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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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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, 2002

|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from          to
     Commission File Number 0-27892

SIPEX CORPORATION

(Exact name of registrant as specified in its charter)


|                                               |  |                                     
|---------------------------------------------- |  | ------------------------------------
|Massachusetts                                  |  | 04-6135748                          
|(State of Incorporation)                       |  | (IRS employer identification number)
|                                               |  |                                     
|233 South Hillview Drive, Milpitas, California |  | 95035                               
|(Address of principal executive offices)       |  | (Zip Code)                          

Registrants telephone number, including area code: (408) 934-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share

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 o

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

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. o

The aggregate market value of common stock held by non-affiliates of the
registrant as of June 28, 2002 was approximately $136,600,000 based upon $4.89
per share, the last reported sale price of the common stock on The Nasdaq
National Market on that date.

The number of shares of the registrants common stock outstanding on March 26,
2003 was 28,030,659.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference certain portions of information from the
Registrants Proxy Statement for
the 2003 Annual Meeting of Shareholders.



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TABLE OF CONTENTS



|                                            |                                                                                                |  |  |  |  |  |  | 
|------------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                     
|                                            | Item 1. Business:                                                                             
|                                            | Item 2. Properties:                                                                           
|                                            | Item 3. Legal Proceedings:                                                                    
|                                            | Item 4. Submission of Matters to a Vote of Security Holders:                                  
|PART II                                    
|                                            | Item 5. Market for the Companys Common Equity and Related Shareholder Matters:               
|                                            | Item 6. Selected Consolidated Financial Data:                                                 
|                                            | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations:
|                                            | Item 8. Financial Statements and Supplementary Data:                                          
|                                            | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure: 
|PART III                                   
|                                            | Item 10. Directors and Executive Officers of the Registrant:                                  
|                                            | Item 11. Executive Compensation:                                                              
|                                            | Item 12. Security Ownership of Certain Beneficial Owners and Management:                      
|                                            | Item 13. Certain Relationships and Related Transactions:                                      
|                                            | Item 14. Controls and Procedures:                                                             
|PART IV                                    
|                                            | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K:                     
|SIGNATURES                                 
|EXHIBIT INDEX                              
|Ex-10.20 Employement Agreement, 2/2/2003   
|Ex-10.21 Employment Agreement, 9/11/2002   
|Ex-10.22 Employment Agreement, 8/23/2002   
|Ex-10.27 Distributor Market Price Agreement
|Ex-10.28 Addendum "A", dated 2/7/2003      
|Ex-23.1 Consent of KPMG LLP                
|Ex-99.1 Section 906 Certification          
|Ex-99.2 Section 906 Certification          



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PART I




Item 1. Business:

Some of the statements contained in this Annual Report on Form 10-K are
forward-looking statements that involve risks and uncertainties. The statements
contained in this Annual Report on Form 10-K that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, including, without limitation,
statements regarding our expectations, beliefs, intentions or strategies
regarding the future. All forward-looking statements included in this Annual
Report on Form 10-K are based on information available to us on the date
hereof, and we assume no obligation to update any such forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors, which may cause our actual results to differ materially from
those implied by the forward-looking statements. In some cases, you can
identify forward-looking statements by terminology such as may, will,
should, expects, plans, anticipates, believes, intends,
estimates, predicts, potential, or continue or the negative of these
terms or other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot offer any assurance of future results, levels of activity, performance
or achievements. Moreover, neither any other person nor we assume
responsibility for the accuracy and completeness of such statements. Important
factors that may cause actual results to differ from expectations include those
discussed in Factors Affecting Future Results beginning on page 20 in this
document. The terms Sipex, the Company, we, us, its and our as used
in this Annual Report on Form 10-K refer to Sipex Corporation and its
subsidiaries and its predecessors as a combined entity, except where the
context requires otherwise.

Availability of Reports and Other Information

Our Internet website is www.sipex.com. On this web site, the public can access
our annual, quarterly and current reports through a hyperlink to the Securities
and Exchange Commission website.

Company Overview

Sipex Corporation is a semiconductor company that designs, manufactures
and markets, high performance, analog integrated circuits, or ICs, that are
used primarily by original equipment manufacturers, or OEMs, operating in the
computing, consumer, communications and networking infrastructure markets.

While advances in digital technology have fueled the demand for digital
integrated circuits, they have also created a demand for more precise, faster
and more power efficient analog ICs. Sipex possesses a broad portfolio of
analog ICs, organized into three product families: power management, serial
interface and optical storage. Sipex uses its wafer fabrication facility in
Milpitas, California and a number of third party contractors to fabricate,
package and test its ICs. Sipexs products are sold either directly or through
a global network of manufacturers representatives and distributors.

Semiconductor Industry Background

Integrated circuits, the essential building blocks of todays electronic
products, are classified as either digital or analog ICs. Digital ICs (e.g.
memory products, microprocessors and digital signal processors, or DSPs),
process binary signals composed of strings of 0s and 1s. Often they are
constrained by market-based standards and depend on a companys ability to
design and manufacture very large-scale circuits, using expensive,
state-of-the-art process technologies that minimize device size.

Analog ICs act as the bridge between the digital world and physical world.
They transform signals derived from the physical environment, such as heat,
pressure, sound and light, or monitor and condition analog signals derived from
external electronic inputs. By contrast with digital ICs, analog ICs are most
often designed and optimized for specialized applications in niche markets.
Their development and successful market adoption require close customer contact
and the deployment of small, tightly coordinated teams of experienced and
highly skilled engineers who understand the complexities of the IC and
understand the interrelationships with its layout, process technology,
packaging and end application.

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Analog and digital IC manufacturers often share the characteristics of the
semiconductor industry including cyclical market demands, capacity limitations,
occasional oversupply, manufacturing variation, accelerated product life
cycles, price erosion, global competition, capital equipment expenditures and
rapid technology changes. Product life cycles in the analog IC market tend to
be longer and customer pricing less volatile because competition, particularly
foreign competition, is more limited and customers avoid major changes in the
analog portions of their products due to the design complexities involved and
the volume of the product used in a typical application. The capital
expenditures for analog IC manufacturers are typically lower because analog ICs
usually consume less silicon area and their fabrication processes are focused
on device matching and careful layout and do not require frequent and expensive
equipment upgrades or replacements to remain competitive.

Sipexs Business Strategy

To remain competitive in the analog IC market, we supply customers in
target markets with an array of standard product choices, which offer the
features, performance and competitive pricing required to enable and enhance
their end products. Sipex maintains close working relationships with strategic
customers. We believe that our relationships enable us to create and follow
future directed product and technology roadmaps, and shorten our customers
product development cycles. In addition, Sipex has recently restructured its
operations to reduce costs and improve quality.

Sipex Markets, Applications and Products

Sipex sells its products into a variety of applications and markets
including networking and communications, computer and peripherals, industrial
controls and instrumentation and consumer products. The customer end-products
in these markets are driven basically by the same requirements: higher
operating efficiency, higher accuracy, more power at lower voltages, faster
data transfer and higher bandwidth. These requirements provide opportunities
for Sipex to develop power management, serial interface and optical storage ICs
with features designed for applications, ranging from power modules in routers
to pick-up heads in CD/DVD systems.

Sipex currently supports approximately one thousand ICs in three product
categories. These products, whether custom or proprietary, are designed for
specific end applications that require unique feature sets, specific electrical
performance criteria (speed, precision, power, etc.), and/or additional
system-level integration. Sipex focuses on developing these products as
standard analog ICs in order to serve larger markets and reduce the risk of
dependency on single customer requirements.

Power Management Products- These ICs regulate, control, monitor or
provide the reference voltage for a system or portion of a system. DC/DC
regulators and pulse-width modulation/pulse-frequency modulation controllers
convert voltage up or down within a system and provide a controlled level of
power to the system, independent of normal operating load, line and temperature
fluctuations. Supervisory ICs monitor power levels and notify controller ICs of
out-of-range power conditions. Voltage references establish benchmark voltages
within a system and provide constant outputs independent of temperature and
other operating variations. Within this product category, Sipex develops white
light-emitting diode (LED) drivers needed in virtually every consumer portable
device. This product family is replacing the electroluminescent lamp driver
family, which developed high voltage alternating current (AC) signals from low
voltage battery sources that provides backlighting for liquid crystal displays,
or LCDs.

The power management product portfolio continued to expand in 2002 with
proprietary ICs including white LED drivers, DC/DC regulators and controllers.
These new products deliver better power efficiency, increased miniaturization
and more power at lower voltage levels to portable power and distributed power
applications.

Interface Products- Interface products facilitate the transfer of digital
signals between or within electronic systems and ensure reliable connectivity
between networks, computers and the rapidly expanding mix of digital
peripherals and consumer portable devices that connect to them. The single
protocol RS-232 and RS-485 transceivers comply with international standards in
delivering multi-channel digital signals between two systems. The
multi-protocol transceivers enable network equipment to communicate with a
large population of peripherals that use a diverse set of serial protocol
standards without the added burden of multiple add-on boards and cables.

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The focus on lower voltage to conserve energy has made our low voltage,
serial interface ICs popular in a variety of digital peripherals including data
cables for PDAs, cellular phones and digital still cameras. Multi-protocol ICs
continue to be used in networking and telecommunications equipment, but the
overall slowdown in these markets has limited their growth.

Optical Storage Products The optical storage product family, a recent
addition to the Sipex product portfolio, started shipping in volume in the
second quarter of 2002. This family provides complete electronic solutions for
pick-up heads used in optical storage systems, such as CD and DVD devices.

The family currently consists of photo-detector ICs, advanced power
control ICs and laser diode drivers. The photo-detector ICs capture a portion
of the light reflected from the optical storage medium, convert it to a set of
electronic digital signals and forward them to the chipset for processing. The
reflected light contains both data and tracking information. The advanced power
control ICs capture a portion of the optical power coming from the laser and
feed it back into a control system that regulates laser intensity. This control
function is used to prevent damage to the laser diode and extend the life of
the system. For both of these functions, Sipex has developed technology that
permits the photo-detection functions to be incorporated with their signal
conditioning circuitry. This functional integration enables faster read speeds
and smaller footprints in DVD-R/W, DVD-RAM and CD-R/W systems.

Sipex is also developing a family of laser diode drivers that we
anticipate will excite the laser diode in the pick-up head. The Sipex devices
are designed to drive two lasers at high speed. This will allow the customer to
build a 780nm and 650nm system on one pick-up head for combo CD/DVD devices.
These products are scheduled for introduction in 2003.

Sales, Distribution and Marketing

Sipex sells its products to OEM customers primarily through our exclusive
distributor network, as well as through a direct sales force and a network of
independent sales representatives. The direct sales force consists of regional
sales managers and field applications engineers who support our sales
representatives, distributors and customers with technical support services.
Our sales staff and field application engineers also manage, train and support
our network of distributors and representatives. The sales and field
applications staff are located in our Billerica and Milpitas facilities and in
field offices in China, France, Germany, Japan, Korea, Taiwan and the United
Kingdom.

Most of Sipexs sales are generated through the worldwide distributor
network. Most of our design win activity is generated through our wide network
of distributors and independent representatives.

Future Electronics is our exclusive distributor for North America and
Europe. It is also our largest distributor worldwide, and accounted for 24%,
21% and 23% of total net sales, respectively, for the years ended December 31,
2002, 2001 and 2000. Distributor sales to North America and Europe were
approximately $13.3 million in 2002 and 2001 and $24.6 million in 2000,
representing 20.1%, 18.5% and 21.5% of total net sales, respectively. Sipex has
entered into a distributor agreement that provides for Future Electronics to
act as our sole distributor for certain products within these territories.
Sales to this distributor are made under an agreement that provides protection
against price reduction for its inventory of Sipex products. Sipex maintains a
separate price list for products sold to Future Electronics, which reflects
discounts from the prices charged to customers in direct sales transactions. On
a quarterly basis, this distributor is permitted to return for credit a total
of 10% of its total purchases during the most recent three-month period. We
recognize revenue on sales to Future Electronics under the distribution
agreement when it sells the products through to the end customer. For sales to
all other distributors and end customers we recognize revenue upon shipment.

In Japan and the Far East, Sipex sells its products through a number of
distributors. Distributor sales to these regions in 2002, 2001 and 2000 were
approximately $30.4 million, $18.3 million and $34.8 million, respectively,
representing 45.8%, 25.4% and 30.3% of total net sales, respectively.
Substantially all sales to these international locations are denominated in
U.S. dollars. Sipex maintains separate price lists for products sold to
distributors, which typically reflect discounts from the prices charged to
customers in direct sales transactions. Sipex generally does not provide price
protection to these distributors on items that are included in their
inventory. On a semi-annual basis, these distributors are permitted to return
for credit against product purchases of an equivalent dollar value, up to 5% of
their total purchases during the most recent six-month period.

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Sipex is subject to the normal risks of conducting business
internationally, including exchange rate fluctuations. To date, Sipex has not
hedged the risks associated with fluctuations in exchange rates but may
undertake such transactions in the future.

Our marketing team develops long term product and technology roadmaps
based on first hand market knowledge, close customer relationships, industry
experience, and a variety of public and private market data. Detailed technical
information in the form of data sheets, application notes and tutorials is
posted on our website and a variety of technical and sales materials are
published and distributed to customers, sales representative and distributors.
Sipex engages in print advertising to raise market awareness of our products
and services.

Customers

Our customer base is comprised of merchant electronics distributors,
manufacturers, subcontract-assembly companies, and customers with captive
manufacturing operations. The captive manufacturers use our products as
components in their equipment and systems. In certain cases, we sell our
products to subcontract-assembly companies specified by the captive
manufacturer. The merchant manufacturers typically function as OEMs as well as
suppliers of sub-systems to other OEMs.

The end users of our products, include ADC Telecommunications, Alcatel,
Cisco Systems, Dell, IBM, L3, Lexmark, Nortel and Ricoh in the networking/data
communications markets; ATI, BenQ, Casio, Matrox, NEC, Palm, Seiko, Sharp, Sony
and Toshiba in the consumer markets; Cidco, Garmin, L.G. Information Systems,
Motorola, NEC and Samsung in the telecommunications markets and Snecma in
military applications markets.

Backlog

Our product backlog was approximately $12.8 million at December 31, 2002
compared to $22.3 million at December 31, 2001. The decrease in Sipexs
backlog as of December 31, 2002 reflected the dramatic change experienced in
our industry during 2002, where product demand visibility by our end customers
was significantly shortened. This was a result of the general slowdown in the
economy and the continued spending reductions by major customers.

We generally include in backlog all orders scheduled for delivery within
one year. However, our business, and to a large extent the entire semiconductor
industry, is characterized by short-term orders and shipment schedules. Sipex
generally permits orders to be canceled or rescheduled without significant
penalty to customers. As a result, the quantities of our products to be
delivered and their delivery schedules may be revised by customers to reflect
changes in their needs. Since backlog can be canceled or rescheduled, our
backlog at any time is not necessarily indicative of future revenues. In
addition, due to the high percentage of our sales going through the
distributors channel, our backlog may be affected by inventory levels at our
distributors.

Manufacturing

Sipex has a wafer fabrication facility in Milpitas, California which
supplies most of our product needs except for the optical storage products and
certain power products requiring more advanced process technologies. This wafer
fabrication facility commenced manufacturing operations in the second half of
1999, and was used to produce both four-inch and six-inch diameter wafers.
Sipexs facilities have been certified as ISO-9001 compliant. The lease for the
four-inch wafer facility, located in San Jose, California, was assumed by an
unrelated third party in early 2003 as a part of Sipexs restructuring
initiative. At the end of December of 2002, all assembly and test operations in
Billerica, Massachusetts were ceased and we transferred these operations to two
subcontractors in Malaysia.

Manufacturing capabilities are broadened by using third-party foundries to
produce complementary metal-oxide semiconductor (CMOS) processed wafers and
BiCMOS processed wafers. The use of third-party foundries enables us to
minimize fixed costs and capital expenditures while providing access to diverse
manufacturing technologies without bearing the full risk of obsolescence. All of these foundries have been
certified as ISO-9001 compliant. Products produced by third party foundries
represented 29.6%, 26.4% and 30.2% of Sipex shipments in 2002, 2001 and 2000,
respectively.

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Sipex tests integrated circuits or die on the wafers produced internally
and by its foundries for compliance with performance specifications before
assembly. Our commercial products are assembled and tested by a variety of
subcontractors in Malaysia, Indonesia and other locations in Asia which have
been certified as ISO-9002, QS 9000, or ISO-14000 compliant. Following testing,
the packaged units are shipped directly from our subcontractors to our
customers worldwide.

Product Quality Assurance and Reliability

Sipex is committed to customer satisfaction and continuous improvement in
all aspects of its business. This is accomplished through a comprehensive
quality and reliability system founded on documented procedures. Quality tools
such as statistical process control, cross-functional teaming and advanced
statistical analysis are used in qualification, production processes and
quality improvement activities. We maintain close relationships with our
subcontractors and routinely qualify suppliers to established standards. Sipex
is ISO-9001 certified and has continuously maintained its ISO certification
since 1996.

Patents, Licenses and Trademarks

Sipex seeks to protect its proprietary technology through patents and
trade secret protection. Currently, we hold a number of patents expiring
between now and 2021 and have additional United States patent applications
pending, although there can be no assurance that any patents will result from
these applications. While Sipex intends to continue to seek patent coverage for
our products and manufacturing technology where appropriate, we believe that
our success depends more heavily on the technical expertise and innovative
abilities of our personnel than on our patent position. Accordingly, Sipex also
relies on trade secrets and confidential technological know-how in the conduct
of its business. There can be no assurance that Sipexs patents or applicable
trade secret laws will provide adequate protection for our technology against
competitors who may develop or patent similar technology or reverse engineer
our products. In addition, the laws of certain territories in which Sipexs
products are or may be developed, manufactured or sold, including Asia, Europe
and Latin America, may not protect Sipexs products and intellectual property
rights to the same extent as the laws of the United States.

Pursuant to license agreements, Sipex pays a royalty to Timex Corporation
for certain electroluminescent product sales, to Maxim Integrated Products and
Analog Devices for certain interface product sales and the Lemelson Medical,
Education and Research Foundation and Syndia Corporation for certain CMOS and
BiCMOS processes.

Research and Development

Sipex believes that continued introduction of new products in target
markets is essential to growth. As performance demands have increased the
complexity of analog circuits, the design and development process has become a
multi-disciplinary effort, requiring diverse competencies to achieve customers
desired performance. In addition to our staff of design engineers, we have an
infrastructure of product and test engineers who perform various support
functions.

In 2002 and 2001, Sipex spent approximately $12.9 million and in 2000
spent $13.2 million on research and development, representing 19.5%, 17.9% and
11.5%, respectively, of net sales for these periods. Sipex expects to focus
more on the productivity of its research and development investment through
better product definition, consistent strategy and excellent execution. Overall
expenditures in support of research and development activity is likely to
increase slightly in absolute terms in the near future.

Sipexs ability to compete depends in part upon its continued introduction
of technologically innovative products on a timely basis. Our research and
development efforts are directed primarily at designing and introducing new
products and technologies. Sipex seeks to continually upgrade its internal technology
while also working with foundries to develop new technologies for new
generations of products. In addition, Sipex seeks to continually refine its
manufacturing practices and technology to improve product yields.

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Competition

Sipex competes in multiple segments of the analog integrated circuit
market. This market is intensely competitive and many major semiconductor
companies presently compete or could compete with Sipex in the same
applications or products. Sipexs current primary competitors include Analog
Devices, Intersil, Linear Technology, Maxim Integrated Products, Micrel
Semiconductor, National Semiconductor, On Semiconductor, Pioneer, Semtech,
Sharp, Sony and Texas Instruments among others. Our primary competitors have
substantially greater financial, technical, manufacturing, marketing,
distribution, other resources and broader product lines than we do. Although
foreign companies, active in the semiconductor market, have not traditionally
focused on the high performance analog market, with the exception of the
optical marketplace, many foreign companies have the financial and other
resources to participate successfully in these markets and may become
formidable competitors in the future.

Sipex believes that product innovation, quality, reliability, performance
and the ability to introduce products rapidly are important competitive factors
in our target markets, because we compete primarily during the customers
design-in stage of product development. We further believe that cost
competitiveness is paramount in every segment of the semiconductor industry.

Employees

At December 31, 2002, we had 334 full-time employees, as compared with 442
employees in the prior year. During the later part of 2002, we implemented a
restructuring program that included discontinuing the Billerica manufacturing
activities, discontinuing the four-inch wafer fabrication in San Jose,
California, the reorganization of the company into functional groups and the
full conversion to six-inch wafer fabrication facility in Milpitas, California.
These actions have resulted in a significant reduction of the Companys
headcount. Additional restructuring actions may be required. However, if
demand for our product increases, we may be required to increase our headcount
in certain areas.

We believe that our future success will depend, in part, on our ability to
attract and retain qualified technical and manufacturing personnel. This is
particularly important in the areas of product design and development, where
competition for skilled personnel is intense. None of our employees are subject
to a collective bargaining agreement and we have never experienced a work
stoppage.




