IBIS TECHNOLOGY CORP - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2001

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _____________ to

Commission file number: 0-23150

IBIS TECHNOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MASSACHUSETTS 04-2987600
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)

32 CHERRY HILL DRIVE, DANVERS, MA 01923
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code: (978) 777-4247

Securities registered pursuant to Section 12(b) of 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 whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) on March 8, 2002 was
$89,360,656 based on the last sale price as reported by the Nasdaq National
Market System.

As of March 8, 2002, the registrant had 8,412,541 shares of common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in Part
III of this Annual Report on Form 10-K is incorporated from the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 9,
2002.

PART I

ITEM 1. BUSINESS

INTRODUCTION

Ibis Technology Corporation ("Ibis") develops, manufactures and markets
SIMOX-SOI implantation equipment and wafers for the worldwide semiconductor
industry. SIMOX, which stands for Separation by IMplantation of OXygen, is a
form of silicon-on-insulator, or SOI, technology that creates an insulating
barrier below the top surface of a silicon wafer. Our proprietary oxygen
implanters produce SIMOX-SOI wafers by implanting oxygen atoms just below the
surface of a silicon wafer to create a very thin layer of silicon dioxide
between the thin operating region of the transistor at the surface and the
underlying silicon wafer itself. The buried layer of silicon dioxide acts as an
insulator for the devices fabricated on the surface of the silicon wafer and
reduces the electrical current leakage which otherwise slows integrated circuit
performance and increases the loss of power during circuit operation. Through
this process our customers can produce integrated circuits which we believe
offer significant advantages over circuits constructed on conventional silicon
wafers. These advantages include:

- substantially improved speed for microprocessors and other logic
integrated circuits,

- reduced power consumption,

- reduced soft error rate, and

- higher temperature operation.

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

- servers and workstations,

- portable and desktop computers,

- wireless communications and battery powered devices such as laptop
computers, personal digital assistants and mobile phones,

- integrated optical components, and

- harsh environment electronics.

When we began operations in 1988, much of our revenue was derived from
research and development contracts and sales of wafers for military
applications. Over the years, there was a shift in revenue to sales of SIMOX-SOI
wafers for commercial applications and the nature of our business has evolved
through stages where sometimes our revenues primarily resulted from selling
wafers for evaluation purposes, and sometimes our revenue was generated
primarily from equipment sales. This is a normal path to follow while developing
and promoting a fundamental new technology, especially when it relates to the
semiconductor industry embracing any change that affects fabrication operations.
We believe that we are in the technology rollout stage of our corporate life
cycle. Our fundamental SIMOX-SOI technology has been developed, refined, and
proven over the last dozen years. Ibis is at a point of introducing the next
generation production-worthy SIMOX-SOI, which includes both the recently
licensed modified low dose ("MLD") wafer process and the i2000(TM), an oxygen
implanter, which is capable of producing eight and twelve inch (or 200 and 300
mm) SIMOX-SOI wafers. We plan to market this implanter as the i2000. In 1999, we
commenced a program to design and develop the i2000 and in January 2002, we
successfully performed the first implants using this tool. The final steps in
the development of the i2000 are expected to be completed during the first half
of 2002.

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Ibis has sold SIMOX-SOI wafers to most of the world's leading commercial
semiconductor manufacturers and foundries, including Advanced Micro Devices,
Fujitsu, Hewlett Packard, Honeywell, IBM, Intel, Mitsubishi Electric, Motorola,
National Semiconductor, NEC, Philips, Samsung, Sharp, Texas Instruments,
Toshiba, TSMC and UMC. In addition to semiconductor manufacturers, we also sell
SIMOX-SOI wafers to several optical components manufacturers, including Bookham
Technology, Lightcross, Lucent, NTT and OKI Electric. We have also sold Ibis
1000 oxygen implanters to IBM, Sumitomo Mitsubishi Silicon Corporation ("SUMCO")
and Shanghai Institute of Metallurgy ("SIM"), which is part of the Chinese
Academy of Sciences.

Ibis believes that strategic alliances will play an important role in
developing a worldwide commercial market for our SIMOX-SOI wafers. We currently
have material alliances or agreements with IBM, MEMC Electronic Materials, Inc.
("MEMC") and SUMCO.

We were incorporated in Massachusetts in October 1987 and commenced
operations in January 1988. Our executive offices are located at 32 Cherry Hill
Drive, Danvers, Massachusetts 01923 and our telephone number is (978) 777-4247.

OUR STRATEGY

Ibis is seeking to become the world leader in SOI technology with the
quality, cost and size required for mainstream commercial applications. Our
objective is to make our SIMOX-SOI wafers the preferred advanced materials
substrate for mainstream commercial applications. We believe that the SIMOX-SOI
industry will eventually evolve from today's situation where we are mainly
providing SIMOX-SOI wafers, to a position where we are focused on providing
oxygen implantation systems to the wafer manufacturers who will produce most of
the SIMOX-SOI wafers needed by the chip making industry. We also plan on
continuing process development and being a source for SIMOX-SOI wafers. Key
elements of our strategy for achieving this objective include:

- CAPITALIZING ON A FUNDAMENTAL TREND IN SEMICONDUCTOR MANUFACTURING.
Semiconductor manufacturers face an increasing demand for faster
integrated circuit speed, reduced power consumption, immunity to
soft errors and smaller chip size. In addition, as indicated in
recent industry announcements and as outlined in the Semiconductor
Industry Association roadmap, the industry is migrating towards much
thinner, more uniform silicon layers. By definition, an SOI wafer is
composed of a layer of silicon on top of a layer of oxide.
Ultra-thin SOI wafers have been demonstrated to provide superior
results especially in terms of increased power efficiency and heat
reduction in the manufacture of fully depleted substrate transistors
for next generation semiconductor devices. We believe SIMOX-SOI
technology is a leading alternative to address the need for
increased power efficiency and heat reduction. The trend towards
thinner layers is an advantage for Ibis because with our SIMOX
process, thinner layers require less time to implant which nets
higher output, lower costs and improved quality. We plan to focus on
our major key customers in the semiconductor industry who we expect
to lead the way in the adoption of SIMOX-SOI technology. We plan to
continue to focus a majority of our technical and marketing
resources on these key customers and to continue our joint
development activities with all of our customers and strategic
partners.

- PURSUING STRATEGIC MARKETING, MANUFACTURING, DISTRIBUTION AND
DEVELOPMENT ALLIANCES. We intend to continue to pursue relationships
through which third parties will distribute some of our products
and/or assist us in research and development activities. As evidence
of this strategy, we have entered into strategic alliances and/or
joint development agreements with MEMC and SUMCO, two of the largest
silicon wafer manufacturers in the world. In addition, we are
pursuing the possibility of forming strategic partnerships with
semiconductor capital equipment manufacturers, additional silicon
wafer manufacturers and suppliers of components for our machines. We
also intend to pursue partnerships or joint development arrangements
which could give us the right to complementary technology and/or
products.

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- ENHANCING AND EXTENDING CURRENT PRODUCT OFFERINGS. We intend to use
our resources and our strategic partners' technical expertise to
improve existing products, expand our core product functionality,
add products to our existing product line and further advance our
process technology. In 2001, we introduced Advantox-Registered
Trademark- MLD wafers which are produced using a process licensed
from IBM and in February 2002, we entered into a Technical
Cooperation Agreement with MEMC aimed at developing advanced
SIMOX-SOI wafers for semiconductor manufacturers worldwide. In
addition, we recently introduced our next generation oxygen
implanter, the i2000, which includes 200 and 300 mm wafer size
capability and enhancements to increase throughput and reduce
production costs. We plan to continue to improve existing, and
develop additional, SIMOX-Advantox products.

- INCREASING OUR SIMOX-SOI WAFER AND IMPLANTATION EQUIPMENT
MANUFACTURING CAPACITY. In 2001, we more than doubled our SIMOX
wafer production capacity by adding four Ibis 1000 implanters and
put in place the balance-of-process equipment set for 300 mm SIMOX
wafer manufacturing. We intend to use the i2000 for 300 mm implants
in the second half of 2002 and plan to build at least one additional
i2000 implanter in 2002.

MARKETING, SALES AND CUSTOMERS

Over the last several years, Ibis has focused on integrating
SIMOX-SOI wafers into commercial applications, which have substantially higher
volume potential than military applications, our initial target market. In 2000
and 2001, substantially all of our sales of SIMOX-SOI wafers were for commercial
applications and a small number of our customers used our SIMOX-SOI wafers in
commercial products. Many more of our customers are sampling SIMOX-SOI wafers or
are developing prototype products.

Commercial shipments of our wafers have been used principally for
evaluation purposes or pilot production in products, including microprocessors,
gate arrays, ASICs (application specific integrated circuits), memories (DRAMs,
SRAMs, etc.), and cellular and mobile radio components. From our customers'
perspective, the pathway to SOI adoption is complex and time consuming.
Typically, a customer will go through three major stages:

- Sampling, where preliminary performance characteristics are explored
and verified;
- R&D, where specific customer specifications are tested and
developed; and
- Production, where yield and cost benefits are optimized.

Each of these stages has many steps, and customers must evaluate
each new wafer technology that essentially lays a new foundation for
substantially all other processes they have spent billions of dollars and
decades of time developing. Accordingly, it takes anywhere from 12 to 36 months
for a customer to proceed from initial sampling through R&D to initial
production, which is not unlike the standard process for qualifying any new
wafer material. These steps apply each time there is a change in the customer's
fabrication process, such as a feature-size change or new material. Ibis has a
number of customers going through this process right now.

In February 2001, Ibis entered into an alliance with MEMC, pursuant
to which MEMC became a global sales representative for Ibis' SIMOX-SOI wafers.
We believe this alliance will allow us to capitalize on MEMC's demonstrated
global expertise in the silicon industry. MEMC has a worldwide presence of
approximately 100 sales and applications personnel located in sales offices
around the world. In addition, MEMC operates manufacturing facilities directly,
or through joint ventures, in Italy, Japan, Malaysia, South Korea, Taiwan and
the United States. We believe that MEMC's proven technology leadership and 300
mm capability will build upon the foundation established by us to promote the
acceptance of our SIMOX products and the future adoption of 300 mm SIMOX.

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Our internal sales personnel generally focus on our largest customers,
optical components and MicroElectroMechanical Systems ("MEMS") manufacturers, as
well as supporting our strategic partners. Our objective in these broad-based
sales efforts is to promote the adoption of SIMOX-SOI technology on an
industry-wide basis.

Overseas, we rely on our strategic partners, MEMC and Sumitomo
Mitsubishi Silicon, to market and sell our wafer products. We also have a SIMOX
implanter sales representation agreement with IRAM Systems Co., Ltd, a Korean
corporation, to solicit orders for our Ibis 1000 implanters from customers
located in China.

The following table sets forth, in thousands of dollars, the amount of
revenue derived from our significant customers during the fiscal years ended
December 31, 1999, 2000 and 2001, as well as the percent of our revenue
represented by these customers' purchases:

The sales to IBM in 1999 and 2000 resulted primarily from the sale of a
total of three units of Ibis 1000 oxygen implanter equipment at a sale price of
approximately $4,000,000 each. There were no implanter sales in 2001.

The growth of MEMS and optical device marketplaces has created new
market opportunities for manufacturers of SIMOX-SOI wafers. Companies such as
Bookham, Lightcross, Opticnet and NTT are developing devices in silicon such as
optical switches, multiplexers and attenuators. We believe the tight silicon
uniformity that SIMOX provides makes it well suited for these types of
applications.

Customers of Ibis that purchase wafers for military applications are
reliant in part on government funding, primarily from the Department of Defense.
During the fiscal years 1999, 2000 and 2001, approximately 4%, 5%, and 8%,
respectively, of our product sales were generated by product sales to such
customers.

Sales to overseas customers in 1999, 2000 and 2001 were 18%, 48% and 52%
of total revenue, respectively. In 1999, sales to Japan were 10% of total
revenue, all of which was attributable to SUMCO. In 2000, sales to the United
Kingdom were 39% of total revenue, most of which was attributable to Bookham
Technology. In 2001, sales to the United Kingdom were 28% of total revenue, most
of which was attributable to Bookham Technology.

STRATEGIC ALLIANCES

Ibis has entered into a number of strategic alliances which we believe
enable us to better address our target market, to advance our technology more
effectively, and to match our technical developments and production expansion to
the needs of our key customers.

