taxes. This interpretation is effective forfiscal years beginning after December 15, 2006. FIN 48 requires managementto perform a two-step evaluation of all tax positions, ensuring that these taxreturn positions meet the “more-likely than not” recognition threshold and canbe measured with sufficient precision to determine the benefit recognized inthe financial statements. These evaluations provide management with acomprehensive model for how a company should recognize, measure, present, anddisclose in its financial statements certain tax positions that the Company hastaken or expects to take on income tax returns. We do not expect the adoptionof FIN 48 to have a material impact on our financial position or results ofoperations.

In September 2006, the SEC issued Staff Accounting BulletinNo. 108, “Considering the Effects of Prior Year Misstatements whenquantifying Misstatements in Current Year Financial Statements” (“SAB 108”).SAB 108 requires companies to evaluate the materiality of identified unadjustederrors on each financial statement and related financial statement disclosureusing both the rollover approach and the iron curtain approach. The rolloverapproach quantifies misstatements based on the amount of the error in thecurrent year financial statement whereas the iron curtain approach quantifiesmisstatements based on the effects of correcting the misstatement existing inthe balance sheet at the end of the current year, irrespective of themisstatement’s year(s) of origin. Financial statements would require adjustmentwhen either approach results in quantifying a misstatement that is material.Correcting prior year financial statements for immaterial errors would notrequire previously filed reports to be amended. SAB 108 is effective forinterim periods of the first fiscal year ending after November 15, 2006.We do not expect the adoption of SAB 108 to have a material impact on ourfinancial position or results of operations.

In August 2001, the FASBissued Statement No. 143, “Accounting for Conditional Asset RetirementObligations” which states “An entity shall recognize the fair value of aliability for an asset retirement obligation in the period in which it isincurred if a reasonable estimate of fair value can be made.”  FASB Interpretation No. 47 is aninterpretation of FASB Statement No. 143 which clarifies that the 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 the fair value of a conditional asset retirement obligation ifthe fair value of the liability can be reasonably estimated. The fair value ofa liability for the conditional asset retirement obligation should berecognized 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 thefair value of an asset retirement obligation. This Interpretation alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation. Fin 47 is effectivefor fiscal years beginning after December 15, 2005. The Company has determinedthat there is no additional impact from the adoption of this Statement.

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

The exposure of market risk associated with risk-sensitiveinstruments is not material to Ibis, as we do not transact our salesdenominated in other than United States dollars, invest primarily in short-termcommercial paper, hold our investments until maturity and have not entered intohedging transactions.

 

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**FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

**IBISTECHNOLOGY CORPORATION**

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

FinancialStatements:

 
|                                                                                                            | **Page  Number** |
|------------------------------------------------------------------------------------------------------------|------------------|
| Report of Independent Registered Public Accounting  Firm                                                   | 40               |
| Balance Sheets as of December 31, 2005 and 2006                                                            | 41               |
| Statements of Operations for the Years Ended  December 31, 2004, 2005 and 2006                             | 42               |
| Statements of Stockholders’ Equity for the Years  Ended December 31, 2004, 2005 and 2006              | 43               |
| Statements of Cash Flows for the Years Ended  December 31, 2004, 2005 and 2006                             | 44               |
| Notes to Financial Statements                                                                              | 45-64            |
|                                                                                                       |             |
| Schedule:                                                                                                  |             |
| Report of Independent Registered Public Accounting  Firm on Financial Statement Schedule                   |             |
| Schedule II — Valuation and Qualifying Accounts for the  Years Ended December 31, 2004, 2005 and 2006 |             |

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Stockholders

 of Ibis Technology Corporation:

We have auditedthe accompanying balance sheets of Ibis Technology Corporation as of December31, 2005 and 2006, and the related statements of operations, stockholders’equity, and cash flows for each of the years in the three-year period endedDecember 31, 2006. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of Ibis Technology Corporation as of December31, 2005 and 2006, and the results of its operations and its cash flows foreach of the years in the three-year period ended December 31, 2006, inconformity with U.S. generally accepted accounting principles.

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

/s/ KPMG LLP

Boston, Massachusetts

March 26, 2007

 

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**IBISTECHNOLOGY CORPORATION**

**BALANCE SHEETS**

**December31, 2005 and 2006**
| ** **                                                                                                                                            | ** ** | **2005**    | ** ** | **2006**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Assets**                                                                                                                                            |       |        |       |        |       |
| **Current assets:**                                                                                                                                   |       |        |       |        |       |
| Cash and cash  equivalents                                                                                                                            |       | $           | 6,856,874  |        | $          | 4,812,477 |   |
| Accounts  receivable, trade, net (notes 4 and 16)                                                                                                     |       | 90,878      |       | 349,154     |       |
| Inventories, net  (note 5)                                                                                                                            |       | 6,276,650   |       | 3,575,296   |       |
| Prepaid expenses  and other current assets                                                                                                            |       | 615,702     |       | 290,780     |       |
| Total current  assets                                                                                                                                 |       | 13,840,104  |       | 9,027,707   |       |
| Property and equipment  (notes 6, 8 and 18)                                                                                                           |       | 26,448,906  |       | 24,728,824  |       |
| Less:  Accumulated depreciation and amortization                                                                                                      |       | (21,352,154 | )          | (20,744,772 | )          |
| Net property and  equipment                                                                                                                           |       | 5,096,752   |       | 3,984,052   |       |
| Patents and other  assets, net (note 7)                                                                                                               |       | 1,055,532   |       | 777,082     |       |
| Total assets                                                                                                                                          |       | $           | 19,992,388 |        | $          | 13,788,841 |   |
|                                                                                                                                                  |       |        |       |        |       |
| ** **                                                                                                                                            |       |        |       |        |       |
| **Liabilities and Stockholders’  Equity**                                                                                                        |       |        |       |        |       |
| **Current liabilities:**                                                                                                                              |       |        |       |        |       |
| Accounts payable                                                                                                                                      |       | $           | 230,871    |        | $          | 409,705 |   |
| Accrued  liabilities (notes 9 and 10)                                                                                                                 |       | 1,201,695   |       | 973,994     |       |
| Deferred revenue  (note 11)                                                                                                                           |       | 7,263,000   |       | 150,000     |       |
| Total current  liabilities                                                                                                                            |       | 8,695,566   |       | 1,533,699   |       |
|                                                                                                                                                  |       |        |       |        |       |
|                                                                                                                                                  |       |        |       |        |       |
| **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 10,816,029 shares and  10,915,481 in 2005 and 2006, respectively |       | 86,528      |       | 87,324      |       |
| Additional  paid-in capital                                                                                                                           |       | 93,245,754  |       | 93,798,393  |       |
| Accumulated  deficit                                                                                                                                  |       | (82,035,460 | )          | (81,630,575 | )          |
| Total  stockholders’ equity                                                                                                                      |       | 11,296,822  |       | 12,255,142  |       |
| Total liabilities and  stockholders’ equity                                                                                                      |       | $           | 19,992,388 |        | $          | 13,788,841 |   |

 

See accompanyingnotes to financial statements.

 

41

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**IBISTECHNOLOGY CORPORATION**

**STATEMENTS OF OPERATIONS**

**Yearsended December 31, 2004, 2005 and 2006**
| ** **                                                    | ** ** | **2004**   | ** **  | **2005**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------|------------|------------|-------------|------------|------------|------------|------------|
| License and other  revenue (note 12)                          |       | $          | 390,975     |       | $          | 324,621    |       | $ | 560,384 |   |
| Equipment  revenue                                            |       | 7,535,270  |        | 277,684    |       | 13,427,035 |       |
| Total sales and revenue (note 16)                             |       | 7,926,245  |        | 602,305    |       | 13,987,419 |       |
|                                                          |       |       |        |       |       |       |       |
| Cost of license  and other revenue                            |       | 15,370     |        | —     |       | —     |       |
| Cost of equipment  revenue                                    |       | 4,721,673  |        | 750,472    |       | 5,893,600  |       |
| Total cost of sales and revenue                               |       | 4,737,043  |        | 750,472    |       | 5,893,600  |       |
|                                                          |       |       |        |       |       |       |       |
| Gross profit (loss)                                           |       | 3,189,202  |        | (148,167   | )          | 8,093,819  |       |
|                                                          |       |       |        |       |       |       |       |
| Operating  expenses:                                          |       |       |        |       |       |       |       |
| General and administrative                                    |       | 2,221,167  |        | 2,216,748  |       | 2,400,645  |       |
| Marketing and selling                                         |       | 1,520,508  |        | 1,318,979  |       | 1,095,844  |       |
| Research and development                                      |       | 5,329,528  |        | 5,993,350  |       | 5,396,321  |       |
| Total operating expenses                                      |       | 9,071,203  |        | 9,529,077  |       | 8,892,810  |       |
|                                                          |       |       |        |       |       |       |       |
| Loss from operations                                          |       | (5,882,001 | )           | (9,677,244 | )          | (798,991   | )          |
|                                                          |       |       |        |       |       |       |       |
| Other income  (expense):                                      |       |       |        |       |       |       |       |
| Interest income                                               |       | 110,385    |        | 208,818    |       | 304,008    |       |
| Interest expense                                              |       | (34,718    | )           | (536       | )          | —     |       |
| Other (note 16)                                               |       | 166,418    |        | 9,671      |       | 901,124    |       |
| Total other income                                            |       | 242,085    |        | 217,953    |       | 1,205,132  |       |
|                                                          |       |       |        |       |       |       |       |
| Income (loss) from continuing operations before  income taxes |       | (5,639,916 | )           | (9,459,291 | )          | 406,141    |       |
|                                                          |       |       |        |       |       |       |       |
| Income tax  expense (note 13)                                 |       | 1,256      |        | 1,256      |       | 1,256      |       |
| Income (loss)  from continuing operations                     |       | (5,641,172 | )           | (9,460,547 | )          | 404,885    |       |
|                                                          |       |       |        |       |       |       |       |
| Discontinued  operations (note 18):                           |       |       |        |       |       |       |       |
| Loss from discontinued operations                             |       | (3,178,529 | )           | —     |       | —     |       |
| Gain (loss) on disposal                                       |       | (2,098,840 | )           | 215,242    |       | —     |       |
| Income (loss) from discontinued operations                    |       | (5,277,369 | )           | 215,242    |       | —     |       |
|                                                          |       |       |        |       |       |       |       |
| Net income (loss)                                             |       | $          | (10,918,541 | )          | $          | (9,245,305 | )          | $ | 404,885 |   |
|                                                          |       |       |        |       |       |       |       |
| Earnings (loss)  per share:                                   |       |       |        |       |       |       |       |
| Basic and Diluted                                             |       |       |        |       |       |       |       |
| Continuing operations                                         |       | $          | (0.53       | )          | $          | (0.88      | )          | $ | 0.04 |   |
| Discontinued operations                                       |       | (0.49      | )           | 0 .02      |       | —     |       |
|                                                          |       |       |        |       |       |       |       |
| Net income (loss)                                             |       | $          | (1.02       | )          | $          | (0.86      | )          | $ | 0.04 |   |
|                                                          |       |       |        |       |       |       |       |
| Weighted average  common shares outstanding                   |       |       |        |       |       |       |       |
| Basic                                                         |       | 10,665,842 |        | 10,737,924 |       | 10,853,304 |       |
| Diluted                                                       |       | 10,665,842 |        | 10,737,924 |       | 10,979,783 |       |

 

See accompanyingnotes to financial statements.