Item 2.Properties:

Sipexs corporate office is located in Milpitas, California. Information
regarding our principal plants and properties appears below:

|                  |  |                |  |               |        |               |  |              |  |            |            |  |  |  |  | 
|----------------- |  | -------------- |  | ------------- | ------ | ------------- |  | ------------ |  | ---------- | ---------- |  |  |  |  | 
|                  |  |                |  |               |        | Approximate   |  | Owned Or     |  | Lease     
|                  |  |                |  |               |        | Facility Size |  | Leased: Land |  | Expiration
|Location          |  | Description    |  | (Square Feet) |        | Area Owned    |  | Date        
|                  |  |                |  |               |        |               |  |             
|Milpitas, CA      |  | Manufacturing  |  |               | 91,700 |               |  | Owned        |  |            |            | 
|                  |  | General Office |  |               |        |               |  |              |  |            |            |  |  | 
|Billerica, MA     |  | General Office |  |               | 63,280 |               |  | Leased       |  |            | 01/31/2008 | 
|San Jose, CA      |  | Manufacturing  |  |               | 12,500 |               |  | Leased       |  |            | 12/31/2004 | 
|Munich, Germany   |  | General Office |  |               | 1,600  |               |  | Leased       |  |            | 12/31/2004 | 
|Tokyo, Japan      |  | General Office |  |               | 2,500  |               |  | Leased       |  |            | 01/31/2005 | 
|Zaventem, Belgium |  | General Office |  |               | 6,000  |               |  | Leased       |  |            | 09/30/2009 | 
|Shenzhen, China   |  | General Office |  |               | 2,670  |               |  | Leased       |  |            | 04/30/2003 | 
|Taipei, Taiwan    |  | General Office |  |               | 1,400  |               |  | Leased       |  |            | 07/31/2003 | 

We believe that our existing facilities will be adequate after our
restructuring efforts are completed. The Company is seeking to terminate its
lease on the facility located in Billerica, Massachusetts. The lease for the
manufacturing facility located in San Jose, California was assumed by a third
party in the first quarter of 2003, as part of the Companys restructuring
effort.

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Item 3.Legal Proceedings:

Sipex may become involved in various legal actions arising in the ordinary
course of business, including securities class actions and other actions.

In February 1999, Sipex filed a lawsuit against Maxim Integrated Products,
Inc. (Maxim) with the U.S. District Court for the District of Massachusetts
seeking a declaratory judgment that three of Sipexs products did not infringe
Maxim patents. Maxim filed counterclaims alleging certain products sold by
Sipex infringe a Maxim patent. The counterclaims seek injunctive relief and
unspecified damages. Sipex has denied infringement and alleges that the patent
is invalid. The results of any litigation or arbitration are inherently
uncertain, and Sipex can offer no assurance that in any future legal actions
Sipex will prevail. If Sipex does not prevail, we would be required to pay
cash damages, injunctive relief could be issued which would prohibit Sipex from
selling the infringing product and liquidity could be adversely affected. The
Company has accrued $450,000 toward a potential settlement.




Item 4.Submission of Matters to a Vote of Security Holders:

No matters were submitted to a vote of Sipexs security holders during the
quarter ended December 31, 2002.

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Executive Officers of Sipex

Information relating to the executive officers of Sipex is set forth
below. All officers held office as of December 31, 2002 except for Mr. Kagel
who was employed by Sipex beginning February 10, 2003.

|                                                                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name, Age & Position                                                                            |  | Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Walid Maghribi  Age 50 
Chief Executive Officer, President and
Director                        |  | Mr. Maghribi joined Sipex in August 2002 as Chief Executive Officer
and President. In addition, Mr. Maghribi serves as a member of the
Board of Directors. Mr. Maghribi was Senior Vice President of Advanced
Micro Devices, Inc., or AMD, a semiconductor manufacturer, and
President of the $1 Billion Memory Group. Mr. Maghribi was at AMD for
16 years where he served in various other management and executive
positions, including Vice Chairman of the Board of Fujitsu-AMD
Semiconductor Ltd. Prior to joining AMD, Mr. Maghribi served in
various technical and management positions at Seeq, an Ethernet data
communications products company, National Semiconductor, a
semiconductor manufacturer, and Intel, a semiconductor chip maker. Mr.
Maghribi earned a BSEE from San Jose State University and a MS in
computer science from the University of Santa Clara.
|                                                                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Phillip A. Kagel  Age 53
Senior Vice President, Finance,
Chief Financial Officer and Treasurer |  | Mr. Kagel joined Sipex in February 2003 as Senior Vice President,
Finance, Chief Financial Officer and Treasurer. From 1997 to 2002,
Mr. Kagel was Vice President, Corporate Controller and Vice President,
Global Tax at Solectron Corp., an electronic manufacturing services
company. Prior to Solectron Mr. Kagel was Chief Financial Officer over
a twelve-year period at Akashic Memories Corp., a privately held
developer and manufacturer of disk drive media and at Sigmatron Nova,
Inc., a publicly held flat panel display company. Mr. Kagel holds a BS
in Mathematics from Brigham Young University and an MBA from the
University of Missouri.                                                                                                                                                                                                                     
|                                                                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Joseph T. Rauschmayer  Age 44
Senior Vice President, Operations                                |  | Mr. Rauschmayer joined Sipex in September 2002 as Senior Vice
President of Operations. From 1988 to 2002, Mr. Rauschmayer held
various management positions in manufacturing and product line
management at Advanced Micro Devices, Inc., or AMD, a semiconductor
manufacturer, most recently as Vice President of Product Line
Engineering for AMDs Memory Group. Prior to his tenure at AMD, Mr.
Rauschmayer held engineering management positions at the Solid State
Electronics Division of Honeywell, a diversified technology and
manufacturing company, and at the Solid State Division of RCA, a
consumer electronics company. Mr. Rauschmayer earned a BSEE from
Wilkes University and a MSEE from Ohio University.                                                                                                                                                     
|                                                                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Kevin Plouse  Age 42
Senior Vice President, 
Business Development                              |  | Mr. Plouse joined Sipex in September 2002 as Senior Vice President,
Marketing and Business Development. From 1983 to 2002, he held various
positions in marketing, engineering, and manufacturing at Advanced
Micro Devices, Inc., or AMD, a semiconductor manufacturer, most
recently as Vice President of Marketing and Business Development for
AMDs Memory Group. Mr. Plouse earned a BSEE from the University of
the Pacific.                                                                                                                                                                                                                                                                                                                                                                                                                                               

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PART II







Item 5.Market for the Companys Common Equity and Related Shareholder Matters:

Since April 2, 1996, the date of our initial public offering, our common
stock has been available for quotation on The Nasdaq National Market under the
symbol SIPX. The following table sets forth, for the period indicated, the
high and low sale prices per share as reported on The Nasdaq National Market:

Quarterly Stock Market Data

|                             |      |               |  |                |  |               |  |                |  |  |  |        |  |  |  |        | 
|---------------------------- | ---- | ------------- |  | -------------- |  | ------------- |  | -------------- |  |  |  | ------ |  |  |  | ------ | 
|Fiscal 2002                  |      | Dec. 31, 2002 |  | Sept. 28, 2002 |  | June 29, 2002 |  | March 30, 2002
|                             |      |               |  |                |  |               |  |               
|Stock price range per share: |      |               |  |                |  |               |  |                |  |  |  |        |  |  |  |       
|                             | High |               |  | 4.260          |  |               |  | 4.930          |  |  |  | 11.200 |  |  |  | 13.450 | 
|                             | Low  |               |  | 0.960          |  |               |  | 1.600          |  |  |  | 4.090  |  |  |  | 9.510  | 
|                             |      |               |  |                |  |               |  |                |  |  |  |        |  |  |  |        | 
|Fiscal 2001                  |      | Dec. 31, 2001 |  | Sept. 29, 2001 |  | June 30, 2001 |  | March 31, 2001
|                             |      |               |  |                |  |               |  |               
|Stock price range per share: |      |               |  |                |  |               |  |                |  |  |  |        |  |  |  |       
|                             | High |               |  | 13.380         |  |               |  | 14.040         |  |  |  | 13.440 |  |  |  | 25.563 | 
|                             | Low  |               |  | 6.000          |  |               |  | 6.440          |  |  |  | 6.531  |  |  |  | 7.656  | 

On December 31, 2002, there were approximately 67 shareholders of record.
We believe that the number of beneficial holders of common stock exceeds 3,000.
The last reported sale price of the common stock on March 26, 2003 was $3.50
per share. We have never declared or paid a cash dividend on our capital stock.
We currently intend to retain all of our earnings to finance future growth and,
therefore, do not anticipate paying any cash dividends on our common stock in
the foreseeable future.

The disclosure required by Item 201(d) of Regulation S-K is included in
Item 12 of this Annual Report on Form 10-K.




Item 6.Selected Consolidated Financial Data:

Selected financial data for the last five years appear below (in
thousands, except per share data):

|                                             |                     |   |                          |        |      |   |         |       |      |  |        |        |  |   |         |      |   |   |         |      |   |   |         |      |  
|-------------------------------------------- | ------------------- | - | ------------------------ | ------ | ---- | - | ------- | ----- | ---- |  | ------ | ------ |  | - | ------- | ---- | - | - | ------- | ---- | - | - | ------- | ---- | -
|                                             |                     |   | Years ended December 31,
|                                             |                     |   |                         
|                                             |                     |   | 2002                     |        | 2001 |   |         |       | 2000 |  | 1999 * | 1998 *
|                                             |                     |   |                          |        |      |   |         |       |      |  |        |        |  |  
|Operating Results:                           |                     |   |                          |        |      |   |         |       |      |  |        |        |  |   |         |      |   |   |         |      |   |   |         |     
|Net sales                                    |                     | $ | 66,260                   |        |      | $ | 72,062  |       |      |  |        |        |  | $ | 114,620 |      |   | $ | 89,820  |      |   | $ | 91,961  |     
|Gross profit (loss)                          |                     |   | (7,322                   | )      |      |   | (1,496  | )     |      |  |        |        |  |   | 36,490  |      |   |   | 32,593  |      |   |   | 39,773  |     
|                                             | As a % of net sales |   |                          | (11.0  | )%   |   |         | (2.1  | )%   |  |        |        |  |   |         | 31.8 | % |   |         | 36.3 | % |   |         | 43.2 | %
|Depreciation and amortization                |                     |   | 7,675                    |        |      |   | 6,662   |       |      |  |        |        |  |   | 4,273   |      |   |   | 2,528   |      |   |   | 2,392   |     
|Research & development expenses              |                     |   | 12,944                   |        |      |   | 12,858  |       |      |  |        |        |  |   | 13,159  |      |   |   | 10,623  |      |   |   | 8,407   |     
|Income (loss) from operations                |                     |   | (46,289                  | )      |      |   | (31,888 | )     |      |  |        |        |  |   | 3,473   |      |   |   | 2,321   |      |   |   | 15,438  |     
|Income (loss) before income taxes            |                     |   | (47,542                  | )      |      |   | (32,282 | )     |      |  |        |        |  |   | 5,540   |      |   |   | 3,680   |      |   |   | 16,588  |     
|Net income (loss)                            |                     |   | (79,276                  | )      |      |   | (19,692 | )     |      |  |        |        |  |   | 3,917   |      |   |   | 6,099   |      |   |   | 19,429  |     
|                                             | As a % of net sales |   |                          | (119.6 | )%   |   |         | (27.3 | )%   |  |        |        |  |   |         | 3.4  | % |   |         | 6.8  | % |   |         | 21.1 | %
|Net income (loss) per common share  basic   |                     |   | (2.92                    | )      |      |   | (0.82   | )     |      |  |        |        |  |   | 0.18    |      |   |   | 0.28    |      |   |   | 0.92    |     
|Net income (loss) per common share 
diluted |                     |   | (2.92                    | )      |      |   | (0.82   | )     |      |  |        |        |  |   | 0.16    |      |   |   | 0.28    |      |   |   | 0.88    |     
|Balance Sheet and Financial Data:            |                     |   |                          |        |      |   |         |       |      |  |        |        |  |   |         |      |   |   |         |      |   |   |         |     
|Cash/short-term investments                  |                     | $ | 16,469                   |        |      | $ | 4,874   |       |      |  |        |        |  | $ | 1,732   |      |   | $ | 7,089   |      |   | $ | 25,791  |     
|Restricted cash equivalents and securities   |                     |   |                         |        |      |   |        | **    |      |  |        |        |  |   | 36,750  |      |   |   | 36,750  |      |   |   | 24,356  |     
|Total assets                                 |                     |   | 98,786                   | ***    |      |   | 145,127 |       |      |  |        |        |  |   | 148,768 |      |   |   | 119,795 |      |   |   | 107,689 |     
|Long-term debt                               |                     |   | 10,455                   |        |      |   | 7,396   |       |      |  |        |        |  |   | 7,057   |      |   |   |        |      |   |   | 516     |     
|Working capital                              |                     |   | 27,775                   |        |      |   | 36,260  |       |      |  |        |        |  |   | 44,845  |      |   |   | 42,037  |      |   |   | 50,478  |     
|Current ratio                                |                     |   | 3.0                      |        |      |   | 4.7     |       |      |  |        |        |  |   | 3.5     |      |   |   | 3.9     |      |   |   | 3.9     |     
|Capital expenditures                         |                     |   | 4,108                    |        |      |   | 40,441  | **    |      |  |        |        |  |   | 19,467  |      |   |   | 9,214   |      |   |   | 4,700   |     
|Shareholders equity                         |                     |   | 74,520                   |        |      |   | 127,822 |       |      |  |        |        |  |   | 122,797 |      |   |   | 105,101 |      |   |   | 89,772  |     

*     The financial data has been adjusted to reflect the combined operations of
Sipex Corporation and Calogic as a result of the November, 1999 merger which
was recorded as a pooling of interests.

**     In June 2001, Sipex purchased the land, building and equipment of its
Milpitas manufacturing facility for $35.0 million which was formerly under
lease. Proceeds for the buyout were provided through the liquidation of $36.8
million of restricted cash that had previously secured the lease of the
facility and equipment.

*** The 2002 decrease in total assets was mainly due to the establishment of a
100% valuation allowance of $31.9 million for deferred tax assets, the
disposition of machinery and equipment with a net book value of $6.7 million
and $3.0 million writeoff of goodwill.

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Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations:

The following discussion should be read together with our financial
statements and the related notes contained elsewhere in this Annual Report on
Form 10-K.

Overview

We are a semiconductor company that designs, manufactures and markets,
high performance analog ICs that are used primarily by OEMs operating in the
computing, communications and networking infrastructure markets.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements 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 consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. On an ongoing basis, we
evaluate our estimates, including those significant estimates that are
particularly susceptible to change, which include revenue recognition, sales
returns, inventory reserves, restructuring and impairment, and income taxes.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. There can be no
assurance that actual results will not differ from those estimates.

We have identified the accounting policies below as the policies most
critical to our business operations and the understanding of our results of
operations. The impact and any associated risks related to these policies on
our business operations is discussed throughout Managements Discussion and
Analysis of Financial Condition and Results of Operations where such policies
affect our reported and expected financial results.

Revenue Recognition.We record revenue to our largest distributor at the
time the product is sold through to the end user (sell-through). For all other
product sales, assuming all other revenue recognition criteria have been met,
revenue is recognized at the time of shipment because these
distributors/customers have no price protection and have limited return rights.
In addition, management believes that it is able to estimate and establish
appropriate reserves for future returns from these distributors. For product
sales recognized at the time of shipment, Sipex accrues for estimated sales
returns upon shipment based upon our estimates of future returns.

Beginning in the fourth quarter of 2000, we began deferring revenue on
ordinary course shipments to our largest distributor until the product is
resold by the distributor to the end user because the arrangement with this
distributor includes price concessions and return rights, the potential impact
of which we believed we could no longer reasonably estimate. In the fourth
quarter of 2001, Sipex accepted distributor orders from our largest distributor
for certain products on a discounted basis for which the distributor has no
rights of return other than for product related issues, price protection or
cancellation rights and which are not governed by the terms of the existing
distributor contract. Revenue from these orders was recognized at the time of
shipment, since these orders are non-cancelable, non returnable and for which
such sales are not subject to the terms of the Companys distribution agreement
with the distributor, including without limitation the price protection,
restocking and other returns rights the distributor is entitled to in the
agreement. Revenue from engineering service contracts is recorded as
performance is completed.

Sales returns.To estimate reserves for future sales returns, we regularly
review our history of actual returns for each major product line. We also
communicate monthly with our channel partners to gather information about
sell-through activity, end user satisfaction and to determine the volume of
inventory in the channel. We use the results of this analysis
to estimate the reserves for sales returns. We adjust our reserves for
future returns as necessary, based on returns experience, returns expectations
and our communications with our channel partners.

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In estimating reserves, we also consider unusual events and market
conditions. It is possible that future events such as the introduction of a
competitive product, product obsolescence, price competition, continued
slowness in the semiconductor industry and distributors desire to decrease
levels of inventory in the distribution channel could result in significant
changes in customer demand and cause future returns to increase beyond
historical levels. Management believes that it is able to estimate returns, and
establish appropriate reserves for returns from customers for which Sipex
recognizes revenue as of shipment, using the process described above. However,
since reserves for estimated sales returns are recorded as a reduction in
revenues, any significant difference between our estimated and actual returns
experience, or changes in our estimate of reserves for future returns, would be
reflected in our reported revenues in the period we determine that difference,
and could have a material impact on our future results of operations.

Inventory reserves.We establish inventory reserves for estimated excess
quantities, obsolescence or unmarketability. In addition, the Company
establishes estimates to write down inventory costs to the lower of cost or
market. The excess and obsolescence reserve is calculated by comparing current
inventory to both anticipated future demand and shipment history. Lower of
cost or market adjustments are determined by reviewing shipments during the
quarter and comparing standard cost to anticipated market pricing. Inventories
are written down to the lower of cost or market which becomes the cost basis.
In establishing the reserves and estimating anticipated market pricing, we also
consider current market conditions, industry performance, distributor inventory
levels and sales to end-users and all other relevant factors. If actual market
conditions are less favorable than those projected by management, additional
inventory reserves may be required. Reviews of the adequacy of inventory
reserves are performed on a quarterly basis. In 2002, we recorded a $5.4
million provision for excess and slow moving inventory, which included a $1.5
million charge relating to product lines sold or discontinued as part of the
Companys third quarter restructuring plan and a $700,000 charge for physical
inventory adjustments.

Restructuring and impairment.The determination of the estimated
restructuring accrual and impairment requires significant management judgment.
To estimate the restructuring accrual, we prepare a plan that includes the
number of employees to be terminated and the related severance cost, the amount
of impairment for certain fixed assets and inventory, the termination costs of
certain leases and the related actions required to execute the plan. It is
possible that future events such as voluntary employee terminations, sublease
agreements or a shift in the timing of the execution of the plan could result
in significant changes to the original estimate.

Sipex reviews long-lived assets and certain identifiable intangibles,
including goodwill, 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. In estimating future net cash flows, management makes certain
assumptions including future sales levels, gross profit margins and expense
levels. The future net cash flows can vary from management estimates due to
unforeseen circumstances which may result in an impairment or additional
impairment charges required to be recognized in the income statement.

We accounted for restructuring charges prior to January 1, 2003, in
accordance with Emerging Issues Task Force Bulletin 94-3 (EITF 94-3),
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) and SEC Staff Accounting Bulletin No. 100 (SAB 100),
Restructuring and Impairment Charges. Under EITF 94-3, costs associated
with restructuring activities are recorded as restructuring costs in the
consolidated statement of operations. In June 2002 the FASB issued SFAS No.
146, Accounting for Costs Associated With Exit or Disposal Activities. SFAS
No. 146 requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of commitment to an
exit or disposal plan. This Statement is effective for exit or disposal
activities initiated after December 31, 2002. On January 1, 2003, the Company
adopted SFAS No. 146 and at the time of adoption, there was no material impact
on our financial position or results of operations; however, the Company has
not yet determined the implications of adoption on future
results of operations.

Income taxes.In assessing the net realizable value of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
taxable. Management considers the scheduled reversals of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes that it is not

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more likely than
not that the deferred tax assets at December 31, 2002 will be realized in the
future. We therefore established a full valuation allowance and incurred a tax
charge for the full amount of deferred income tax asset of $48.8 million for
the year 2002. Approximately $30,000 of the valuation allowance is
attributable to stock compensation expense for tax purposes, the tax benefit of
which, when realized, will be credited to shareholders equity.

Results of Operations

For the periods indicated, the following table sets forth the percentage
of net sales represented by the respective line items in our consolidated
statements of operations.

|                                  |                                     |  |                          |      |      |  |       |      |  |  |       |      |  
|--------------------------------- | ----------------------------------- |  | ------------------------ | ---- | ---- |  | ----- | ---- |  |  | ----- | ---- | -
|                                  |                                     |  | Years Ended December 31,
|                                  |                                     |  |                         
|                                  |                                     |  | 2002                     |      | 2001 |  | 2000 
|                                  |                                     |  |                          |      |      |  |      
|Net sales                         |                                     |  | 100.0                    | %    |      |  | 100.0 | %    |  |  | 100.0 | %   
|Cost of sales                     |                                     |  | 111.0                    |      |      |  | 102.1 |      |  |  | 68.2  |     
|                                  |                                     |  |                          |      |      |  |       |      |  |  |       |     
|Gross profit (loss)               |                                     |  | (11.0                    | )    |      |  | (2.1  | )    |  |  | 31.8  |     
|                                  |                                     |  |                          |      |      |  |       |      |  |  |       |     
|Operating expenses:               |                                     |  |                          |      |      |  |       |      |  |  |       |     
|                                  | Research and development            |  |                          | 19.5 |      |  |       | 17.9 |  |  |       | 11.5 |  
|                                  | Marketing and selling               |  |                          | 12.2 |      |  |       | 13.8 |  |  |       | 9.4  |  
|                                  | General and administrative          |  |                          | 12.2 |      |  |       | 9.8  |  |  |       | 8.1  |  
|                                  | Restructuring                       |  |                          | 3.2  |      |  |       | 0.2  |  |  |       | (0.5 | )
|                                  | Impairment of fixed assets          |  |                          | 7.2  |      |  |       |     |  |  |       |     |  
|                                  | Amortization/impairment of goodwill |  |                          | 4.5  |      |  |       | 0.5  |  |  |       | 0.3  |  
|                                  |                                     |  |                          |      |      |  |       |      |  |  |       |     
|Total operating expenses          |                                     |  | 58.8                     |      |      |  | 42.2  |      |  |  | 28.8  |     
|                                  |                                     |  |                          |      |      |  |       |      |  |  |       |     
|Income (loss) from operations     |                                     |  | (69.8                    | )    |      |  | (44.3 | )    |  |  | 3.0   |     
|Other income (expense), net       |                                     |  | (1.9                     | )    |      |  | (0.5  | )    |  |  | 1.8   |     
|                                  |                                     |  |                          |      |      |  |       |      |  |  |       |     
|Income (loss) before income taxes |                                     |  | (71.7                    | )    |      |  | (44.8 | )    |  |  | 4.8   |     
|                                  |                                     |  |                          |      |      |  |       |      |  |  |       |     

Fiscal Year Ended December 31, 2002 compared to Fiscal Year Ended December 31,2001

Net sales. Net sales decreased 8.1% to $66.3 million for the year ended
December 31, 2002, as compared to $72.1 million for the year ended December 31,
2001. The decrease in net sales was primarily attributable to the continued
global slowdown in the semiconductor technology end-markets resulting in lower
average selling prices. The decreases were primarily in the hybrid, analog
display and legacy product families. These decreases were partially offset by
increased sales in the power and optical storage families. Net sales
for 2001 were also unfavorably affected by $4.5 million in the first quarter
of 2001, which was related to a change in the timing of revenue recognition on
sales to our largest distributor. Effective October 1, 2000, we began to
recognize revenue on sales to our largest distributor when the distributor
sells our products to end users (sell through), rather than upon shipment of
the product to the distributor. As of December 31, 2000, there was
approximately $4.5 million of inventory shipped to this distributor for which
we had recognized revenue prior to October 1, 2000. Accordingly, our net sales
for the fiscal year ended 2001 were impacted by that amount. Our 2001 net sales
were also impacted by $1.3 million of sales in the fourth quarter to our
largest distributor on a discounted, non-cancelable and non-returnable basis,
which were recorded as revenue upon shipment.