In July 1994, Ibis entered into a business development agreement with
SUMCO under which SUMCO markets and sells Ibis manufactured SIMOX-SOI wafers in
Japan and the Pacific Rim. We have also collaborated with SUMCO on joint
research and development focused on optimizing SIMOX-SOI process technology for
high-volume commercial applications. In 1998, SUMCO purchased an Ibis 1000
oxygen implanter in order to establish a Japanese-based manufacturing facility
of Ibis' SIMOX-SOI wafers. This implanter had been operating at our Danvers
facility, but was installed in SUMCO's wafer manufacturing facility in Chiba,
Japan in July 2001. In July 1999, we completed an agreement to license our
standard and Advantox SIMOX-SOI wafer fabrication process to SUMCO. Under this
agreement we received an initial royalty fee and are entitled to future
royalties based on a percentage of SUMCO's SIMOX-SOI wafer sales.

4

In December 2000, Ibis licensed from IBM the right to manufacture and
sell SIMOX-SOI wafers, using IBM's proprietary SIMOX process, to IBM and to all
our other customers. Under the royalty-bearing license agreement, we use IBM's
process to produce SIMOX-SOI wafers which we market as Advantox MLD. We have
been working with IBM and other customers for many years to improve the quality
and manufacturing standards of SIMOX wafers. This relationship gives us an
opportunity to combine our foremost SOI material with the leading
production-proven process of record in the industry and make it available to all
our customers. A complementary product to our existing Advantox product line,
Advantox MLD wafers are being broadly marketed to integrated circuit
manufacturers looking to accelerate their SOI adoption process.

In February 2001, Ibis entered into an alliance with MEMC, pursuant to
which MEMC became a global sales representative for our entire SIMOX-SOI wafer
product line, including Advantox MLD, and the primary supplier to us of silicon
substrate material. In February 2002, Ibis and MEMC expanded this alliance by
entering into a Technical Cooperation Agreement aimed at developing advanced
SIMOX-SOI wafers for semiconductor manufacturers worldwide. The priorities of
the alliance include boosting device performance and fab yield through defect
density improvement in the device layer using optimized wafers such as MEMC's
OPTIA(TM) product, and accelerating the industry's adoption of Ibis' SIMOX-SOI
products. The alliance also grants MEMC the right to license our SIMOX-SOI wafer
technology and to purchase oxygen implanters manufactured by us. Such rights are
designed to provide MEMC with the option to produce and sell SIMOX-SOI wafers at
some point in the future.

RESEARCH AND DEVELOPMENT

Ibis has active research and development programs in both equipment and
wafer process technology. For the past two years a primary focus has been
developing capacity to produce 300 mm SIMOX wafers. This has required the
development of a new implant tool, the i2000, and the procurement and
qualification of annealing, cleaning, and metrology tools for balance of process
at 300 mm. Both the i2000 and the balance of process have targeted the
production of 300 mm SIMOX wafers in early 2002, a goal which we met in the
first quarter of 2002.

In 1999, Ibis launched a program to design and develop the
next-generation oxygen implanter, the i2000. The proprietary i2000 was designed
to support the volume production of high quality SIMOX-SOI 200 and 300 mm wafers
for the global semiconductor industry. In January 2002, the i2000 successfully
performed first implants. The final steps in the development of the i2000,
process qualification for Advantox and MLD SIMOX processes, are expected to be
completed during the first half of 2002. The i2000 duplicates the process
environment of the Ibis 1000 to minimize process risks; however, it incorporates
a number of features to improve throughput and reduce costs. These include
increased beam current, faster wafer handling, off-hub wafer cooling, and
modular construction, which we believe will enable improved serviceability and
diagnostics, while simplifying the assembly and shipping of the machine. The
simpler beam line design of the i2000 will also offer extensive capabilities,
facilitating the manufacture of the Advantox product portfolio. Taken together,
these features increase productivity of the i2000 over the Ibis 1000 by greater
than a factor of two. Finally, the i2000 is far more fab friendly than the Ibis
1000. It is designed to be bulkhead mounted in the clean room, offers
front-opening unified pod (FOUP) capability and meets all SEMI safety and
ergonomic guidelines. We also believe that the i2000's improved automation and
operator-friendly controls will improve product yield and afford ease-of-use.

In early 2000, Ibis undertook an ion source development program with the
U.S. Department of Energy's Lawrence Berkeley National Laboratory. Under the
terms of the agreement, Dr. Ka-Ngo Leung and his staff developed an ion source
suitable for the i2000 SIMOX-SOI implanter. The ion source uses the RF inductive
coupling technology developed in Dr. Leung's laboratory for high current
injection of H+ ions into tokamak reactors for fusion research. We intend to
work with Dr. Leung to enhance the ion source in 2002 with the goal of
developing an ion source with increased beam current and a reduction of debris
caused by a molecular ion, thus increasing intervals between preventative
maintenance on the beamline.

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Wafer technology R&D has concentrated on enhancing the range of
potential commercial applications for Ibis' SIMOX-SOI wafers by:

- Refining techniques to produce SIMOX-SOI wafers of higher quality;
- Developing new processes to produce SIMOX-SOI wafers with thinner
top silicon and buried oxide layers at lower cost, to a large extent
expanding and improving the MLD process; and
- Responding to specific customer requirements and emerging industry
trends, such as the development of our Advantox MLD-UT (ultra thin)
product line to address requirements for fully depleted devices.
Ultra-thin SOI wafers have been demonstrated to provide superior
results especially in terms of increased power efficiency and heat
reduction in the manufacture of fully depleted substrate transistors
for next generation semiconductor devices. We are also developing
high resistivity SIMOX-SOI wafers for mixed signal and RF
applications.

During the fiscal years ended December 31, 1999, 2000 and 2001, Ibis'
internally funded research and development expenses were approximately
$1,774,000, $4,586,000 and $5,119,000, or 11%, 32% and 69% of our revenues,
respectively.

Government sponsored research and development activities also comprise a
part of our research and development effort. SIMOX-SOI technology is important
to various government agencies in large part due to its utility in constructing
high performance, radiation-tolerant and high temperature defense and
space-based systems. As a result of this government sponsored research and
development, radiation-tolerant integrated circuits on Ibis-produced SIMOX-SOI
wafers are now in production for commercial, military and space applications at
Honeywell. During the fiscal years ended 1999, 2000 and 2001, revenues from
government sponsored research and development contracts were approximately
$374,000, $372,000 and $212,000, or 2%, 3% and 3% of our revenues, respectively.
Research and development expenses attributable to research contracts are
expensed as incurred and included in the cost of contract revenue.

Government-sponsored research and development has focused on improving
SIMOX-SOI manufacturing and characterization methods and developing new
processes to ensure the availability of high quality SIMOX-SOI wafers which meet
the requirements for commercial and military applications. The Small Business
Innovative Research, or SBIR, program, which is the largest source of direct
government support to us, has funded development of advanced methods of
SIMOX-SOI processing, resulting in improved fabrication and characterization of
SIMOX-SOI materials, and the SBIR has been supportive in developing a
fundamental understanding of new processes which has been useful in new product
development. We have received SBIR contracts from ARPA, the Ballistic Missile
Defense Organization, the Defense Special Weapons Agency, U.S. Army, the U.S.
Air Force, the Department of Energy, National Science Foundation, National
Aeronautical and Space Administration and the Strategic Defense Initiative
Organization. Similarly, we expect our cooperative research efforts with
entities including the Naval Research Laboratory, the Microelectronics Research
Laboratory, the National Institute of Standards, the Massachusetts Institute of
Technology, University of Florida, University of Arizona and Arizona State
University to yield benefits to our ongoing commercialization activities.

Contracts with government agencies require compliance with applicable
government regulations and are generally subject to competitive bidding,
extensive regulation and cancellation at the government's sole discretion.
Pursuant to the terms of such government contracts, we will be required to grant
to the U.S. government a royalty-free nonexclusive worldwide license to any
inventions claimed by us which were funded by the U.S. government. Additionally,
these agreements are subject to negotiated overhead rates, and work performed
under government contracts is subject to audit and retroactive adjustments of
amounts paid to us.

COMPETITION

We believe we face three general sources of competition: (1) direct
SIMOX-SOI competition, (2) competing SOI technologies, and (3) competing non-SOI
technologies. Among direct SIMOX-SOI competitors, we believe we are presently
the only U.S. manufacturer of SIMOX-SOI wafers. SUMCO is manufacturing SIMOX
wafers in Japan on Ibis 1000 implanters. Wacker Siltronic's recently formed
joint venture with Nippon Steel Corporation, Wacker Nippon Steel Corporation
("WNC"), has decided to enter

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production of 200 mm SIMOX technology to meet rising demand from its global
customer base. WNC is also continuing development of 300 mm SIMOX manufacturing
technology from Nippon Steel Corporation. Komatsu is also marketing SIMOX-SOI
material. We believe that, at this stage of the market's development, the
availability of alternate sources of SIMOX-SOI wafers will help address customer
concerns about the lack of available alternate sources of supply. In addition,
we believe these companies could be potential equipment customers of ours.

The first generation oxygen implanter, the NV-200, was produced by Eaton
Corporation (now known as Axcelis), which built a total of six implanters. Of
these six implanters, we owned two which were removed from production in 1997.
We do believe that the remaining machines are being used for research, if at
all, as opposed to commercial production of SIMOX wafers. In 1995, Hitachi began
marketing an oxygen implanter and has also developed an oxygen implanter capable
of producing 300 mm wafers. We are not aware of plans by any of the major ion
implant manufacturers to design and develop oxygen ion implanters, but they may
develop plans in the future. It is our belief that it would take at least two
years to develop such an implanter.

The second source of competition for us is the development of
alternative SOI materials. The approach that competes with SIMOX is thin-film
bonded SOI wafers. SOITEC, a French-based company that spun off from LETI, a
French government research lab, uses a bonded method. SOITEC has, to date,
been our major wafer product competitor and has sold larger volumes of SOI
wafers than us. The thin-film bonded approach uses two silicon wafers, one or
both having a thermally-grown oxide layer, which are first bonded together to
form the silicon/silicon dioxide/silicon structure. A majority of one of the
wafers is removed or separated from the double-wafer structure, and the
remaining portion serves as the device layer of the SOI wafer. The most
popular method is to transfer the thin layer using wafer splitting
techniques, allowing the rest of the wafer to be reclaimed and reused.
Regions of stress are first created using implantation and/or epitaxial
growth. The wafer is split along the stress interface by the application of
heat (SOITEC's Smartcut-Registered Trademark- process), a gas jet (Silicon
Genesis' process), or a water jet (Canon's ELTRAN-Registered Trademark-
process). Evidence to date suggests that both SIMOX and bonded wafers perform
equally well. Ibis believes, however, that the SIMOX process results in a
lower manufacturing cost. Ibis believes that, at this stage in the market's
development, multiple SOI suppliers will help accelerate the adoption of SOI
technology.

The third source of competition is derived from alternative non-SOI
technologies designed to obtain benefits similar to those of SOI, including
improvements to existing technologies. Significant resources are continually
expended to improve epitaxial and conventional silicon wafers. The semiconductor
industry has demonstrated its resourcefulness in improving these materials
through creative circuit design and manufacturing techniques, thereby extending
the useful life of conventional substrates, and we cannot be sure that it will
not continue to do so. The relatively lower cost of these substrates provides an
incentive to the semiconductor industry to continuously improve existing
material without moving to new, more advanced substrates. In addition, complex
variations of more conventional approaches, such as elaborate circuit structures
built on conventional silicon substrates, and compound materials
(silicon-germanium, gallium-arsenide, indium phosphide, etc.), are other
alternative substrate choices.

BACKLOG

Ibis' backlog consists of written orders for SIMOX-SOI wafers expected
to be delivered during 2002, equipment revenue expected to be recognized during
2002 and other contracts expected to be performed during 2002. As of February
28, 2002, the backlog was $2,349,000 in wafer orders, $5,798,000 in equipment
related orders and $450,000 in other contracts. This is compared with a backlog
of approximately $1,017,000 in wafer orders, $353,000 in equipment orders and
$384,000 in other contracts at February 28, 2001. Approximately 1% of the wafer
backlog is for 100 mm (four-inch) wafers, less than 1% is for 150 mm (six-inch)
wafers, 41% is for 200 mm (eight-inch) wafers, and 58% is for 300 mm
(twelve-inch) wafers. As customers of Ibis move from development and pilot
production into volume production, we expect much of the increased demand to be
for 200 mm and 300 mm wafers. Approximately 95% of the wafer backlog is
comprised of orders from three customers of Ibis. All customer orders are
subject to modification or cancellation by the customers.

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Backlog can fluctuate greatly based upon, among other matters, the
timing of receipt of orders, especially equipment orders. Therefore, variations
in backlog may not represent a fair indication of future business trends.