 

42

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**IBISTECHNOLOGY CORPORATION**

**STATEMENTS OF STOCKHOLDERS’ EQUITY**

**Yearsended December 31, 2004, 2005 and 2006**
| ** **                              | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total  Stockholders’  Equity** | ** **  |
|-----------------------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|---------------------------------------|-------------|
|                                    |       |              |       |                             |       |                     |       |                                  |        |
| **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                            |        |
| ** **                              |       |              |       |                             |       |                     |       |                                  |        |
| Exercise of  stock options              |       | 8                 |       | 1,386                            |       | —                   |       | 1,394                                 |        |
| Stock based  compensation               |       | —            |       | 398,599                          |       | —                   |       | 398,599                               |        |
| Employee Stock  Purchase Plan           |       | 788               |       | 152,654                          |       | —                   |       | 153,442                               |        |
| Net income                              |       | —            |       | —                           |       | 404,885                  |       | 404,885                               |        |
|                                    |       |              |       |                             |       |                     |       |                                  |        |
| ** Balances at December 31, 2006** |       | $                 | 87,324     |                             | $          | 93,798,393               |       | $                                     | (81,630,575 | ) | $ | 12,255,142 |   |

 

See accompanyingnotes to financial statements

 

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**IBISTECHNOLOGY CORPORATION**

**STATEMENTS OF CASH FLOWS**

**Yearsended December 31, 2004, 2005 and 2006**
| ** **                                                                             | ** ** | **2004**   | ** **  | **2005**   | ** ** | **2006**   | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|------------|------------|
| **Cash  flows from operating activities:**                                             |       |       |        |       |       |       |       |
| Net income (loss)                                                                      |       | $          | (10,918,541 | )          | $          | (9,245,305 | )          | $ | 404,885 |   |
| Less: income (loss) from discontinued operations                                       |       | (5,277,369 | )           | 215,242    |       | —     |       |
| Income (loss) from continuing operations                                               |       | (5,641,172 | )           | (9,460,547 | )          | 404,885    |       |
| Adjustments to reconcile net loss to net cash used  in operating activities:           |       |       |        |       |       |       |       |
| Stock-based compensation expense                                                       |       | —     |        | —     |       | 394,776    |       |
| Depreciation and amortization                                                          |       | 1,962,716  |        | 1,746,989  |       | 1,535,856  |       |
| Changes in operating assets and liabilities:                                           |       |       |        |       |       |       |       |
| Accounts receivable, trade                                                             |       | 6,340      |        | 117,023    |       | (258,276   | )          |
| Unbilled revenue                                                                       |       | 528,581    |        | —     |       | —     |       |
| Inventories                                                                            |       | 141,404    |        | (651,483   | )          | 2,705,177  |       |
| Prepaid expenses and other current assets                                              |       | 92,600     |        | (42,302    | )          | 324,922    |       |
| Accounts payable                                                                       |       | 184,893    |        | (162,004   | )          | 178,834    | )          |
| Accrued liabilities and deferred revenue                                               |       | (613,114   | )           | 7,240,174  |       | (7,340,701 | )          |
| Net cash used in operating activities of continuing  operations                        |       | (3,337,752 | )           | (1,212,150 | )          | (2,054,527 | )          |
| **Cash  flows from investing activities:**                                             |       |       |        |       |       |       |       |
| Additions to property and equipment, net                                               |       | (721,002   | )           | (149,648   | )          | (41,804    | )          |
| Additions to assets held for sale                                                      |       | (131,416   | )           | —     |       | —     |       |
| Other assets                                                                           |       | (102,815   | )           | 247,988    |       | (102,902   | )          |
| Net cash provided (used) in investing activities of  continuing operations             |       | (955,233   | )           | 98,340     |       | (144,706   | )          |
| **Cash  flows from financing activities:**                                             |       |       |        |       |       |       |       |
| Exercise of stock options, warrants and Employee  Stock Purchase Plan                  |       | 221,189    |        | 122,266    |       | 154,836    |       |
| Net cash provided by financing activities. of  continuing operations                   |       | 221,189    |        | 122,266    |       | 154,836    |       |
| **Cash  flows of discontinued operations:**(Revised See Note 18):                      |       |       |        |       |       |       |       |
| Operating cash flows                                                                   |       | (1,524,213 | )           | 45,297     |       | —     |       |
| Investing cash flows                                                                   |       | 331,764    |        | 77,049     |       | —     |       |
| Financing cash flows                                                                   |       | (1,184,399 | )           | —     |       | —     |       |
| Net cash provided (used) in discontinued operations                                    |       | (2,376,848 | )           | 122,346    |       | —     |       |
| Net increase  (decrease) in cash and cash equivalents                                  |       | (6,448,644 | )           | (869,198   | )          | (2,044,397 | )          |
| Cash and cash  equivalents, beginning of year                                          |       | 14,174,716 |        | 7,726,072  |       | 6,856,874  |       |
| Cash and cash  equivalents, end of year                                                |       | $          | 7,726,072   |       | $          | 6,856,874  |       | $ | 4,812,477 |   |
|                                                                                   |       |       |        |       |       |       |       |
| Supplemental  disclosures of cash flow information:                                    |       |       |        |       |       |       |       |
| Cash paid during the year for interest                                                 |       | $          | 34,718      |       | $          | 536        |       | $ | — |   |
| Transfer of  internally constructed equipment from property and equipment to inventory |       | $          | 3,674,903   |       | $          | —     |       | $ | — |   |

 

See accompanyingnotes to financial statements.

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**IBISTECHNOLOGY CORPORATION**

**NOTES TO FINANCIAL STATEMENTS**

# **December31, 2005 and 2006**

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

Ibis Technology Corporation (the “Company”) wasincorporated in October 1987 for the purpose of supplying silicon-on-insulator(SOI) wafers formed by SIMOX (Separation by Implantation of Oxygen) technology.SIMOX-SOI wafers were manufactured by the Company using a specialized oxygenion implanter, which was developed and manufactured by the Company and isintegrated with other specialized processes and characterization equipment. TheCompany is the leading manufacturer of high current oxygen implanters and beganselling these oxygen implanters in 1996.

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

**(a) *Cash andCash Equivalents***

Cash equivalents represent highly liquid investmentswith original maturities of three months or less.

**(b) *Inventories***

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

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

Property and equipment is stated at cost. Depreciationis provided using the straight-line method over the estimated useful lives ofthe respective assets, ranging from three to eight years. Amortization of leaseholdimprovements is provided using the straight-line method over the lesser of thelife of the lease, or the estimated useful life of 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 undiscounted 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 andOther Assets***

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

**(e) *RevenueRecognition***

The Company historically recognized revenue fromequipment sales and the sales of spare parts when all of the following criteriahave been met: (1) evidence exists that the customer is bound to thetransaction; (2) the product has been delivered to the customer and, whenapplicable, the product has been installed and accepted by the customer; (3)the sales price to the customer has been fixed or is determinable; and (4)collectibility of the sale price is reasonably assured. The Company recognizesrevenue from implanter sales upon acceptance at the customer’s site. Revenuederived from contracts and services is recognized upon performance. Provisionsfor anticipated losses are made in the period in which such losses becomedeterminable.

45

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**(f) *Research andDevelopment***

Research and development costs are charged to expenseas incurred.

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

Net income (loss)per share of common stock is computed based upon the weighted average number ofshares outstanding during each period and including the dilutive effect, ifany, of stock options and warrants. SFAS 128 requires the presentation of basicand diluted earnings (loss) per share for all periods presented. As the Companywas in a net loss position for the years ended December 31, 2004 and December31, 2005, common stock equivalents of 133,092 and 74,590 for the years endedDecember 31, 2004, and 2005, respectively, were excluded from the diluted lossper share calculation as they would be antidilutive. As a result, diluted lossper share is the same as basic loss per share for 2004 and 2005.

The reconciliationof the 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,** | ** **  |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                                           | ** ** | **2004**                                    | ** **  | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                           | ** ** | **Diluted**                                 | ** **  | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** |
| Income (loss)  from:                                                                 |       |                                        |        |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                                                                |       | $                                           | (5,641,172  | ) | $ | (5,641,172 | ) | $ | (9,460,547 | ) | $ | (9,460,547 | ) | $ | 404,885 |   | $ | 404,885 |   |
| Discontinued operations                                                              |       | (5,277,369                                  | )           | (5,277,369 | ) | 215,242 |   | 215,242 |   | — |   | — |   |
| Net income (loss)                                                                    |       | $                                           | (10,918,541 | ) | $ | (10,918,541 | ) | $ | (9,245,305 | ) | $ | (9,245,305 | ) | $ | 404,885 |   | $ | 404,885 |   |
| Weighted average  common shares outstanding                                          |       | 10,665,842                                  |        | 10,665,842 |   | 10,737,924 |   | 10,737,924 |   | 10,853,304 |   | 10,853,304 |   |
| Potential common  share equivalents.                                                 |       | —                                      |        |   |   | — |   |   |   | 126,479 |   |   |   |
| Weighted average  shares outstanding                                                 |       | 10,665,842                                  |        |   |   | 10,737,924 |   |   |   | 10,979,783 |   |   |   |
| Earnings (loss)  per common share and common share equivalents Continuing operations |       | $                                           | (0.53       | ) | $ | (0.53 | ) | $ | (0.88 | ) | $ | (0.88 | ) | $ | 0.04 |   | $ | 0.04 |   |
| Discontinued operations                                                              |       | (0.49                                       | )           | (0.49 | ) | 0.02 |   | 0.02 |   | — |   | — |   |
| Net income  (loss)                                                                   |       | $                                           | (1.02       | ) | $ | (1.02 | ) | $ | (0.86 | ) | $ | (0.86 | ) | $ | 0.04 |   | $ | 0.04 |   |

 

**(h) *IssuanceCosts***

Commonstock issuance costs are netted against additional paid-in capital.

***(i) Use ofEstimates***

The preparation of financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenue and expenses duringthe reporting period. Actual results may differ from these estimates.Management exercises judgment and relies on estimates in recognizing revenue, valuing inventory, accruing certainliabilities, and assessing long-lived asset impairment, estimated useful livesof long-lived assets, and inventory obsolescence reserves.

**(j) *Fair Valueof Financial Instruments***

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

46

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**(k) *Share-BasedCompensation***

On January 1, 2006, the Company adoptedStatement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment,”(“SFAS 123(R)”) which requires the measurement and recognition ofcompensation expense for all share-based payment awards made to employees anddirectors including employee stock options, employee stock purchases related tothe 2000 Employee Stock Purchase Plan (“the ESPP”), restricted stock and otherspecial equity awards based on grant-date estimated fair values. SFAS 123(R)supersedes the Company’s previous accounting under Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) forperiods beginning in 2006. In March 2005, the Securities and ExchangeCommission issued SAB 107 relating to SFAS 123(R). The Company has applied theprovisions of SAB 107 in its adoption of SFAS 123(R).