International net sales increased 14% and domestic net sales decreased 43%
for the year ended December 31, 2002, as compared to 2001. International sales
represented 76% and 62% of net sales for 2002 and 2001, respectively. The
increase in the percentage of international sales in 2002 compared to 2001 was
due to a decrease of $12.0 million in domestic sales for 2002, combined with a
$6.2 million increase in international sales. Geographically, Sipex
experienced sales growth of 45.7% in the Pacific Rim and 49.4% in Japan, which
was driven by our power and optical storage product families, while sales
declined 18.2% in Europe and 43.3% in the United States in 2002.

Gross profit (loss).Gross loss was $7.3 million or 11.0% of net sales in
2002, as compared to a gross loss of $1.5 million or 2.1% of net sales in 2001.
The $5.8 million deterioration resulted from the effect of decreased revenue
due to lower average selling prices and increased inventory reserves, and was
partially offset by lower manufacturing costs. The gross loss in 2002 included
$7.1 million of inventory charges of which $1.7 million was a fourth quarter
cost adjustment and $5.4 million was for excess and slow moving inventory,
which included a $1.5 million charge relating to product lines sold or
discontinued as part of the Companys third quarter restructuring plan and a
$700,000 charge resulting from physical inventory adjustments. Of the $5.4
million provision in 2002, $3.2 million was recorded in the fourth quarter. The
2002 deterioration in gross margin was partially offset by improved yields in
the second half of 2002.

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In 2001, our wafer fabrication facility experienced lower capacity
utilization and lower wafer fabrication yields. In addition, we recorded
provisions for slow moving and obsolete material of $5.6 million, which
included an inventory charge of $2.6 million due to the sudden and significant
decrease in forecasted revenue in our business experienced in the second
quarter of 2001.

Research and development.Research and development expenses were $12.9
million for both 2002 and 2001, or 19.5% and 17.9% of net sales, respectively.
Research and development expenses for 2002 included increased expenses for
optical storage product startup costs in 2002, offset by reduced process
development expenses in the wafer fabrication facility. The increase in
research and development as a percentage of net sales in 2002 was primarily due
to the decreased sales.

Marketing and selling.Marketing and selling expenses were $8.1 million
and $9.9 million for 2002 and 2001, respectively, or 12.2% and 13.8% of net
sales, respectively. The absolute dollar decrease in marketing and selling
expenses in 2002, as compared to 2001, was due to decreased sales
representative commissions on lower net sales and the continued effect of cost
savings measures implemented in the fourth quarter of 2001. The decrease as a
percentage of net sales in 2002 was attributable to decreased sales
representative commissions and continued cost savings measures, which were
partially offset by the decrease in sales.

General and administrative.General and administrative expenses were $8.1
million and $7.1 million in 2002 and 2001, respectively, or 12.2% and 9.8% of
net sales, respectively. The $1.0 million increase in general and
administrative expenses was primarily due to severance costs of approximately
$800,000 paid in the second quarter of 2002 to the Companys former Chief
Executive Officer. The increase as a percentage of net sales in 2002 was due
to these costs and the decrease in sales.

Amortization/impairment of goodwill. The Company adopted SFAS 142
effective January 1, 2002, thereby discontinuing annual goodwill amortization
of approximately $376,000. Upon adoption of SFAS 142, the Company performed a
goodwill impairment test and concluded that there was no indication of
impairment and recorded no impairment charges as of January 1, 2002. In the
second quarter of 2002, the Company experienced a significant reduction in the
fair value of its common stock. The fair value decrease was primarily related
to the financial impact to Sipex of the continued global slowdown in the
semiconductor industry. As a result, the Company performed a goodwill
impairment test in accordance with SFAS 142. The results of this impairment
test indicated that the full amount of the Companys goodwill of $3.0 million
was not recoverable and was written off. During 2001 and 2000, the Company
recorded goodwill amortization of $376,000.

The proforma effects of the adoption of SFAS 142 on net income and
earnings per share for the Company for the year ended December 31, 2001 and
2000 are as follows (in thousands):

|                                             |                                          |   |                          |         |      |   |       |       | 
|-------------------------------------------- | ---------------------------------------- | - | ------------------------ | ------- | ---- | - | ----- | ----- | 
|                                             |                                          |   | Years ended December 31,
|                                             |                                          |   |                         
|                                             |                                          |   | 2001                     |         | 2000
|                                             |                                          |   |                          |         |     
|Net income (loss) as reported                |                                          | $ | (19,692                  | )       |      | $ | 3,917 |      
|Goodwill amortization expense                |                                          |   | 376                      |         |      |   | 376   |      
|                                             |                                          |   |                          |         |      |   |       |      
|                                             | Adjusted income (loss)                   |   | $                        | (19,316 | )    |   | $     | 4,293 | 
|                                             |                                          |   |                          |         |      |   |       |      
|Basic income (loss) per share, as reported   |                                          | $ | (0.82                    | )       |      | $ | 0.18  |      
|Add back: Goodwill amortization expense      |                                          |   | 0.02                     |         |      |   | 0.02  |      
|                                             |                                          |   |                          |         |      |   |       |      
|                                             | Proforma basic income (loss) per share   |   | $                        | (0.80   | )    |   | $     | 0.20  | 
|                                             |                                          |   |                          |         |      |   |       |      
|Diluted income (loss) per share, as reported |                                          | $ | (0.82                    | )       |      | $ | 0.16  |      
|Add back: Goodwill amortization expense      |                                          |   | 0.02                     |         |      |   | 0.02  |      
|                                             |                                          |   |                          |         |      |   |       |      
|                                             | Proforma diluted income (loss) per share |   | $                        | (0.80   | )    |   | $     | 0.18  | 
|                                             |                                          |   |                          |         |      |   |       |      

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Restructuring, fixed asset impairment and inventory costs.In September
2002, Sipex announced a plan to close the Companys four-inch wafer fabrication
facility in San Jose, California and change to a modified five day per week
work schedule from the seven day per week schedule in the six-inch wafer
fabrication facility in Milpitas. These actions were taken to reduce the
Companys cost structure as a result of the continued slowdown in the
semiconductor industry and to align the structure with our current business
plan, which included the sale and discontinuance of the hybrid product line at
the end of the third quarter and the discontinuance of the analog display
product line which is expected to be completed by the end of the first quarter
of 2003. These product families accounted for approximately $4.0 million of net
sales in the third quarter of 2002. These actions allow us to consolidate our
operations and focus on our three core businesses consisting of serial
interface, power management and optical storage.

Below is a summary of the activity related to restructuring costs for
fiscal years 2002 and 2001 (in thousands):

|                         |                        |   |               |        |                  |   |           |        |   |   |   |        |  
|------------------------ | ---------------------- | - | ------------- | ------ | ---------------- | - | --------- | ------ | - | - | - | ------ | -
|                         |                        |   | Restructuring |        | Fixed Asset      |   | Inventory
|                         |                        |   | Costs         |        | Impairment Costs |   | Costs    
|                         |                        |   |               |        |                  |   |          
|Accrual balance 12/31/00 |                        | $ | 506           |        |                  | $ |          |        |   | $ |  |       
|                         | Incurred 2001          |   |               | 534    |                  |   |           |       |   |   |   |       |  
|                         | Charges utilized       |   |               | (683   | )                |   |           |       |   |   |   |       |  
|                         | Adjustments to accrual |   |               | (357   | )                |   |           |       |   |   |   |       |  
|                         |                        |   |               |        |                  |   |           |        |   |   |   |       
|Accrual balance 12/31/01 |                        |   |              |        |                  |   |          |        |   |   |  |       
|                         | Incurred 2002          |   |               | 2,857  |                  |   |           | 4,718  |   |   |   | 1,908  |  
|                         | Charges utilized       |   |               | (1,371 | )                |   |           | (4,718 | ) |   |   | (1,524 | )
|                         | Adjustments to accrual |   |               | (731   | )                |   |           |       |   |   |   | (384   | )
|                         |                        |   |               |        |                  |   |           |        |   |   |   |       
|Accrual balance 12/31/02 |                        | $ | 755           |        |                  | $ |          |        |   | $ |  |       
|                         |                        |   |               |        |                  |   |           |        |   |   |   |       

General

During 2002, we recorded restructuring charges of $2.9 million, $4.7
million of fixed asset impairment charges and $1.9 million of inventory reserve
charges. Gross restructuring charges consisted of employee severance costs of
$524,000, management reorganization charges of approximately $1.7 million and
accrued lease expenses of $661,000 for the Companys San Jose facility. These
gross restructuring charges were reduced in the fourth quarter for a $661,000
reversal in accrued lease costs for the Companys San Jose facility due to the
sale of the analog display business in the first quarter of 2003 which included
the assumption of the lease by the third party purchaser and a $70,000 decrease
in employee termination costs. Fixed asset impairment charges for 2002
consisted of $1.8 million to write down the value of the machinery and
equipment in the San Jose facility to its fair value, as a result of the
closure of the San Jose fabrication facility in the first quarter of 2003, and
$2.9 million of fabrication equipment at the Milpitas fabrication facility.
The $1.9 million inventory reserve, which is recorded as cost of sales, was
established to provide for the discontinued analog display and hybrid product
families. In the fourth quarter, the reserve was reduced by $384,000 due to
the unexpected sale of a portion of the inventory.

Restructuring

The third quarter 2002
restructuring charges for the above actions were $2.6
million, which consisted of $256,000 of severance costs related to a reduction
in force of approximately 50 employees at both manufacturing facilities, $1.7
million of severance and related costs to six former management employees
related to the Companys plan to reorganize into six functional groups and
facility costs of $661,000 consisting mainly of the remaining lease payments at
the San Jose fabrication facility.

In the
fourth quarter of 2002, Sipex incurred restructuring costs related to the
transfer of the Companys backend test operations from the Billerica,
Massachusetts, facility to subcontractors in Malaysia. The restructuring costs
consisted of $268,000 of employee severance related costs for the workforce
reduction of approximately 60 employees and freight charges of $48,000 related
to the $2.0 million sale of the Billerica test related machinery and equipment
with a net book value of $1.7 million. Accrued severance costs as of December
31, 2002 are planned to be paid mainly during the first half of 2003.

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Impairment

Third quarter 2002 fixed asset impairment charges totaled $4.7 million,
consisting of $2.9 million of fabrication equipment on the Companys four-inch
and six-inch manufacturing product lines at the Milpitas fabrication facility
and $1.8 million for the write down to fair value of the machinery and
equipment at the San Jose fabrication facility which had been scheduled to be
closed by the end of the first quarter of 2003. In the first quarter of 2003,
the San Jose fabrication machinery and equipment, which had been written down
by $1.8 million, were sold to an unrelated third party. The gain on the sale
of the San Jose fabrication machinery and equipment will be recorded upon
collection of the cash due to the length of time and related uncertainties
affecting their ultimate receipt.

During 2001 we recorded net restructuring charges of $177,000 consisting
of $534,000 for severance payments related to the reduction of our
workforce, partially offset by a reduction of $357,000 in the restructuring
accrual, which was established in the fourth quarter of 1999. The reduction in
2001 was due to the sale of the Calogic fabrication facility, which had been
planned for closure in 2001. As a result of the sale, we reduced both the
facility exit related and employee termination portions of the accrual due to
the assumptions of the facility by the new owners who retained many of the
employees to whom we had planned to pay severance costs.

Other income (expense).Other income (expense), net was $(1.3) million and
$(394,000) in 2002 and 2001, respectively. The decrease in other income in
2002 was due primarily to decreased interest income as a result of the decrease
in restricted cash in the second quarter of 2001. The restricted cash was used
to purchase the land, building and equipment of the Milpitas wafer fabrication
facility.

Income tax expense.We recorded an income tax charge of $31.7 million for
2002, as compared to an income tax benefit of $12.6 million for 2001. In the
second quarter of 2002, the Company established a full valuation allowance for
its deferred tax assets, which included significant net operating loss and tax
credit carryforwards. The valuation allowance was established, as the Company
no longer believed that it is more likely than not that the net operating loss
and tax credit carryforwards would be realized during the carryforward period.
This change in estimate during the second quarter of 2002 was based on
updated evaluations considering historical taxable income levels and
expectations of future taxable income. For the year ended December 31, 2001,
the Company recorded an income tax benefit at a 39% effective rate. The
Company recorded the tax benefit for the 2001 period and the related increase
in deferred tax assets, as it believed it was more likely than not,
considering the level of historical taxable income and expectations for future
taxable income, that the operating loss would be utilized in the future to
offset taxable income.

Fiscal Year Ended December 31, 2001 compared to Fiscal Year Ended December 31, 2000

Net sales. Net sales decreased 37.1% to $72.1 million for the year ended
December 31, 2001, as compared to $114.6 million for the year ended December
31, 2000. The decrease in net sales was primarily due to the global slowdown in
the semiconductor technology end-markets resulting in lower shipment levels.
Net sales were also reduced in 2001 by reductions in the selling price of some of our power management and interface
products. Additionally, net sales were further reduced by the second quarter
increase in reserves for returns of $1.2 million, which was based upon our
decision to authorize returns from certain distributors in excess of their
contractual return privileges, due to continued slowness in the semiconductor
industry. Year-to-date 2001 net sales were also affected by $4.5 million in
the first quarter of 2001, which was related to a change in the timing of
revenue recognition on sales to our largest distributor. Effective October 1,
2000, we began to recognize revenue on sales to our largest distributor when
the distributor sells our products to end users (sell through), rather than
upon shipment of the product to the distributor. As of December 31, 2000,
there was approximately $4.5 million of inventory shipped to this distributor
for which we had recognized revenue prior to October 1, 2000; accordingly, our
net sales for the fiscal year ended 2001 were impacted by that amount.
Approximately 62% of our net sales were derived from international customers in
2001, as compared to 53% in 2000. Geographically, in 2001, sales decreased in
all regions except for Europe, as compared to 2000.

Gross profit (loss).Gross loss was $1.5 million or 2.1% of net sales in
2001 compared to gross profit of $36.5 million or 31.8% of net sales in 2000.
The reduction in gross profit as a percentage of net sales in 2001 from 2000
was primarily due to the higher operating costs of the Milpitas wafer
fabrication facility, lower capacity utilization, lower wafer fab yield and the
reduced selling prices on some of our power management and interface products
as a result of the continued global slowdown in the semiconductor industry.

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In the second quarter of 2001, we announced that a continued softness in
our business led to a reduction in the demand on our inventory. During the
several quarters preceding the announcement, we had expanded our internal
fabrication facility and test operations in response to forecasts of
significant revenue growth in our business. However, we experienced significant
customer deferrals of delivery dates and order cancellations. These customer
actions contributed to higher than normal levels of inventory, which based on
current and forecasted demand, would not be consumed during the products life
cycle. As a result, we recorded an inventory charge of $2.6 million due to the
sudden and significant decrease in forecasted revenue in our business.

Research and development.Research and development expenses were $12.9
million and $13.2 million in 2001 and 2000, respectively, or 17.9% and 11.5% of
net sales, respectively. The reduction in research and development expenses in
2001, as compared to 2000, was due to cost saving measures taken due to the
continued slowness in the semiconductor industry. The reduction included
decreases in bonuses and discretionary spending such as travel, which were
offset by continued spending related to process development in the new wafer
fabrication facility. The increase as a percentage of net sales in 2001 was
primarily due to lower sales.

Marketing and selling.Marketing and selling expenses were $9.9 million
and $10.8 million in 2001 and 2000, respectively, or 13.8% and 9.4% of net
sales, respectively. The decrease in marketing and selling expenses in 2001
over 2000 was due to lower commissions due to decreased sales and lower
discretionary spending such as travel and entertainment and was partially
offset by increased advertising and additional sales resources in Asia. The
increase as a percent of sales in 2001 was primarily due to lower sales.

General and administrative.General and administrative expenses, including
amortization of goodwill, were $7.1 million and $9.2 million in 2001 and 2000,
respectively, or 9.8% and 8.1% of net sales, respectively. The decrease in
general and administration expenses was due primarily to controls over
spending, and decreased salaries and bonuses in 2001. The increase as a percent
of sales in 2001 was due primarily to the lower sales.

Restructuring costs.Below is a summary of the activity related to
restructuring costs for fiscal years 2001 and 2000 (in thousands):

|                         |                        |   |               |      |  
|------------------------ | ---------------------- | - | ------------- | ---- | -
|                         |                        |   | Restructuring
|                         |                        |   | Costs        
|                         |                        |   |              
|Accrual balance 12/31/99 |                        | $ | 1,870         |     
|                         | Charges utilized       |   |               | (839 | )
|                         | Adjustments to accrual |   |               | (525 | )
|                         |                        |   |               |     
|Accrual balance 12/31/00 |                        |   | 506           |     
|                         | Incurred 2001          |   |               | 534  |  
|                         | Charges utilized       |   |               | (683 | )
|                         | Adjustments to accrual |   |               | (357 | )
|                         |                        |   |               |     
|Accrual balance 12/31/01 |                        | $ |              |     
|                         |                        |   |               |     

During 2001 we recorded net restructuring charges of $177,000 consisting
of $534,000 for severance payments related to the reduction of our workforce.
These charges were recorded as a result of the continued slowness in the
semiconductor market, partially offset by a reduction of $357,000 in the
restructuring accrual, which was established in the fourth quarter of 1999.
The reduction in 2001 was due to the sale of the Calogic fabrication facility,
which had been planned for closure in 2001. As a result of the sale, we reduced
both the facility exit related and employee termination portions of the accrual
due to the assumptions of the facility by the new owners who retained many of
the employees to whom we had planned to pay severance costs.

In fiscal 2000, a $1.9 million restructuring accrual, which was
established in 1999 for the closure of the Calogic facility, was reduced by
$525,000. This reduction resulted from delaying the timing of the closure of
the Calogic facility to match the timing of the Milpitas facility ramp-up.

Other income (expense).Other income (expense), net was $(394,000) and
$2.1 million in 2001 and 2000, respectively. The decrease in other income was
due primarily to interest expense in 2001 as a result of borrowings on our bank
line of

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credit, decreased interest income as a result of the decrease in
restricted cash in the second quarter of 2001 which was used to purchase the
land, building and equipment of the Milpitas wafer fabrication facility, which
was formerly leased and a $292,000 increase in royalty expense due to the
discontinuance of offsetting royalty income.

Income tax expense.We recorded an income tax benefit of $12.6 million for
2001 compared to an income tax expense of $1.6 million for 2000, resulting in
an effective income tax benefit rate of 39.0% in 2001 compared to an effective
tax expense rate of 29.3% in 2000. The 2001 effective rate differs from the
2000 effective rate primarily due to the disproportionately larger impact of
federal and state tax credits on the effective rate in 2000.

Financial Condition, Liquidity and Capital Resources

As of December 31, 2002, we had available funds of $16.5 million
consisting of cash, cash equivalents and short-term investments, as compared to
$4.9 million at December 31, 2001. Net cash used in operations was $15.2
million, $16.5 million, and $1.0 million in 2002, 2001 and 2000, respectively.
Net cash used in operating activities in 2002 resulted primarily from a $79.3
million net loss, of which $54.7 million was non-cash related, partially offset
by a $1.6 million decrease in accounts receivable, a $5.5 million decrease in
inventories and a $2.1 million increase in accounts payable. The significantly
greater net loss in 2002 was largely due to the $31.9 million non-cash tax
charge as a result of the establishment of a valuation allowance for the full
amount of our net deferred income tax assets, as compared to an increase of
$11.9 million of deferred income tax assets for the same period last year and
$4.7 million of fixed asset impairment charges in 2002. This increased net
loss, which also included a $3.0 million charge for goodwill impairment, a
provision of $2.1 million for uncollectable receivables and returns and
allowances and a provision of $5.4 million for excess and obsolete inventory,
did not result in greater net cash used in our operations as the deferred tax
charge, goodwill impairment, fixed asset impairment and provision for
receivables are not cash items. In 2001, net cash used in operating activities
resulted primarily from a $19.7 million net loss, an $11.9 million increase in
deferred income tax assets, a $4.6 million decrease in accounts payable, a $2.4
million decrease in accrued expenses and a $1.4 million decrease in other
long-term liabilities. These cash outflows were partially offset by a $5.2
million decrease in accounts receivable and a decrease in inventory of $2.4
million.