PATENTS AND PROPRIETARY RIGHTS

Ibis has an exclusive worldwide sublicense to the proprietary beam
scanning system developed and patented by a consultant to us during the
development of the Ibis 1000. Our beam scanning system sublicense agreement also
grants us certain rights to further sublicense the beam scanning system for
certain applications other than oxygen implantation. Pursuant to these rights,
we have entered into four non-exclusive sublicense agreements that permit the
respective sublicensees to manufacture, use and sell implantation machines
incorporating the beam scanning system so long as such machines are not designed
for the production of oxygen implanted wafers. Each sublicensee has paid us a
non-refundable option fee upon signing an agreement and an initial license fee
when it exercised its option to use the licensed technology. In addition, each
sublicensee will pay a royalty fee with respect to each implantation machine
manufactured, used or sold after its option fee and initial license fee has been
applied. License fees received by us from sublicenses are to be shared on a
substantially equal basis with the licensor of the beam scanning system. As of
December 31, 2001, Ibis had received approximately $1,352,000 in net license
fees, after deducting amounts paid to the licensor.

Ibis also obtained an exclusive license to technology that facilitates
the presentation of wafers to ion beams developed by Superion Limited, a United
Kingdom corporation. Through December 31, 2001, Ibis has paid $420,000 for
license fees for Ibis 1000 implantation machines that have been manufactured by
us. Under the terms of this agreement, Superion Limited has retained the right
to utilize the technology for uses not involving oxygen implantation of silicon
or other semiconductor materials. During 2001, this agreement was modified to
incorporate i2000 implantation machines. Ibis also entered into a Sublicense
Agreement during 2001which gives our customer a royalty-bearing, non-exclusive
license to utilize this technology for ion implantation machines, excluding
oxygen implanters.

During 1998, we entered into an equipment licensing and development
agreement which gives the customer the right to a royalty-bearing, non-exclusive
license to supplement our equipment manufacturing capacity. We have received no
royalties under this agreement.

During 1999, we completed an agreement to license its standard and
Advantox SIMOX-SOI wafer fabrication process to SUMCO. The agreement consisted
of an initial royalty fee. Future royalties shall be payable based on a
percentage of SUMCO's SIMOX-SOI wafer sales.

In 2000, we licensed from IBM the right to manufacture and sell
SIMOX-SOI wafers, using IBM's proprietary SIMOX process, to IBM and to all our
other customers. Under the royalty-bearing license agreement, we may use IBM's
process to produce SIMOX-SOI wafers which we market as Advantox MLD. A
complementary product to our existing Advantox product line, Advantox MLD wafers
are broadly marketed to integrated circuit manufacturers looking to accelerate
their SOI adoption process. Under the agreement we granted IBM rights to our
patents utilized in the modified low dose, or MLD process.

Although we own or have exclusive rights to several patents and several
pending applications, and we diligently monitor the research and development
process to identify inventions which warrant pursuing patent protection, we rely
largely upon trade secret protection to safeguard our proprietary technology.
All of our employees are currently required to execute confidentiality
agreements pursuant to which they agree to assign to us all patent rights and
technical or other information developed by the employees during their
employment with us, and agree not to disclose any trade secret or confidential
information without our prior written consent. Notwithstanding these
confidentiality agreements, we cannot be sure that other companies will not
acquire information which we consider to be proprietary. Moreover, we cannot be
sure that our patent rights will be enforceable or provide us with meaningful
protection from competitors or that patent applications will be allowed. Even if
a competitor's products were to infringe patents owned or licensed by us, it
would be very costly for us to enforce our rights in an enforcement action,
which would also divert funds and resources which

8

otherwise could be used in our operations. We cannot be sure that we would be
successful in enforcing such rights, that our products or processes do not
infringe the patent or intellectual property rights of a third party, or that if
we are not successful in a suit involving patents or other intellectual property
rights of a third party, that a license for such technology would be available,
if at all, on commercially reasonable terms.

Pursuant to the terms of our government contracts, Ibis will be required
to grant to the U.S. government a royalty-free non-exclusive worldwide license
to any inventions claimed by us which were funded by the U.S. government.

GOVERNMENT REGULATION

Ibis has entered into certain research and development contracts with
agencies of the United States government which require compliance with
applicable government regulations. These contracts are generally subject to
competitive bidding and extensive regulation and are generally subject to
cancellation at the U.S. government's sole discretion.

Ibis is subject to a variety of federal, state and local environmental
regulations related to the storage, treatment, discharge or disposal of
chemicals used in its operations and 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 fines being imposed on us, suspension of production or a cessation of
operations. Our future activities may result in our being subject to additional
regulations. Such regulations could require us to acquire significant equipment
or to incur other substantial expenses to comply with regulations. Any failure
by us to control the use of, or to restrict adequately the discharge of,
hazardous substances or to properly control other occupational hazards could
subject us to substantial financial liabilities.

Certain technologies associated with Ibis' implanters are subject to
export regulations administered by the U.S. Department of Commerce. Accordingly,
Ibis may be required to secure U.S. export licenses with respect to sales of
implanters or transfers of technologies to end users in certain foreign
countries. There can be no assurance that if necessary, Ibis will be able to
secure such licenses in a timely manner, or at all.

MANUFACTURING AND SUPPLIES

Ibis manufactures its oxygen implanters from standard components and
from components manufactured in-house or by other vendors according to our
design specifications. Most raw materials and components not produced by us are
available from more than one supplier. However, certain raw materials,
components and subassemblies are obtained from a limited group of suppliers.
Although we seek to reduce our dependence on these limited source suppliers and
we have not experienced significant production delays due to unavailability or
delay in procurement of component parts or raw materials to date, disruption or
termination of certain of these sources could occur and such disruptions could
have a material adverse effect on our business and results of operations.

We manufacture our SIMOX-SOI wafers using conventional silicon wafers
and a variety of chemicals and gases, all of which are available from multiple
sources. We order the chemicals and gases pursuant to blanket purchase orders
which generally may be modified or cancelled by us upon 60 days' prior notice to
the vendor. In February 2001, Ibis and MEMC, a leading global producer of
silicon wafers, entered into an alliance pursuant to which on April 1, 2001,
MEMC became our primary supplier of silicon substrate material. In periods of
increasing demand in the semiconductor industry for silicon wafers, we cannot be
sure that we will be able to purchase an adequate supply of such silicon wafers
for manufacture of our products at or near current prices, if at all. Any
shortages in the availability of silicon wafers or a significant increase in the
price of silicon wafers could have a material adverse effect on our business and
results of operations.

EMPLOYEES

As of December 31, 2001, we employed 99 persons on a full-time basis and
1 person on a permanent part-time basis. None of our employees are represented
by a labor union and we believe our relations with our employees are good.

9

RISK FACTORS

THE COMMERCIAL MARKET FOR SIMOX-SOI TECHNOLOGY IS STILL DEVELOPING AND
MAY NEVER FULLY DEVELOP.

The sources of our revenue have shifted from primarily research and
development contracts and sales of SIMOX-SOI wafers for military applications to
primarily sales of SIMOX-SOI wafers for commercial applications and sales and
support of oxygen implantation equipment. To date, most customers who have
purchased our SIMOX-SOI wafers in the commercial field have done so for the
purpose of characterizing and evaluating the wafers and developing prototypes.
We are aware of only four commercial manufacturers that are using SIMOX-SOI
wafers in low volume production for a limited number of products. The
performance advantages of SIMOX-SOI wafers may never be realized commercially
and a commercial market for SIMOX-SOI wafers may never fully develop. The
failure of major semiconductor manufacturers to adopt SIMOX-SOI technology would
adversely affect, and may prevent, the widespread adoption of this technology by
others.

WE RELY HEAVILY ON SALES TO CERTAIN SIGNIFICANT CUSTOMERS, WHICH MAY
VARY SIGNIFICANTLY FROM QUARTER TO QUARTER CAUSING OUR OPERATING RESULTS TO
FLUCTUATE.

We derive a large portion of our sales of both wafers and wafer
manufacturing equipment from certain significant customers. The following table
sets forth, in thousands of dollars, the amount of revenue derived from our
significant customers during the fiscal years ended December 31, 1999, 2000 and
2001, as well as the percent of our revenue represented by these customers'
purchases:

The sales to IBM in 1999 and 2000 resulted primarily from the sale of a
total of three Ibis 1000 oxygen implanters at a sale price of approximately
$4,000,000 each. Ibis expects that we will continue to rely on a relatively
small number of customers as sources of revenue in the foreseeable future. The
loss of one or more of these major customers and our failure to obtain other
sources of revenue could have a material adverse impact on our business. In
addition, any downturn in these customers' business or the industry in which
these customers operate could result in a significant decrease in sales of our
products to these customers, which would have an adverse effect on our business.

WE HAVE SIGNIFICANT LOSSES AND MAY NEVER BE ABLE TO SUSTAIN
PROFITABILITY.

Although we had a net income of $827,129 in 1999, we experienced net
losses of $1,501,867 and $9,594,919 in 2000 and 2001, respectively. As of
December 31, 2001, we had an accumulated deficit of $26,325,646. Net losses may
continue for the foreseeable future. Although we have had profitable periods
from time to time, we may not be able to achieve sustained profitability.

WE EXPECT OUR QUARTERLY REVENUE AND OPERATING RESULTS TO FLUCTUATE
SIGNIFICANTLY.

We anticipate that our revenue and operating results are likely to vary
significantly from quarter to quarter in the future, and it is likely that in
future quarters our operating results may be below the expectations of public
market analysts or investors. If this occurs, the price of our common stock will
likely decrease. Customers in the semiconductor industry tend to order large
quantities of wafers on an irregular basis. This means that customers who
account for a significant portion of our net revenue in one quarter may not
place any orders in the succeeding quarter or quarters. These ordering patterns
may result in significant quarterly

10

fluctuations in our revenue and operating results. In addition, because we do
not sell implanters on a regular basis, the recognition of revenue from the sale
of even one implanter is likely to result in a significant increase in the
revenue for that quarter. A number of other factors, many of which are discussed
in more detail in other risk factors, may also cause variations in our results
of operations, including:

- cancellations of orders and shipment delays and rescheduling;
- our wafer manufacturing capacity and yields;
- new product introductions, which often result in a mismatching of
research and development expenses and recognition of revenue;
- the success of our marketing alliances; and
- economic conditions and capital spending in the semiconductor

industry and in other industries in which our customers operate.

A high percentage of our expenses are essentially fixed in the short
term. As a result, if we experience delays in generating and recognizing
revenue, our quarterly operating results are likely to be seriously harmed. Due
to these and other factors, we believe that quarter-to-quarter comparisons of
our operating results will not be meaningful. You should not rely on our results
for one quarter as any indication of our future performance.

COMPETITORS AND COMPETING TECHNOLOGIES MAY RENDER SOME OR ALL OF OUR
PRODUCTS OR FUTURE PRODUCTS NONCOMPETITIVE OR OBSOLETE.

The semiconductor industry is highly competitive and has been
characterized by rapid and significant technological advances. A number of
established semiconductor and materials manufacturers, including certain of our
customers, have expended significant resources in developing improved wafer
substrates. Our competitors or others, many of which have substantially greater
financial, technical and other resources than we do, may succeed in developing
technologies and products that are equal to or more effective than any which we
are developing, which could render our technology obsolete or noncompetitive. In
addition to competition from other manufacturers of SIMOX-SOI wafers, we face
competition from manufacturers using bulk silicon and epitaxial wafer
technology, compound materials technology such as silicon-germanium,
gallium-arsenide and indium phosphide and SOI technology other than SIMOX
technology. Although we believe that SIMOX-SOI wafers offer integrated circuit
performance advantages, semiconductor manufacturers may develop improvements to
existing bulk silicon or epitaxial wafer technology, and competing compound
materials or SOI technologies may be more successfully developed, which would
eliminate or diminish the performance advantages of SIMOX-SOI wafers. Although
we are aware of only one other company manufacturing oxygen implant equipment,
other major semiconductor implant equipment manufacturers could develop a less
expensive oxygen implanter with superior technology. Our ability to compete with
other manufacturers of semiconductor implanters, SIMOX wafers and manufacturers
of competing SOI wafers, as well as with bulk silicon, epitaxial and compound
materials wafer manufacturers, will depend on numerous factors within and
outside our control, including:

- the success and timing of our product introductions and those of our
competitors;
- product distribution;
- customer support;
- sufficiency of funding available to us; and
- the price, quality and performance of competing products and
technologies.