TheCompany’s financial statements for the fiscal year ended December 31, 2006reflect the impact of SFAS 123(R). In accordance with the modified prospectivetransition method, the Company’s financial statements for prior periods havenot been restated to reflect, and do not include, the impact of SFAS 123(R).Share-based compensation expense recognized under SFAS 123(R) for the twelvemonths ended December 31, 2006 was $0.4 million or $0.04 per share, whichconsisted of share-based compensation expense related to employee stock optionsand the employee stock purchase plan. Of this year-to-date expense, fifty fourpercent came from options issued prior to December 31, 2005 and are valuedusing the accrual method, which is consistent with prior periods, while twentythree percent came from options issued in 2006 and are valued using thestraight-line prorated method, which was adopted in 2006 under the newguidance, and twenty three percent came from the valuation of shares issuedunder the employee stock purchase plan. There was no stock-based compensationexpense related to employee stock options or employee stock purchasesrecognized during the fiscal years ended December 31, 2004 and December 31,2005 because the Company elected  not toadopt the recognition provisions, and instead provided footnote disclosure permissible under Statementof Financial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”).

SFAS 123(R) requires companies to estimate the fair value ofshare-based payment awards on the date of grant using an option-pricing model.The value of the portion of the award that is ultimately expected to vest isrecognized as expense over the requisite service periods in the Company’sStatement of Operations. Prior to the adoption of SFAS 123(R) the Companyaccounted for stock-based awards to employees and directors using the intrinsicvalue method in accordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”) as allowed under SFAS 123. Under theintrinsic value method, stock-based compensation expense had not beenrecognized in the Company’s statement of operations when the exercise price ofthe Company’s stock options granted to employees and directors equaled orexceeded the fair market value of the underlying stock at the date of grant.

 Share-based compensation expenserecognized during the period is based on the value of the portion ofshare-based payment awards that is ultimately expected to vest during theperiod. Stock-based compensation expense recognized in the Company’s Statementof Operations for the fiscal year ended December 31, 2006 included compensationexpenses for share-based payment awards granted prior to, but not yet vested asof December 31, 2005, based on the grant date fair value estimated inaccordance with the pro forma provisions of SFAS 123, and compensation expensefor the share-based payment awards granted subsequent to December 31, 2005based on the grant date fair value estimated in accordance with the provisionsof SFAS 123(R).

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

Upon adoption of SFAS 123(R), the Company elected to retain its method ofvaluation for share-based awards granted beginning in 2006 using theBlack-Scholes option-pricing model (“Black-Scholes model”) which was alsopreviously used for the Company’s pro forma information required under SFAS123. The Company’s determination of fair value of share-based payment awards onthe date of grant using an 

47

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option-pricingmodel is affected by the Company’s stock price as well as assumptions regardinga number of highly complex and subjective variables. These variables include,but are not limited to the Company’s expected stock price volatility over theterm of the awards, and actual and projected employee stock option exercisebehaviors.

**(l) *Reclassifications***

Certain prior year amountshave been reclassified to conform to current year presentation. Thesereclassifications had no effect on the Company’s reported net loss or financialposition.

**NewAccounting Pronouncements**

In July 2006, the Financial AccountingStandards Board (FASB) issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109” (FIN 48), which clarifies the accounting and disclosure foruncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversityin practice associated with certain aspects of the recognition and measurementrelated to accounting for income taxes. This interpretation is effective forfiscal years beginning after December 15, 2006. FIN 48 requires managementto perform a two-step evaluation of all tax positions, ensuring that these taxreturn positions meet the “more-likely than not” recognition threshold and canbe measured with sufficient precision to determine the benefit recognized inthe financial statements. These evaluations provide management with acomprehensive model for how a company should recognize, measure, present, anddisclose in its financial statements certain tax positions that the Company hastaken or expects to take on income tax returns. We do not expect the adoption of FIN 48 to have a material impact on ourfinancial position or results of operations.

In September 2006, the SEC issued Staff Accounting BulletinNo. 108, “Considering the Effects of Prior Year Misstatements whenquantifying Misstatements in Current Year Financial Statements” (“SAB 108”).SAB 108 requires companies to evaluate the materiality of identified unadjustederrors on each financial statement and related financial statement disclosureusing both the rollover approach and the iron curtain approach. The rolloverapproach quantifies misstatements based on the amount of the error in thecurrent year financial statement whereas the iron curtain approach quantifiesmisstatements based on the effects of correcting the misstatement existing inthe balance sheet at the end of the current year, irrespective of themisstatement’s year(s) of origin. Financial statements would require adjustmentwhen either approach results in quantifying a misstatement that is material.Correcting prior year financial statements for immaterial errors would notrequire previously filed reports to be amended. SAB 108 is effective forinterim periods of the first fiscal year ending after November 15, 2006.We do not expect the adoption of SAB 108 to have a material impact on ourfinancial position or results of operations.

In August 2001, the FASBissued Statement No. 143, “Accounting for Conditional Asset RetirementObligations” which states “An entity shall recognize the fair value of aliability 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 whichclarifies that the term *conditional assetretirement obligation*  refersto a legal obligation to perform an asset retirement activity in which thetiming and (or) method of settlement are conditional on a future event that mayor may not be within the control of the entity. The obligation to perform theasset retirement activity is unconditional even though uncertainty exists aboutthe timing and (or) method of settlement. Thus, the timing and (or) method ofsettlement may be conditional on a future event. Accordingly, an entity isrequired to recognize a liability for the fair value of a conditional assetretirement obligation if the fair value of the liability can be reasonablyestimated. The fair value of a liability for the conditional asset retirementobligation should be recognized when incurred—generally upon acquisition,construction, or development and (or) through the normal operation of theasset. Uncertainty about the timing and (or) method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists. Statement No.143acknowledges that in some cases, sufficient information may not be available toreasonably estimate the fair value of an asset retirement obligation. ThisInterpretation also clarifies when an entity would have sufficient informationto reasonably estimate the fair value of an asset retirement obligation. 

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Fin 47 is effective forfiscal years beginning after December 15, 2005. The Company has determined thatthere is no additional impact on its financial position or results ofoperations from the adoption of this Statement.

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

Historically, theCompany has financed its operations and met its capital requirements throughfunds generated from operations, the issuance of common stock, equipment linesof credit, a working capital line of credit, a term loan, sales-leasebackarrangements and collaborative arrangements. In July 2004, the Companydiscontinued its wafer manufacturing business, to focus exclusively on theequipment manufacturing business. The Company will maintain a research anddevelopment effort focused on continuous improvement of the equipmentcapabilities and for supporting the Company’s equipment customers’ needs.

As of December 31,2006, Ibis had cash and cash equivalents of $4.8 million, including the finalpayment of $1.1 million for the second i2000 SIMOX implanter accepted by SUMCOin the fiscal year ended December 31, 2006.

During the fiscalyear ended December 31, 2006, Ibis used $2.1 million of cash for operatingactivities of continuing operations as compared to $1.2 million in 2005. To date,Ibis’ working capital requirements have been funded primarily through debt(capital leases) and equity financings, including the February 2007 financingdiscussed below. The principal uses of cash during the fiscal year endedDecember 31, 2006, as described in the Statement of Cash Flows on page 46 ofthis 10K, were to fund operations and additions to property and equipment. AtDecember 31, 2006, Ibis had commitments to purchase approximately $0.2 millionin material. Our headcount for the year ended December 31, 2006 was 45employees.

Cash flow projections developed by management indicate the Companybelieves it will have sufficient cash resources to support current operationsuntil at least June 2008. This expectation however, is based on the Company’scurrent operating plan and general sales outlook, each of which may changerapidly. In January, 2007 the Company announced that to conserve cash it wasreducing its operating expenses by approximately 40% which involved costcutting measures consisting of headcount reductions, consulting at aneighboring business for a minimum of six months under a staffing servicesagreement, salary reductions andreducing consumable expenses. On February 16, 2007, the Company entered into apurchase agreement pursuant to which it agreed to sell unregistered shares ofits common stock and warrants exercisable for common stock to Special SituationFunds for an aggregate purchase price of $5.3 million in a two-tranchefinancing.  The first closing, at whichthe Company received approximately $2.2 million in proceeds, occurred onFebruary 20, 2007.  Subject tostockholder approval, the Company agreed to sell the remainder of thesecurities at a second closing, at which the Company will receive approximately$3.1 million in proceeds.  The secondclosing is expected to occur after the Company’s annual stockholder meeting,which is scheduled to be held on May 10, 2007. In connection with thetransaction, the Company also entered into a registration rights agreement withthe investors.  The Company will pay aplacement fee to a placement agent, which includes a cash fee equal to 5% ofthe gross proceeds and warrants exercisable for common stock with a dollarvalue equal to 5% of the gross proceeds. A payment of approximately $100,000 was made and warrants to purchase74,434****shares of common stock****were issued to the placement agent in connection with thefirst closing**. **Allof the securities will be sold in a private placement pursuant to Regulation Dof the Securities Act.

**(4) AccountsReceivable**

Accounts receivable consisted of the following atDecember 31:

|                                        | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Accounts  receivable, trade            |       | $        | 36,250     |     | $          | 160,822 |   |
| Less: Allowance  for doubtful accounts |       | (25,000  | )          | —   |       |
| Accounts  receivable, other            |       | 79,628   |       | 188,332  |       |
|                                   |       | $        | 90,878     |     | $          | 349,154 |   |

 

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**(5)Inventories**

Inventories consisted of the following at December 31:

|                             | ** ** | **2005**  | ** ** | **2006**  | ** ** |
|-----------------------------|------------|-----------|------------|-----------|------------|
|                        |       |      |       |      |       |
| Raw materials.              |       | $         | 1,790,923  |      | $          | 1,445,182 |   |
| Work in process             |       | 1,980,513 |       | 2,130,114 |       |
| Finished goods              |       | 2,505,214 |       | —    |       |
| Total equipment  inventory. |       | $         | 6,276,650  |      | $          | 3,575,296 |   |

 

Equipment inventory atDecember 31, 2006 consists of i2000 parts and/or implanters under constructionor otherwise available for resale. Finished goods inventory decreased by $2.5million in 2006 as a result of the sale of an implanter. With thediscontinuance of the wafer operation in the third quarter of 2004, all waferinventory was written off to the loss from discontinued operations with theexception 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, 2006 is $0.1 million.

At December 31, 2006, theCompany had commitments to purchase approximately $0.2 million in material tobe used for the i2000 implanter under construction and general operatingexpenses.