Net accounts receivable was $7.3 million and $11.0 million as of December
31, 2002 and 2001, respectively. The $3.7 million decrease was due to lower
sales and improved collections for the fourth quarter to 2002. Bad debt
allowances were $292,000 and $444,000 as of December 31, 2002 and 2001,
respectively. Distributor reserves were $653,000 and $2.0 million as of
December 31, 2002 and 2001, respectively. The decrease was the result of
improved inventory management and decreased inventory levels at the
distributors.

Net inventory was $14.4 million and $25.3 million as of December 31, 2002
and 2001, respectively. The $10.9 million reduction in 2002 included
charges of $7.1 million, of which $1.7 million was a fourth quarter
cost adjustment and $5.4 million was for excess and slow moving
inventory,
which included a $1.5 million charge relating to product lines sold or
discontinued as part of the Companys third quarter restructuring plan and a
$700,000 charge resulting from physical inventory adjustments. The remaining
decrease is the result of improved cycle times.

Net cash used in investing activities was $12.1 million and $3.7 million
for the years ended December 31, 2002 and 2001, respectively. Additions to
property, plant and equipment were $4.1 million in 2002, as compared to $40.4
million in 2001. The expenditures in the 2001 period consisted mainly of the
purchase of the land, building and equipment of our Milpitas manufacturing
facility for $35.0 million in June 2001, which was previously leased. Proceeds
for the lease buyout in 2001 were provided by the liquidation of $36.8 million
of restricted cash. Additionally in 2002, $14.9 million was used for the
purchase of short-term investments offset by $5.0 million received on
maturities of short-term investments.

Net cash of $29.0 million and $23.2 million was provided by financing
activities for the years ended December 31, 2002 and 2001, respectively. In
the second quarters of 2002 and 2001, we received cash of $23.5 million and
$21.6 million, respectively, net of placement agent fees and other costs,
through the private placements of 3.0 million and 2.2 million shares,
respectively, of Sipex common stock. Proceeds from the 2002 offering were used
to pay down our line of credit to zero, with the balance to be used for general
corporate purposes. Proceeds from the 2001 offering were used to pay down our
line of credit to $7.2 million from $11.0 million at the end of the first
quarter of 2001, with the balance used to provide funding for operations.

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On September 27, 2002, Sipex sold a convertible secured note (the Note)
with an attached warrant to an affiliate of its largest distributor for an
aggregate cash amount of $12.0 million. The Company recorded the Note at $10.4
million and the warrant at $1.6 million (recorded to paid-in-capital) based
upon their estimated fair values at the date of issuance using the
Black-Scholes option pricing model. The Note pays a 5.75% coupon and is
convertible after one year into Sipex common stock at a conversion price of
$7.50 per share. Following the one year anniversary of the issuance of the
Note, the Company can require the conversion of the Note in installments if for
a period of time Sipex common stock trades at a price in excess of 150% of the
conversion price of $7.50. The private placement also included a warrant to
purchase 900,000 shares of Sipex common stock exercisable for a two-year period
beginning on the one-year anniversary of the date of issuance. The exercise
price for the warrant is equal to 110% of the average closing price for the 5
days preceding the closing or $2.9458. The warrant has been recorded as an
addition to paid-in capital. The discount on the Note of $1.6 million,
recorded at the time of purchase, is being amortized over the five-year term of
the Note and may be accelerated as a result of conversion. The Note matures on
September 27, 2007. The Note is secured by a Deed of Trust on the Companys
land and building in Milpitas, California.

On April 16, 2002, the outstanding bank line of credit balance of $6.9
million was paid down to zero using proceeds from the private placement of
Company common stock. On September 27, 2002, the Company terminated its line
of credit agreement with its bank. The banks security interest in
substantially all the Companys assets was subsequently extinguished.

Sipexs commitments and contingencies consist of the Note (discussed
above), operating lease obligations and a potential contingent loss relating to
a patent litigation suit with Maxim Integrated Products, Inc. (discussed
below). Minimum payments under the commitment and contingencies as of December
31, 2002 are approximately as follows (in thousands):

|              |  |           |       |         |      |       |        |  |  |   |        | 
|------------- |  | --------- | ----- | ------- | ---- | ----- | ------ |  |  | - | ------ | 
|              |  | Operating |       |         | Note |       |        |  |  |  
|Calendar Year |  | Lease     |       | Payable |      | Total
|              |  |           |       |         |      |      
|2003          |  | $         | 850   |         |      | $     |       |  |  | $ | 850    | 
|2004          |  |           | 808   |         |      |       |       |  |  |   | 808    | 
|2005          |  |           | 690   |         |      |       |        |  |  |   | 690    | 
|2006          |  |           | 683   |         |      |       |        |  |  |   | 683    | 
|2007          |  |           | 683   |         |      |       | 12,000 |  |  |   | 12,683 | 
|Thereafter    |  |           | 200   |         |      |       |       |  |  |   | 200    | 
|              |  |           |       |         |      |       |        |  |  |   |        | 
|              |  | $         | 3,914 |         |      | $     | 12,000 |  |  | $ | 15,914 | 
|              |  |           |       |         |      |       |        |  |  |   |        | 

In February 1999, Sipex filed a lawsuit against Maxim with the U.S.
District Court for the District of Massachusetts seeking a declaratory judgment
that three of Sipexs products did not infringe Maxim patents. Maxim filed
counterclaims alleging certain products sold by Sipex infringe a Maxim patent.
The counterclaims seek injunctive relief and unspecified damages. Sipex has
denied infringement and alleges that the patent is invalid. The results of any
litigation or arbitration are inherently uncertain, and Sipex can offer no
assurance that in any future legal actions Sipex will prevail. If Sipex does
not prevail, we would be required to pay cash damages, injunctive relief could
be issued which would prohibit Sipex from selling the infringing product and
liquidity could be adversely affected. The Company has accrued $450,000 toward
a potential settlement.

We believe that our currently available cash and investments, combined
with our cost reduction programs-in-process and the restructuring and
reorganization that we have taken, will be sufficient to meet our cash and
working capital requirements through at least December 31, 2003. We may need to
raise additional funds if our estimates change or prove inaccurate, if our cost
reduction initiatives are insufficient, for general working capital purposes,
or to strengthen our financial position. Our ability to raise funds may be
adversely affected by a number of factors relating to Sipex, as well as factors
beyond our control, including the continued downturn in the semiconductor
industry, volatility and uncertainty in the capital markets as well as
continued market uncertainty related to the ongoing U.S. war on terrorism and
the war with Iraq. There can be no assurance that any financing will be
available on terms acceptable to us, if at all, and any need to raise
additional capital through the issuance of equity or debt securities may result
in additional, and perhaps, significant dilution.

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Effect of Recent Accounting Pronouncements

In June 2001, SFAS No. 143, Accounting for Asset Retirement Obligations,
was issued. SFAS No. 143 addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of the fair value can be made.
The Company adopted the provisions of SFAS No. 143 on January 1, 2003 and its
adoption did not have a material impact on its financial position or results of
operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for impairment or disposal of long-lived assets. This
statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. This Statement
requires that long-lived assets be reviewed 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 undiscounted net cash
flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future undiscounted net cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement
No.s 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections, effective for fiscal years beginning May 15, 2002 or later. It
rescinds SFAS No. 4, Reporting Gains and Losses From Extinguishments of Debt,
SFAS No. 64, Extinguishments of Debt to Satisfy Sinking-Fund Requirements,
and SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. This
Statement also amends SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects similar to sale-leaseback transactions. This Statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. On January 1, 2003, the Company adopted SFAS No. 145 and at the
time of adoption, there was no material impact on its financial position or
results of operations; however, the Company has not yet determined the
implications of adoption on future results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated With Exit or Disposal Activities. SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan.
This Statement is effective for exit or disposal activities initiated after
December 31, 2002. On January 1, 2003, the Company adopted SFAS No. 146 and at
the time of adoption, there was no material impact on our financial position or
results of operations; however, the Company has not yet determined the
implications of adoption on future results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of a stand-ready to perform obligation assumed under a guarantee.
Additionally, a guarantor must recognize a contingent obligation to make future
payments when such obligation becomes probable and estimable. FIN 45 also
requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with guarantees issued.
The recognition provisions of FIN 45 will be effective for any guarantees that
are issued or modified after December 31, 2002. The Company does not guarantee
any obligations and as a result, management does not expect the adoption of FIN
45 to have a material impact on the Companys financial position or results of
operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock
Based Compensation - Transition and Disclosure - an Amendment of SFAS 123.
SFAS No. 148 provides additional transition guidance for those entities that
elect to voluntarily adopt the provisions of SFAS No. 123, Accounting for
Stock Based Compensation. Furthermore, SFAS No. 148 mandates new prominent
disclosures in both interim and year-end financial statements about the fair
value based method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 is effective for
fiscal years ending after December 15, 2002. Management does not believe the
adoption of SFAS No. 148 had or will have a material impact on the Companys
financial position or results of operations because the Company expects to
continue to account for stock options granted under its stock incentive plans
in accordance with the provisions of APB No. 25 and related interpretations.

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SFAS No. 148 is effective for fiscal years ending after December 15, 2002. Management does not
believe the adoption of SFAS No. 148 had or will have a material impact on the
Companys financial position or results of operations because the Company
expects to continue to account for stock options granted under its stock
incentive plans in accordance with the provisions of APB No. 25 and related
interpretations.

Factors Affecting Future Results

Except for historical information contained herein, the matters set forth
on this report on Form 10-K, including the statements in the following
paragraphs, are forward looking statements that are dependent on certain risks
and uncertainties including, without limitation, such factors as, among others,
delays in new product and process technology announcements and product
introductions by us or our competitors, competitive pricing pressures,
fluctuations in manufacturing yields, changes in the mix or markets in which
our products are sold, availability and costs of raw materials, reliance on
subcontractors, the cyclical nature of the semiconductor industry,
industry-wide wafer processing capacity, political and economic conditions in
various geographic areas, and costs associated with other events, such as
under-utilization or expansion of production capacity, intellectual property
disputes, litigation, or environmental regulation and other factors described
below and elsewhere in this Form 10-K. These risks and uncertainties are not
the only ones facing our Company. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our
business operations. If any of these risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In such case, the trading price of our common stock could decline.

Our quarterly and annual operating results are volatile and difficult to
predict and may cause our stock price to fluctuate.

Our quarterly and annual operating results are affected by a wide variety
of factors that could materially and adversely affect net sales and
profitability from period-to-period, including:



| |  |  | the cyclical nature of the semiconductor industry;                                                                                                         
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | competitive pressures on selling prices;                                                                                                                   
|
| |  |  | the timing and cancellation of customer orders;                                                                                                            
|
| |  |  | the availability of foundry capacity, raw materials and assembly and test capacity;                                                                        
|
| |  |  | fluctuations in yields;                                                                                                                                    
|
| |  |  | changes in product mix;                                                                                                                                    
|
| |  |  | our ability to introduce new products and technologies on a timely basis;                                                                                  
|
| |  |  | the introduction of products and technologies by our competitors;                                                                                          
|
| |  |  | market acceptance of our products and our customers products;                                                                                             
|
| |  |  | the level of orders received that can be shipped in a quarter;                                                                                             
|
| |  |  | delays in shipments from our fabrication plant to assembly houses;                                                                                         
|
| |  |  | our ability to manufacture in the correct mix to respond
to orders on hand and new orders received in the future;                                          
|
| |  |  | the timing of investments in research and development,
including tooling expenses associated with product development,
process improvements and production;
|
| |  |  | the level of future product returns; and                                                                                                                   
|
| |  |  | the overall economic conditions in the United States and
abroad, particularly as a result of the ongoing U.S. war on
terrorism and the war with Iraq.      

Due to the absence of substantial non-cancelable backlog, we typically
plan our production and inventory levels based on internal forecasts of
customer demand, which are highly unpredictable and can fluctuate
substantially.

Our expense levels are based, in part, on expectations of future revenues
and are, to a large extent, fixed in the short term. Our future revenues are
difficult to predict and at times in the past we have failed to achieve revenue
expectations. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. If revenue levels are below
expectations for any reason, operating results are likely to be unfavorably
affected. We may also take steps to adjust our strategic product families and
change our cost structure, which may result in our incurring additional
restructuring, reorganization and other charges. Based on forecasts, we may
increase our operating expenses for personnel

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and new product development and
for inventory in anticipation of increasing sales levels; therefore, operating
results would be worsened if increased sales are not achieved. In addition, we are
limited in our ability to reduce costs quickly in response to any revenue
shortfalls.

Since 2001, the semiconductor industry has been experiencing a prolonged
and severe downturn that continues to adversely affect our results of
operations. Our net sales for the quarter and year ended December 31, 2002,
decreased 7.7% and 8.1% from the corresponding prior year periods. Our business
depends on market demand for products using analog semiconductors. Prolonged
downturns in the semiconductor industry lead to decreases in net sales levels
and may cause continued losses and cash flow shortages.

As a result of the foregoing and other factors, we may experience material
fluctuations in future operating results on a quarterly or annual basis, which
could substantially negatively affect our business, financial condition and
operating results.

We have been notified by our auditors that we have certain material weaknesses
related to internal control processes and systems. If we are unable to
promptly and effectively implement adequate controls, systems and procedures,
we may continue to experience weaknesses in our internal controls and
operations that could call into question the accuracy of our financial results
and we may be unable to achieve Section 404 Certification as
mandated under the Sarbanes-Oxley Act.

As a result of the December 31, 2002 audit of the consolidated financial
statements, our auditors noted certain matters involving internal control and
its operation that they consider to be material weaknesses under standards
established by the American Institute of Certified Public Accountants.
Material weaknesses are significant deficiencies in the design or operation of
internal control that could adversely affect our ability to record, process,
summarize and report financial data consistent with our assertions of
management in the financial statements. By definition, material weaknesses do
not reduce to a relatively low level the risk that errors or fraud, in amounts
that would be material in relation to the financial statements being audited,
may occur and may not be detected within a timely period by employees in the
normal course of performing their assigned functions. The material weaknesses
noted during the audit resulted from the deficiencies in the systems and
processes used in the preparation of the financial statements and the lack of
proper management review and account analysis in certain areas. Although other
areas were impacted by the material weaknesses, the most significant issues
arising from the material weaknesses included inappropriate process and systems
tracking of inventory, including significant manual reconciliation, as well as
inappropriate and insufficient analysis performed in evaluating inventory costs
capitalized and inventory excess and obsolete reserves established. To ensure
appropriate analysis, we must systemize processes by establishing appropriate
guidelines that will reduce the level of manual reconciliation as well as improve
the account analysis methodologies and increase the level of supervisory and
management review.

While we have identified and
intend to take measures to improve our systems and internal control
structure, implement more rigorous internal accounting and
operational policies, procedures and controls, and conduct systems training,
the success of these measures cannot be assured and will depend on many
factors, including our ability to hire, train and retain additional qualified
accounting staff. Our ability to implement our business plan successfully in a
volatile market requires effective management systems and a system of financial
processes and controls. If we are unable to maintain an adequate level
of processes and controls and improve our systems, we may not be able to accurately report our
financial performance on a timely basis and our business and stock price would
be adversely affected. In addition, we may be unable to achieve
Section 404 certification as mandated by the Sarbanes-Oxley Act.

We have recently experienced significant changes in senior management and our
corporate organization.

A number of members of our senior management team, including our Chief
Executive Officer and President, Senior Vice President of Operations; Senior
Vice President of Finance and Chief Financial Officer; Senior Vice President,
Marketing and Business Development; Vice President of Engineering and Vice
Presidents of Sales for Asia and the Americas have joined our company since the
second half of 2002. In particular, our Chief Financial Officer, Phillip Kagel,
joined Sipex in February 2003, after the audit of our financial statements for
the year ended December 31, 2002 was substantially complete. Changes in
management may be disruptive to our business and may result in the departure of
existing employees and/or customers. In addition, during the third quarter of
2002, we announced the restructuring and reorganization of the Company into six
functional groups reporting to our Chief Executive Officer, as well as the sale
of our hybrid product family. It may take significant time to integrate our new
management personnel and achieve efficiencies from our new corporate structure,
which may adversely affect our business and operating results.

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We may experience difficulties in developing and introducing new or enhanced
products necessitated by technological advances.

Our future success will depend, in part, upon our ability to anticipate
changes in market demand and evolving technologies. To remain competitive, we
must enhance our current products and to develop and introduce new products
that keep pace with technological advancements and address the increasingly
sophisticated needs of our customers. Our products may be rendered obsolete if
we fail to anticipate or react to change, and, as a result, our revenues and
cash flow may be negatively impacted. Our success depends on our ability to
develop new semiconductor devices for existing and new markets, to introduce
these products in a timely manner and to have these products selected for
design into new products of our customers. The development of these new devices
is highly complex and from time to time we have experienced delays in
completing the development of new products. Successful product development and
introduction depends on a number of factors, including:



| |  |  | accurate new product definition;                              
| | - |  | --------------------------------------------------------------
|
| |  |  | timely completion and introduction of new product designs;    
|
| |  |  | availability of foundry capacity;                             
|
| |  |  | achievement of manufacturing yields; and                      
|
| |  |  | market acceptance of our products and our customers products.

Our success also depends upon our ability to accurately specify and
certify the conformance of our products to applicable standards and to develop
our products in accordance with customer requirements. There can be no
assurance that we will be able to adjust to changing market conditions as
quickly and cost-effectively as necessary to compete successfully. There can be
no assurance that we will be able to introduce new products in a timely and
cost-effective manner or in sufficient quantities to meet customer demand or
that these products will achieve market acceptance. Furthermore, there can be
no assurance that our customers products will achieve market acceptance.

We depend on distributors who sell directly to OEMs.

Approximately 66% of our net sales are from shipments of our product to
distributors who sell directly to OEMs. Our agreements with distributors
contain limited provisions for return of our product, including stock rotations
whereby distributors may return a percentage of their product based upon a
percentage of their most recent six months shipments (except for Future
Electronics, which is based on three months). In addition, in certain
circumstances upon termination of the distributor relationship distributors may
return a percentage of purchases. The loss of business from any of our
significant distributors or the delay of significant orders from any of them,
even if only temporary, could significantly reduce our income, delay
recognition of revenue and impact our ability to accurately predict cash flow.
We estimate the amount of future returns and have established reserves for
estimated returns based upon information including sales during the period into
the distribution channel, reported sell-through by distributors to OEMs,
distributor inventory levels and the specific terms of the distributor
agreements as well as historical returns experience. Beginning in the fourth
quarter of 2000, we began deferring revenue on shipments to Future Electronics
until the product is resold by the distributor to the end user (sell-through),
because the arrangement with this distributor included price concessions and
return rights the potential impact of which we believed we could no longer
reasonably estimate.

We derive a substantial portion of our revenues from Future Electronics, and
our revenues would likely decline significantly if Future Electronics elects
not to make, cancels, reduces or defers purchases of our products.

Future Electronics has historically accounted for a significant portion of
our revenues. It is our largest distributor worldwide, and accounted for 24%,
21% and 23% of total net sales, respectively, for the years ended December 31,
2002, 2001 and 2000. We anticipate that sales of our products to Future
Electronics will continue to account for a significant portion of our revenues.
The loss of Future Electronics as a distributor, or a significant reduction in
orders from Future Electronics would materially and adversely affect our
operating results, our business, our financial condition and our stock price.

We have a distributor agreement with Future Electronics that provides for
Future Electronics to act as our sole distributor for certain products within
North America and Europe. Sales to this distributor are made under an agreement
that provides protection against price reduction for their inventory of Sipex
products. Sipex maintains a separate price list for products sold to Future
Electronics, which reflects discounts from the prices charged to customers in
direct sales

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transactions. Our distributor agreement with Future Electronics
does not contain minimum purchase commitments. As a
result, Future Electronics could cease purchasing our products with short
notice to us. In addition, Future Electronics may defer or cancel orders
without penalty, which would likely cause our revenues our business, our
financial condition and our stock price to decline.

We may not successfully expand our sales and distribution channels.

An integral part of our strategy is to expand our sales and distribution
channels. We are increasing resources dedicated to developing and expanding
these channels but we may not be successful doing so. If we are successful in
increasing our sales through indirect sales channels, we expect that those
sales will be at lower per unit prices than sales through direct channels, and
revenues we receive for each sale will be less than if we had sold the same
product to the customer directly. Selling through indirect channels may also
limit our contact with our customers. As a result, our ability to accurately
forecast sales, evaluate customer satisfaction and recognize emerging customer
requirements may be hindered. Even if we successfully expand our distribution
channels, any new distributors may not have the technical expertise required to
market and support our products successfully. If parties do not provide
adequate levels of services and technical support, our customers could become
dissatisfied, we could be required to devote additional resources for customer
support, and our brand name and reputation could be negatively impacted. Our
strategy of marketing products directly to our customers and indirectly through
distributors may result in distribution channel conflicts. Our direct sales
efforts may compete with those of our indirect channels and, to the extent
different distributors target the same customers, distributors may also compete
with each other. Although we have attempted to manage our distribution channels
to avoid potential conflicts, channel conflicts may negatively impact our
relationships with existing sales representatives or distributors or impair our
ability to attract sales representatives.

We may face significant risks related to our international operations.

We derive a significant portion of our net sales from international sales,
including Asia, which are subject to certain risks, including:



| |  |  | unexpected changes in legal and regulatory requirements;       
| | - |  | ---------------------------------------------------------------
|
| |  |  | changes in tariffs;                                            
|
| |  |  | exchange rates and other barriers;                             
|
| |  |  | political and economic instability;                            
|
| |  |  | difficulties in accounts receivable collection;                
|
| |  |  | difficulties in managing distributors or representatives;      
|
| |  |  | difficulties in staffing and managing international operations;
|
| |  |  | difficulties in protecting our intellectual property overseas; 
|
| |  |  | the seasonality of sales; and                                  
|
| |  |  | potentially adverse tax consequences.                          