WE MUST CONTINUALLY IMPROVE EXISTING PRODUCTS, DESIGN AND SELL NEW
PRODUCTS AND MANAGE THE COSTS OF RESEARCH AND DEVELOPMENT IN ORDER TO COMPETE
EFFECTIVELY.

The semiconductor industry is characterized by rapid technological
change, evolving industry standards and continuous improvements in products and
required customer specifications. Due to the constant changes in our markets,
our future success depends on our ability to improve our manufacturing
processes, improve existing products and develop new products. For example, our
oxygen implanters must remain

11

competitive on the basis of cost of ownership, process performance and evolving
customer needs. To remain competitive we must continually introduce oxygen
implanters with higher capacity, better production yields and the ability to
process larger wafer sizes.

The commercialization of new products involves substantial expenditures
in research and development, production and marketing. We may be unable to
successfully design or manufacture these new products and may have difficulty
penetrating new markets. Because it is generally not possible to predict the
amount of time required and the costs involved in achieving certain research,
development and engineering objectives, actual development costs may exceed
budgeted amounts and estimated product development schedules may be extended.
Our business may be materially and adversely affected if:

- we are unable to improve our existing products on a timely basis;
- our new products are not introduced on a timely basis;
- we incur budget overruns or delays in our research and development
efforts; or
- our new products experience reliability or quality problems.

OUR SIMOX-SOI WAFER PRODUCTS ARE DIFFICULT TO MANUFACTURE AND SMALL
MANUFACTURING DEFECTS CAN ADVERSELY AFFECT OUR CUSTOMERS' AND OUR OWN PRODUCTION
YIELDS AND OUR OPERATING RESULTS.

The manufacture of our SIMOX-SOI wafers is a highly complex and precise
process. SIMOX-SOI wafer production requires a tightly controlled, clean
environment. Very small impurities in our manufacturing materials or process,
contamination of the manufacturing environment and/or equipment failures can
cause wafers to be rejected, can adversely affect our customers' manufacturing
yields of their integrated circuits or can cause shipping delays. Our customers
or we may experience problems in achieving an acceptable yield in the
manufacture of SIMOX-SOI wafers, and the risk of encountering difficulties
increases as we transition to new manufacturing methods or more exacting
customer specifications. In the past, we have experienced difficulties in
meeting evolving customer specifications which have led to delayed SIMOX-SOI
wafer shipments and/or increased production costs.

THE CUSTOMER QUALIFICATION PROCESS FOR OUR WAFER PRODUCTS IS COMPLEX AND
LENGTHY.

Our customers expend significant efforts in evaluating and qualifying
our wafer products before they place significant orders with us. To date,
commercial shipments of our wafers have been used principally for evaluation
purposes or pilot production in products by our customers. The time to develop
an integrated circuit on SIMOX-SOI is lengthy, sometimes taking twelve to
thirty-six months. The cycle typically goes from initial sampling of SIMOX-SOI
wafers to more intensive sampling, the manufacture of prototype integrated
circuits, circuit process modifications, yield optimization, pilot production
and finally, production. This is a normal cycle in the semiconductor industry
for any new advanced material such as Ibis' SIMOX-SOI. Even after this lengthy
qualification process, customers may not purchase our products in substantial
amounts, or at all. This lengthy sales cycle, as well as the practice of
semiconductor manufacturers to place sporadic orders, may cause our revenue and
operating results to vary significantly and unexpectedly from period to period.

THE MANUFACTURING AND CUSTOMER QUALIFICATION PROCESS FOR OUR IMPLANTERS
IS COMPLEX, LENGTHY AND COSTLY.

In the semiconductor industry customers regularly require equipment
manufacturers to qualify the equipment at the customer's site. The time required
to customer qualify an implanter at a customer's site is very difficult to
predict because the qualification process for each of our implanters is complex,
lengthy and costly. The manufacturing and qualification process for each
implanter requires us to construct and customer qualify the machine at our
premises, disassemble the machine for transportation, and reassemble and
requalify it at the customer's premises. During this qualification period, we
invest significant resources and dedicate substantial production and technical
personnel to achieve acceptance of the implanter. Each customer will not accept
the

12

implanter until it has successfully produced wafers to exact specifications at
the customer's premises. Even very small differences in the customer's
environment or initially imperceptible changes that may occur to the implanter
during the transportation to and reassembly of the implanter at the customer's
site can cause a large percentage of wafers produced by the implanter to be
rejected, which would delay the acceptance of the implanter by the customer.
Historically, we have experienced delays in achieving customer acceptance.
Delays or difficulties in our manufacturing and qualification process could
increase manufacturing and warranty costs and adversely affect our relationships
with our customers. In addition, because we do not recognize revenue on the sale
of an implanter until it is delivered and qualified by the customer, any delay
in qualification would result in a delay in our ability to recognize revenue
from the sale. Historically it takes approximately nine months to build, ship
and obtain customer acceptance of our Ibis 1000 implanters.

WE HAVE ONLY RECEIVED ORDERS FOR A SMALL QUANTITY OF OUR OXYGEN
IMPLANTER EQUIPMENT.

Since we began selling implanters in 1996, we have only sold a total of
eight oxygen implanters at an average sale price of approximately $4,000,000
each. We do not expect to sell more than a limited number of implanters in the
near future. The sale of one implanter would generally represent a substantial
portion of our annual revenue. Accordingly, the delay in the manufacture or
delivery of even one unit would have a material adverse effect on our quarterly
or annual results of operations.

OUR IMPLANTERS AND ASSOCIATED TECHNOLOGY ARE SUBJECT TO EXPORT
REGULATIONS, WHICH COULD PREVENT OR DELAY THE SALE OF SUCH PRODUCTS IN FOREIGN
COUNTRIES.

Certain technologies associated with our implanters are subject to
export regulations administered by the U.S. Department of Commerce. Accordingly,
we may be required to secure U.S. export licenses with respect to sales of
implanters or transfers of technologies to end users in certain foreign
countries. This requirement could result in significant delays in, or the
prevention of, sales of implanters or transfers of technology or other such
technical data to customers in certain foreign countries. For example, the
recent sale of an Ibis 1000 implanter and the corresponding transfer of
technology to the Shanghai Institute of Metallurgy, Chinese Academy of Sciences
required an export license which took approximately one year to secure. There
can be no assurance that if necessary, we will be able to secure such licenses
in the future in a timely manner, or at all.

THE LOSS OF KEY MEMBERS OF OUR SCIENTIFIC AND MANAGEMENT STAFF COULD
DELAY AND MAY PREVENT THE ACHIEVEMENT OF OUR RESEARCH, DEVELOPMENT AND BUSINESS
OBJECTIVES.

Our Chief Executive Officer, Martin J. Reid, and other current officers
and key members of our scientific staff are responsible for areas such as
product development and improvements, and process improvements research, which
are important to our specialized scientific business. The loss of, and failure
to promptly replace, any member of this group could significantly delay and may
prevent the achievement of our research, development and business objectives.
While we have entered into an employment agreement with our Chief Executive
Officer, under certain circumstances he may be able to terminate his employment
with us. Furthermore, although our employees are subject to certain
confidentiality and non-competition obligations, our key personnel may terminate
their employment at any time and may become employed by a competitor.

WE MAY NOT BE ABLE TO SUCCESSFULLY PRODUCE OUR PRODUCTS ON A
LARGE-SCALE.

We have limited manufacturing experience and have only manufactured
limited quantities of SIMOX-SOI wafers and Ibis 1000 oxygen implanters for low
volume production. To be successful, our products must be manufactured in
commercial quantities, at acceptable costs. We may not be able to make the
transition to high volume commercial production successfully. Future production
in commercial quantities may create technical and financial challenges for us.
We currently have nine Ibis 1000 oxygen implanters available for the production
of wafers and are currently relocating one additional Ibis 1000 implanter for
internal wafer production into the cleanroom. In addition, we are in the final
stages of development of our i2000 implanter, which we expect to complete in the
first quarter of 2002. We are beginning to procure parts for a second i2000

13

and plan to construct additional implanters as we need more capacity to meet
demand, but the time it takes to build and qualify an implanter is lengthy. Any
difficulty or delay in completing the development of the i2000 or in
constructing additional implanters if needed could have a material adverse
effect on our business.

WE MAY NOT BE ABLE TO USE ALL OF OUR EXISTING OR FUTURE MANUFACTURING
CAPACITY AT A PROFITABLE LEVEL.

We have spent, and expect to continue to spend, large amounts of money
to upgrade and increase our wafer fabrication, assembly and test manufacturing
capacity. Because a significant portion of our expenses is fixed, if we end up
not needing this capacity and capability for any of a variety of reasons,
including inadequate demand or a significant shift in the mix of product orders
making our existing capacity and capability inadequate or in excess of our
actual needs, our fixed costs per wafer produced will increase, which would
adversely affect us. At times we may also have the capacity to produce more
oxygen implantation machines than we have orders for at such times. During such
idle time we would continue to be responsible for the fixed costs for
maintaining personnel and space for such production, which could have a material
adverse effect on our business.

WE MAY NOT SUCCESSFULLY FORM OR MAINTAIN DESIRABLE STRATEGIC ALLIANCES.

We believe we will need to form alliances with strategic partners for
the manufacturing, marketing and distribution of our products. We may enter into
these strategic alliances to satisfy customer demand and to address possible
customer concerns regarding our being a sole source supplier. The limited number
of reliable sources of supply other than Ibis may adversely affect or delay the
integration of SIMOX-SOI wafers in mainstream commercial applications. In July
1994, we entered into a business development agreement with SUMCO, under which
SUMCO markets and sells our SIMOX-SOI wafers in Japan. In February 2001, we
entered into an alliance with MEMC, pursuant to which MEMC became a global sales
representative for our entire SIMOX-SOI wafer product line and the primary
supplier to us of silicon substrate material. We may not be successful in
maintaining such alliances or in forming and maintaining other alliances,
including satisfying our contractual obligations with our strategic partners,
and our partners may not devote adequate resources to manufacture, market and
distribute these products successfully or may attempt to compete with us.

WE MAY HAVE DIFFICULTY OBTAINING THE MATERIALS AND COMPONENTS NEEDED TO
PRODUCE OUR PRODUCTS.

Pursuant to an agreement that we entered into with MEMC in February
2001, MEMC is the primary supplier to us of silicon substrate material. If MEMC
is not able to meet our demand for silicon wafers, and we are unable to obtain
substitute wafers from other vendors, we would be unable to manufacture our
SIMOX-SOI wafer products. Any shortages in the availability of silicon wafers or
a significant increase in the price of silicon wafers could have a material
adverse effect on our business. We manufacture our oxygen implanters from
standard components and from components manufactured in-house or by other
vendors according to our design specifications. Although we have not experienced
any significant production delays due to the unavailability of or delay in
obtaining our component parts or raw materials to date, a disruption or
termination of certain of our vendors may occur. Any such disruption or
termination could have a material adverse effect on our business.

WE MAY NEED SUBSTANTIAL ADDITIONAL CAPITAL IN THE FUTURE.

We anticipate that our existing capital resources, will enable us to
maintain currently planned operations for at least the next twelve months.
However, this expectation is based on our current operating plan which may
change. We intend to continue to invest in facilities and state-of-the-art
equipment in order to increase our research, development and manufacturing
capabilities. Changes in technology or sales growth beyond currently established
capabilities would require further investment. As a result, we may need to raise
substantial additional capital in the future. We have previously financed our
working capital requirements through:

14

- equity financings, including warrant and option exercises,
- equipment lines of credit,
- a working capital line of credit,
- a term loan,
- sale-leaseback arrangements,
- collaborative relationships,
- wafer product and equipment sales, and
- government contracts.

We may not be able to raise any required additional funds on terms
favorable to us, or at all. If future financing is not available or is not
available on acceptable terms, we may not be able to fund our future needs,
which would seriously harm our business and results of operations. In addition,
if we raise additional funds through the sale of equity or convertible debt
securities, the value of our stock outstanding may be diluted. We may also have
to issue securities that have rights, preferences and privileges senior to our
common stock.

WE MAY NOT BE ABLE TO PROTECT OUR PATENTS AND PROPRIETARY TECHNOLOGY.

Our ability to compete effectively with other companies will depend, in
part, on our ability to maintain the proprietary nature of our technology.
Although we have been awarded or have filed applications for a number of patents
in the U.S. and foreign countries, those patents may not provide meaningful
protection, or pending patents may not be issued. Our competitors in both the
U.S. and foreign countries, many of which have substantially greater resources
and have made substantial investments in competing technologies, may have or may
obtain patents that will prevent, limit or interfere with our ability to make
and sell our products or intentionally infringe on our patents. The defense and
prosecution of patent suits is both costly and time-consuming, even if the
outcome is favorable to us. In addition, there is an inherent unpredictability
regarding obtaining and enforcing patents. An adverse outcome in the defense of
a patent suit could:

- subject us to significant liabilities to third parties,
- require disputed rights to be licensed from third parties, or
- require us to cease selling our products.