**(6)Property and Equipment**

Property and equipment consisted of the following atDecember 31:

 

|                           | ** ** | **2005**  | ** ** | **2006**  | ** ** |
|---------------------------|------------|-----------|------------|-----------|------------|
|                      |       |      |       |      |       |
| Machinery and  equipment. |       | $         | 21,160,832 |      | $          | 19,448,571 |   |
| Furniture and  fixtures.  |       | 408,593   |       | 376,618   |       |
| Leasehold  improvements.  |       | 4,733,443 |       | 4,903,635 |       |
| Construction in  progress |       | 146,038   |       | —    |       |
|                      |       | $         | 26,448,906 |      | $          | 24,728,824 |   |

 

**(7) OtherAssets**

InDecember 2000, the Company entered into a royalty-bearing license agreementwhich gives the Company the right to manufacture SIMOX-SOI wafers using thelicensed process. Although the Company is no longer in the wafer manufacturingbusiness, it did sell in 2006 a small amount of wafers and paid royalty ofapproximately $2 thousand. Much of the R&D development work is still beingdone using this licensed process in support of implanter and processimprovements. Warrants were issued in connection with this agreement. The costof the license agreement, including cash paid and the fair value of thewarrants issued, is $2.3 million and is included in other assets at December31, 2005 and December 31, 2006, net of accumulated 

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amortization of$1.6 million and $2.0 million, respectively. The warrants associated with thistransaction expired in December 2005 unexercised.

**(8)Commitments and Contingencies**

***(a) Leases***

Ibis’ corporate office and manufacturing site arelocated at a leased facility in Danvers, Massachusetts. The equipmentmanufacturing business and the engineering and wafer processing research anddevelopment effort are housed in approximately 32,000 square feet whichincludes a modernized cleanroom that contains metrology equipment, cleaningequipment and an implantation equipment manufacturing and service area. Thelease on the space we currently occupy was renewed during 2006 and will expireon June 30, 2011, and contains an option to renew for five years. TheCompany has no significant contractual obligations not fully recorded on itsBalance Sheets or fully disclosed in the Notes to its Financial Statements. TheCompany has no off-balance sheet arrangements.

AtDecember 31, 2006, the Company’s contractual obligations included:

 
| ** **                        | ** ** | **Payment due by period** | ** ** |
|-----------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations**  | ** ** | **Total**                                | ** ** | **Less than  1 year** | ** ** | **1  year** | ** ** | **2  years** | ** ** | **3-5  years** | ** ** | **More than  5 years** | ** ** |
| Minimum  Operating Lease Payments |       | $                                        | 1,745,325  |   | $ | 412,015 |   | $ | 384,384 |   | $ | 383,432 |   | $ | 565,494 |   | — |   |
|                                   |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Rent expense was approximately $702,000, $489,000 and$343,177 for the years ended December 31, 2004, 2005 and 2006 respectively.

**(b)Contingencies**

Five class action securities lawsuits have been filed in the UnitedStates District Court in the District of Massachusetts against Ibis and itsPresident and CEO: Martin Smolowitz v. Ibis Technology Corporation., et al.,Civ. No. 03-12613 (RCL) (D. Mass.); Fred Den v. Ibis Technology Corporation.,et al., Civ. No. 04-10060 (RCL) (D. Mass.); Weinstein v. Ibis TechnologyCorporation., et al., Civ. No. 04-10088 (RCL) (D. Mass.); George Harrison v.Ibis Technology Corporation., et al., Civ. No. 04-10286 (RCL) (D. Mass.); andEleanor Pitzer v. Ibis Technology Corporation., et al, Civ. No. 04-10446 (RCL)(D. Mass.).On June 4, 2004, the Court entered an order consolidating theseactions under the caption In re Ibis Technology Securities Litigation, C.A.04-10446 RCL. On July 6, 2004, a consolidated amended class action complaintwas filed which alleges, among other things, that the Company violated federalsecurities laws by allegedly making misstatements to the investing publicrelating to demand for certain Ibis products and intellectual property issuesrelating to the sale of the i2000 oxygen implanter. The plaintiffs are seekingunspecified damages. On August 5, 2004, we filed a motion to dismiss theconsolidated amended complaint on the grounds, among others, that it failed tostate a claim on which the relief could be granted. On September 22, 2005 theMagistrate Judge issued a report and recommendation that our motion be grantedin part and denied in part. By Memorandum and Order dated March 31, 2006, theCourt adopted the Report and Recommendation of the Magistrate Judge, grantingin part and denying in part the Company’s motion to dismiss. As a result of theCourt’s Order, plaintiffs filed a Conformed Consolidated Amended Complaint,which the Company answered on July 5, 2006. On October 2, 2006, the companyannounced that it had reached an agreement in principle to settle the fiveclass action securities lawsuits subject to, and contingent upon thenegotiation and execution of a

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formalsettlement agreement and final court approval after notice to the class. Theproposed settlement, which provides for a payment to the plaintiffs of $1.9million and is to be funded entirely by the Company’s insurance carrier, is notexpected to have a material adverse effect on our business, results ofoperations or financial condition.

Ibis remains a nominal defendant in a shareholder derivative actionfiled in February 2004 against certain of its directors and officers: Louis F.Matheson, Jr. v. Martin J. Reid et al., Civ. Act. No. 04-10341 (RCL). Thecomplaint alleges, among other things, that the alleged conduct challenged inthe securities cases pending against Ibis in Massachusetts (described above)constitutes a breach of the defendants’ fiduciary duties to Ibis. The complaintseeks unspecified money damages and other relief ostensibly on behalf of Ibis.On June 4, 2004, the Court entered an order staying this matter pending theentry of a final order on any motion filed by the Company to dismiss theconsolidated class action complaint referenced above.  On May 1, 2006, the parties jointly moved tocontinue the administrative stay of the Derivative Action until finaldisposition of all claims in the Consolidated Action, which the Court grantedon July 26, 2006. This continuing litigation may be time-consuming, expensiveand disruptive to normal business operations, and the outcome of litigation isdifficult to predict.

 

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**(9) AccruedLiabilities**

Current accruedliabilities were as follows at December 31:

|                  | ** ** | **2005** | ** ** | **2006** | ** ** |
|------------------|------------|----------|------------|----------|------------|
|             |       |     |       |     |       |
| Accrued vacation |       | $        | 125,468    |     | $          | 156,213 |   |
| Accrued warranty |       | 653,133  |       | 435,979  |       |
| Accrued payroll  |       | 76,195   |       | 128,343  |       |
| Accrued expenses |       | 346,899  |       | 253,459  |       |
| Total            |       | $        | 1,201,695  |     | $          | 973,994 |   |

 

**(10)Accrued Warranty**

At the time thatrevenue is recognized for the sale of an implanter a liability for warranty isalso established. An estimate of the warranty cost is made based on the number ofyears involved and the Company’s prior experience. As material and labor isused during the warranty period the liability is reduced based on thesecharges. At the end of the warranty term the balance in the liability iseliminated and adjusted through cost of sales, the account charged atinception. A reconciliation of warranty liability for the period ended December31, 2004, December 31, 2005 and December 31, 2006 is as follows:

| Warranty balance December  31, 2003 |   | $         | 593,969 |   |
|-------------------------------------|--------|-----------|---------|--------|
| Expense incurred — 2004        |   | (125,080) |    |
| Initiated — 2004               |   | 400,000   |    |
| Expired — 2004                 |   | (160,059) |    |
| Warranty balance  December 31, 2004 |   | $         | 708,830 |   |
| Expense incurred —2005         |   | (31,061   | )       |
| Initiated — 2005               |   | —    |    |
| Expired — 2005                 |   | (24,636)  |    |
| Warranty balance  December 31, 2005 |   | $         | 653,133 |   |
| Expenses incurred —  2006      |   | (160,939  | )       |
| Initiated — 2006               |   | 608,220   |    |
| Expired — 2006                 |   | (664,435  | )       |
| Warranty balance December 31, 2006  |   | $         | 435,979 |   |

 

**(11)Deferred Revenue**

Deferred revenue includesprepaid license and royalty fees in the amount of $13,000 at December 31, 2005and zero at December 31, 2006. Also included in deferred revenue at December31, 2005 was $7,250,000 in deposits from the two i2000 implanter orders fromSUMCO. At December 31, 2006 deferred revenue was $150,000 in deposits forservice from SUMCO.

**(12)License Agreements**

The Company obtained anexclusive sublicense in the field of oxygen implantation to the proprietarybeam scanning system developed by a consultant to the Company during thedevelopment of the first Ibis 1000 implanter. The beam scanning systemsublicense agreement also grants the Company certain rights to furthersublicense the technology for certain applications. The Company received $0.4million, $0.3 million and $0.5 million in 2004, 2005 and 2006, respectively,for non-refundable option fees or royalty fees in accordance with non-exclusivesublicense agreements.

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**(13)Income Taxes**

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

|            | ** ** | **Year Ended December 31,** | ** ** |
|------------|------------|--------------------------------------------|------------|
| ** ** | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Current:   |       |                                       |       |   |   |   |   |
| Federal    |       | $                                          | —     |   | $ | — |   | $ | — |   |
| State      |       | 1,256                                      |       | 1,256 |   | 1,256 |   |
| Deferred:  |       |                                       |       |   |   |   |   |
| Federal    |       | —                                     |       | — |   | — |   |
| State      |       | —                                     |       | — |   | — |   |
| Total      |       | $                                          | 1,256      |   | $ | 1,256 |   | $ | 1,256 |   |

 

Stateincome tax expense (benefit), which consists of Massachusetts and Californiaexcise and corporate taxes, differs from the amount computed by applying thestatutory federal income tax rate of 34% to the income (loss) before incometaxes from continuing operations as follows:
| ** **                                           | ** ** | **2004**  | ** **  | **2005**  | ** ** | **2006**   | ** ** |
|------------------------------------------------------|------------|-----------|-------------|-----------|------------|------------|------------|
| Computed “expected” tax  expense (benefit) |       | $         | (1,917,571) |      | $          | (3,216,586 | )          | $ | 142,444 |   |
| State income taxes, net  of federal tax benefit      |       | 829       |        | 829       |       | 26,441     |       |
| Other                                                |       | —    |        | —    |       | —     |       |
| Losses (benefited)/not  benefited                    |       | 1,917,998 |        | 3,217,013 |       | (167,629   | )          |
|                                                 |       | $         | 1,256       |      | $          | 1,256      |       | $ | 1,256 |   |

 

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

 
| ** **                                                              | ** ** | **2005**    | ** ** | **2006**    | ** ** |
|-------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| Deferred tax assets:                                                    |       |        |       |        |       |
| Net operating  loss carryovers                                          |       | $           | 36,193,000 |        | $          | 34,586,000 |   |
| Accruals not  currently deductible for tax purposes                     |       | 1,731,000   |       | 1,607,000   |       |
| General business  tax credit carryovers                                 |       | 2,599,000   |       | 2,374,000   |       |
| Impairment  reserves                                                    |       | 2,017,000   |       | 1,906,000   |       |
| FAS 123R                                                                |       | —      |       | 173,000     |       |
| Other                                                                   |       | 11,000      |       | —      |       |
| Less: Valuation  allowance                                              |       | (40,700,000 | )          | (38,715,000 | )          |
| Total deferred  tax assets                                              |       | 1,851,000   |       | 1,931,000   |       |
| Deferred tax  liabilities:                                              |       |        |       |        |       |
| Property and  equipment, principally due to differences in depreciation |       | (1,675,000  | )          | (1,735,000  | )          |
| Patents                                                                 |       | (176,000    | )          | (196,000    | )          |
| Net deferred tax assets                                                 |       | $           | —     |        | $          | — |   |

 

Total valuationallowance increased by $3.8 million and decreased by $2.0 million for the yearsended December 31, 2005 and 2006, respectively. The Company has recorded avaluation allowance against its net deferred tax assets for 2005 and 2006,since management believes that, after considering all the available objectiveevidence, both positive and negative, historical and prospective, with thegreater weight given to historical evidence, it is more likely than not thatthese assets will not be realized in the foreseeable future.