Our international sales in 2002 and 2001 were $50.5 million and $44.4
million, respectively, or 76% and 62% of total net sales, respectively. There
can be no assurance that economic and geopolitical troubles in any area of the
world will not have a material adverse effect on our business, results of
operations and financial condition.

Our inability to meet any increase in demand could reduce our market share.

Demand shifts in the semiconductor industry are rapid and difficult to
predict, and we may not be able to respond quickly enough to an increase in
demand, if any. Our ability to increase sales of our products depends, in
part, upon our ability to optimize the use of our manufacturing capacity in a
timely manner and, if necessary, expand our manufacturing capacity. If we are
unable to respond to rapid increases in demand, if any, for our products on a
timely basis or to manage any corresponding expansion of our manufacturing
capacity effectively, our customers could increase their purchases from our
competitors, which would reduce our market share.

Our financial results may be adversely affected due to the highly volatile
optical storage market.

A significant component of the companys growth strategy depends on
increasing shipments in the optical storage market. During 2002, we derived
all of our optical storage sales from a limited number of customers in Japan.
Local

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suppliers in Japan may have a competitive advantage over Sipex, which
could adversely affect our ability to grow sales or
continue to compete in Japan or other regions of the world. Any failure
to increase our shipments in the optical storage market could limit our ability
to grow our business and could adversely affect our operating results.

If we are unable to compete effectively with existing or new competitors, we
will experience fewer customer orders, reduced revenues, reduced gross margins
and lost market share.

We compete in markets that are intensely competitive, and which are
subject to both rapid technological change and continued price erosion. Our
competitors include many large domestic and foreign companies that have
substantially greater financial, technical and management resources than us.
Loss of competitive position could result in price reductions, fewer customer
orders, reduced revenues, reduced gross margins and loss of market share, any
of which would affect our operating results and financial condition. To remain
competitive, we continue to evaluate our manufacturing operations, looking for
additional cost savings and technological improvements. If we are not able to
successfully implement new process technologies and to achieve volume
production of new products at acceptable yields, our operating results and
financial condition may be affected. In addition, if competitors in Asia reduce
prices on commodity products, it would adversely affect our ability to compete
effectively in that region. Our future competitive performance depends on a
number of factors, including our ability to:



| |  |  | accurately identify emerging technological trends and
demand for product features and performance characteristics;
| | - |  | ------------------------------------------------------------------------------------------------------------------
|
| |  |  | develop and maintain competitive products;                                                                        
|
| |  |  | enhance our products by adding innovative features that
differentiate our products from those of our competitors; 
|
| |  |  | bring products to market on a timely basis at competitive prices;                                                 
|
| |  |  | respond effectively to new technological changes or new product announcements by others;                          
|
| |  |  | increase device performance and improve manufacturing yields;                                                     
|
| |  |  | adapt products and processes to technological changes; and                                                        
|
| |  |  | adopt and/or set emerging industry standards.                                                                     

There can be no assurance that our design, development and introduction
schedules for new products or enhancements to our existing and future products
will be met. In addition, there can be no assurance that these products or
enhancements will achieve market acceptance, or that we will be able to sell
these products at prices that are favorable to us.

We have only limited protection for our proprietary technology.

The semiconductor industry is characterized by frequent litigation
regarding patent and other intellectual property rights. Although we are not
aware of any pending or threatened patent litigation that we consider material,
there can be no assurance that third parties will not assert claims against us
with respect to existing or future products or technologies and we have been
subject to such claims in the past. In litigation to determine the validity of
any third party claims, such litigation, whether or not determined in our
favor, could result in significant expense to us and divert the efforts of our
management personnel from productive tasks. In the event of an adverse ruling
in such litigation, we may be required to discontinue the use of certain
processes, cease the manufacture, use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses
to the infringing technology. There can be no assurance that licenses will be
available on acceptable terms, or at all, with respect to disputed third party
technology. In the event of a successful claim against us and our failure to
develop or license a substitute technology at a reasonable cost, our business,
financial condition and results of operations would be materially and adversely
affected.

In February 1999, Sipex filed a lawsuit against Maxim Integrated Products,
Inc. (Maxim) with the U.S. District Court for the District of Massachusetts
seeking a declaratory judgment that three of Sipexs products did not infringe
Maxim patents. Maxim filed counterclaims alleging certain products sold by
Sipex infringe a Maxim patent. The counterclaims seek injunctive relief and
unspecified damages. Sipex has denied infringement and alleges that the patent
is invalid. The results of any litigation or arbitration are inherently
uncertain, and Sipex can offer no assurance that in any future legal actions
Sipex will prevail. If Sipex does not prevail, we would be required to pay
cash damages, injunctive relief could be issued which would prohibit Sipex from
selling the infringing product and liquidity could be adversely affected. The
Company has accrued $450,000 toward a potential settlement.

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There can be no assurance that foreign intellectual property laws will
protect our intellectual property rights. Furthermore, there can be no
assurance that others will not independently develop similar products,
duplicate our products or design around any of our patents. We may be subject
to, or may initiate, interference proceedings in the U.S. patent office, which
can demand significant financial and management resources.

Our future success depends on retaining our key personnel and attracting and
retaining additional highly qualified employees.

Our success depends upon the continued service of our executive officers
and other key management and technical personnel, and on our ability to
continue to attract, retain and motivate qualified personnel, such as
experienced analog circuit designers. The competition for these employees is
intense. Most of our employees are employees at-will and we have no fixed-term
employment agreements with most employees, which means that they can terminate
their employment at any time. There can be no assurance that we will be able to
retain our design engineers, executive officers and other key personnel. The
loss of the services of one or more of our design engineers, executive officers
or other key personnel or our inability to recruit replacements for these
personnel or to otherwise attract, retain and motivate qualified personnel
could seriously impede our success.

Our manufacturing processes are very complex, which may result in manufacturing
difficulties.

Our manufacturing processes are highly complex and are continuously being
modified in an effort to improve yields and product performance. Process
changes can result in interruptions in production or significantly reduced
yields causing product introduction or delivery delays. In addition, yields can
be adversely affected by minute impurities in the environment or other problems
that occur in the complex manufacturing process. Many of these problems are
difficult to diagnose and are time-consuming or expensive to remedy. From time
to time we have experienced unfavorable yield variances. In particular, new
process technologies or new products can be subject to especially wide
variations in manufacturing yields and efficiency. There can be no assurance
that our foundry or those of our suppliers will not experience unfavorable
yield variances or other manufacturing problems that result in delayed product
introduction or delivery delays.

We rely on outside foundries to supply wafers and those foundries may not
produce at acceptable levels.

We rely on outside foundries to supply fully processed semiconductor
wafers. This reliance on outside foundries presents the following potential
risks:



| |  |  | lack of adequate wafer supply;                                                    
| | - |  | ----------------------------------------------------------------------------------
|
| |  |  | limited control over delivery schedules;                                          
|
| |  |  | unavailability of or delays in obtaining access to key process technologies; and  
|
| |  |  | limited control over quality assurance, manufacturing yields and production costs.

Additionally, the manufacture of integrated circuits is a highly complex
and technologically demanding process. Our third party foundries have, from
time to time, experienced lower than anticipated manufacturing yields,
particularly in connection with the introduction of new products and the
installation and start-up of new process technologies. There can be no
assurance that our outside foundries will not experience lower than expected
manufacturing yields in the future.

Additionally, we do not have a guaranteed level of production capacity at
any of these foundries. The ability of each foundry to provide wafers to us is
limited by the foundrys available capacity, and the foundrys allocation of
its available capacity among multiple customers. There can be no assurance
that our third party foundries will allocate sufficient capacity to satisfy our
requirements. We have experienced decreased allocations of wafer supplies from
our suppliers in the past, which reduced our capacity to ship products, and,
thus, recognize revenues. Additionally, any sudden reduction or elimination of
any primary source or sources of fully processed wafers could result in a
material delay in the shipment of our products. If any other delays or
shortages occur in the future, our business and operating results will be
negatively impacted.

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Our wafer fabrication facility and the facilities of certain of our significant
customers and third party wafer suppliers are located in areas susceptible to
earthquakes.

Our in-house fabrication facility and the facilities of certain of our
significant customers and third-party wafer suppliers are located in areas that
are susceptible to earthquakes. Damage caused by earthquakes may result in
shortages in water or electricity or transportation, which could limit the
production capacity of our wafer facility and/or the ability of certain of our
subcontractors to provide needed products. Any reduction in production capacity
or the ability to obtain fully processed semiconductor wafers could cause
delays or shortages in our product supply, which would negatively impact our
business. If our facilities or the facilities of our customers are damaged by
future earthquakes, it could have a materially adverse effect on our business.

We rely on outside suppliers to assemble, test and ship product to our
customers.

We rely on outside assembly houses to assemble, test and ship our product
to end customers. There can be no assurance that our third party suppliers
will allocate sufficient capacity to us to meet our requirements. Any sudden
reduction or elimination of a primary source could result in material delay in
the shipment of our product and could have a material adverse affect on our
business and operating results.

We have limited control over quality assurance, manufacturing yields and
production costs. We have in the past experienced yield issues and delays,
especially with the introduction of new products. We could experience delays or
yield issues in the future due to the transfer of products from development to
production, which could negatively impact our business and operating results.

We must comply with significant environmental regulations, which is difficult
and expensive.

We are subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing processes.
Although we believe that our activities conform to presently applicable
environmental regulations, 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. Any failure by us to control the use of, or
adequately restrict the discharge of, hazardous substances, or otherwise comply
with environmental regulations, could subject us to significant future
liabilities. In addition, there can be no assurance that we have not violated
laws or regulations in the past, which violations could result in remediation
or other significant liabilities, or that past use or disposal of
environmentally sensitive materials in conformity with then existing
environmental laws and regulations will not result in remediation or other
significant liabilities under current or future environmental laws or
regulations.

It would be difficult for us to adjust our spending significantly if we
experience any revenue shortfalls.

Our future revenues are difficult to predict and at times in the past we
have failed to achieve our revenue expectations. Our expense levels are based
in part, on our expectations of future revenues, and expense levels are, to a
large extent, fixed in the short term. Since the fourth quarter of 2000, we
have adjusted our spending levels as a result of decreased revenues and
continue to focus on controlling costs. We may, however, be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
If revenue levels are below expectations for any reason our operating results
will be negatively impacted. Due to the absence of substantial non-cancelable
backlog, we typically plan our production and inventory levels based on
internal forecasts of customer demand, which are highly unpredictable and often
fluctuate substantially. In the future, if we believe that demand is
increasing, our operating expenses for personnel, new product development and
for inventory would correspondingly increase as needed in anticipation of
increasing sales levels. Our operating results would be negatively impacted if
increased sales were not achieved. In addition, we are limited in our ability
to reduce costs quickly in response to any revenue shortfalls.

We may have capital requirements to maintain and grow our business and we may
not be able to secure adequate capital on acceptable terms.

In order to remain competitive, we must continue to make investments in
our facilities and capital equipment. We have obtained additional funding
through the private placement of 3.0 million shares of Sipex common stock on
April 16, 2002, which provided $23.5 million to the Company, net of placement
agent fees and other costs of issuance, and through the private placement of a
convertible secured note and related warrant on September 27, 2002, which
provided approximately

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$12.0 million to the Company, net of costs of issuance. We
may need to seek additional equity or debt financing from time to time and
cannot be certain that additional financing will be available on favorable
terms, if at all. Because our stock is trading near historically low levels,
any future equity or convertible debt financing may result in substantial
dilution to existing stockholders, depending on the price at which the equity
is sold or the debt is converted and the extent of our needs. Our ability to
raise funds may be adversely affected by a number of factors relating to Sipex,
as well as factors beyond our control, such as capital market uncertainty and
general economic conditions.

Our stock price has been volatile and could continue to remain volatile.

The trading price of our common stock is subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, announcements
of technological innovations or new products by us or our competitors, general
conditions in the semiconductor manufacturing and electronic markets, changes
in earnings estimates by analysts, or other events or factors. In addition, the
public stock markets have experienced extreme price and trading volume
volatility in recent months. In the quarter ended December 31, 2000, our stock
closing price ranged from a high of $45.125 to a low of $15.875. In the fourth
quarter ending December 31, 2002, our stock closing price ranged from a high of
$4.26 to a low of $0.96. This volatility has significantly affected the market
prices of securities of many technology companies 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.

We could face securities litigation if our stock price remains highly volatile.

In the past, securities class action litigation has often followed periods
of volatility in the market price of a companys securities. In the past, we
were named in two virtually identical securities class action lawsuits. The
complaints and unspecified damages alleged, among other things, that our
financial statements for the second and third quarters of fiscal year 2000
contained incorrect statements. On April 12, 2002, the U.S. District Court
dismissed both suits with prejudice.

The litigation process is inherently uncertain and unpredictable, however,
and there can be no guarantee that we will not become subject to such suits in
the future. Moreover, there can be no guarantee that if we do become subject
to such suits, that the ultimate outcome will be similar to the cases noted
above. Any litigation could result in substantial costs and a diversion of
managements attention and resources, which could negatively impact our
business.

Changes in laws, regulations and financial accounting standards may affect our
reported results of operations.

The recently enacted Sarbanes-Oxley Act of 2002 and related regulations
may result in changes in accounting standards or accepted practices within our
industry. New pronouncements and varying interpretations of pronouncements have
occurred in the past and are likely to occur in the future as a result of
recent Congressional and regulatory actions. New laws, regulations, and
accounting standards, as well as the questioning of, or changes to, currently
accepted accounting practices in the technology industry may adversely affect
our reported financial results, which could have an adverse effect on our stock
price. Proposals have been made concerning the expensing of stock options which
could result in rules or laws that may adversely affect our reported financial
results and have an adverse effect on our stock price.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk:

Sipex invests excess cash in financial investments that are sensitive to
market risks as part of its investment strategy. None of these
market-sensitive instruments are held for trading purposes. Sipex does not own
derivative financial instruments in its portfolio. The investment portfolio
contains instruments that are subject to the risk of a decline in interest
rates. As required by Sipexs investment policy, available funds are invested
in a manner that assures maximum safety and liquidity and, secondarily,
maximizes yield within such constraints.

Investment Rate Risk  The Companys financial investments consist
primarily of high quality commercial paper and money market funds. The Company
does not believe that it has a material exposure to interest rate risk.

27



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##### Table of Contents






Item 8.Financial Statements and Supplementary Data:

Sipexs Consolidated Financial Statements and related Independent
Auditors Reports are presented in the following pages.

|                                   |                                                                                                                                     
|---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------
|Independent Auditors Report      
|Consolidated Financial Statements:
|                                   | Consolidated Balance Sheets at December 31, 2002 and 2001                                                                           
|                                   | Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000                                          
|                                   | Consolidated Statements of Shareholders Equity and Comprehensive Income
(Loss) for the years ended December 31, 2002, 2001 and 2000
|                                   | Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000                                          
|                                   | Notes to Consolidated Financial Statements                                                                                          




Item 9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure:

Not applicable.

28



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##### Table of Contents






PART III




Item 10.Directors and Executive Officers of the Registrant:

The information required by this item, with respect to the directors of
the registrant and the filing of reports under Section 16(a) of the Securities
Exchange Act of 1934, is incorporated by reference from Sipexs definitive
proxy statement in connection with its 2003 Annual Meeting of
Shareholders, to be filed with the Commission not later than 120 days
after the close of the fiscal year ended December 31, 2002, in the table under
the captions Election of Directors and Compliance with Section 16(a) of the
Securities Exchange Act of 1934.




Item 11.Executive Compensation:

The information required by this item is incorporated by reference from
Sipexs definitive proxy statement in connection with its 2003 Annual Meeting of
Shareholders, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 2002,
under the caption Compensation and Other Information Concerning Directors and
Officers.




Item 12.Security Ownership of Certain Beneficial Owners and Management:

The information required by this item is incorporated by reference from
Sipexs definitive proxy statement in connection with its 2003 Annual Meeting of
Shareholders, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 2002,
in the tables under the caption Security Ownership of Certain Beneficial
Owners and Management.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2002 about the
securities authorized for issuance under our equity compensation plans,
consisting of our the 1994 Stock Option and Incentive Plan, 1996 Stock Option
Plan, 1996 Non-Employee Director Stock Option Plan, 1997 Stock Option Plan, the
1999 Stock Option Plan, the 2000 Non-Qualified Stock Option Plan and the 2002
Nonstatutory Stock Option Plan.



| |                                     
| | ------------------------------------
| | Equity Compensation Plan Information

|                                                           |  |                      |           |                   |  |                         |       |  |  |                         |           |    
|---------------------------------------------------------- |  | -------------------- | --------- | ----------------- |  | ----------------------- | ----- |  |  | ----------------------- | --------- | ---
|                                                           |  | (a)                  |           | (b)               |  | (c)                    
|                                                           |  |                      |           |                   |  |                        
|                                                           |  |                      |           |                   |  |                         |       |  |  | Number of securities   
|                                                           |  |                      |           |                   |  |                         |       |  |  | remaining available for
|                                                           |  | Number of securities |           | Weight-average    |  | future issuance under  
|                                                           |  | to be issued upon    |           | exercise price of |  | equity compensation    
|                                                           |  | exercise of          |           | outstanding       |  | plans (excluding       
|                                                           |  | outstanding options, |           | options, warrants |  | securities reflected in
|Plan Category                                              |  | warrants and rights  |           | and rights        |  | column (a))            
|                                                           |  |                      |           |                   |  |                        
|Equity compensation plans
approved by security holders     |  |                      | 1,191,193 |                   |  | $                       | 16.72 |  |  |                         | 1,187,819 | (1)
|Equity compensation plans not
approved by stockholders (2) |  |                      | 5,266,970 |                   |  | $                       | 5.21  |  |  |                         | 904,820   |    
|                                                           |  |                      |           |                   |  |                         |       |  |  |                         |           |    
|Total                                                      |  |                      | 6,458,163 |                   |  | $                       | 7.33  |  |  |                         | 2,092,639 | (1)



| | (1) |  | Includes 162,615 shares issuable under our 1996 Employee Stock
Purchase Plan.                                                                                           
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Includes 3,649,500 shares issuable pursuant to options granted
outside of any plan, which did not require the approval of and has not
been approved by our stockholders.

29



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##### Table of Contents





| |                                     
| | ------------------------------------
| | 2000 Non-Qualified Stock Option Plan

In April 2000, our Board of Directors adopted the 2000 Nonqualified Stock
Option Plan pursuant to which non-statutory stock options for up to 1,000,000
shares of common stock may be granted to employees, consultants or advisors.
The 2000 Nonqualified Stock Option Plan was filed as an exhibit to our Annual
Report on Form 10-K for the fiscal year ended December 31, 2000 (File No.
000-27892) as filed with the SEC on March 23, 2001. In October 2002, our Board
of Directors adopted an amendment to the 2000 Nonqualified Stock Option Plan to
decrease the number of shares reserved under the plan by 328,010 shares, from
1,000,000 shares to 671,990 shares.

Our Board of Directors is authorized to administer the 2000 Nonqualified
Stock Option Plan. Our Board of Directors is authorized to adopt rules and
regulations of the 2000 Nonqualified Stock Option Plan and to interpret the
provisions of the 2000 Nonqualified Stock Option Plan. Our Board of Directors
may amend or terminate the 2000 Nonqualified Stock Option Plan at any time. Our
Board of Directors has delegated to the Compensation Committee authority to
administer certain aspects of the 2002 Nonqualified Stock Option Plan.

Our Board of Directors and our Compensation Committee have the authority
to select the recipients of options under the 2000 Nonqualified Stock Option
Plan and determine (i) the number of shares of common stock covered by such
options, (ii) the dates upon which such options become exercisable, (iii) the
exercise price of options (which may not be less than the fair market value of
the common stock on the date of grant), and (iv) the duration of the options
(which may not exceed 10 years).



| |                                    
| | -----------------------------------
| | 2002 Nonstatutory Stock Option Plan

In September 2001, our Board of Directors adopted the 2002 Nonstatutory
Stock Option Plan pursuant to which non-statutory stock options for up to
1,000,000 shares of common stock may be granted to employees, consultants or
advisors. The 2002 Nonstatutory Stock Option Plan was filed recently with our
registration statement on Form S-8 (File No. 333-73880) as filed with the SEC
on November 21, 2001. In October 2002, our Board of Directors adopted an
amendment to the 2002 Nonstatutory Stock Option Plan to increase the number of
shares reserved under the plan by 1,000,000 shares, from 1,000,000 shares to
2,000,000 shares.

Our Board of Directors is authorized to administer the 2002 Nonstatutory
Stock Option Plan. Our Board of Directors is authorized to adopt, amend and
repeal the rules and regulations of the 2002 Nonstatutory Stock Option Plan and
to interpret the provisions of the 2002 Nonstatutory Stock Option Plan. Our
Board of Directors may amend, suspend or terminate the 2002 Nonstatutory Stock
Option Plan at any time. Our Board of Directors has delegated to the
Compensation Committee authority to administer certain aspects of the 2002
Nonstatutory Stock Option Plan.

Our Board of Directors and our Compensation Committee have the authority
to select the recipients of options under the 2002 Nonstatutory Stock Option
Plan and determine (i) the number of shares of common stock covered by such
options, (ii) the dates upon which such options become exercisable, (iii) the
exercise price of options, and (iv) the duration of the options (which may not
exceed 10 years).




Item 13.Certain Relationships and Related Transactions:

The information required by this item is incorporated by reference from
the Companys definitive proxy statement in connection with its Annual Meeting
of Shareholders to be held on May 16, 2003, to be filed with the Commission not
later than 120 days after the close of the fiscal year ended December 31, 2002,
under the caption Certain Transactions.