We also rely in large part on unpatented proprietary technology and
others, including strategic partners, may independently develop the same or
similar technology or otherwise obtain access to our proprietary technology. To
protect our rights in these areas, we currently require all of our employees to
enter into confidentiality agreements. However, these agreements may not provide
meaningful protection for our trade secrets, know-how or other proprietary
information in the event of any unauthorized use, misappropriation or disclosure
of such trade secrets, know-how or other proprietary information.

Others may claim that our technology infringes on their proprietary
rights. Any infringement claims, even if without merit, can be time consuming
and expensive to defend and may divert management's attention and resources. If
successful, they could also require us to enter into costly royalty or licensing
agreements. A successful claim of product infringement against us and our
inability to license the infringed or similar technology could adversely affect
our business.

IF WE DO NOT COMPLY WITH ALL APPLICABLE ENVIRONMENTAL REGULATIONS, WE
COULD BE SUBJECT TO FINES AND OTHER SANCTIONS.

We are subject to a variety of federal, state and local environmental
regulations related to the storage, treatment, discharge or disposal of
chemicals used in our operations and 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 fines being imposed on us, suspension of production or a cessation of
operations. Our future activities may result in our being subject to additional

15

regulations. Such regulations could require us to acquire significant equipment
or to incur other substantial expenses to comply with regulations. Our failure
to control the use of, or to restrict adequately the discharge of, hazardous
substances or properly control other occupational hazards could subject us to
substantial financial liabilities.

OUR STOCK PRICE IS HIGHLY VOLATILE.

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

- quarterly fluctuations in operating results,
- difficulty in forecasting future results,
- announcements by us or our present or potential competitors,
- technological innovations or new commercial products or services by
us or our competitors,
- the timing of receipt of orders from major customers,
- product mix,
- product obsolescence,
- shifts in customer demand,
- our ability to manufacture and ship products on a cost-effective and
timely basis,
- market acceptance of new and enhanced versions of our products or
implanters,
- the evolving and unpredictable nature of the markets for the
products incorporating our SIMOX-SOI wafers,
- the amount of research and development expenses associated with new
or enhanced products or implanters
- the cyclical nature of the semiconductor industry, and
- general market conditions.

FUTURE ISSUANCES OF PREFERRED STOCK MAY DIMINISH THE RIGHTS OF OUR
COMMON STOCKHOLDERS.

Our board of directors has the authority to issue up to 2,000,000 shares
of preferred stock and to determine the price, rights, privileges and other
terms of these shares. The board of directors may exercise this authority
without the approval of the stockholders. The rights of the holders of common
stock may be adversely affected by the rights of the holders of any preferred
stock that may be issued in the future.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS AND PROVISIONS OF
MASSACHUSETTS LAW COULD MAKE A THIRD-PARTY ACQUISITION OF US DIFFICULT.

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

- a classified board of directors, with three classes of directors
each serving a staggered three-year term;
- the ability of the board of directors to issue preferred stock;
- a 75% super-majority shareholder vote to amend certain provisions of
our articles of organization and bylaws; and

16

- the requirement under Massachusetts law that any stockholder action
by written consent be unanimous.

ITEM 2. DESCRIPTION OF PROPERTY

Ibis' corporate office and manufacturing facilities are located at
leased facilities in Danvers, Massachusetts. In 2000, we opened our second
building in Danvers, which effectively separated our two business segments:
Implantation equipment design and manufacture and SIMOX wafer production. This
transition has streamlined both our implanter and wafer manufacturing
operations, while allowing us to expand capacity in both areas. We have a 40,000
square foot facility dedicated to wafer operations which includes modernized
cleanrooms that contain a total of ten implanters, upgraded metrology equipment
and cleaning equipment. The implantation equipment design and manufacturing
facility is approximately 20,000 square feet and we have an additional 20,000
square feet of adjacent space for future expansion. The leases expire on May 31,
2005 and contain options to renew for five years.

ITEM 3. LEGAL PROCEEDINGS

Ibis is not a party to any material pending legal proceedings, and
management is not aware of any contemplated proceeding by any governmental
authority against us of a material nature.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to stockholders during the fourth quarter of
the year ended December 31, 2001.

17

PART II

ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Ibis' Common Stock began trading on May 20, 1994 on the Nasdaq SmallCap
Market and on the Boston Stock Exchange. Prior to May 20, 1994, there was no
public market for the Common Stock or any other securities of Ibis. On April 4,
1996, Ibis commenced trading on the Nasdaq National Market. Our Common Stock is
traded under the symbol "IBIS." The following tables set forth, for 2000 and
2001, the high and low sale prices for the Common Stock as reported by the
Nasdaq National Market.

- -----------------
STOCKHOLDERS

As of March 9, 2002, there were approximately 124 stockholders of record
of the 8,412,238 outstanding shares of Common Stock and approximately 7,600
beneficial owners of the Common Stock.

DIVIDENDS

Ibis has never declared or paid any dividends and does not anticipate
paying such dividends on its Common Stock in the foreseeable future. Ibis
currently intends to retain any future earnings for use in its business. The
payment of any future dividends will be determined 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 factors deemed relevant by the Board of Directors.

RECENT SALES OF UNREGISTERED SECURITIES

During the fourth quarter of the fiscal year ended December 31, 2001,
there were no sales of securities that were not registered under the Securities
Act of 1933.

18

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below under the captions
"Statement of Operations Data" and "Balance Sheet Data" for, and as of the end
of each of the years in the five-year period ended December 31, 2001, are
derived from the financial statements of Ibis, which financial statements have
been audited by KPMG LLP, independent certified public accountants. The audited
balance sheets at December 31, 2001 and 2000 and the related statements of
operations, stockholders equity and cash flows for each of the years in the
three-year period ended December 31, 2001 and the report thereon, are included
elsewhere in this Annual Report on Form 10-K. The data set forth below should be
read in conjunction with Ibis' financial statements, the related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K.

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

19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS OF IBIS (INCLUDING NOTES THERETO) AND SELECTED FINANCIAL
DATA INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.

OVERVIEW

Ibis Technology Corporation ("Ibis") was formed in October 1987 and
commenced operations in January 1988. Ibis' initial activities consisted of
producing and selling SIMOX-SOI wafers and conducting research and development
activities. This research led to the development of a proprietary second
generation implanter, the Ibis 1000, which we began selling in 1996, and to
other proprietary process technology.

Initially, much of our revenue was derived from research and development
contracts and sales of wafers for military applications. Over the years, there
was a shift in revenue to sales of SIMOX-SOI wafers for commercial applications
and the nature of our business has evolved through stages where sometimes our
revenues primarily resulted from selling wafers for evaluation purposes, and
sometimes our revenue was generated primarily from equipment sales. This is a
normal path to follow while developing and promoting a fundamental new
technology, especially when it relates to the semiconductor industry embracing
any change that affects fabrication operations This trend is expected to
continue in the near-term as our customers continue to sample SOI and the early
adopters work to achieve stable production processes and enter pilot production.
We believe that we are in the technology rollout stage of our corporate life
cycle. Our fundamental SIMOX-SOI technology has been developed, refined, and
proven over the last dozen years. Ibis is at a point of introducing the next
generation production-worthy SIMOX-SOI, which includes both the recently
licensed modified low dose ("MLD") wafer process and the i2000, our
next-generation oxygen implanter, which is capable of producing eight and twelve
inch (or 200 and 300 mm) SIMOX-SOI wafers. In 1999, we commenced a program to
design and develop the i2000 and in January 2002, we successfully performed the
first implants using the i2000. The final steps in the development of the i2000
are expected to be completed during the first half of 2002.

Commercial shipments of our wafers have been used principally for
evaluation purposes or pilot production in products, including microprocessors,
gate arrays, ASICs (application specific integrated circuits), memories (DRAMs,
SRAMs, etc.), and cellular and mobile radio components. From our customers'
perspective, the pathway to SOI adoption is complex and time consuming.
Typically, a customer will go through three major stages:

- Sampling, where preliminary performance characteristics are explored
and verified;
- R&D, where specific customer specifications are tested and
developed; and
- Production, where yield and cost benefits are optimized.

Each of these stages has many steps, and customers must evaluate each
new wafer technology that essentially lays a new foundation for substantially
all other processes they have spent billions of dollars and decades of time
developing. Accordingly, it takes anywhere from 12 to 36 months for a customer
to proceed from initial sampling through R&D to initial production, which is not
unlike the standard process for qualifying any new wafer material. These steps
apply each time there is a change in the customer's fabrication process, such as
a feature-size change or new material. To date, most of our customers have
purchased wafers for the purpose of characterizing and evaluating the wafers,
developing prototype products or for pilot production, consequently historical
sales are not necessarily an indication of future operations. As a result,
inventory valuation is a critical accounting policy for Ibis. Our policy is to
value our wafers at market when costs exceed market and to reserve for a
possible over supply of wafers utilizing inventory aging records and for
obsolescence when engineering changes or other technological advances indicate
that obsolescence has occurred.

20

Ibis has experienced quarterly and annual fluctuations in revenue and
results of operations due to the timing of receipt of equipment orders and
dependence on a limited number of customers. We expect to continue to experience
fluctuations in revenue due to equipment sales and shifts in customer demands
during various stages of the SIMOX-SOI sales cycle. We recognize implanter
revenue in accordance with SAB 101, which includes among other criteria, the
shipment and factory installation of the implanter at the customer's location.
As a result, deferral of revenue may extend longer due to meeting this criteria.

At December 31, 2001, Ibis had nine Ibis 1000 implanters available to
produce up to 200 mm SIMOX wafers, two of which are owned by a customer.
Relative to products produced, the utilization rate for those nine implanters
during the fourth quarter of 2001 was approximately 40%. One more Ibis 1000
implanter will become available to produce wafers in the first quarter of 2002
and an additional one is dedicated as a research and development tool. Ibis
anticipates that one i2000 implanter will be available to produce 300 mm SIMOX
wafers in the second half of 2002 and we plan to build at least one more i2000
in 2002. Although, the implanters are currently underutilized, Management has
performed an analysis of impairment, which indicates that there is not an
impairment issue with our implanters. The factors we considered are as follows:

- Management of Ibis currently believes that our anticipated scale of
operations assumes a modest increase in wafer sales in the first
half over the run rate in the fourth quarter of 2001 and indications
suggest that our Advantox MLD wafers will be qualified at one of our
largest customers, which we believe could lead to increased wafer
sales in the second half of 2002;
- SOI is a new technology which is just starting to be adopted by
major semiconductor players;
- Ibis is at a point of introducing the next generation
production-worthy SIMOX-SOI, which includes both the recently
licensed modified low dose ("MLD") wafer process and the i2000, our
next-generation oxygen implanter, which is capable of producing
eight and twelve inch (or 200 and 300 mm) SIMOX-SOI wafers; and
- We recently sold an Ibis 1000 implanter to a customer in China and
have potential for additional sales of used Ibis 1000 implanters to
this customer and others in the future.

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

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000

PRODUCT SALES. Wafer product sales decreased to $5,390,860 for the
fiscal year ended December 31, 2001, a decrease of $2,782,235 or 34% from
$8,173,095 for the fiscal year ended December 31, 2000. The decrease in product
sales is attributable to decreased wafer sales by Ibis in Europe, as the impact
of the order cutback announced in mid-April 2001 from one of our largest wafer
customers that is in the optical components arena, was realized. In the Pacific
Rim wafer sales increased overall during this twelve-month period. Sales by Ibis
in the United States also increased overall during this twelve-month period,
even though our largest domestic customer delayed further SIMOX-SOI wafer
purchases during their qualification of our Advantox MLD process. In December
2000, Ibis entered into a royalty-bearing license agreement with this customer
which gives Ibis the right to manufacture and sell SIMOX-SOI wafers using the
licensed process. Ibis began shipping sample quantities of this material in May
2001.

CONTRACT AND OTHER REVENUE. Contract and other revenue decreased for the
fiscal year ended December 31, 2001 to $518,379 from $532,395 for the fiscal
year ended December 31, 2000, a decrease of $14,016 or 3%. This decrease is due
to decreased government contract work.