The Company had federal net operating loss and generalbusiness credit carryovers of approximately $87.1 million and $1.2 million,respectively, at December 31, 2006, with varying expiration dates through 2026,that may be used to offset future taxable income. State net operating loss andcredit carryovers of $52.4 

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millionand $1.2 million, respectively, have varying expiration dates. Included in thetotal deferred tax assets, offset by the valuation allowance, was $3.2 millionrelated to the net operating loss carry forward resulting from the exercise ofemployee stock options, the tax benefit of which, when recognized, will beaccounted for as a credit to additional paid-in capital rather than a reductionof income tax expense.

Ownership changes, as defined in the Internal Revenue Code, may limitthe amount of net operating loss carry forwards that can be utilized annuallyto offset future taxable income.  TheCompany anticipates that these limitations will have no material impact ontheir ability to utilize the 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 common stock and2,000,000 shares of preferred stock (“Undesignated Preferred Stock”)authorized. At December 31, 2006,****65,493 common shares were reserved forissuance upon exercise of options outstanding under the Company’s 1993Employee, Director and Consultant Stock Option Plan. At December 31, 2006, theCompany also had 1,729,818 common shares reserved for issuance upon exercise ofoptions outstanding or available for grant under the Company’s 1997 Employee,Director and Consultant stock option plan. At December 31, 2006, the Companyhad 169,664 common shares reserved for issuance under the Company’s 2000Employee Stock Purchase Plan.

**(15)Stock Plans and Warrants**

**(a) *Stock OptionPlans***

InDecember 1993, the Board of Directors and stockholders approved the adoption ofthe Company’s 1993 Employee, Director and Consultant Stock Option Plan whichprovided for the issuance of options to purchase up to 250,000 shares of commonstock to employees, consultants and non-employee directors. In May 1996, thestockholders increased to 750,000 shares the aggregate number of shares thatmay be granted under this plan.

In October 1997,the Board of Directors approved the adoption of the Company’s 1997 Employee,Director and Consultant Stock Option Plan (the “1997 Plan”) which provides forthe issuance of options to purchase up to 750,000 shares of common stock of theCompany to employees, consultants and non-employee directors. The stockholdersapproved the Plan at the May 1998 Annual Stockholders Meeting. In February 2001,the Board of Directors approved an amendment to the 1997 Plan to increase theaggregate number of shares reserved for issuance to 1,350,000. The stockholdersapproved this amendment at the May 2001 Annual Stockholders Meeting. InFebruary 2004, the Board of Directors approved an amendment to the 1997 Plan toincrease the aggregate number of shares reserved for issuance to 1,650,000. Thestockholders approved this amendment at the May 2004 Annual StockholdersMeeting. In March 2006, the Board of directors approved an amendment to the1997 plan to increase the aggregate number of shares reserved for issuance to1,950,000. The stockholders approved this amendment at the May 2006 AnnualStockholders Meeting.

The Company hasstock-based compensation plans under which employees and directors may begranted options to purchase common stock. Options are generally granted withexercise prices at not less than the fair market value on the grant date,generally vest over 4 years and expire in 10 years after the grant date. As ofDecember 31, 2006 a total of 3.3 million shares had been authorized for grantunder the Company’s stock-based compensation plans. The number of common sharesreserved for granting of future awards to employees and directors under theseplans was 0.4 million at December 31, 2006. The remaining unrecognizedcompensation expense on stock options at December 31, 2006 was $0.5 million.The weighted average period over which the cost is expected to be recognized isapproximately 2 years.

As of December 31,2006 the Company had three equity compensation plans under which our equitysecurities have been authorized for issuance to our employees and/or directors:the 2000 Employee Stock Purchase Plan, as amended (see note 15b), the 1993Employee, Director and Consultant Stock Option Plan, as amended (the 1993plan); and the 1997 Employee, Directors and Consultant Stock Option Plan, asamended. 

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The1993 Plan has expired and there are no options available for issuance; however,the 1993 Plan continues to govern all options, awards and other grants grantedand outstanding under the 1993 Plan.

*Distribution and Dilutive Effectof Options*

Thefollowing table illustrates the grant dilution and exercise dilution for theyears ended December 31**:**

|                                     | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Shares of common  stock outstanding |       | 10,719,595 |       | 10,816,029 |       | 10,915,481 |       |
|                                |       |       |       |       |       |       |       |
| Granted                             |       | 242,700    |       | 304,500    |       | 201,721    |       |
| Canceled/forfeited                  |       | (66,169    | )          | (331,473   | )          | (167,573   | )          |
| Expired                             |       | —     |       | —     |       | —     |       |
| Net options  granted                |       | 176,531    |       | (26,973    | )          | 34,148     |       |
|                                |       |       |       |       |       |       |       |
| Grant dilution  (1)                 |       | 1.6        | %          | 0.0        | %          | 0.3        | %          |
| Exercised                           |       | 550        |       | —     |       | 1,025      |       |
| Exercised dilution (2)              |       | 0.0        | %          | —     |       | 0.0        | %          |

----

(1)  The percentage for grant dilution is computedbased on net options granted as a percentage of shares of common stock outstanding.

(2)  The percentage for exercise dilution iscomputed based on options exercised as a percentage of shares of common stockoutstanding.

Basic and diluted sharesoutstanding for the twelve months ended December 31, 2004, December 31, 2005and December 31, 2006 were 10,665,842 10,798,933, 10,737,924, 10,812,514,10,853,304 and 10,979,783 shares respectively. During the twelve months endingDecember 31, 2006, the dilutive effect of in the money employee stock optionswas 126,479 shares or 1.1% of the basic shares outstanding based on the Company’saverage share price of $1.70.

 

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A summary of stock optionactivity under the plans is as follows:
| ** **                                | ** ** | **Options Outstanding** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **Options available**   | ** ** | ** ** | ** ** | **Weighted average** | ** ** |
| ** **                                | ** ** | **for**                      | ** ** | ** ** | ** ** | **exercise price of** | ** ** |
| ** **                                | ** ** | **Grant**                    | ** ** | **Shares** | ** ** | **shares under plan** | ** ** |
| Balance outstanding at  December 31, 2003 |       | 82,700                       |       | 1,172,254 |   | $ | 15.69 |   |
| Granted                                   |       | (242,700                     | )          | 242,700 |   | 4.99 |   |
| Exercised                                 |       | —                       |       |   |   | (550 | ) |
| 5.56                                      |       |                         |       |   |   |   |   |
| Cancelled/forfeited                       |       | 66,169                       |       | (66,169 | ) | 9.78 |   |
| Expired                                   |       | (47,951                      | )          | — |   | — |   |
| Additional shares  reserved               |       | 300,000                      |       | — |   | — |   |
| Balance outstanding at  December 31, 2004 |       | 158,218                      |       | 1,348,235 |   | $ | 14.06 |   |
| Granted                                   |       | (304,500                     | )          | 304,500 |   | 1.46 |   |
| Exercised                                 |       | —                       |       |   |   | — |   |
| —                                    |       |                         |       |   |   |   |   |
| Cancelled/forfeited                       |       | 331,473                      |       | (331,473 | ) | 12.95 |   |
| Expired                                   |       | —                       |       |   |   | — |   |
| —                                    |       |                         |       |   |   |   |   |
| Additional shares  reserved               |       | —                       |       | — |   | — |   |
| Balance outstanding at  December 31, 2005 |       | 185,191                      |       | 1,321,262 |   | $ | 11.43 |   |
| Granted                                   |       | (201,721                     | )          | 201,721 |   | 3.17 |   |
| Exercised                                 |       | —                       |       |   |   | (1,025 | ) |
| 1.36                                      |       |                         |       |   |   |   |   |
| Cancelled/forfeited                       |       | 167,573                      |       | (167,573 | ) | 16.42 |   |
| Expired                                   |       | (10,117                      | )          | — |   | — |   |
| Additional shares  reserved               |       | 300,000                      |       | — |   | — |   |
| Balance outstanding at December 31 2006   |       | 440,926                      |       | 1,354,385 |   | $ | 9.59 |   |

 

The followingtable summarizes information concerning outstanding and exercisable options asof December 31, 2006:
| Options Outstanding | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** **                   | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **average** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **               | ** ** | ** **                   | ** ** | **remaining** | ** ** | **average** | ** ** | ** ** | ** ** | ** ** | ** ** | **average** | ** ** |
| **Range**                | ** ** | **Number**                   | ** ** | **contractual** | ** ** | **outstanding** | ** ** | **Aggregate** | ** ** | **Number** | ** ** | **exercise** | ** ** |
| **Exercise prices** | ** ** | **outstanding**              | ** ** | **life (years)** | ** ** | **option price** | ** ** | **Intrinsic value** | ** ** | **exercisable** | ** ** | **price** | ** ** |
| $.01 - 6.00              |       |                         |       | 726,221 |   | 8.0 |   | $ | 3.07 |   | $ | 7,034 |   | 263,311 |   | $ | 3.95 |   |
| $6.01 - 9.00             |       |                         |       | 150,554 |   | 5.6 |   | $ | 7.91 |   |   |   | 125,554 |   | $ | 7.91 |   |
| $9.01 - 13.50            |       |                         |       | 306,035 |   | 3.0 |   | $ | 10.19 |   |   |   | 298,660 |   | $ | 10.16 |   |
| $13.51 - 20.26           |       |                         |       | 42,575 |   | 3.8 |   | $ | 18.29 |   |   |   | 42,575 |   | $ | 18.29 |   |
| $20.27 - 30.37           |       |                         |       | 10,250 |   | 2.7 |   | $ | 24.10 |   |   |   | 10,250 |   | $ | 24.10 |   |
| $30.38 - 45.55           |       |                         |       | 13,250 |   | 3.3 |   | $ | 37.27 |   |   |   | 13,250 |   | $ | 37.27 |   |
| $45.56 - 68.32           |       |                         |       | 104,500 |   | 3.0 |   | $ | 46.33 |   |   |   | 104,500 |   | $ | 46.33 |   |
| $68.33 - 98.71           |       |                         |       | 1,000 |   | 3.2 |   | $ | 89.94 |   | — |   | 1,000 |   | $ | 89.94 |   |
|                     |       | 1,354,385                    |       |   |   |   |   | $ | 7,034 |   | 859,100 |   |   |   |

 

The aggregate intrinsicvalue in the preceding table represents the total pretax intrinsic value, basedon the Company’s closing stock price of $1.48 as of December 31, 2006, whichwould have been received by the option holders had all option holders exercisedtheir options as of that date. The fair value of stock options vested atDecember 31, 2006 and December 31, 2005 was $4.9 million and $5.4 million,respectively. The total number of in-the-money options exercisable as ofDecember 31, 2006 was 50,075. As of December 31, 2006, 859,100 outstandingoptions were exercisable, and the weighted average exercise price was $13.41.