Item 14. Controls and Procedures:

During the 90 day period prior to the filing of this annual report, we
carried out an evaluation under the supervision and with the participation of
our senior management, including Walid Maghribi, our Chief Executive Officer,
and Phillip A. Kagel, our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Senior
management and our Audit Committee have been informed by our independent
auditors that they had identified material weaknesses (as defined under
standards established by the American Institute of Certified Public

30



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##### Table of Contents



Accountants) relating to the deficiencies in the systems and processes
used in the preparation of the financial statements and the lack of proper
management review and account analysis. Mr. Maghribi and Mr. Kagel determined
that these material weaknesses, together with certain other deficiencies, if
unaddressed, could result in accounting errors and impair our ability to
accurately report our financial results in a timely manner.

Based on the above and under the direction of the Audit Committee and the
Board of Directors, senior management have dedicated resources and are taking
steps to strengthen control processes in order both to identify and rectify the
deficiencies and prevent the situations from recurring. To this end, we are
taking, or have taken, the following steps:



| |  |  | we hired Mr. Kagel as our Chief Financial Officer effective February
10, 2003;                                                                                                                                                                                
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we elected a new independent director to our Board of Directors,
Joseph Consoli, who has extensive financial background and serves as the Chairman of the Audit Committee;                                                                                    
|
| |  |  | we established a Disclosure Committee with a mandate to assist our
Chief Executive Officer and Chief Financial Officer in overseeing the
accuracy and timeliness of our public disclosures and in evaluating
regularly our disclosure controls and procedures;
|
| |  |  | we implemented procedures to ensure accurate and timely
account analysis and reconciliations; and                                                                                                                                                             
|
| |  |  | updated written policies and procedures are being prepared to
standardize and improve processes, including procedures relating to
systems, finance policies and internal controls.                                                                            

We continue to evaluate further improvements, including formalizing our
processes, procedures and policies, to our internal controls and disclosure
controls and procedures.

As a result of the steps taken to improve controls and following the
conclusion of our recently completed review of our financial accounts, Mr.
Maghribi and Mr. Kagel concluded that the information required to be disclosed
in this annual report on Form 10-K has been recorded, processed, summarized and
reported as required. Based upon and as of the date of their evaluation, the
Chief Executive Officer and Chief Financial Officer further concluded that our
disclosure controls and procedures, taking into account the steps listed above
to improve the controls and procedures, are effective in all material respects.

Other than as described above, there have been no significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation.

31



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##### Table of Contents






PART IV




Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K:

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



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Consolidated Financial Statements.The following consolidated
financial statements of the Company and Reports of Independent Accountants
are incorporated in Item 8 of this report.



| |  |  | Independent Auditors Report                                                                       
| |  |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | Consolidated Balance Sheets at December 31, 2002 and 2001                                          
|
| |  |  | Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000         
|
| |  |  | Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the Years Ended
|
| |  |  | December 31, 2002, 2001 and 2000                                                                   
|
| |  |  | Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000         
|
| |  |  | Notes to Consolidated Financial Statements                                                         



| |                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. Consolidated Financial Statement Schedules.Consolidated financial
statement schedules have been omitted because the required information is not
present or not present in amounts sufficient to require submission of the
schedule or because the information required is included in the consolidated
financial statements or the notes thereto.

| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | 3(a). The exhibits listed in the Exhibit Index immediately preceding the
Exhibits are filed as a part of this Annual Report on Form 10-K.
| |                                                                                                                                          
| | 3(b). Reports on
Form 8-K                                                                                                                



| |                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On December 2, 2002, Sipex filed a current report on Form 8-K (SEC file
number 000-27892) to announce that Frank R. DiPietro resigned as the
Companys Chief Financial Officer and Philip A. Dube, Sipexs Vice President
and Corporate Controller, will serve as the Registrants interim Chief
Financial Officer until such time as Mr. DiPietros successor is determined.



| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 1, 2002, Sipex filed a current report on 8-K (SEC file number
000-27892) to announce that, on September 27, 2002, Sipex sold a convertible
secured note due in 2007 and a related warrant to S&F Financial Holdings,
Inc. for an aggregate cash amount of $12,000,000. The note pays a 5.75%
coupon and is convertible after one year into Sipex common stock at a
conversion price of $7.50 per share.

32



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##### Table of Contents








| |           
| | ----------
| | 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, on the 31st day of
March, 2003.

| |  |                   |                                   |                                   
| |  | ----------------- | --------------------------------- | ----------------------------------
| |  | SIPEX CORPORATION
| |  |                   |                                   |                                   
| |  | By:               | /s/ WALID MAGHRIBI
Walid Maghribi
| |  |                   |                                   | Chief Executive Officer, President
| |  |                   |                                   | and Director                      

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

|                                             |  |                                                                                                                    |  |               
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | --------------
|Name                                         |  | Title                                                                                                              |  | Date          
|                                             |  |                                                                                                                    |  |               
|                                             |  |                                                                                                                    |  |               
|/s/ WALID MAGHRIBI

Walid Maghribi           |  | Chief Executive Officer, President and Director
(Principal Executive Officer)                                      |  | March 31, 2003
|                                             |  |                                                                                                                    |  |               
|/s/
PHILLIP A. KAGEL

Phillip A. Kagel       |  | Senior Vice President, Finance,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) |  | March 31, 2003
|                                             |  |                                                                                                                    |  |               
|/s/ JOSEPH C. CONSOLI

Joseph C. Consoli     |  | Director                                                                                                           |  | March 31, 2003
|                                             |  |                                                                                                                    |  |               
|/s/ MANFRED LOEB

Manfred Loeb               |  | Director                                                                                                           |  | March 31, 2003
|                                             |  |                                                                                                                    |  |               
|/s/ DOUGLAS M. MCBURNIE

Douglas M. McBurnie |  | Chairman of the Board of Directors                                                                                 |  | March 31, 2003
|                                             |  |                                                                                                                    |  |               
|/s/ LIONEL H. OLMER

Lionel H. Olmer         |  | Director                                                                                                           |  | March 31, 2003
|                                             |  |                                                                                                                    |  |               
|/s/ WILLY SANSEN

Dr. Willy Sansen           |  | Director                                                                                                           |  | March 31, 2003
|                                             |  |                                                                                                                    |  |               
|/s/ JOHN L. SPRAGUE

John L. Sprague         |  | Director                                                                                                           |  | March 31, 2003

33



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##### Table of Contents



Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Walid Maghribi, President and Chief Executive Officer of Sipex Corporation,
certify that:

|   |  |                                                                                                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. |  | I have reviewed this yearly report on Form 10-K of Sipex Corporation;                                                                                                                                                                                                                                                   
|   |  |                                                                                                                                                                                                                                                                                                                         
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
|   |  |                                                                                                                                                                                                                                                                                                                         
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;                   
|   |  |                                                                                                                                                                                                                                                                                                                         
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                

| |  |    |  |                                                                                                                                                                                                                                                                                
| |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a. |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
| |  |    |  |                                                                                                                                                                                                                                                                                
| |  | b. |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                     
| |  |    |  |                                                                                                                                                                                                                                                                                
| |  | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                           

|   |  |                                                                                                                                                                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5. |  | The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors (or persons
performing the equivalent function):

| |  |    |  |                                                                                                                                                                                                                                                                                               
| |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a. |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| |  |    |  |                                                                                                                                                                                                                                                                                               
| |  | b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

|   |  |                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. |  | The registrants other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

|                     |  |                                                     
|-------------------- |  | ----------------------------------------------------
|Date: March 31, 2003 |  | By: /s/ Walid Maghribi                              
|                     |  |                                                     
|                     |  | Walid Maghribi
President and Chief Executive Officer

34



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##### Table of Contents



Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Phillip A. Kagel, Senior Vice President , Finance, Chief Financial Officer &
Treasurer of Sipex Corporation, certify that:

|   |  |                                                                                                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. |  | I have reviewed this annual report on Form 10-K of Sipex Corporation;                                                                                                                                                                                                                                                   
|   |  |                                                                                                                                                                                                                                                                                                                         
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
|   |  |                                                                                                                                                                                                                                                                                                                         
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;                   
|   |  |                                                                                                                                                                                                                                                                                                                         
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                

| |  |    |  |                                                                                                                                                                                                                                                                                
| |  | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a. |  | designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
| |  |    |  |                                                                                                                                                                                                                                                                                
| |  | b. |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                     
| |  |    |  |                                                                                                                                                                                                                                                                                
| |  | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                           

|   |  |                                                                                                                                                                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5. |  | The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors (or persons
performing the equivalent function):

| |  |    |  |                                                                                                                                                                                                                                                                                               
| |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a. |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
| |  |    |  |                                                                                                                                                                                                                                                                                               
| |  | b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        

|   |  |                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. |  | The registrants other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

|                     |  |                                                                                      
|-------------------- |  | -------------------------------------------------------------------------------------
|Date: March 31, 2003 |  | By: /s/ Phillip A. Kagel                                                             
|                     |  |                                                                                      
|                     |  | Phillip A. Kagel
Senior Vice President, Finance
Chief Financial Officer and Treasurer

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EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                  
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                  
|2.1     |  | Agreement and Plan of Reorganization dated October 21, 1999
by and among the Company, Calogic, CAT Acquisition
Corporation I and the other signatories thereto (previously
filed as Exhibit 2.1 to the Companys Form 8-K filed on
December 8, 1999 and incorporated herein by reference)                        
|        |  |                                                                                                                                                                                                                                                                                                                  
|2.2     |  | Amendment No. 1 to the Agreement and Plan of Reorganization
dated November 23, 1999 by and among the Company, Calogic,
CAT Acquisition Corporation I and the other signatories
thereto (previously filed as Exhibit 2.2 to the Companys
Form 8-K filed on December 8, 1999 and incorporated herein
by reference)
|        |  |                                                                                                                                                                                                                                                                                                                  
|3.1     |  | Restated Articles of Organization of the Company, as
amended (filed as Exhibit 3.1 to the Companys Registration
Statement on Form S-1 (File No. 333-1328, and incorporated
herein by reference)                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                  
|3.2     |  | Restated By-Laws of the Company, as amended (filed as
Exhibit 3.2 to the Companys Registration Statement on Form
S-1, File No. 333-1328, and incorporated herein by
reference)                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                  
|4.2     |  | Form of Indemnification Agreement for directors and
officers (filed as Exhibit 4.2 to the Companys
Registration Statement on Form S-1, File No. 333-1328, and
incorporated herein by reference)                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.1**  |  | 1988 Non-Statutory Stock Option Plan (filed as Exhibit 10.1
to the Companys Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference)                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.2**  |  | 1991 Non-Statutory Stock Option Plan (filed as Exhibit 10.2
to the Companys Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference)                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.3**  |  | 1993 Stock Option and Incentive Plan (filed as Exhibit 10.3
to the Companys Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference)                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.4**  |  | 1994 Stock Option and Incentive Plan (filed as Exhibit 10.4
to the Companys Registration Statement on Form S-1, File
No. 333-1328, and incorporated herein by reference)                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.5**  |  | 1996 Incentive Stock Option Plan (filed as Exhibit 10.5 to
the Companys Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference)                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.6    |  | 1996 Non-Employee Director Stock Option Plan (filed as
Exhibit 10.6 to the Companys Registration Statement on
Form S-1, File No. 333-1328, and incorporated herein by
reference)                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.7**  |  | 1996 Employee Stock Purchase Plan (filed as Exhibit 10.7 to
the Companys Registration Statement on Form S-1, File No.
333-1328, and incorporated herein by reference)                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.8**  |  | Employment Agreement dated August 19, 2002 by and between
the Company and Walid Maghribi (filed as Exhibit 99.1 to
the Companys 8K filed on August 23, 2002, and incorporated
herein by reference)                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.9**  |  | Employment Agreement, as of the 14th day of May, 1999,
between the Company and James E. Donegan (filed as Exhibit
10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999, and incorporated herein by
reference)                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.10** |  | Employment Agreement, as of the 14th day of May, 1999,
between the Company and Raymond W.B. Chow (filed as Exhibit
10.4 to the Companys Quarterly Report on Form 10-Q for the
quarter ended July 3, 1999, and incorporated herein by
reference)                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.11   |  | Form of Sales Representative Agreement (filed as Exhibit
10.15 to the Companys Registration Statement on Form S-1,
File No. 333-1328, and incorporated herein by reference)                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.12   |  | Form of Sales Representative Agreement (previously filed
as an exhibit to the Companys Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference)                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.13** |  | 1997 Incentive Stock Option Plan (filed as Appendix A to
the Companys definitive Proxy Statement for the Special
Meeting In Lieu Of Annual Meeting Of Shareholders held May
30, 1997 and incorporated herein by reference)                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                  
|10.14** |  | Sipex Corporation 1999 Stock Plan (filed as Appendix A to
the Companys Definitive Proxy Statement on Schedule 14A,
No. 1000-27897, and incorporated herein by reference)                                                                                                                                        

36



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|        |  |                                                                                                                                                                                                                                                                          
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.15*  |  | License Agreement between Timex Corporation and Sipex
Corporation dated July 1, 1997 (previously filed as an
Exhibit to the Companys Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein by
reference)                             
|        |  |                                                                                                                                                                                                                                                                          
|10.16** |  | Employment Agreement, dated as of the 9th day of August,
1999 between the Company and Stephen E. Parks (filed as
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q
for the quarter ended July 3, 1999, and incorporated herein
by reference)                   
|        |  |                                                                                                                                                                                                                                                                          
|10.17** |  | 2000 Non-Qualified Stock Option Plan (previously filed as
an exhibit to the Companys Annual Report on Form 10-K for
the year ended December 31, 2000, and incorporated herein
by reference)                                                                             
|        |  |                                                                                                                                                                                                                                                                          
|10.18** |  | 2002 Nonstatutory Stock Option Plan (filed as Exhibit 4.3
to the Companys Registration Statement on Form S-8, File
No. 73880, and incorporated herein by reference)                                                                                                     
|        |  |                                                                                                                                                                                                                                                                          
|10.19   |  | Deed of Reconveyance and Termination of Lease (filed as
Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001, and incorporated
herein by reference)                                                                           
|        |  |                                                                                                                                                                                                                                                                          
|10.20** |  | Employment Agreement dated February 2, 2003 by and between
the Company and Phillip A. Kagel (filed herewith).                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                          
|10.21** |  | Employment Agreement dated September 11, 2002 by and
between the Company and Joseph T. Rauschmayer (filed
herewith).                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                          
|10.22** |  | Employment Agreement dated August 23, 2002 by and between
the Company and Kevin Plouse (filed herewith).                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                          
|10.23   |  | Securities Purchase Agreement dated as of September 27,
2002, by and between the Company and S&F Financial
Holdings, Inc. (filed as Exhibit 99.2 to the Companys 8-K
filed on October 1, 2002, and incorporated herein by
reference).                                   
|        |  |                                                                                                                                                                                                                                                                          
|10.24   |  | Sipex Corporation 5.75% Convertible Secured Note due 2007
(filed as Exhibit 99.3 to the Companys 8-K filed on
October 1, 2002, and incorporated herein by reference).                                                                                                   
|        |  |                                                                                                                                                                                                                                                                          
|10.25   |  | Warrant to purchase 900,000 shares of common stock issued
to S&F Financial Holdings, Inc. (filed as Exhibit 99.4 to
the Companys 8-K on October 1, 2002, and incorporated
herein by reference).                                                                         
|        |  |                                                                                                                                                                                                                                                                          
|10.26   |  | Deed of Trust with Assignment of Rents dated as of
September 27, 2002, between the Company, First America
Title Insurance Company and S&F Financial Holdings, Inc.
(filed as Exhibit 99.5 to the Companys 8-K on October 1,
2002, and incorporated herein by reference).
|        |  |                                                                                                                                                                                                                                                                          
|10.27   |  | Worldwide Authorized Distributor Market Price Agreement
dated July 22, 1993, by and between the Company and Future
Electronics Incorporated (filed herewith).                                                                                                            
|        |  |                                                                                                                                                                                                                                                                          
|10.28   |  | Addendum A dated February 7, 2003 to Worldwide Authorized
Distributor Market Price Agreement dated July 22, 1993, by
and between the Company and Future Electronics Incorporated
(filed herewith).                                                                     
|        |  |                                                                                                                                                                                                                                                                          
|21.1    |  | Subsidiaries of the Company (previously filed as an exhibit
to the Companys Annual Report on Form 10-K for the year
ended December 31, 2000, and incorporated herein by
reference)                                                                                      
|        |  |                                                                                                                                                                                                                                                                          
|23.1    |  | Consent of KPMG LLP, independent auditors                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                          
|99.1    |  | Certification of Chief Executive Officer                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                          
|99.2    |  | Certification of Chief Financial Officer                                                                                                                                                                                                                                 



|*  |  | Confidential treatment as to certain portions has been requested pursuant
to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as
amended.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | The Exhibits identified above with an asterisk (*) are management contracts
or compensatory plans or arrangements.                                        

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SIPEX CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS

|                                                                                                                                     |  |      |            | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ---------- | 
|                                                                                                                                     |  | Page
|                                                                                                                                     |  |     
|Independent Auditors Report                                                                                                         |  |      | F-2        | 
|Consolidated Financial Statements:                                                                                                   |  |      |            | 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                                                         |  |      | F-3        | 
|Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000                                           |  |      | F-4        | 
|Consolidated Statements of Shareholders Equity and
Comprehensive Income (Loss) for the years ended December 31,
2002, 2001 and 2000 |  |      | F-5        | 
|Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000                                           |  |      | F-6        | 
|Notes to Consolidated Financial Statements                                                                                           |  |      | F-7  F-20 | 

F-1



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INDEPENDENT AUDITORS REPORT

The Board Of Directors and Shareholders
Sipex Corporation:

We have audited the accompanying consolidated balance sheets of Sipex
Corporation (the Company) as of December 31, 2002
and 2001, and the related
consolidated statements of operations, shareholders equity and comprehensive
income (loss), and cash flows for each of the years in the three-year period
ended December 31, 2002. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sipex
Corporation as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.

| |               
| | --------------
| | /s/   KPMG LLP

Boston, Massachusetts
February 18, 2003

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SIPEX CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                         |                                            |        |                                       |        |      |        |         |         | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------------------------------- | ------ | ---- | ------ | ------- | ------- | 
|                                     |                                                                                                                                                         |                                            |        | Years ended December 31,             
|                                     |                                                                                                                                                         |                                            |        |                                      
|                                     |                                                                                                                                                         |                                            |        | 2002                                  |        | 2001
|                                     |                                                                                                                                                         |                                            |        |                                       |        |     
|                                     |                                                                                                                                                         |                                            |        | (in thousands, except per share data)
|ASSETS                               |                                                                                                                                                         |                                            |        |                                       |        |      |        |        
|Current assets:                      |                                                                                                                                                         |                                            |        |                                       |        |      |        |        
|                                     | Cash and cash equivalents                                                                                                                               |                                            | $      | 6,489                                 |        |      | $      | 4,874   |        
|                                     | Short-term investment securities                                                                                                                        |                                            |        | 9,980                                 |        |      |        |        |        
|                                     | Accounts receivable, less allowances of $945 and $2,444 in
2002 and 2001, respectively                                                                  |                                            |        | 7,278                                 |        |      |        | 10,966  |        
|                                     | Inventories                                                                                                                                             |                                            |        | 14,393                                |        |      |        | 25,295  |        
|                                     | Deferred income taxes  current                                                                                                                         |                                            |        |                                      |        |      |        | 3,163   |        
|                                     | Prepaid expenses and other current assets                                                                                                               |                                            |        | 3,446                                 |        |      |        | 1,871   |        
|                                     |                                                                                                                                                         |                                            |        |                                       |        |      |        |        
|                                     |                                                                                                                                                         | Total current assets                       |        |                                       | 41,586 |      |        |         | 46,169  | 
|Property, plant, and equipment, net  |                                                                                                                                                         |                                            | 56,997 |                                       |        |      | 67,172 |        
|Goodwill, net                        |                                                                                                                                                         |                                            |       |                                       |        |      | 2,984  |        
|Deferred income taxes                |                                                                                                                                                         |                                            |       |                                       |        |      | 28,688 |        
|Other assets                         |                                                                                                                                                         |                                            | 203    |                                       |        |      | 114    |        
|                                     |                                                                                                                                                         |                                            |        |                                       |        |      |        |        
|                                     |                                                                                                                                                         | Total assets                               |        | $                                     | 98,786 |      |        | $       | 145,127 | 
|                                     |                                                                                                                                                         |                                            |        |                                       |        |      |        |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                                                         |                                            |        |                                       |        |      |        |        
|Current liabilities:                 |                                                                                                                                                         |                                            |        |                                       |        |      |        |        
|                                     | Accounts payable                                                                                                                                        |                                            | $      | 8,103                                 |        |      | $      | 5,989   |        
|                                     | Accrued expenses                                                                                                                                        |                                            |        | 3,570                                 |        |      |        | 2,928   |        
|                                     | Accrued restructuring costs                                                                                                                             |                                            |        | 755                                   |        |      |        |        |        
|                                     | Deferred income                                                                                                                                         |                                            |        | 1,383                                 |        |      |        | 992     |        
|                                     |                                                                                                                                                         |                                            |        |                                       |        |      |        |        
|                                     |                                                                                                                                                         | Total current liabilities                  |        |                                       | 13,811 |      |        |         | 9,909   | 
|Long-term debt                       |                                                                                                                                                         |                                            | 10,455 |                                       |        |      | 7,396  |        
|                                     |                                                                                                                                                         |                                            |        |                                       |        |      |        |        
|                                     |                                                                                                                                                         | Total liabilities                          |        |                                       | 24,266 |      |        |         | 17,305  | 
|                                     |                                                                                                                                                         |                                            |        |                                       |        |      |        |        
|Shareholders equity:                |                                                                                                                                                         |                                            |        |                                       |        |      |        |        
|                                     | Preferred stock, $0.01 par value, 1,000 shares authorized
and no shares issued or outstanding                                                           |                                            |        |                                      |        |      |        |        |        
|                                     | Common stock, $0.01 par value, 40,000 shares authorized and
28,031 and 24,844 shares issued and outstanding at
December 31, 2002 and 2001, respectively |                                            |        | 280                                   |        |      |        | 248     |        
|                                     | Additional paid-in capital                                                                                                                              |                                            |        | 175,489                               |        |      |        | 149,447 |        
|                                     | Accumulated deficit                                                                                                                                     |                                            |        | (101,179                              | )      |      |        | (21,903 | )      
|                                     | Accumulated other comprehensive income (loss)                                                                                                           |                                            |        | (70                                   | )      |      |        | 30      |        
|                                     |                                                                                                                                                         |                                            |        |                                       |        |      |        |        
|                                     |                                                                                                                                                         | Total shareholders equity                 |        |                                       | 74,520 |      |        |         | 127,822 | 
|                                     |                                                                                                                                                         |                                            |        |                                       |        |      |        |        
|                                     |                                                                                                                                                         | Total liabilities and shareholders equity |        | $                                     | 98,786 |      |        | $       | 145,127 | 
|                                     |                                                                                                                                                         |                                            |        |                                       |        |      |        |         |        