EQUIPMENT REVENUE. Equipment revenue decreased to $1,525,317 for the
fiscal year ended December 31, 2001 from $5,769,393 for the fiscal year ended
December 31, 2000, a decrease of $4,244,076 or

21

74%. Equipment revenue in 2000 included an implanter sale, whereas equipment
revenue for 2001 consisted solely of parts and service revenue. Field service
revenue accounted for $914,188 or 60% of equipment revenue for the fiscal year
ended December 31, 2001 as compared to $474,670 or 8% of equipment revenue for
the fiscal year ended December 31, 2000. Sales of spare parts accounted for
$611,129 or 40% of equipment revenue for the fiscal year ended December 31, 2001
as compared to $572,723 or 10% of equipment revenue for the fiscal year ended
December 31, 2000. In December 2001, Ibis shipped an Ibis 1000 oxygen implanter
to a customer in China and expects to recognize revenue from this sale sometime
during fiscal year 2002, depending on when the new facility being built to house
and support this implanter is completed and the system is installed and
accepted.

TOTAL SALES AND REVENUE. Total sales and revenue for the fiscal year
ended December 31, 2001 was $7,434,556, a decrease of $7,040,327 or 49% from
$14,474,883 for the fiscal year ended December 31, 2000. Approximately $4
million of this decrease is due to the lack of an implanter sale in 2001 and the
remainder is due primarily to a decrease in wafer sales to two customers.

TOTAL COST OF SALES AND REVENUE. Cost of wafer product sales for the
fiscal year ended December 31, 2001 was $8,209,540, as compared to $5,824,160
for the fiscal year ended December 31, 2000, an increase of $2,385,380 or 41%.
This increase is primarily attributable to the increase in fixed costs
associated with production, which include depreciation and amortization,
utilities, occupancy expenses, and repair and maintenance and increased wafer
reserves. Cost of contract and other revenue for the fiscal year ended December
31, 2001 was $376,371, as compared to $388,320 for the fiscal year ended
December 31, 2000, a decrease of $11,949 or 3%. Cost of equipment revenue for
the fiscal year ended December 31, 2001 was $1,502,356, as compared to
$3,481,516 for the fiscal year ended December 31, 2000, a decrease of $1,979,160
or 57%. This decrease is due to lack of implanter sales and increased equipment
reserves in 2001 compared to the prior year which included the cost of an
implanter. As a result of the foregoing, the total cost of sales and revenue for
the fiscal year ended December 31, 2001 was $10,088,267 as compared to
$9,693,996 for the fiscal year ended December 31, 2000, an increase of $394,271
or 4%. The gross margin for all sales was a negative 36% for the fiscal year
ended December 31, 2001 as compared to a positive 33% for the fiscal year ended
December 31, 2000. This decrease in gross margin for all sales is attributable
to decreased wafer sales, the lack of implanter sales, increased fixed wafer
costs and an increase in reserve for excess or obsolete parts.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the fiscal year ended December 31, 2001 were $2,273,077 (31% of total
revenue) as compared to $1,998,302 (14% of total revenue) for the fiscal year
ended December 31, 2000, an increase of 274,775 or 14%. This is primarily a
result of an increase in legal fees of approximately $234,000.

MARKETING AND SELLING EXPENSES. Marketing and selling expenses for the
fiscal year ended December 31, 2001 were $1,812,891 (24% of total revenue) as
compared to $1,639,845 (11% of total revenue) for the fiscal year ended December
31, 2000, an increase of $173,046 or 11%. The increase in marketing and sales
expenses is primarily a result of an increase in customer support expenses.

RESEARCH AND DEVELOPMENT EXPENSES. Internally funded research and
development expenses increased by $532,640 or 12% to $5,119,015 (69% of total
revenue) for the fiscal year ended December 31, 2001 from $4,586,375 (32% of
total revenue) for the fiscal year ended December 31, 2000. This increase is
primarily due to increased material expenses on Ibis' SIMOX-SOI wafer
development programs, which were partially offset by a decrease in consulting
services used for the design and development effort on our next generation
oxygen implanter, the i2000.

OTHER INCOME. Total other income for the fiscal year ended December 31,
2001 was $2,265,031 as compared to $1,943,024 for the fiscal year ended December
31, 2000, an increase of $322,007 or 17%. The increase in total other income is
attributable to non-recurring income amounting to approximately $1.4 million
which is the result of an expired wafer production capacity option. This was
offset by decreased interest income earned as a result of lower average cash
balances and a reduction in interest rates.

22

As of December 31, 2001, the Company had federal net operating loss and
general business credit carryforwards of approximately $38,065,000 and $808,000,
respectively, for tax purposes expiring through 2021. As a result of the public
stock offering that closed in April 1996 of 1,600,000 shares at $7.25 per share,
a change of ownership within the meaning of Sec. 382(g) of the Internal Revenue
Code occurred. As a result of this ownership change, the net operating loss
carryforward utilization is limited to approximately $1,500,000 per year, which
limitation, if not utilized, can be carried forward to future years.

FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1999

PRODUCT SALES. Wafer product sales increased to $8,173,095 for the
fiscal year ended December 31, 2000, an increase of $2,890,930 or 55% from
$5,282,165 for the fiscal year ended December 31, 1999. The increase in product
sales is attributable to increased wafer sales by Ibis in Europe, primarily from
one customer who used Ibis' SIMOX-SOI wafers in its optical components products.
Sales by Ibis in the United States and the Pacific Rim decreased in 2000
compared to 1999.

CONTRACT AND OTHER REVENUE. Contract and other revenue decreased for the
fiscal year ended December 31, 2000 to $532,395 from $1,257,235 for the fiscal
year ended December 31, 1999, a decrease of $724,840 or 58%. This decrease is
primarily due to the fact that in 1999, Ibis recognized license revenue in the
form of a one time initial royalty fee in connection with an agreement to
license its standard and Advantox SIMOX-SOI wafer fabrication process.

EQUIPMENT REVENUE. Equipment revenue decreased to $5,769,393 for the
fiscal year ended December 31, 2000 from $10,063,622 for the fiscal year ended
December 31, 1999, a decrease of $4,294,229 or 43%. This decrease is
attributable to decreases in implanter and spare parts sales which were
partially offset by an increase in field service revenue. Field service revenue
accounted for $474,670 or 8% of equipment revenue for the fiscal year ended
December 31, 2000 as compared to 2% of equipment revenue for the fiscal year
ended December 31, 1999. Sales of spare parts accounted for $572,723 or 10% of
equipment revenue for the fiscal year ended December 31, 2000 as compared to
$1,057,514 or 11% of equipment revenue for the fiscal year ended December 31,
1999.

TOTAL SALES AND REVENUE. Total sales and revenue for the fiscal year
ended December 31, 2000 was $14,474,883, a decrease of $2,128,139 or 13% from
$16,603,022 for the fiscal year ended December 31, 1999. The decrease is due to
decreases in equipment revenue and contract and other revenue which were
partially offset by an increase in product sales.

TOTAL COST OF SALES AND REVENUE. Cost of wafer product sales for the
fiscal year ended December 31, 2000 was $5,824,160, as compared to $4,643,421
for the fiscal year ended December 31, 1999, an increase of $1,180,739 or 25%.
This increase is primarily attributable to the increase in fixed costs
associated with production, which include depreciation and amortization,
utilities, and repair and maintenance. Cost of contract and other revenue for
the fiscal year ended December 31, 2000 was $388,320, as compared to $443,078
for the fiscal year ended December 31, 1999, a decrease of $54,758 or 12%. The
decrease is a result of lower costs associated with contract and other revenue.
Cost of equipment revenue for the fiscal year ended December 31, 2000 was
$3,481,516, as compared to $7,242,126 for the fiscal year ended December 31,
1999, a decrease of $3,760,610 or 52%. The lower cost of equipment revenue is a
result of decreased equipment revenue. As a result of the foregoing, the total
cost of sales and revenue for the fiscal year ended December 31, 2000 was
$9,693,996 as compared to $12,328,625 for the fiscal year ended December 31,
1999, a decrease of $2,634,629 or 21%. The gross margin for all sales was a
positive 33% for the fiscal year ended December 31, 2000 as compared to a
positive 26% for the fiscal year ended December 31, 1999. This increase in gross
margin for all sales is attributable to increased wafer sales which were
partially offset by decreased equipment revenue and the fact that in 1999, Ibis
recognized license revenue in the form of a one time initial royalty fee in
connection with an agreement to license its standard and Advantox SIMOX-SOI
wafer fabrication process.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the fiscal year ended December 31, 2000 were $1,998,302 (14% of
total revenue) as compared to $1,787,821 (11% of total revenue)

23

for the fiscal year ended December 31, 1999, an increase of $210,481 or 12%.
This is primarily a result of an increase in personnel and professional service
fees.

MARKETING AND SELLING EXPENSES. Marketing and selling expenses for the
fiscal year ended December 31, 2000 were $1,639,845 (11% of total revenue) as
compared to $1,015,843 (6% of total revenue) for the fiscal year ended December
31, 1999, an increase of $624,002 or 61%. The increase in marketing and sales
expenses is primarily a result of an increase in the number of customer support
personnel, public relations and product sample expenses.

RESEARCH AND DEVELOPMENT EXPENSES. Internally funded research and
development expenses increased by $2,812,364 or 159% to $4,586,375 (32% of total
revenue) for the fiscal year ended December 31, 2000 from $1,774,011 (11% of
total revenue) for the fiscal year ended December 31, 1999. This increase is
primarily due to an increase in personnel and consultants hired for the design
and development effort on our next generation oxygen implanter, the i2000, and
increased material expenses on Ibis' SIMOX-SOI wafer development program.

OTHER INCOME. Total other income for the fiscal year ending December 31,
2000 was $1,943,024 as compared to $1,140,663 for the fiscal year ending
December 31, 1999. The increase in total other income of $802,361 or 70% is
attributable to increased interest income earned on the cash balance and reduced
interest expense on capitalized leases.

As of December 31, 2000, the Company had federal net operating loss and
general business credit carryforwards of approximately $27,235,000 and $598,000,
respectively, for tax purposes expiring through 2020. As a result of the public
stock offering that closed in April 1996 of 1,600,000 shares at $7.25 per share,
a change of ownership within the meaning of Sec. 382(g) of the Internal Revenue
Code occurred. As a result of this ownership change, the net operating loss
carryforward utilization is limited to approximately $1,500,000 per year, which
limitation, if not utilized, can be carried forward to future years.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2001, Ibis had cash and cash equivalents of
$13,087,799, reflecting in large part our receipt of approximately $25 million
in net proceeds from the August 1999 public sale of 1,000,000 shares of Common
Stock. During the fiscal year ended December 31, 2001, Ibis used $11,505,240 in
cash from operating activities as compared to cash generated by operations in
the amount of $884,186 in 2000. Depreciation and amortization expense for the
fiscal years ended December 31, 2001 and 2000 was $3,632,664 and $1,662,538,
respectively. This accounted for 49% and 11% of total revenue, respectively. Due
to the capital intensive nature of Ibis' business and the recent expansion of
our facilities and production capacity, management expects that depreciation and
amortization will continue to be a significant portion of its expenses. To date,
Ibis' working capital requirements have been funded primarily through debt and
equity financings. The principal uses of cash during the fiscal year ended
December 31, 2001 were to fund operations and additions to property and
equipment which totaled $6,373,781. At December 31, 2001, Ibis had commitments
to purchase approximately $1,019,289 in material to be used for wafer
manufacturing, spare parts on the Ibis 1000 implanters and for manufacturing an
additional i2000 implanter, and approximately $576,318 in capital equipment
purchases.

On August 6, 1999, Ibis completed the public offering of 1,000,000
shares of common stock in an offering underwritten by SoundView Technology
Group. The shares were included in a shelf registration statement filed with the
Securities and Exchange Commission on July 8, 1999 and declared effective on
July 26, 1999. Net proceeds from the offering were approximately $25 million and
have been used and will continue to be used to fund research and development,
capital expenditures, working capital and for other general corporate purposes.

In September 2001, Ibis entered into a $4.5 million equipment lease line
with Heller Financial's Commercial Equipment Finance Group. The lease line was
used to finance the purchase of process equipment

24

for wafer production, primarily 300 mm wafers. This line was fully drawn down in
two sale-leaseback transactions, bearing interest at approximately 8% with a
term of three years, and a monthly net payment of approximately $125,000. Ibis
has a fair market value purchase option at the end of the lease term. The
lease-line is secured by the underlying assets and all other property and
equipment of Ibis.