57

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*Valuation and Expense Informationunder SFAS 123(R)*

The followingtable summarizes stock-based compensation expense related to employee stockoptions and employee stock purchases under SFAS123 (R) for the twelve monthsended December 31, 2006 which was allocated as follows:

|                                                                  | ** ** | **Twelve Months Ended** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                       | ** ** | **December 31, 2006**   | ** ** |
| ** **                                                       | ** ** | **(in thousands)**           | ** ** |
| Cost of sales                                                    |       | $                                 | 18         |   |
| Research and  development                                        |       | 118                               |       |
| Marketing and  selling                                           |       | 45                                |       |
| General and  administration                                      |       | 214                               |       |
| Stock-based compensation expense  included in operating expenses |       | $                                 | 395        |   |

 

As of December 31, 2006 the Company capitalized $4 thousand ofstock-based compensation in inventory. The Company did not recognize any taxbenefits on the stock-based compensation recorded in the periods based on thecurrent tax status of the Company.

The table below reflects reported net loss per share, basic and dilutedfor the twelve months ended December 31, 2004 and 2005 compared with the proforma information as required by SFAS 123(R).
| ** **                                                                                            | ** ** | **Twelve Months Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|-------------|
| ** **                                                                                            | ** ** | **2004**                                                 | ** **  | **2005** | ** ** |
| Net loss as  reported for prior periods (1)                                                           |       | $                                                        | (10,918,541 | ) | $ | (9,245,305 | ) |
|                                                                                                  |       |                                                     |        |   |   |
| Stock-based compensations expense related to employee  stock options and employee stock purchases (2) |       | (1,284,491                                               | )           | (717,379 | ) |
|                                                                                                  |       |                                                     |        |   |   |
| Net loss  including the effect of stock based compensation expense (3)                                |       | $                                                        | (12,203,032 | ) | $ | (9,962,684 | ) |
| Per share  information, basic and diluted:                                                            |       |                                                     |        |   |   |
|                                                                                                  |       |                                                     |        |   |   |
| Net loss as  reported for the prior period (1)                                                        |       | $                                                        | (1.02       | ) | $ | (0.86 | ) |
| Net loss including the  effect of stock-based compensation expense (3)                                |       | $                                                        | (1.14       | ) | $ | (0.93 | ) |

----

(1) Net loss and net lossper share prior to 2006 did not include stock-based compensation expense relatedto employee stock options and employee stock purchases under SFAS123 because wedid not adopt the recognition provisions of SFAS123.

(2) Stock-basedcompensation expense is calculated on the pro forma application of SFAS123 aspreviously disclosed in the notes to the Financial Statements.

58

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(3) Net loss and net loss per share represents proforma information based on SFAS123 as previously disclosed in the notes to theFinancial Statements.

*Pro Forma Information Under SFAS123 for Periods Prior to Fiscal 2006*

The weightedaverage estimated fair value of employee stock options granted during thetwelve months ended December 31, 2004 and December 31, 2005 was $3.27 and$1.05, respectively, using the Black Scholes option-pricing model with thefollowing weighted average assumptions:
| ** **                                               | ** ** | **Twelve Months Ended** | ** ** | **Twelve Months Ended** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                               | ** ** | **December 31, 2004**   | ** ** | **December 31, 2005**   | ** ** |
| Expected  volatility                                     |       | 96.39                             | %          | 97.62                             | %          |
| Risk free  interest rate                                 |       | 2.87                              | %          | 2.91                              | %          |
| Dividend yield                                           |       | 0.00                              |       | 0.00                              |       |
| Expected option life  (10 year contractual life options) |       | 4.00                              |       | 4.00                              |       |

 

For purposes ofpro forma disclosures under SFAS 123, the estimated fair value of the optionsis assumed to be amortized to expense over the options’ vesting period.

Theweighted-average estimated fair value of employee stock options granted duringthe twelve months ended December 31, 2006 was $2.31 per share using the BlackScholes option-pricing model with the following weighted-average assumptions:
| ** **                                               | ** ** | **Twelve Months Ended** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                               | ** ** | **December 31, 2006**   | ** ** |
| Expected  volatility                                     |       | 102.49                            | %          |
| Risk free  interest rate                                 |       | 4.70                              | %          |
| Dividend yield                                           |       | 0.00                              |       |
| Expected option life  (10 year contractual life options) |       | 6.25                              |       |

 

The expected lifeof employee stock options is the anticipated average time that an option willbe outstanding. The Company chose to use the simplified method provided underSAB107 to estimate the expected term for “plain vanilla” stock options. Theexpected term as calculated under the simplified method is 6.25 years.

The Companydetermined the expected volatility of the stock price by using a period equalto the expected life of the stock options, 6.25 years. Volatility was measuredas the standard deviation of the difference in the natural logarithms of thestock over the expected life of the options using the daily closing stock price.This resulted in the volatility of 102.49 percent.

The risk-freeinterest rate assumption is based upon observed treasury bill interest rates(risk free) appropriate for the expected term of the Company’s employee stockoptions.

As stock-basedcompensation expense recognized in the Statement of Operations for the twelvemonths ended December 31, 2006 is actually based on awards ultimately expectedto vest, it has been reduced for annualized estimated forfeitures of 14.18%.SFAS 123 (R ) requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Forfeitures were estimated based on historical experience andthe Company intends to review the forfeiture estimates on a quarterly basis.

59

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**(b) *EmployeeStock Purchase Plan***

On February 24, 2000, theBoard of Directors adopted the Ibis Technology Corporation 2000 Employee StockPurchase Plan (the “Purchase Plan”) pursuant to which a total of 300,000 sharesof the Company’s Common Stock may be sold to eligible employees of the Companyat a 15% discount from the market value of the shares. The stockholdersapproved the plan 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 to eligible employees. The stockholders approvedthis amendment at the May 2005 Annual Stockholders Meeting. Under the terms ofthe Purchase Plan, employees may elect to have up to 15% of their base earningswithheld to purchase these shares during each offering period, which is asix-month period. The purchase price under the Purchase Plan is 85% of the lesserof the market price on the beginning or the end of the offering period.Approximately 55% of eligible employees participated in the Purchase Plan inthe initial offering period, 51% in 2004, 51% in 2005, and 51% in 2006. During2004, 2005, and 2006, the Company sold 67,875, 96,434 and 98,427 shares,respectively, to employees under the Purchase Plan.

**(c) *Warrants***

In February 2007, inconnection with the first closing of a two step financing agreement, theCompany issued 1,050,000 Common Stock warrants exercisable for Common Stock at a strike price of $1.50 pershare. Additionally, the Company plans to issue approximately 1,483,000 CommonStock warrants exercisable for CommonStock, also at a strike price of $1.50 per share, in a second closing, subjectto stockholder approval at the Company’s annual stockholder meeting, which isexpected to be held on May 10, 2007.

Inconnection with the transaction, the Company also entered into a RegistrationRights Agreement with the Investors.  TheCompany will pay a placement fee to a placement agent, which includes a cashfee equal to 5% of the Company’s gross proceeds from the agreement, andwarrants exercisable for Common Stock with a dollar value also equal to 5% ofthe Company’s gross proceeds from the agreement..  All of the securities will be sold in aprivate placement pursuant to Regulation D of the Securities Act of 1933, asamended (the “Act”), solely to accredited investors, as defined in Rule 501 ofthe Act.

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

The Company sells its implanters to a limited numberof semiconductor manufacturers primarily in the United States and the PacificRim.

Significant customerrevenue is shown in dollar amounts and as a percentage of total revenue asfollows:

 

|                     | ** ** | **Significant** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|-----------------|------------|------------|------------|------------|------------|
| **Year Ended** | ** ** | **Customers**   | ** ** | **Amount** | ** ** | **%**      | ** ** |
|                |       |            |       |       |       |       |       |
| December 31,  2004  |       | 1               |       | $          | 7,000,000  |       | 88         | % |
| December 31,  2005  |       | —          |       | $          | 0          |       | —     | % |
| December 31, 2006   |       | 1               |       | $          | 13,325,000 |       | 95         | % |

 

Accountsreceivable from significant customers was $0 at December 31, 2005 and $150,000at December 31, 2006.

Exportsales to unaffiliated customers in 2004, 2005 and 2006 were 95%, 81% and 99% oftotal revenues, respectively.

During 2004, 2005 and2006, the Company purchased substantially all of its raw materials, componentsand subassemblies for its implanters from a limited group of suppliers.Disruption or termination of certain of these sources could occur and suchdisruptions could have a material adverse effect on the Company’s business andresults of operations.

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**(17) Other Income**

In 2006 the Company recognized a gain in other incomeof approximately $800,000, which is the result of the expiration of an optionto place an order for an additional implanter prior to the end of 2006. Thispayment was received in the fiscal year ended December 31, 2006.

**(18)Discontinued Operations**

In July 2004, the Company announced its decision todiscontinue its wafer manufacturing business to concentrate its efforts onsupplying equipment and process technology****toits equipment customers. As a result, the Company recorded an estimated loss ondisposal of approximately $2.1 million for the year ended December 31, 2004,consisting principally of the write off of 300 mm wafer inventory not expectedto be used in the Company’s ongoing R&D efforts ($1.2 million) and the netimpairment of wafer manufacturing assets expected to be sold ($0.9 million). Inaddition to write-offs of wafer manufacturing assets, the Company alsorecognized $78 thousand in severance costs associated with employeeterminations. For the period ending December 31, 2005 the discontinuedOperations generated a net gain of $0.2 million. The net gain of $0.2 millionwas the result of the reduction of $0.1 million of expenses associated with theclosure of the wafer operation and $0.1 million from scrap recovery. For theperiod ending December 31, 2006 there was no discontinued operations gain orloss recognized by the company. In 2006 and 2005, the Company has separatelydisclosed the operating, investing, and financing portions of the cash flowsattributable to discontinued operations, which in 2004 were reported on acombined basis as a single amount.

 **(19) Industry Segments**

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

The accounting policies of the operating segments arethe same as those described in the summary of significant accounting policies.The Company generally evaluates operating performance based on income or lossbefore interest and taxes.