See accompanying notes to consolidated financial statements

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SIPEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |        |        | 
|---------------------------------------------------- | ----------------------------------- | ---------------------------- |  | ------------------------ |  | - | ------- | ------------------------------------- | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                     |                                     |                              |  | Years ended December 31,
|                                                     |                                     |                              |  |                          |  |   |         |                                      
|                                                     |                                     |                              |  |                          |  |   |         | 2002                                  |        | 2001 |         | 2000  
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |       
|                                                     |                                     |                              |  |                          |  |   |         | (in thousands, except per share data)
|Net sales                                            |                                     |                              |  |                          |  | $ | 66,260  |                                       |        | $    | 72,062  |        |        | $ | 114,620 |       
|Cost of sales                                        |                                     |                              |  |                          |  |   | 73,582  |                                       |        |      | 73,558  |        |        |   | 78,130  |       
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|                                                     |                                     | Gross profit (loss)          |  |                          |  |   |         |                                       | (7,322 | )    |         |        | (1,496 | ) |         |        | 36,490 | 
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|Operating expenses:                                  |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|                                                     | Research and development            |                              |  |                          |  |   |         | 12,944                                |        |      |         | 12,858 |        |   |         | 13,159 |       
|                                                     | Marketing and selling               |                              |  |                          |  |   |         | 8,104                                 |        |      |         | 9,911  |        |   |         | 10,765 |       
|                                                     | General and administrative          |                              |  |                          |  |   |         | 8,091                                 |        |      |         | 7,070  |        |   |         | 9,242  |       
|                                                     | Restructuring                       |                              |  |                          |  |   |         | 2,126                                 |        |      |         | 177    |        |   |         | (525   | )     
|                                                     | Impairment of fixed assets          |                              |  |                          |  |   |         | 4,718                                 |        |      |         |       |        |   |         |       |       
|                                                     | Amortization/impairment of goodwill |                              |  |                          |  |   |         | 2,984                                 |        |      |         | 376    |        |   |         | 376    |       
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|                                                     |                                     | Total operating expenses     |  |                          |  |   |         |                                       | 38,967 |      |         |        | 30,392 |   |         |        | 33,017 | 
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|Income (loss) from operations                        |                                     |                              |  |                          |  |   | (46,289 | )                                     |        |      | (31,888 | )      |        |   | 3,473   |       
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|Other income (expense):                              |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|                                                     | Interest expense                    |                              |  |                          |  |   |         | (260                                  | )      |      |         | (559   | )      |   |         |       |       
|                                                     | Other, net                          |                              |  |                          |  |   |         | (993                                  | )      |      |         | 165    |        |   |         | 2,067  |       
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|                                                     |                                     | Total other income (expense) |  |                          |  |   |         |                                       | (1,253 | )    |         |        | (394   | ) |         |        | 2,067  | 
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|Income (loss) before income taxes                    |                                     |                              |  |                          |  |   | (47,542 | )                                     |        |      | (32,282 | )      |        |   | 5,540   |       
|Income tax expense (benefit)                         |                                     |                              |  |                          |  |   | 31,734  |                                       |        |      | (12,590 | )      |        |   | 1,623   |       
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|Net income (loss)                                    |                                     |                              |  |                          |  | $ | (79,276 | )                                     |        | $    | (19,692 | )      |        | $ | 3,917   |       
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|Net income (loss) per common share  basic           |                                     |                              |  |                          |  | $ | (2.92   | )                                     |        | $    | (0.82   | )      |        | $ | 0.18    |       
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|Net income (loss) per common share  diluted         |                                     |                              |  |                          |  | $ | (2.92   | )                                     |        | $    | (0.82   | )      |        | $ | 0.16    |       
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|Weighted average common shares outstanding  basic   |                                     |                              |  |                          |  |   | 27,191  |                                       |        |      | 24,003  |        |        |   | 22,133  |       
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       
|Weighted average common shares outstanding  diluted |                                     |                              |  |                          |  |   | 27,191  |                                       |        |      | 24,003  |        |        |   | 23,749  |       
|                                                     |                                     |                              |  |                          |  |   |         |                                       |        |      |         |        |        |   |         |       

See accompanying notes to consolidated financial statements

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SIPEX CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)

|                                                                                   |                      |  |                                       |  |            |   |         |  |             |   |               |  |               |   |          |   |  |   |      |   |  |   |         |         |  
|---------------------------------------------------------------------------------- | -------------------- |  | ------------------------------------- |  | ---------- | - | ------- |  | ----------- | - | ------------- |  | ------------- | - | -------- | - |  | - | ---- | - |  | - | ------- | ------- | -
|                                                                                   |                      |  | Common Stock                          |  |            |   |         |  |             |   |               |  | Accumulated   |   |          |   | 
|                                                                                   |                      |  |                                       |  | Additional |   |         |  |             |   | Other         |  | Total        
|                                                                                   |                      |  | Number of                             |  | $0.01 Par  |   | Paid-in |  | Accumulated |   | Comprehensive |  | Shareholders'
|                                                                                   |                      |  | Shares                                |  | Value      |   | Capital |  | Deficit     |   | Income (Loss) |  | Equity       
|                                                                                   |                      |  |                                       |  |            |   |         |  |             |   |               |  |              
|                                                                                   |                      |  | (in thousands, except per share data)
|Balance at December 31, 1999                                                       |                      |  | 21,768                                |  |            | $ | 218     |  |             | $ | 110,951       |  |               | $ | (6,128   | ) |  | $ | 60   |   |  | $ | 105,101 |        
|Net income                                                                         |                      |  |                                      |  |            |   |        |  |             |   |              |  |               |   | 3,917    |   |  |   |     |   |  |   | 3,917   |        
|Foreign currency translation
adjustments                                           |                      |  |                                      |  |            |   |        |  |             |   |              |  |               |   |         |   |  |   | (174 | ) |  |   | (174    | )      
|                                                                                   |                      |  |                                       |  |            |   |         |  |             |   |               |  |               |   |          |   |  |   |      |   |  |   |         |        
|                                                                                   | Comprehensive income |  |                                       |  |            |   |         |  |             |   |               |  |               |   |          |   |  |   |      |   |  |   |         | 3,743   |  
|Issuance of common stock under
option plans                                        |                      |  | 715                                   |  |            |   | 7       |  |             |   | 8,354         |  |               |   |         |   |  |   |     |   |  |   | 8,361   |        
|Issuance of common stock under
stock purchase plan                                 |                      |  | 19                                    |  |            |   |        |  |             |   | 326           |  |               |   |         |   |  |   |     |   |  |   | 326     |        
|Tax effect of exercises of stock
options                                           |                      |  |                                      |  |            |   |        |  |             |   | 5,266         |  |               |   |         |   |  |   |     |   |  |   | 5,266   |        
|                                                                                   |                      |  |                                       |  |            |   |         |  |             |   |               |  |               |   |          |   |  |   |      |   |  |   |         |        
|Balance at December 31, 2000                                                       |                      |  | 22,502                                |  |            | $ | 225     |  |             | $ | 124,897       |  |               | $ | (2,211   | ) |  | $ | (114 | ) |  | $ | 122,797 |        
|Net loss                                                                           |                      |  |                                      |  |            |   |        |  |             |   |              |  |               |   | (19,692  | ) |  |   |     |   |  |   | (19,692 | )      
|Foreign currency translation
adjustments                                           |                      |  |                                      |  |            |   |        |  |             |   |              |  |               |   |         |   |  |   | 144  |   |  |   | 144     |        
|                                                                                   |                      |  |                                       |  |            |   |         |  |             |   |               |  |               |   |          |   |  |   |      |   |  |   |         |        
|                                                                                   | Comprehensive loss   |  |                                       |  |            |   |         |  |             |   |               |  |               |   |          |   |  |   |      |   |  |   |         | (19,548 | )
|Issuance of common stock under
option plans                                        |                      |  | 86                                    |  |            |   | 1       |  |             |   | 702           |  |               |   |         |   |  |   |     |   |  |   | 703     |        
|Issuance of common stock under
stock purchase plan                                 |                      |  | 66                                    |  |            |   |        |  |             |   | 525           |  |               |   |         |   |  |   |     |   |  |   | 525     |        
|Private placement issuance of
common stock                                         |                      |  | 2,190                                 |  |            |   | 22      |  |             |   | 21,589        |  |               |   |         |   |  |   |     |   |  |   | 21,611  |        
|Tax effect of exercises of stock
options                                           |                      |  |                                      |  |            |   |        |  |             |   | 1,734         |  |               |   |         |   |  |   |     |   |  |   | 1,734   |        
|                                                                                   |                      |  |                                       |  |            |   |         |  |             |   |               |  |               |   |          |   |  |   |      |   |  |   |         |        
|Balance at December 31, 2001                                                       |                      |  | 24,844                                |  |            | $ | 248     |  |             | $ | 149,447       |  |               | $ | (21,903  | ) |  | $ | 30   |   |  | $ | 127,822 |        
|Net loss                                                                           |                      |  |                                      |  |            |   |        |  |             |   |              |  |               |   | (79,276  | ) |  |   |     |   |  |   | (79,276 | )      
|Foreign currency translation
adjustments                                           |                      |  |                                      |  |            |   |        |  |             |   |              |  |               |   |         |   |  |   | (100 | ) |  |   | (100    | )      
|                                                                                   |                      |  |                                       |  |            |   |         |  |             |   |               |  |               |   |          |   |  |   |      |   |  |   |         |        
|                                                                                   | Comprehensive loss   |  |                                       |  |            |   |         |  |             |   |               |  |               |   |          |   |  |   |      |   |  |   |         | (79,376 | )
|Issuance of common stock under
option plans                                        |                      |  | 88                                    |  |            |   | 1       |  |             |   | 500           |  |               |   |         |   |  |   |     |   |  |   | 501     |        
|Issuance of common stock under
stock purchase plan                                 |                      |  | 99                                    |  |            |   | 1       |  |             |   | 396           |  |               |   |         |   |  |   |     |   |  |   | 397     |        
|Private placement issuance of
common stock (net of issuance
costs of $2.0 million) |                      |  | 3,000                                 |  |            |   | 30      |  |             |   | 23,492        |  |               |   |         |   |  |   |     |   |  |   | 23,522  |        
|Warrant issuance                                                                   |                      |  |                                      |  |            |   |        |  |             |   | 1,621         |  |               |   |         |   |  |   |     |   |  |   | 1,621   |        
|Compensation from acceleration
of stock vesting                                    |                      |  |                                      |  |            |   |        |  |             |   | 33            |  |               |   |         |   |  |   |     |   |  |   | 33      |        
|                                                                                   |                      |  |                                       |  |            |   |         |  |             |   |               |  |               |   |          |   |  |   |      |   |  |   |         |        
|Balance at December 31, 2002                                                       |                      |  | 28,031                                |  |            | $ | 280     |  |             | $ | 175,489       |  |               | $ | (101,179 | ) |  | $ | (70  | ) |  | $ | 74,520  |        
|                                                                                   |                      |  |                                       |  |            |   |         |  |             |   |               |  |               |   |          |   |  |   |      |   |  |   |         |        

See accompanying notes to consolidated financial statements

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##### Table of Contents



SIPEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |       |         |         |  
|----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | -------------------------------------------------------------------- | ----------------------------------------- | ----------------------------------------- | ------ | ------------------------ | ------- | ------- | ------- | ------ | ------- | ------- | ----- | ------- | ------- | -
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        | Years ended December 31,
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                         
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        | 2002                     |         | 2002    |         | 2000  
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |       
|                                                                              |                                                                                      | (in thousands)                                                      
|Operating activities:                                                         |                                                                                      |                                                                     
|                                                                              | Net income (loss)                                                                    |                                                                      | $                                         | (79,276                                   | )      |                          | $       | (19,692 | )       |        | $       | 3,917   |      
|                                                                              | Adjustments to reconcile net income (loss) to net cash used in
operating activities: |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|                                                                              |                                                                                      | Decrease (increase) in deferred income taxes                         |                                           |                                           | 31,851 |                          |         |         | (11,852 | )      |         |         | 1,904 |        
|                                                                              |                                                                                      | Provision for uncollectable receivables and returns and allowances   |                                           |                                           | 2,084  |                          |         |         | 4,555   |        |         |         | 3,681 |        
|                                                                              |                                                                                      | Compensation from acceleration of stock vesting                      |                                           |                                           | 33     |                          |         |         |        |        |         |         |      |        
|                                                                              |                                                                                      | Depreciation                                                         |                                           |                                           | 7,675  |                          |         |         | 6,662   |        |         |         | 4,273 |        
|                                                                              |                                                                                      | Amortization / impairment of goodwill                                |                                           |                                           | 2,984  |                          |         |         | 376     |        |         |         | 376   |        
|                                                                              |                                                                                      | Provision for inventories                                            |                                           |                                           | 5,395  |                          |         |         | 5,637   |        |         |         | 3,645 |        
|                                                                              |                                                                                      | (Gain) loss on disposal of capital assets                            |                                           |                                           | (123   | )                        |         |         |        |        |         |         | 38    |        
|                                                                              |                                                                                      | Impairment of fixed assets                                           |                                           |                                           | 4,718  |                          |         |         |        |        |         |         |      |        
|                                                                              |                                                                                      | Amortization of discount on notes payable                            |                                           |                                           | 76     |                          |         |         |        |        |         |         |      |        
|                                                                              |                                                                                      | Changes in assets and liabilities:                                   |                                           |                                           |        |                          |         |         |         |        |         |         |       |        
|                                                                              |                                                                                      |                                                                      | Accounts receivable                       |                                           |        | 1,604                    |         |         |         | 5,167  |         |         |       | (10,367 | )      
|                                                                              |                                                                                      |                                                                      | Inventories                               |                                           |        | 5,507                    |         |         |         | 2,392  |         |         |       | (13,841 | )      
|                                                                              |                                                                                      |                                                                      | Prepaid expenses and other current assets |                                           |        | (1,575                   | )       |         |         | (367   | )       |         |       | 580     |        
|                                                                              |                                                                                      |                                                                      | Deferred taxes                            |                                           |        |                         |         |         |         | (37    | )       |         |       | (5,129  | )      
|                                                                              |                                                                                      |                                                                      | Other assets                              |                                           |        | (89                      | )       |         |         | 75     |         |         |       | (23     | )      
|                                                                              |                                                                                      |                                                                      | Accounts payable                          |                                           |        | 2,114                    |         |         |         | (4,594 | )       |         |       | 3,922   |        
|                                                                              |                                                                                      |                                                                      | Accrued expenses                          |                                           |        | 642                      |         |         |         | (2,444 | )       |         |       | 2,512   |        
|                                                                              |                                                                                      |                                                                      | Accrued restructuring costs               |                                           |        | 755                      |         |         |         |       |         |         |       | 506     |        
|                                                                              |                                                                                      |                                                                      | Deferred income                           |                                           |        | 391                      |         |         |         | (971   | )       |         |       | 1,963   |        
|                                                                              |                                                                                      |                                                                      | Other long-term liabilities               |                                           |        |                         |         |         |         | (1,396 | )       |         |       | 996     |        
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|                                                                              |                                                                                      |                                                                      |                                           | Net cash used in operating activities     |        |                          | (15,234 | )       |         |        | (16,489 | )       |       |         | (1,047  | )
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|Investing activities:                                                         |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |        
|                                                                              | Proceeds from maturity of short-term investment securities                           |                                                                      |                                           | 5,000                                     |        |                          |         |        |         |        |         | 5,734   |      
|                                                                              | Purchase of short-term investment securities                                         |                                                                      |                                           | (14,980                                   | )      |                          |         |        |         |        |         |        |      
|                                                                              | Proceeds from liquidation of restricted cash investment                              |                                                                      |                                           |                                          |        |                          |         | 36,750  |         |        |         |        |      
|                                                                              | Purchase of property, plant, and equipment                                           |                                                                      |                                           | (4,108                                    | )      |                          |         | (40,441 | )       |        |         | (19,467 | )    
|                                                                              | Proceeds from sale of machinery and equipment                                        |                                                                      |                                           | 2,013                                     |        |                          |         |        |         |        |         |        |      
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|                                                                              |                                                                                      |                                                                      |                                           | Net cash used in investing activities     |        |                          | (12,075 | )       |         |        | (3,691  | )       |       |         | (13,733 | )
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|Financing activities:                                                         |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |        
|                                                                              | Proceeds from issuance of common stock under employee stock plans                    |                                                                      |                                           | 898                                       |        |                          |         | 1,228   |         |        |         | 8,687   |      
|                                                                              | Net proceeds from issuance of common stock through private placement                 |                                                                      |                                           | 23,522                                    |        |                          |         | 21,611  |         |        |         |        |      
|                                                                              | Proceeds from issuance of note payable and related warrants                          |                                                                      |                                           | 12,000                                    |        |                          |         |        |         |        |         |        |      
|                                                                              | Proceeds from (payments of) line of credit                                           |                                                                      |                                           | (7,396                                    | )      |                          |         | 339     |         |        |         | 7,057   |      
|                                                                              | Payment of capital lease and other debt obligations                                  |                                                                      |                                           |                                          |        |                          |         |        |         |        |         | (413    | )    
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|                                                                              |                                                                                      |                                                                      |                                           | Net cash provided by financing activities |        |                          | 29,024  |         |         |        | 23,178  |         |       |         | 15,331  |  
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|Effect of foreign currency exchange rate changes on cash and
cash equivalents |                                                                                      |                                                                      | (100                                      | )                                         |        |                          | 144     |         |         |        | (174    | )      
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|Increase (decrease) in cash and cash equivalents                              |                                                                                      |                                                                      | 1,615                                     |                                           |        |                          | 3,142   |         |         |        | 377     |        
|Cash and cash equivalents at beginning of period                              |                                                                                      |                                                                      | 4,874                                     |                                           |        |                          | 1,732   |         |         |        | 1,355   |        
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|Cash and cash equivalents at end of period                                    |                                                                                      | $                                                                    | 6,489                                     |                                           |        | $                        | 4,874   |         |         | $      | 1,732   |        
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|Supplemental cash flow information:                                           |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |        
|                                                                              | Cash paid (refunded) during the period for:                                          |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|                                                                              |                                                                                      | Income taxes                                                         |                                           | $                                         | (205   | )                        |         | $       | (238    | )      |         | $       | 475   |        
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|                                                                              |                                                                                      | Interest                                                             |                                           | $                                         | 81     |                          |         | $       | 559     |        |         | $       | 27    |        
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      
|Supplemental disclosure of non-cash investing activities:                     |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |        
|                                                                              |                                                                                      | Tax benefit from disposition of stock acquired through stock options |                                           | $                                         |       |                          |         | $       | 1,734   |        |         | $       | 5,266 |        
|                                                                              |                                                                                      |                                                                      |                                           |                                           |        |                          |         |         |         |        |         |         |      

See accompanying notes to consolidated financial statements

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##### Table of Contents



SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000

1. Description of Business

Sipex Corporation (Sipex or the Company) is a semiconductor company
that designs, manufactures and markets, high performance, value-added analog
integrated circuits (ICs) that are used primarily by original equipment
manufacturers (OEMs) operating in the historically high growth markets of
computing, communications and networking infrastructure.

While advances in digital technology have fueled the demand for digital
integrated circuits, they have also created a rapidly growing demand for more
precise, faster and more power efficient analog ICs. Sipex possesses a broad
portfolio of analog ICs, organized into three product families: power
management, serial interface and optical storage. Sipex uses its wafer
fabrication facility in Milpitas, California and a number of third party
vendors to fabricate, package and test its ICs. Sipexs products are sold
either directly or through a global network of manufacturers representatives
and distributors.

2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Sipex
Corporation and all of its wholly-owned subsidiaries. All intercompany accounts
and transactions have been eliminated.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates that are particularly susceptible to changes include
revenue, sales returns, inventory reserves, restructuring reserves and income
taxes.

Revenue Recognition

The Company records revenue to its largest distributor at the time the
product is sold through to the end user (sell-through). For all other product
sales, assuming all other revenue recognition criteria have been met, revenue
is recognized at the time of shipment because these distributors/customers have
no price protection and have limited return rights. In addition, management
believes that it is able to estimate and establish appropriate reserves for
future returns from these distributors. For product sales recognized at the
time of shipment, Sipex accrues for estimated sales returns upon shipment based
upon the Companys estimates of future returns.