Our existing cash resources are believed to be sufficient to support
Ibis' operations on our anticipated scale for at least the next twelve months.
Our anticipated scale of operations assumes a modest increase in wafer sales in
the first half over the run rate in the fourth quarter of 2001 and indications
suggest that our Advantox MLD wafers will be qualified at one of our largest
customers, which we believe could lead to increased wafer sales in the second
half of 2002. Our plans also include the purchase of production support
equipment and facility improvements and the build of at least one more i2000
oxygen implanter. We continue to explore equity offerings and other forms of
financing and anticipate that we may be required to raise additional capital in
the future in order to finance the expansion of our manufacturing capacity and
our research and development programs. Should dispositive results occur in the
qualification of our MLD wafers or our new i2000 implanter, we will be required
to curtail capital outlays and other discretionary spending and possibly
accelerate longer term investments in Ibis.

EFFECTS OF INFLATION

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

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") that
establishes accounting and reporting requirements for derivative instruments and
for hedging activities. SFAS 133 requires companies to recognize all derivatives
as either assets or liabilities in the statement of financial position at fair
value. In June 1999, the FASB decided that the effective date for adopting the
requirements of SFAS 133 should be delayed to fiscal years beginning after June
15, 2000. This delay, published as SFAS 137, applies to quarterly and annual
financial statements. In June 2000, the FASB issued SFAS 138, which addresses a
limited number of issues causing implementation difficulties for numerous
entities that apply SFAS 133. The Company adopted the provisions of SFAS 133 as
amended, on January 1, 2001. The adoption of these provisions had no impact on
the Company's financial condition or results of operations.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial
Statements". This bulletin, as amended, established guidelines for revenue
recognition and was originally effective for periods beginning after March 15,
2000. In June 2000, the SEC announced that the effective date of SAB 101 was
being delayed until no later than the quarter ending December 31, 2000. Ibis
adopted SAB 101 for its fiscal year ending December 31, 2000 and it did not have
a material impact on its financial condition or results of operations.

Statement of Financial Accounting Standards No. 141, "Business
Combinations", ("SFAS 141"), issued in June 2001, addresses financial accounting
and reporting for business combinations which were initiated after June 30,
2001. This Statement also applies to all business combinations accounted for
using the purchase method for which the date of acquisition is July 1, 2001, or
later. The Company does not expect the implementation of SFAS 141 to have a
material impact on its financial condition or results of operations.

Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", ("SFAS 142"), issued in June 2001, addresses financial
accounting and reporting for acquired goodwill and intangible assets. The
provisions of SFAS 142 are required to be applied starting with fiscal years
beginning after December 15, 2001. Early application is permitted for entities
with fiscal years beginning after March 15, 2001, provided that the first
interim financial statements have not previously been issued. Impairment losses
for goodwill and indefinite-lived intangible assets that arise due to the
initial application of SFAS 142 (resulting from a transitional impairment test)
are to be reported as resulting from a change in accounting

25

principle. The Company does not expect the implementation of SFAS 142 to have a
material impact on its financial condition or results of operations.

Statement of Financial Accounting Standards No. 143, "Accounting For
Asset Retirement Obligations", ("SFAS 143"), issued in August 2001, addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and for the associated retirement
costs. SFAS 143 which applies to all entities that have a legal obligation
associated with the retirement of a tangible long-lived asset is effective for
fiscal years beginning after June 15, 2001. The Company does not expect the
implementation of SFAS 143 to have a material impact on its financial condition
or results of operations.

Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", ("SFAS 144"), issued in October
2001, addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144, which applies to all entities, is
effective for fiscal years beginning after December 15, 2001. The Company does
not expect the implementation of SFAS 144 to have a material impact on its
financial condition or results of operations.

BUSINESS OUTLOOK

This Form 10-K contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 including statements regarding Ibis' belief in the acceptance of
Ibis-produced SIMOX-SOI wafers for mainstream commercial applications, the
eventual evolution from supplying mainly SIMOX-SOI wafers to semiconductor fabs
to supplying mainly implanters to wafer manufacturers who will supply SIMOX-SOI
wafers to the fabs, our intent to pursue further strategic relationships,
partnerships and alliances with third parties, our intention to add products and
advance our process technology including the introduction of Advantox MLD
wafers, the potential benefits of the agreement with MEMC, the anticipated
schedule for the i2000, our plan to build at least one additional i2000
implanter in 2002, the anticipated benefits of the i2000, and the sufficiency of
our capital resources. Such statements are based on our current expectations and
are subject to a number of factors and uncertainties which could cause actual
results to differ materially from those described in the forward-looking
statements. Such factors and uncertainties include, but are not limited to those
set forth above in "Business - Risk Factors" and elsewhere throughout this Form
10-K. All information set forth in this Form 10-K is as of the date of this Form
10-K, and Ibis undertakes no duty to update this information, unless required by
law.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

IBIS TECHNOLOGY CORPORATION

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

27

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Ibis Technology Corporation:

We have audited the accompanying balance sheets of Ibis Technology
Corporation as of December 31, 2000 and 2001, and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Ibis Technology
Corporation at December 31, 2000 and 2001, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.

KPMG LLP

Boston, Massachusetts
February 1, 2002

28

IBIS TECHNOLOGY CORPORATION

BALANCE SHEETS

DECEMBER 31, 2000 AND 2001

See accompanying notes to financial statements.

29

IBIS TECHNOLOGY CORPORATION

STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

See accompanying notes to financial statements.

30

IBIS TECHNOLOGY CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

See accompanying notes to financial statements.

31

IBIS TECHNOLOGY CORPORATION

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

See accompanying notes to financial statements.

32

IBIS TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2000 AND 2001

(1) NATURE OF BUSINESS AND ORGANIZATION

Ibis Technology Corporation (the "Company") was incorporated 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 are
manufactured by the Company using a specialized oxygen ion implanter, which was
developed and manufactured by the Company and is integrated with other
specialized processes and characterization equipment. The Company is the leading
manufacturer of high current oxygen implanters and began selling these oxygen
implanters in 1996.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) CASH AND CASH EQUIVALENTS

Cash equivalents represent highly liquid investments with 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 AND EQUIPMENT AND IMPAIRMENT OF LONG-LIVED ASSETS

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

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

(d) PATENTS AND OTHER ASSETS

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

(e) REVENUE RECOGNITION

The Company recognizes revenue from product sales, equipment sales and
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) the product
has been delivered to the customer and, when applicable, 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. Provisions for estimated sales returns and

33

IBIS TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

allowances are made at the time the products are sold. Revenue derived from
services is recognized upon performance. Contract revenue is recognized on
the percentage-of-completion method. Provisions for anticipated losses are
made in the period in which such losses become determinable. Unbilled revenue
under customer contracts represents revenue earned under the
percentage-of-completion method but not yet billable under the terms of the
contract. These amounts are billable based on the terms of the contract,
which can include shipment of the product, achievement of milestones or
completion of the contract.

Government contracts are performed under negotiated overhead rates and
are subject to audit and retroactive adjustments of amounts paid to the Company.

(f) RESEARCH AND DEVELOPMENT

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

(g) NET INCOME (LOSS) PER COMMON SHARE

Net income (loss) per share of common stock is computed based upon the
weighted average number of shares outstanding during each period and including
the dilutive effect, if any, of stock options and warrants. SFAS 128 requires
the presentation of basic and diluted earnings (loss) per share for all periods
presented. As the Company was in a net loss position for 2000 and 2001, common
stock equivalents of 471,969 and 224,856 for the years ended December 31, 2000
and 2001, respectively, were excluded from the diluted loss per share
calculation as they would be antidilutive. As a result, diluted loss per share
is the same as basic loss per share for 2000 and 2001.

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

(h) ISSUANCE COSTS

Issuance costs of common stock are netted against additional paid-in
capital.

34

IBIS TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

(i) USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results may differ from these
estimates. Management exercises judgment and relies on estimates in assessing
long-lived asset impairment and inventory obsolescence.

(j) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

(k) NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") that
establishes accounting and reporting requirements for derivative instruments and
for hedging activities. SFAS 133 requires companies to recognize all derivatives
as either assets or liabilities in the statement of financial position at fair
value. In June 1999, the FASB decided that the effective date for adopting the
requirements of SFAS 133 should be delayed to fiscal years beginning after June
15, 2000. This delay, published as SFAS 137, applies to quarterly and annual
financial statements. In June 2000, the FASB issued SFAS 138, which addresses a
limited number of issues causing implementation difficulties for numerous
entities that apply SFAS 133. The Company adopted the provisions of SFAS 133 as
amended on January 1, 2001. The adoption of these provisions had no impact on
the Company's financial condition or results of operations.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
No. 101"). This bulletin, as amended, established guidelines for revenue
recognition and was originally effective for periods beginning after March 15,
2000. In June 2000, the SEC announced that the effective date of SAB 101 was
being delayed until no later than the quarter ending December 31, 2000. Ibis
adopted SAB 101 for its fiscal year ending December 31, 2000 and it did not have
a material impact on its financial condition or results of operations.

Statement of Financial Accounting Standards No. 141, "Business
Combinations", ("SFAS 141"), issued in June 2001, addresses financial accounting
and reporting for business combinations which were initiated after June 30,
2001. This Statement also applies to all business combinations accounted for
using the purchase method for which the date of acquisition is July 1, 2001, or
later. The Company does not expect the implementation of SFAS 141 to have a
material impact on its financial condition or results of operations.

Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", ("SFAS 142"), issued in June 2001, addresses financial
accounting and reporting for acquired goodwill and intangible assets. The
provisions of SFAS 142 are required to be applied starting with fiscal years
beginning after December 15, 2001. Early application is permitted for entities
with fiscal years beginning after March 15, 2001, provided that the first
interim financial statements have not previously been issued. Impairment losses
for goodwill and indefinite-lived intangible assets that arise due to the
initial application of this Statement (resulting from a transitional impairment
test) are to be reported as resulting from a change in accounting principle. The
Company does not expect the implementation of SFAS 142 to have a material impact
on its financial condition or results of operations.

35

IBIS TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

Statement of Financial Accounting Standards No. 143, "Accounting For
Asset Retirement Obligations", ("SFAS 143"), issued in August 2001, addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and for the associated retirement
costs. SFAS 143 which applies to all entities that have a legal obligation
associated with the retirement of a tangible long-lived asset is effective for
fiscal years beginning after June 15, 2001. The Company does not expect the
implementation of SFAS 143 to have a material impact on its financial condition
or results of operations.

Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", ("SFAS 144"), issued in October
2001, addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144, which applies to all entities, is
effective for fiscal years beginning after December 15, 2001. The Company does
not expect the implementation of SFAS 144 to have a material impact on its
financial condition or results of operations.

(3) ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following at December 31:

Accounts receivable at December 31, 2001 included the shipment of an
Ibis 1000 oxygen implanter that was shipped to the Shanghai Institute of
Metallurgy, Chinese Academy of Sciences against a letter of credit. The revenue
from this shipment will not be recognized until 2002 when the oxygen implanter
is installed and accepted by the customer.

(4) INVENTORIES

Inventories consisted of the following at December 31:

Equipment inventory at December 31, 2000 included Ibis 1000 implanters
under construction for either resale or the Company's own use. In view of the
continued downturn in the semiconductor industry and the fact that an upturn
from the present economic and industry conditions and Ibis 1000 implanter sales
are not visible, the Company intends to use a majority of the implanters under
construction in its internal wafer production facility. Accordingly, the Company
transferred its equipment inventory to property and equipment as of June 30,
2001.

36

IBIS TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

(5) PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31:

Fixed assets subject to capital leases at December 31, 2000 and 2001
were $66,447 and $4,564,835, respectively. Accumulated depreciation for fixed
assets subject to capital leases was $21,436 and $362,609 in 2000 and 2001,
respectively.

Construction in progress includes implanters under construction that the
Company intends to use in its wafer production facility and other expansion
projects.

At December 31, 2001, the Company had commitments to purchase
approximately $1,019,000 in material or subassemblies to be used in normal
operations and approximately $576,000 in capital equipment purchase commitments.

(6) OTHER ASSETS

In December 2000, the Company entered into a royalty-bearing license
agreement which gives the Company the right to manufacture SIMOX-SOI wafers
using the licensed process. Warrants were issued in connection with this
agreement. The cost of the license agreement, including cash paid and the fair
value of the warrants issued, is $2,280,000 and is included in other assets at
December 31, 2000 (see note 13 (c)).

(7) LEASE COMMITMENTS

In January 1997, the Company entered into a non-cancelable operating
lease for its office and manufacturing facility expiring in 2003 with a
five-year renewal option. In April 2000, the Company entered into a
non-cancelable operating lease for an additional manufacturing facility expiring
in 2005 with a five-year renewal option. This lease was amended in September
2001 by which Ibis secured an additional 20,000 square feet of adjacent space
for future expansion. The Company also leases certain equipment under
non-cancelable operating leases expiring through 2006, as well as equipment used
in operations under non-cancelable capital leases expiring through 2004.