The table below providesinformation for the years ended December 31, 2004, 2005 and 2006 pertaining tothe Company’s two industry segments after the discontinuance of the wafermanufacturing business.

 
| ** **                                                    | ** ** | **SIMOX  Equipment** | ** ** | **Other Products  or Services** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|-------------------------------------------|------------|------------|------------|
| **Net  Revenues**                                             |       |                 |       |                                      |       |       |       |
| Year Ended December  31, 2004                                 |       | $                    | 7,535,270  |                                      | $          | 390,975    |       | $ | 7,926,245 |   |
| Year Ended  December 31, 2005                                 |       | 277,684              |       | 324,621                                   |       | 602,305    |       |
| Year Ended  December 31, 2006                                 |       | 13,427,035           |       | 560,384                                   |       | 13,987,419 |       |
|                                                          |       |                 |       |                                      |       |       |       |
| **Operating  Income (Loss)**                                  |       |                 |       |                                      |       |       |       |
| 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 | )          |
| Year Ended  December 31, 2006                                 |       | 1,041,270            |       | 560,384                                   |       | 1,601,654  |       |
| ** **                                                    |       |                 |       |                                      |       |       |       |
|                                                          |       |                 |       |                                      |       |       |       |
| **Assets**                                                    |       |                 |       |                                      |       |       |       |
| December 31,  2004                                            |       | 13,839,523           |       | 187,321                                   |       | 14,026,844 |       |
| December 31,  2005                                            |       | 12,937,175           |       | 79,628                                    |       | 13,016,803 |       |
| December 31,  2006                                            |       | 8,630,273            |       | 188,332                                   |       | 8,818,605  |       |
|                                                          |       |                 |       |                                      |       |       |       |
| **Capital  Expenditures**                                     |       |                 |       |                                      |       |       |       |
| Year Ended  December 31, 2004                                 |       | 713,349              |       | —                                    |       | 713,349    |       |
| Year Ended  December 31, 2005                                 |       | 149,648              |       | —                                    |       | 149,648    |       |
| Year Ended  December 31, 2006                                 |       | 41,804               |       | —                                    |       | 41,804     |       |
| ** **                                                    |       |                 |       |                                      |       |       |       |
| **Depreciation and Amortization   of Property and Equipment** |       |                 |       |                                      |       |       |       |
| Year Ended  December 31, 2004                                 |       | 1,884,687            |       | —                                    |       | 1,884,687  |       |
| Year Ended  December 31, 2005                                 |       | 1,671,836            |       | —                                    |       | 1,671,836  |       |
| Year Ended December 31,  2006                                 |       | 1,474,900            |       | —                                    |       | 1,474,900  |       |
|                                                               |            |                      |            |                                           |            |            |            |  |  |  |

#  

61

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The table below providesthe reconciliation of reportable segment operating income (loss), assets,capital expenditures, and depreciation and amortization to the Company’stotals.

 
| ** **                                                     | ** ** | **Years Ended December 31,** | ** **  |
|----------------------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                                     | ** ** | **2004**                                    | ** **  | **2005** | ** ** | **2006** | ** ** |
| **Segment  Reconciliation**                                    |       |                                        |        |   |   |   |   |
| Net Income  (loss) :                                           |       |                                        |        |   |   |   |   |
| Total operating income (loss) for reportable  segments         |       | $                                           | (3,660,834  | ) | $ | (7,460,496 | ) | $ | 1,601,654 |   |
| Corporate general & administrative expenses                |       | (2,221,167                                  | )           | (2,216,748 | ) | (2,400,645 | ) |
| Net other income                                               |       | 242,085                                     |        | 217,953 |   | 1,205,132 |   |
| Income tax expense                                             |       | 1,256                                       |        | 1,256 |   | 1,256 |   |
| Income (loss) from discontinued operations                     |       | (5,277,369                                  | )           | 215,242 |   | — |   |
| Net income (loss)                                              |       | $                                           | (10,918,541 | ) | $ | (9,245,305 | ) | $ | 404,885 |   |
|                                                           |       |                                        |        |   |   |   |   |
| Assets:                                                        |       |                                        |        |   |   |   |   |
| Total assets for reportable segments                           |       | $                                           | 14,026,844  |   | $ | 13,016,803 |   | $ | 8,818,605 |   |
| Cash & cash equivalents not allocated to  segments         |       | 7,726,072                                   |        | 6,856,874 |   | 4,812,477 |   |
| Other unallocated assets                                       |       | 529,724                                     |        | 118,711 |   | 157,759 |   |
| Total assets                                                   |       | $                                           | 22,282,640  |   | $ | 19,992,388 |   | $ | 13,788,841 |   |
|                                                           |       |                                        |        |   |   |   |   |
| Capital  Expenditures:                                         |       |                                        |        |   |   |   |   |
| Total capital expenditures for reportable segments             |       | $                                           | 713,349     |   | $ | 149,648 |   | $ | 41,804 |   |
| Corporate capital expenditures                                 |       | 7,653                                       |        | — |   | — |   |
| Total capital expenditures                                     |       | $                                           | 721,002     |   | $ | 149,648 |   | $ | 41,804 |   |
|                                                           |       |                                        |        |   |   |   |   |
| Depreciation and  Amortization:                                |       |                                        |        |   |   |   |   |
| Total depreciation & amortization for reportable  segments |       | $                                           | 1,884,687   |   | $ | 1,671,836 |   | $ | 1,474,900 |   |
| Corporate depreciation & amortization                      |       | 78,029                                      |        | 75,153 |   | 60,956 |   |
| Total  depreciation & amortization                         |       | $                                           | 1,962,716   |   | $ | 1,746,989 |   | $ | 1,535,856 |   |

 

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

The Table belowprovides information for the years 2005 and 2006.

 
| ** **                                | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **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               | )          |
| **2006**                                  |       |               |       |                |       |               |       |                |       |
| Total sales and  revenue                  |       | $                  | 6,260,822  |                | $          | 42,411             |       | $                   | 7,223,863  |   | $ | 460,323 |   |
| Gross profit  (loss)                      |       | 3,588,030          |       | (11,073             | )          | 4,266,614          |       | 250,248             |       |
| Profit (loss)  from continuing operations |       | 1,364,886          |       | (2,166,062          | )          | 2,237,233          |       | (1,031,172          | )          |
| Net income  (loss)                        |       | 1,364,886          |       | (2,166,062          | )          | 2,237,233          |       | (1,031,172          | )          |
| Net income (loss) per  common share       |       | 0.12               |       | (0.20               | )          | 0.21               |       | (0.09               | )          |

#  

###### **(21)Subsequent Events**

On February 16, 2007, Ibis Technology Corporation., a Massachusettscorporation (the “Company”) entered into a Purchase Agreement (the “PurchaseAgreement”) pursuant to which the Company plans to sell unregistered shares ofits common stock, par value $0.08 per share (“Common Stock”), and warrants (“Warrants”)exercisable for Common Stock to the investors identified in the PurchaseAgreement (the “Investors”) for an aggregate purchase price of $5.3million.  In connection with thetransaction, the Company also entered into a Registration Rights Agreement (the“Registration Rights Agreement”) with the Investors.  The Company will pay a placement fee to aplacement agent, which includes a cash fee equal to 5% of the Company’s grossproceeds and warrants exercisable for Common Stock with a dollar value equal to5% of the 

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Company’sgross proceeds.  All of the securitieswill be sold in a private placement pursuant to Regulation D of the SecuritiesAct of 1933, as amended (the “Act”), solely to accredited investors, as definedin Rule 501 of the Act.  Set forth belowis a brief description of the terms and conditions of the Purchase Agreement,the Registration Rights Agreement and the Warrants, which description isqualified in its entirety by reference to the full text of the underlyingdocuments which have been filed as exhibits hereto.

        *Purchase Agreement*.  Pursuant to the Purchase Agreement, theCompany agreed to sell approximately 1.4 million shares of Common Stock andWarrants exercisable for up to approximately 1.05 million additional shares ofCommon Stock for aggregate gross cash proceeds of approximately $2.2 million atan initial closing , which occurred on February 20, 2007 (the “Initial Closing”).  In addition, subject to stockholder approval,the Company agreed to sell approximately 2.0 million additional shares ofCommon Stock and Warrants exercisable for up to approximately 1.5 millionadditional shares of Common Stock for aggregate gross cash proceeds ofapproximately $3.1 million at a second closing expected to occur after theCompany’s annual stockholder meeting expected to be held on May 10, 2007.  The Common Stock sold pursuant to thePurchase Agreement (the “Shares”), the Warrants and the shares of Common Stockissuable upon exercise of the Warrants (the “Warrant Shares”) will berestricted securities as that term is defined in the Act.

        *Registration Rights Agreement*.  Pursuant to the Registration RightsAgreement, the Company agreed to file with the Securities and ExchangeCommission a registration statement covering resales of the Shares and WarrantShares.  The fees and expenses of suchregistration will be borne by the Company. The Registration Rights Agreement includes customary indemnificationprovisions.

        *Warrants*. The Warrant issued to each Investor is exercisable for up to 75% of thenumber of shares of Common Stock purchased by such Investor pursuant to thePurchase Agreement at an exercise price of $1.50 per share.  The exercise price and number of sharesissuable upon exercise of the Warrants are subject to adjustment in the eventof stock dividends, stock splits, dilutive issuances and other similarevents.  The Warrants have a term of fiveyears, are to be fully exercisable from the date of issuance, and may beexercised on a cashless basis under specified conditions.

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###### **Item9.                    CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON                                 ACCOUNTINGAND FINANCIAL DISCLOSURE**

Not applicable.

###### **Item9A. CONTROLS AND PROCEDURES**

**a)****             ***Evaluationof Disclosure Controls and Procedures. *As of the end of the periodcovered by this report, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s****managementincluding****the Company’s President and****ChiefExecutive Officer and Chief Financial Officer of the effectiveness of thedesign and operation of the company’s disclosure controls and procedures, asdefined in Exchange Acts Rules 13a-15(e) and 15d-15(e). Based upon thatevaluation the Company’s President and****Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures are effectivein enabling the Company to record, process, summarize, and report informationrequired to be included in the Company’s periodic SEC filings within therequired time period.

**b)***             **Changes**inInternal Controls over Financial Reporting.*There were no changes inthe Company’s internal controls over financial reporting (as defined in Rule13a-15(f) under the Exchange Act) during the fourth quarter of fiscal year 2006that has materially affected, or would be reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

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

                    Notapplicable.

**PART III**

###### **Item10. DIRECTORS AND OFFICERS OF THEREGISTRANT**

The Response tothis item is incorporated by reference from the discussion responsive theretounder the captions “Management” and “Section 16(a) Beneficial OwnershipReporting Compliance” in the Company’s Proxy Statement for the 2007 AnnualMeeting of Stockholders.

**Item 11. EXECUTIVE COMPENSATION**

The response tothis item is incorporated by reference from the discussion responsive theretounder the caption “Executive Compensation” in the Company’s Proxy Statement forthe 2007****Annual Meeting of Stockholders.

**Item 12.****    SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

The response tothis item is incorporated by reference from the discussion responsive theretounder the caption “Share Ownership” in the Company’s Proxy Statement for the2007 Annual Meeting of Stockholders.

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

The response tothis item is incorporated by reference from the discussion responsive theretounder the captions “Certain Transactions” and “ExecutiveCompensation—Employment Contracts and Change of Control Arrangements” in theCompany’s Proxy Statement for the 2007 Annual Meeting of Stockholders.

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

The response tothis item is incorporated by reference from the discussion responsive theretounder the caption “Independent Registered Public Accountants” “Audit and NonAudit Fees” in the Company’s Proxy Statement for the 2007 Annual Meeting ofStockholders.

 

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

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

**(1) and(2)**              See “Indexto Financial Statements and Financial Statement Schedule” at Item 8 to this****Annual Report on Form 10-K. Other financial statement schedules have not been included because theyare not applicable or the information is included in the financial statementsor notes thereto.