In September 2001 Ibis entered into a $4.5 million equipment lease line
with Heller Financial's Commercial Equipment Finance Group. The lease line was
used to finance the purchase of process equipment for wafer production of
primarily 300mm wafers. This line is a sale-leaseback transaction bearing
interest at approximately 8% with a term of three years and a monthly net
payment of approximately $125,000. Ibis has a fair market value purchase option
at the end of the lease term. The lease-line is secured by the underlying assets
and all other property and equipment of Ibis. The gain of approximately $36,000
under the sale and leaseback has been deferred and will be amortized as a
reduction of depreciation expense over the life of the lease. The unamortized
amount of this gain at December 31, 2001 was $33,704.

37

IBIS TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

Future minimum lease payments under non-cancelable leases at December
31, 2001, are as follows:

Interest was calculated using an imputed interest rate of 14%.

Rent expense was approximately $332,000, $447,000 and $623,000 for the
years ended December 31, 1999, 2000 and 2001, respectively.

(8) ACCRUED LIABILITIES

Current accrued liabilities were as follows at December 31:

(9) DEFERRED REVENUE

In April 2000, the Company received funding from a customer for a
capacity reservation. This capacity reservation will allow this customer to
utilize a purchase credit toward an additional implanter, wafers or spare parts.

In December 2001, the Company shipped an Ibis 1000 oxygen implanter to
the Shanghai Institute of Metallurgy, Chinese Academy of Sciences against a
letter of credit. The revenue from this shipment will not be recognized until
2002 when the oxygen implanter is installed and accepted by the customer. The
costs associated with this shipment are included in deferred costs and will also
be recognized in 2002.

The funding amounts for which revenue has not been earned are included
in deferred revenue.

38

IBIS TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

(10) LICENSE AGREEMENTS

The Company obtained an exclusive sublicense in the field of oxygen
implantation to the proprietary beam scanning system developed by a consultant
to the Company during the development of the first Ibis 1000 implanter. The beam
scanning system sublicense agreement also grants the Company certain rights to
further sublicense the technology for certain applications. The Company received
$181,522, $141,044 and $243,382 in 1999, 2000 and 2001, respectively, for
non-refundable option fees or royalty fees in accordance with non-exclusive
sublicense agreements.

During 1999, Ibis completed an agreement to license its standard and
Advantox SIMOX-SOI wafer fabrication process. The agreement consists of an
initial royalty fee and future royalties based on a percentage of SIMOX-SOI
wafer sales. In 2000 and 2001 the Company recognized no royalty fee income from
this agreement.

(11) INCOME TAXES

Income tax expense consists of state income taxes for each year. No
federal tax benefit was recorded in 1999, 2000 and 2001 due to the existence of
unused net operating loss carryforwards.

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

As a result of the losses incurred to date by the Company, a 100%
valuation allowance has been applied against the Company's deferred tax assets.
The amount recorded as net deferred tax assets as of December 31, 2000 and 2001
represents the tax benefits of existing deductible temporary differences or
carryforwards that are more likely than not to be realized through the
generation of sufficient future taxable income within the carryforward period.
The net change in the total valuation allowance was an increase of $2,896,000
and $4,167,000 for the years ended December 31, 2000 and 2001, respectively.

The Company had federal net operating loss and general business credit
carryovers of approximately $38,065,000 and $808,000, respectively, at December
31, 2001, that may be used to offset future taxable income, if any, through
2021. Deferred tax assets and related valuation allowance of $2,826,000 related
to the net operating loss carryforward results from the exercise 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 a reduction of income tax
expense. Net operating loss carryforwards and other tax attributes may be
limited in the event of certain changes in ownership interests.

39

IBIS TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

(12) CAPITALIZATION

The Company has 50,000,000 shares of common stock and 2,000,000 shares
of preferred stock ("Undesignated Preferred Stock") authorized. At December 31,
2001, 160,496, 1,218,125, and 200,000 common shares were reserved for issuance
upon exercise of options outstanding or available for grant under the Company's
1993 Employee, Director and Consultant Stock Option Plan, 1997 Employee,
Director and Consultant Stock Option Plan, and for exercises of warrants,
respectively.

On August 6, 1999, the Company completed a public offering of 1,000,000
shares of common stock in an offering underwritten by SoundView Technology
Group. The shares were included in a shelf registration statement filed with the
Securities and Exchange Commission on July 8, 1999 and declared effective on
July 26, 1999. Net proceeds from the offering were approximately $25,538,000
after deducting approximately $1,462,000 for underwriting discounts, commissions
and other associated expenses.

(13) STOCK PLANS AND WARRANTS

(a) STOCK OPTION PLANS

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

In October 1997, the Board of Directors approved the adoption of the
Company's 1997 Employee, Director and Consultant Stock Option Plan (the "1997
Plan") which provides for the issuance of options to purchase up to 750,000
shares of common stock of the Company to employees, consultants and non-employee
directors. The stockholders approved 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 the aggregate number of shares reserved
for issuance to 1,350,000. The stockholders approved this amendment at the May
2001 Annual Stockholders Meeting.

A summary of stock option activity under the plans is as follows:

40

IBIS TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2001:

The Company accounts for its stock option plans in accordance with APB
No. 25 and related interpretations. Had compensation costs for the stock option
plans been determined based on the fair value at the grant dates for awards in
1999, 2000 and 2001 consistent with the provisions of SFAS No. 123, the
Company's net income (loss) and net income (loss) per common share would have
been increased or decreased to the following pro forma amounts at December 31:

The per share weighted-average fair value of each option granted during
1999, 2000 and 2001, was $9.91, $25.85, and $7.13, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions: 1999 - expected volatility of 79.47%, risk-free interest
rate of 5.50%, and an expected life of 3 years; 2000 - expected volatility of
96.96%, risk-free interest rate of 5.06%, and an expected life of 3 years; 2001
- - expected volatility of 108.17%, risk-free interest rate of 3.62%, and an
expected life of 3 years. The expected dividend yield rate for 1999, 2000 and
2001 is zero.

Pro forma net loss reflects only options granted in 1995 through 2001.
Therefore, the full impact of calculating compensation costs for stock options
under SFAS No. 123 is not reflected because compensation costs for options
granted prior to January 1, 1995 are not considered.

(b) EMPLOYEE STOCK PURCHASE PLAN

On February 24, 2000, the Board of Directors adopted the Ibis Technology
Corporation 2000 Employee Stock Purchase Plan (the "Purchase Plan") pursuant to
which a total of 300,000 shares of the Company's Common Stock may be sold to
eligible employees of the Company at a 15% discount from the market value of the
shares. Under the terms of the Purchase Plan, employees may elect to have up to
15% of their base earnings withheld to purchase these shares during each
offering period, which is a six month period. The purchase price under the
Purchase Plan is 85% of the lesser of the market price on the beginning or the
ending of the offering period. Approximately 55% of eligible employees
participated in the Purchase Plan in

41

IBIS TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

the initial offering period and 65% in 2001. During 2000 and 2001, the Company
sold 14,161 and 38,176 shares, respectively, to employees under the Purchase
Plan. The stockholders approved the Purchase Plan at the May 2000 Annual
Stockholders Meeting.

(c) WARRANTS

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

In December 2000, the Company issued warrants to purchase 200,000 shares
of common stock at $22.30 per share in connection with a license agreement. The
value of the warrants is included in other assets (see note 6) and was
calculated using the Black-Scholes option-pricing model with the following
assumptions: expected volatility of 93.69%, risk-free interest rate of 5.50%,
and an expected life of 5 years. At December 31, 2001, there were 200,000
warrants outstanding.

(14) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF BUSINESS RISK

The Company sells its products to a limited number of semiconductor and
optical components manufacturers primarily in the United States, the Pacific Rim
and the United Kingdom.

Government sales and other significant customers are shown in dollar
amounts and as a percentage of total revenue as follows:

Accounts receivable from government sales amounted to approximately
$45,000 and 280,000 at December 31, 2000 and 2001, respectively. Accounts
receivable from significant customers amounted to $932,000 and $428,000 and at
December 31, 2000 and 2001, respectively.

Export sales to unaffiliated customers in 1999, 2000 and 2001 were 17%,
47% and 52% of total revenues, respectively.

During 1999, 2000 and 2001, the Company purchased substantially all of
its conventional bulk silicon wafers and certain raw materials, components and
subassemblies for its implanters from a limited group of suppliers. Disruption
or termination of certain of these sources could occur and such disruptions
could have a material adverse effect on the Company's business and results of
operations.

(15) OTHER INCOME

In the third quarter of 2001, the Company recognized a non-recurring
gain in other income of approximately $1.4 million which is the result of an
expired wafer production capacity option that was entered into in September
1995. Under this agreement, a customer advanced non-refundable cash to the
Company to ensure dedicated wafer production capacity over a five-year period.
As wafers were produced, amounts were

42

IBIS TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

recognized in revenue over this five-year period, which ended December 2000.
Ibis completed its negotiations with this customer and decided not to extend the
agreement further. Accordingly, the remaining amount deferred under this
agreement was recognized in income, as no further obligations exist.

(16) INDUSTRY SEGMENTS

The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" during 1998. SFAS No. 131 established the
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders.

The Company's reportable segments are SIMOX Wafer Products, SIMOX
Equipment and Other Products or Services. For purposes of segment reporting,
equipment spares and field service revenue are combined and reported as SIMOX
Equipment. Government contracts, other services and license revenue are combined
and reported as Other Products or Services. In previous financial statements
spares and field service revenue were included in the Other Products or Services
segment. This reclassification was made in the third quarter of 1999 and all
prior periods presented reflect this reclassification.

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

The table below provides information for the years ended December 31,
1999, 2000 and 2001 pertaining to the Company's three industry segments.

43

IBIS TECHNOLOGY CORPORATION

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

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

(17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The Table below provides information for the years 2000 and 2001.

44

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

The Response to this item is incorporated by reference from the
discussion responsive thereto under the captions "Management" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for
the 2002 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

The response to this item is incorporated by reference from the
discussion responsive thereto under the caption "Executive Compensation" in the
Company's Proxy Statement for the 2002 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The response to this item is incorporated by reference from the
discussion responsive thereto under the caption "Share Ownership" in the
Company's Proxy Statement for the 2002 Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The response to this item is incorporated by reference from the
discussion responsive thereto under the captions "Certain Transactions" and
"Executive Compensation--Employment Contracts and Change of Control
Arrangements" in the Company's Proxy Statement for the 2002 Annual Meeting of
Stockholders.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

ITEM 14(a). The following documents are filed as part of this annual
report on Form 10-K.

ITEM 14(a)(1). See "Index to Financial Statements and Financial Statement
AND (2) Schedule" at Item 8 to this Annual Report on Form 10-K. Other
financial statement schedules have not been included because they
are not applicable or the information is included in the
financial statements or notes thereto.

45

ITEM 14(a)(3) EXHIBITS

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

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

@ Confidential treatment previously obtained from the Securities and Exchange
Commission. The portions of the document for which confidential treatment
has been granted are marked "Confidential" and such confidential portions
have been filed separately with the Securities and Exchange Commission.

+ Management contract or compensatory plan, contract or arrangement.

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

(B) FINANCIAL STATEMENT SCHEDULES

Schedule II -- Valuation and Qualifying Accounts

ITEM 14(b) REPORTS ON FORM 8-K

The Company filed with the Commission on October 18, 2001, a Current Report on
Form 8-K for the October 17, 2001 event reporting the public dissemination of a
press release announcing that it had received an order for an Ibis 1000 oxygen
implanter, including spare parts and other options, from the Shanghai Institute
of Metallurgy (SIM), Chinese Academy of Sciences.

The Company filed with the Commission on October 24, 2001, a Current Report on
Form 8-K for the October 24, 2001 event reporting the public dissemination of a
press release announcing third quarter FY 2001 results.

The Company filed with the Commission on December 18, 2001, a Current Report on
Form 8-K for the December 18, 2001 event reporting the public dissemination of a
press release announcing the shipment of an oxygen implanter to Shanghai
Institute of Metallurgy (SIM), Chinese Academy of Sciences.

48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Danvers,
Massachusetts on March 15, 2002.

IBIS TECHNOLOGY CORPORATION

By: /s/ Martin J. Reid
------------------
Martin J. Reid
President

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

49

SCHEDULE II

IBIS TECHNOLOGY CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

S-1