**(3)**           Exhibits

Thefollowing is a list of exhibits filed as part of this Annual Report on Form 10-K.
| Exhibit    | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                |
|------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                           |
| 1          |       | —     |       | Underwriting Agreement dated October 16, 2003,  between the Registrant and CDC Securities (Filed as Exhibit 1.1 to the  Company’s Current Report on Form 8-K filed on October 17, 2003 and  incorporated herein by reference)                              |
| 3.1        |       | —     |       | Restated Articles of Organization of Registrant  (Filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q  for the Quarter Ended September 30, 2000 and incorporated herein by  reference)                                                     |
| 3.1.1      |       | —     |       | Articles of Amendment to the Restated Articles of  Organization of the Registrant (Filed as Exhibit 3.1.1 to the Company’s  Quarterly Report on Form 10-Q for the Quarter Ended September 30,  2000 and incorporated herein by reference)                  |
| 3.1.2      |       | —     |       | Articles of Amendment to the Restated Articles of  Organization of the Registrant (Filed as Exhibit 3.1.2 to the Company’s  Quarterly Report on Form 10-Q for the Quarter Ended September 30,  2000 and incorporated herein by reference)                  |
| 3.2        |       | —     |       | Restated Bylaws of Registrant (Filed as Exhibit 3.1  to the Company’s Quarterly Report on Form 10Q for the Quarter Ended  September 30, 2004 and incorporated herein by reference)                                                                    |
| 4.1        |       | —     |       | Article 4 of Restated Articles of Organization  (Filed as Exhibit 4.1*)                                                                                                                                                                                              |
| 4.2        |       | —     |       | Form of Common Stock Certificate (Filed as Exhibit 4.2*)                                                                                                                                                                                                             |
| 4.3        |       | —     |       | Purchase Agreement dated February 16, 2007  between the Registrant and various Investors (filed as Exhibit 4.1 to  our Current Report on Form 8-K filed on February 21, 2007 and  incorporated herein by reference)                                        |
| 4.4        |       | —     |       | Registration Rights Agreement dated February 16,  2007 between the Registrant. and various Investors (filed as Exhibit 4.2  to our Current Report on Form 8-K filed on February 21, 2007 and  incorporated herein by reference).                      |
| **4.5      |       | —     |       | Form of Warrant to Purchase Shares of Common Stock.                                                                                                                                                                                                                       |
| **4.6      |       | —     |       | Placement Agent Form of Warrant to Purchase Shares  of Common Stock.                                                                                                                                                                                                      |
|       |       |       |       | Hilton Glavish, and Zimec, Inc. (Filed as Exhibit 10.2*)                                                                                                                                                                                                             |
| 10.1       |       | —     |       | Master Agreement, dated as of August 7, 1992,  among the Registrant, Dr. Hilton                                                                                                                                                                                 |
|       |       |       |       | Glavish, and Zimec, Inc. (Filed as Exhibit 10.1*)                                                                                                                                                                                                                    |
| 10.2       |       | —     |       | Sublicense Agreement, dated December 21, 1993,  among the Registrant, Dr.                                                                                                                                                                                            |
|       |       |       |       | Hilton Glavish, and Zimec, Inc. (Filed as Exhibit 10.2*)                                                                                                                                                                                                             |
| @10.3      |       | —     |       | Business Development Agreement, dated as of July 15,  1994, between the                                                                                                                                                                                              |
|       |       |       |       | Registrant and Mitsubishi Materials Corporation  (Filed as Exhibit 10.3*)                                                                                                                                                                                            |
| 10.4       |       | —     |       | Lease Agreement, dated December 22, 1987, as  amended, between the Registrant                                                                                                                                                                                        |
|       |       |       |       | and Thomas J. Flatley d/b/a The Flatley Company  (“Flatley”) (Filed as Exhibit 10.4*)                                                                                                                                                                      |
| 10.4A      |       | —     |       | Fifth Amendment to Lease Agreement, dated February 4,  1997 between the Registrant and Flatley (Filed as Exhibit 10.4 to the  Registrant’s Quarterly Report on Form 10-Q for the Quarter ended March 31,  1997 and Incorporated herein by reference). |
| 10.5       |       | —     |       | Form of Noncompetition, Nondisclosure and Assignment  of Inventions Agreement                                                                                                                                                                                             |
|       |       |       |       | between the Registrant and each current employee of  the Registrant (Filed as Exhibit 10.11*)                                                                                                                                                                        |
| †10.6 |       | —     |       | Ibis Technology Corporation 1993 Employee, Director  and Consultant Stock                                                                                                                                                                                                 |
|       |       |       |       | Option Plan as amended (Filed as Exhibit 10.15  to the Company’s Quarterly Report on Form 10-Q for the Quarter  Ended June 30, 1996 and Incorporated herein by reference)                                                                             |
| †10.7 |       | —     |       | Form of Stock Option Agreement under 1993 Employee,  Director and Consultant                                                                                                                                                                                              |
|       |       |       |       | Stock Option Plan (Filed as Exhibit 10.16*)                                                                                                                                                                                                                          |
| 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.0-3078) 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 May 31, 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)                                                                                           |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                  |

 

67

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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)                                                                                                                                       |
| †10.26 |       | —     |       | Amended and restated Ibis Technology Corporation  1997 Employee, Directors and Consultant Stock Option Plan (Filed as Exhibit 99.1  to the Company’s Form S-8 (file No. 333-45247) filed on  January 30, 1998, as amended May 18, 2001, June 17, 2004 and  May 26, 2006 and incorporated herin by reference).                                                              |
| 10.27       |       | —     |       | Ninth Amendment to Lease dated April 3, 2006  between the Company and Cherry Hill Corporation Center LLC amending Lease  Agreement dated December 22, 1987 between the company and Thomas J.  Fatly d/b/a the Flatly Company (Filed as Exhibit 10.42 to the Company’s  Quarterly Report as Form 10-Q for the Quarter Ended September 30,  1998 and incorporated herin by reference.) |
| †10.28 |       | —     |       | Amendment to Employment Agreement dated November 12,  2003 between the Registrant and Martin J. Reid, (Filed as Exhibit 10.1  to the Company’s Current Report on Form 8-K filed  on August 17, 2006 and incorporated herein by reference)                                                                                                                                            |
| 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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*                    Previouslyfiled with the Commission as Exhibits to, and incorporated herein by referencefrom, the Company’s Registration Statement filed on Form S-1, File No.333-1174, effective April 2, 1996.

**             Filed herewith.

@               Confidentialtreatment previously obtained from the Securities and Exchange Commission. Theportions of the document for which confidential treatment has been granted aremarked “Confidential” and such confidential portions have been filed separatelywith the Securities and Exchange Commission.

†                     Managementcontract or compensatory plan, contract or arrangement.

Where a documentis incorporated by reference from a previous filing, the Exhibit number of thedocument in that previous filing is indicated in parentheses after thedescription of such document.

(B) *Financial Statement Schedules*

Schedule II — Valuationand Qualifying Accounts

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###### **SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, in Danvers,Massachusetts on March 29, 2007.
|        | **IBIS TECHNOLOGY CORPORATION** |
|--------|---------------------------------|
|   | By:                             | /s/ Charles M. McKenna,  Ph.D. |
|   |                            | Charles M. McKenna, Ph. D. |
|   |                            | President |

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the registrant and in thecapacities indicated and on the dates indicated.
|        | **Signatures**                      | ** ** | **Title**                              | ** ** | **Date**       |
|--------|-------------------------------------|------------|----------------------------------------|------------|----------------|
| By:    | /s/***Charles  M. McKenna, Ph.D.*** |       | President and Chief  Executive Officer |       | March 26, 2007 |
|   | Charles M. McKenna, Ph.D            |       |                                   |       |           |
| By:    | /s/***William J. Schmidt***         |       | Chief Financial  Officer,              |       | March 26, 2007 |
|   | William J. Schmidt                  |       | Treasurer, Clerk, (principal financial |       |           |
|   |                                |       | and accounting officer)                |       |           |
| By:    | /s/***Martin J. Reid***             |       | Chairman and Director                  |       | March 26, 2007 |
|   | Martin J. Reid                      |       |                                   |       |           |
| By:    | /s/***Dimitri A. Antoniadis***      |       | Director                               |       | March 26, 2007 |
|   | Dimitri A. Antoniadis, Ph.D.        |       |                                   |       |           |
| By:    | /s/***Robert L. Gable***            |       | Director                               |       | March 26, 2007 |
|   | Robert L. Gable                     |       |                                   |       |           |
| By:    | /s/ ***Leslie B. Lewis***      |       | Director                               |       | March 26, 2007 |
|   | Leslie B. Lewis                     |       |                                   |       |           |
| By:    | /s/ ***Donald McGuinnes***     |       | Director                               |       | March 26, 2007 |
|   | Donald McGuinness                   |       |                                   |       |           |
| By:    | /s/ ***Lamberto Raffaelli***   |       | Director                               |       | March 26, 2007 |
|   | Lamberto Raffaelli                  |       |                                   |       |           |
| By:    | /s/ ***Cosmo S. Trapani***     |       | Director                               |       | March 26, 2007 |
|   | Cosmo S. Trapani                    |       |                                   |       |           |

** **

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**SCHEDULEII**

**IBIS TECHNOLOGY CORPORATION**

**VALUATIONAND QUALIFYING ACCOUNTS**

**For theYears Ended December 31, 2004, 2005 and 2006**
| ** **                          | ** ** | **Balance at**   | ** ** | ** **           | ** ** | ** **  | ** ** | ** **           | ** ** | **Balance at** | ** ** |
|-------------------------------------|------------|-----------------------|------------|----------------------|------------|-------------|------------|----------------------|------------|---------------------|------------|
| ** **                          | ** ** | **Beginning of** | ** ** | ** **           | ** ** | ** **  | ** ** | **Amounts**          | ** ** | **End of**     | ** ** |
| **Description**                     | ** ** | **Period**            | ** ** | **Reclass (1)** | ** ** | **Expense** | ** ** | **Written Off** | ** ** | **Period**          | ** ** |
| Allowance for Doubtful  Accounts    |       |                  |       |                 |       |        |       |                 |       |                |       |
| December 31, 2004                   |       | 65,000                |       | —               |       | (37,470     | )          | (2,530               | )          | 25,000              |       |
| December 31, 2005                   |       | 25,000                |       | —               |       | —      |       | —               |       | 25,000              |       |
| December 31, 2006                   |       | 25,000                |       | —               |       | (25,000     | )          | —               |       | —              |       |
| Reserve for Inventory  Obsolescence |       |                  |       |                 |       |        |       |                 |       |                |       |
| 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           |       |
| December 31, 2006                   |       | 3,672,000             |       | —               |       | —      |       | (225,000             | )          | 3,447,000           |       |

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(1)             AtDecember 31, 2003 equipment inventory and the related reserves were included inconstruction in progress within property and equipment. The balances werereclassified to inventory in the second quarter of fiscal 2004 in connectionwith the discontinuance of the wafer manufacturing business.

(2)             Includesinventory written off of $1.2 million and inventory reserves included indiscontinued operations of $1.3 million.

 

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