Beginning in the fourth quarter of 2000, Sipex began deferring revenue on
ordinary course shipments to its largest distributor until the product is
resold by the distributor to the end user because the arrangement with this
distributor includes price concessions and return rights, the potential impact
of which management believed they could no longer reasonably estimate. In the
fourth quarter of 2001, Sipex accepted distributor orders from the Companys
largest distributor for certain products on a discounted basis for which the
distributor has no rights of return other than for product related issues,
price protection or cancellation rights and which are not governed by the terms
of the existing distributor contract. Revenue from these orders was recognized
at the time of shipment, since these orders are non-cancelable, non returnable
and for which such sales are not subject to the terms of the Companys
distribution agreement with the distributor, including, without limitation, the
price protection, restocking and other returns rights the distributor is
entitled to in the agreement. Revenue from engineering service contracts is
recorded as performance is completed.

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##### Table of Contents



Sales Returns

To estimate reserves for future sales returns, Sipex regularly reviews its
history of actual returns for each major product line. The Company also
communicates monthly with its channel partners to gather information about
sell-through activity, end user satisfaction and to determine the volume of
inventory in the channel. The results of this analysis is used
to estimate the reserves for sales returns. Reserves for future returns
are adjusted as necessary, based on returns experience returns expectations and
communications with channel partners.

In estimating reserves, Sipex also considers unusual events and market
conditions. It is possible that future events such as the introduction of a
competitive product, product obsolescence, price competition, continued
slowness in the semiconductor industry and distributors desire to decrease
levels of inventory in the distribution channel could result in significant
changes in customer demand and cause future returns to increase beyond
historical levels. Management believes that it is able to estimate returns, and
establish appropriate reserves for returns from customers for which Sipex
recognizes revenue as of shipment, using the process described above. However,
since reserves for estimated sales returns are recorded as a reduction in
revenues, any significant difference between the Companys estimated and actual
returns experience, or changes in its estimate of reserves for future returns,
would be reflected in the Companys reported revenues in the period Sipex
determines that difference and could have a material impact on the Companys
future results of operations.

Research and Development

Research and development costs are expensed as incurred.

Net Income (Loss) Per Share

Basic income (loss) per share is based upon the weighted average number of
common shares outstanding. Diluted income (loss) per share is based upon the
weighted average number of common and common equivalent shares outstanding
assuming dilution.

A reconciliation of basic weighted average common shares with diluted
weighted average shares is as follows (in thousands):

|                                                                                                                             |  |      |        |      |  |      |        |  |  |  |        | 
|---------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                                                                                                                             |  | 2002 |        | 2001 |  | 2000
|                                                                                                                             |  |      |        |      |  |     
|Weighted average common shares outstanding  basic                                                                           |  |      | 27,191 |      |  |      | 24,003 |  |  |  | 22,133 | 
|Net effect of dilutive potential common shares outstanding based
on the treasury stock method using the average market price |  |      |       |      |  |      |       |  |  |  | 1,616  | 
|                                                                                                                             |  |      |        |      |  |      |        |  |  |  |        | 
|Weighted average common shares outstanding  diluted                                                                         |  |      | 27,191 |      |  |      | 24,003 |  |  |  | 23,749 | 
|                                                                                                                             |  |      |        |      |  |      |        |  |  |  |        | 
|Antidilutive potential common shares excluded from the
computation above                                                     |  |      | 5,804  |      |  |      | 4,995  |  |  |  | 175    | 
|                                                                                                                             |  |      |        |      |  |      |        |  |  |  |        | 

Concentration of Credit Risk

Financial instruments that potentially subject Sipex to concentrations of
credit risk consist primarily of cash equivalents, short-term investments and
accounts receivable. Cash equivalents consist of deposits with, or guaranteed
by, major commercial banks, the maturities of which are three months or less
from date of purchase. With respect to accounts receivable, Sipex performs
periodic credit evaluations of the financial condition of its customers and
typically does not require collateral from them. Management assesses the need
for allowances for potential credit losses by considering the credit risk of
specific customers, historical trends and other information. In addition,
management reviews other inherent risks in the portfolio based on current
market conditions, the economic environment and the Companys concentration of
credit risk.

Fair Values of Financial Assets and Financial Liabilities

The carrying values of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued liabilities approximate their
fair values due to the relatively short periods to maturity of the instruments.
At December 31, 2002, long-term debt approximates fair value as the interest
rate was negotiated with a third party towards the end of 2002.

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Short-term Investments

Investments, which primarily consist of highly rated commercial paper, are
accounted for under Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities issued by
the Financial Accounting Standards Board (FASB). Pursuant to the provisions of
SFAS No. 115, the Company has classified its investments as held to maturity
which represent investments that the Company intends to hold to maturity and
are recorded at amortized cost. Upon purchase, these investments have
maturities within twelve months and,as result, have been classified as
short-term.

Inventories

Inventories are stated at the lower of cost or market. Costs are
determined using the first-in, first-out method.

Inventory Reserves

Sipex establishes inventory reserves for estimated excess quantities,
obsolescence or unmarketability. In addition, the Company establishes
estimates to write down inventory costs to the lower of cost or market. The
excess and obsolescence reserve is calculated by comparing current inventory to
both anticipated future demand and shipment history. Lower of cost or market
adjustments are determined by reviewing shipments during the quarter and
comparing standard cost to anticipated market pricing. Inventories are written
down to the lower of cost or market which becomes the cost basis. In
establishing the reserves and estimating anticipated market pricing, we also
consider current market conditions, industry performance, distributor inventory
levels and sales to end-users and all other relevant factors. If actual market
conditions are less favorable than those projected by management, additional
inventory reserves may be required. Reviews of the adequacy of inventory
reserves are performed on a quarterly basis. In 2002, we recorded a $5.4
million provision for excess and slow moving inventory, which included a $1.5
million charge relating to product lines sold or discontinued as part of the
Companys third quarter restructuring plan and a $700,000 charge for physical
inventory adjustments.

Related Parties

Sipex has included as other current assets approximately $134,000,
$631,000 and $583,000 due from employees in 2002, 2001 and 2000, respectively,
which consist mainly of amounts due to Sipex related to hiring and relocation
costs. These amounts are normally forgiven over periods of employee service as
agreed upon between the employee and Sipex.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is provided
by using the straight-line method over the respective useful lives as follows:

|                                         |  |                    |  | 
|---------------------------------------- |  | ------------------ |  | 
|                                         |  | Useful Lives      
|                                         |  |                   
|Buildings                                |  | 30 years          
|Machinery and equipment                  |  | 5-10 years        
|Furniture, fixtures and office equipment |  | 5-10 years        
|Leasehold improvements                   |  | Lesser of         
|                                         |  | estimated useful  
|                                         |  | life or lease term

Goodwill

The Company adopted SFAS 142 effective January 1, 2002, thereby
discontinuing annual goodwill amortization of approximately $376,000. Upon
adoption of SFAS 142, the Company performed a goodwill impairment test and
concluded that there was no indication of impairment and recorded no impairment
charges as of January 1, 2002. In the second quarter of 2002, the Company
experienced a significant reduction in the fair value of its common stock. The
fair value decrease was primarily related to the financial impact to Sipex of
the continued global slowdown in the semiconductor industry. As a result, the
Company performed a goodwill impairment test in accordance with SFAS 142. The
results of this impairment test indicated that the full amount of the Companys
goodwill of $3.0 million was not recoverable and was written off. During 2001
and 2000, the Company recorded goodwill amortization of $376,000.

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##### Table of Contents



The proforma effects of the adoption of SFAS 142 on net income and
earnings per share for the Company for the year ended December 31, 2001 and
2000 are as follows (in thousands):

|                                             |  |                          |         |      |  |   |       | 
|-------------------------------------------- |  | ------------------------ | ------- | ---- |  | - | ----- | 
|                                             |  | Years ended December 31,
|                                             |  |                         
|                                             |  | 2001                     |         | 2000
|                                             |  |                          |         |     
|Net income (loss) as reported                |  | $                        | (19,692 | )    |  | $ | 3,917 | 
|Goodwill amortization expense                |  |                          | 376     |      |  |   | 376   | 
|                                             |  |                          |         |      |  |   |       | 
|Proforma income (loss)                       |  | $                        | (19,316 | )    |  | $ | 4,293 | 
|                                             |  |                          |         |      |  |   |       | 
|Basic income (loss) per share, as reported   |  | $                        | (0.82   | )    |  | $ | 0.18  | 
|Add back: Goodwill amortization expense      |  |                          | 0.02    |      |  |   | 0.02  | 
|                                             |  |                          |         |      |  |   |       | 
|Proforma basic income (loss) per share       |  | $                        | (0.80   | )    |  | $ | 0.20  | 
|                                             |  |                          |         |      |  |   |       | 
|Diluted income (loss) per share, as reported |  | $                        | (0.82   | )    |  | $ | 0.16  | 
|Add back: Goodwill amortization expense      |  |                          | 0.02    |      |  |   | 0.02  | 
|                                             |  |                          |         |      |  |   |       | 
|Proforma diluted income (loss) per share     |  | $                        | (0.80   | )    |  | $ | 0.18  | 
|                                             |  |                          |         |      |  |   |       | 

Impairment of Long-lived Assets and Long-lived Assets to be Disposed of

Sipex reviews long-lived assets and certain identifiable intangibles,
including goodwill, 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 undiscounted cash flows expected to
be generated by the asset. If such asset is considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less cost to
sell.

Foreign Currency Translation

Foreign currency assets and liabilities are translated into U.S. dollars
at current rates, and revenues, costs and expenses are translated at average
rates during each reporting period. Gains or losses resulting from foreign
currency transactions are included in earnings currently, while those resulting
from translation of financial statements are shown as a separate component of
other comprehensive income in the statement of shareholders equity.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using statutory tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in earnings in the period that includes the
enactment date.

Stock-based Compensation

As allowed by SFAS No. 123, Accounting for Stock Based Compensation, the
Company accounts for its stock option plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based compensation cost is
reflected in net income (loss) for these plans, as all options granted under
these plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect
on net income (loss) per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock based compensation.

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The remaining unamortized pro-forma compensation expense as of December
31, 2002 and 2001 was $32.6 million and $26.4 million, respectively.

|                                      |  |             |  |   |         |      |  |      |         |      |  |   |        |   |  | 
|------------------------------------- |  | ----------- |  | - | ------- | ---- |  | ---- | ------- | ---- |  | - | ------ | - |  | 
|                                      |  |             |  |   |         | 2002 |  | 2001 |         | 2000
|                                      |  |             |  |   |         |      |  |      |         |     
|Net income (loss)                     |  | As reported |  | $ | (79,276 | )    |  | $    | (19,692 | )    |  | $ | 3,917  |  
|                                      |  | Pro forma   |  |   | (90,261 | )    |  |      | (28,378 | )    |  |   | (2,495 | )
|Net income (loss) per share  basic   |  | As reported |  |   | (2.92   | )    |  |      | (0.82   | )    |  |   | 0.18   |  
|                                      |  | Pro forma   |  |   | (3.32   | )    |  |      | (1.18   | )    |  |   | (0.11  | )
|Net income (loss) per share  diluted |  | As reported |  |   | (2.92   | )    |  |      | (0.82   | )    |  |   | 0.16   |  
|                                      |  | Pro forma   |  |   | (3.32   | )    |  |      | (1.18   | )    |  |   | (0.11  | )

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2002, 2001 and 2000; no
dividend yield; expected volatility of 247 percent for 2002, 179 percent for
2001 and 95 percent for 2000 and expected option lives of six years. The risk
free interest rate assumed was 4.0% for 2002, 5.3% for 2001 and 5.0% for 2000.
The weighted-average fair value of options granted during 2002, 2001 and 2000
was $3.99, $9.38 and $23.14, respectively.

The fair value of Employee Stock Purchase Plan shares issued during 2002
was estimated on the date of grant using the Black-Scholes option-pricing model
with no dividend yield, volatility of 75 percent and 180 percent for the first
and second 2002 purchase periods, respectively, option lives of six months and
an assumed risk free interest rate of 4.0%. The weighted-average fair value of
Employee Stock Purchase Plan shares granted during 2002 was $2.72 and $3.62,
for the same respective periods.

Effect of Recent Accounting Pronouncements

In June 2001, SFAS No. 143, Accounting for Asset Retirement Obligations,
was issued. SFAS No. 143 addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of the fair value can be made.
The Company adopted the provisions of SFAS No. 143 on January 1, 2003 and its
adoption did not have a material impact on its financial position or results of
operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for impairment or disposal of long-lived assets. This
statement supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. This Statement
requires that long-lived assets be reviewed 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 undiscounted net cash
flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future undiscounted net cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement
No.s 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections, effective for fiscal years beginning May 15, 2002 or later. It
rescinds SFAS No. 4, Reporting Gains and Losses From Extinguishments of Debt,
SFAS No. 64, Extinguishments of Debt to Satisfy Sinking-Fund Requirements,
and SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. This
Statement also amends SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects similar to sale-leaseback transactions. This Statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings or describe their applicability under changed
conditions. On January 1, 2003, the Company adopted SFAS No. 145 and at the
time of adoption, there was no material impact on its financial position or
results of operations; however, the Company has not yet determined the
implications of adoption on future results of operations.

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In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated With Exit or Disposal Activities. SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan.
This Statement is effective for exit or disposal activities initiated after
December 31, 2002. On January 1, 2003, the Company adopted SFAS No. 146 and at
the time of adoption, there was no material impact on its financial position or
results of operations; however, the Company has not yet determined the
implications of adoption on future results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of a stand-ready to perform obligation assumed under a guarantee.
Additionally, a guarantor must recognize a contingent obligation to make future
payments when such obligation becomes probable and estimable. FIN 45 also
requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with guarantees issued.
The recognition provisions of FIN 45 will be effective for any guarantees that
are issued or modified after December 31, 2002. The Company does not guarantee
any obligations and as a result management does not expect the adoption of FIN 45
to have a material impact on the Companys financial position or results of
operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock
Based Compensation  Transition and Disclosure  an Amendment of SFAS 123.
SFAS No. 148 provides additional transition guidance for those entities that
elect to voluntarily adopt the provisions of SFAS No. 123, Accounting for
Stock Based Compensation. Furthermore, SFAS No. 148 mandates new prominent
disclosures in both interim and year-end financial statements about the fair
value based method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 is effective for
fiscal years ending after December 15, 2002. Management does not believe the
adoption of SFAS No. 148 had or will have a material impact on the Companys
financial position or results of operations because the Company expects to
continue to account for stock options granted under its stock incentive plans
in accordance with the provisions of APB No. 25 and related interpretations.

Reclassifications

Certain prior year amounts have been reclassified to conform with the
current year presentation.

3. Restructuring and Impairment of Fixed Assets

In September 2002, Sipex announced a plan to close the Companys four-inch
wafer fabrication facility in San Jose, California and change to a modified
five day per week work schedule from the seven day per week schedule in the
six-inch wafer fabrication facility in Milpitas. These actions were taken to
reduce the Companys cost structure as a result of the continued slowdown in
the semiconductor industry and to align the structure with our current business
plan, which included the sale and discontinuance of the hybrid product line at
the end of the third quarter and the discontinuance of the analog display
product line which is expected to be completed by the end of the first quarter
of 2003. These product families accounted for approximately $4.0 million of net
sales in the third quarter of 2002. These actions allow us to consolidate the
Companys operations and focus the Company on three core businesses consisting
of serial interface, power management and optical storage.

Below is a summary of the activity related to restructuring, impairment of
fixed assets and inventory costs (in

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thousands):

|                         |                  |                        |       |               |        |            |   |             |        |   |   |   |        |  
|------------------------ | ---------------- | ---------------------- | ----- | ------------- | ------ | ---------- | - | ----------- | ------ | - | - | - | ------ | -
|                         |                  |                        |       |               |        |            |   | Fixed Asset |        |   |   |  
|                         |                  |                        |       | Restructuring |        | Impairment |   | Inventory  
|                         |                  |                        |       | Costs         |        | Costs      |   | Costs      
|                         |                  |                        |       |               |        |            |   |            
|Accrual balance 12/31/99 |                  | $                      | 1,870 |               |        | $          |  |             |        | $ |  |  
|                         | Charges utilized |                        |       | (839          | )      |            |   |            |        |   |   |  |       
|                         |                  | Adjustments to accrual |       |               | (525   | )          |   |             |       |   |   |   |       |  
|                         |                  |                        |       |               |        |            |   |             |        |   |   |  
|Accrual balance 12/31/00 |                  |                        | 506   |               |        |            |  |             |        |   |  |  
|                         |                  | Incurred 2001          |       |               | 534    |            |   |             |       |   |   |   |       |  
|                         |                  | Charges utilized       |       |               | (683   | )          |   |             |       |   |   |   |       |  
|                         |                  | Adjustments to accrual |       |               | (357   | )          |   |             |       |   |   |   |       |  
|                         |                  |                        |       |               |        |            |   |             |        |   |   |  
|Accrual balance 12/31/01 |                  |                        |      |               |        |            |  |             |        |   |  |  
|                         |                  | Incurred 2002          |       |               | 2,857  |            |   |             | 4,718  |   |   |   | 1,908  |  
|                         |                  | Charges utilized       |       |               | (1,371 | )          |   |             | (4,718 | ) |   |   | (1,524 | )
|                         |                  | Adjustments to accrual |       |               | (731   | )          |   |             |       |   |   |   | (384   | )
|                         |                  |                        |       |               |        |            |   |             |        |   |   |  
|Accrual balance 12/31/02 |                  | $                      | 755   |               |        | $          |  |             |        | $ |  |  
|                         |                  |                        |       |               |        |            |   |             |        |   |   |  

General

During
2002, Sipex recorded restructuring charges of $2.9 million, $4.7
million of fixed asset impairment charges and $1.9 million of inventory reserve
charges. Gross restructuring charges consisted of employee severance costs of
$524,000, management reorganization charges of approximately $1.7 million and
accrued lease expenses of $661,000 for the Companys San Jose facility. These
gross restructuring charges were reduced in the fourth quarter for a $661,000
reversal in accrued lease costs for the Companys San Jose facility due to the
sale of the analog display business in the first quarter of 2003 which included
the assumption of the lease by the third party purchaser and a $70,000 decrease
in employee termination costs. Fixed asset impairment charges for 2002
consisted of $1.8 million to write down the value of the machinery and
equipment in the San Jose facility to its fair value, as a result of the
closure of the San Jose fabrication facility in the first quarter of 2003, and
$2.9 million of fabrication equipment at the Milpitas fabrication facility.
The $1.9 million inventory reserve, which is recorded as cost of sales, was
established to provide for the discontinued analog display and hybrid product
families. In the fourth quarter, the reserve was reduced by $384,000 due to
the unexpected sale of a portion of the inventory.

Restructuring

The
third quarter 2002 restructuring charges for the above actions were $2.6
million, which consisted of $256,000 of severance costs related to a reduction
in force of approximately 50 employees at both manufacturing facilities, $1.7
million of severance and related costs to six former management employees
related to the Companys plan to reorganize into six functional groups and
facility costs of $661,000 consisting mainly of the remaining lease payments at
the San Jose fabrication facility.

In the
fourth quarter of 2002, Sipex incurred restructuring costs related to the transfer of the
Companys backend test operations from the Billerica, Massachusetts facility to
subcontractors in Malaysia. The restructuring costs consisted of $268,000 of
employee severance related costs for the workforce reduction of approximately
60 employees and freight charges of $48,000 related to the $2.0 million sale of
the Billerica test related machinery and equipment with a net book value of
$1.7 million. Accrued severance costs as of December 31, 2002 are planned to
be paid mainly during the first half of 2003.

Impairment

Third quarter 2002 fixed asset impairment charges totaled $4.7 million
consisting of $2.9 million of fabrication equipment on the Companys four-inch
and six-inch manufacturing product lines at the Milpitas fabrication facility
and $1.8 million for the write down to fair value of the machinery and
equipment at the San Jose fabrication facility which had been scheduled to be
closed by the end of the first quarter of 2003. In the first quarter of 2003,
the San Jose fabrication machinery and equipment, which had been written down
by $1.8 million, were sold to an unrelated third party. The gain on the sale
of the San Jose fabrication machinery and equipment will be recorded upon
collection of the cash due to the length of time and related uncertainties
affecting their ultimate receipt.

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During 2001 Sipex recorded net restructuring charges of $177,000
consisting of $534,000 for severance payments related to the reduction of its
workforce, partially offset by a reduction of $357,000 in the
restructuring accrual, which was established in the fourth quarter of 1999. The
reduction in 2001 was due to the sale of the Calogic fabrication facility,
which had been planned for closure in 2001. As a result of the sale, Sipex
reduced both the facility exit related and employee termination portions of the
accrual due to the assumptions of the facility by the new owners who retained
many of the employees to whom the Company had planned to pay severance costs.

In fiscal 2000, a $1.9 million restructuring accrual, which was
established in 1999 for the closure of the Calogic facility was reduced by
$525,000. This reduction resulted from delaying the timing of the closure of
the Calogic facility to
match the timing of the Milpitas facility ramp-up.

4. Inventories

Inventories were as follows (in thousands):

|                |  |      |        |      |  |   |        | 
|--------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                |  | 2002 |        | 2001
|                |  |      |        |     
|Raw materials   |  | $    | 893    |      |  | $ | 4,027  | 
|Work-in-process |  |      | 8,532  |      |  |   | 14,854 | 
|Finished goods  |  |      | 4,968  |      |  |   | 6,414  | 
|                |  |      |        |      |  |   |        | 
|                |  | $    | 14,393 |      |  | $ | 25,295 | 
|                |  |      |        |      |  |   |        | 

5. Property, Plant and Equipment

Property, plant and equipment were as follows (in thousands):

|                                               |  |      |        |      |  |   |        | 
|---------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                               |  | 2002 |        | 2001
|                                               |  |      |        |     
|Land                                           |  | $    | 5,957  |      |  | $ | 5,957  | 
|Building                                       |  |      | 23,370 |      |  |   | 23,360 | 
|Machinery and equipment                        |  |      | 37,260 |      |  |   | 53,001 | 
|Furniture, fixtures and office equipment       |  |      | 11,163 |      |  |   | 11,863 | 
|Leasehold improvements                         |  |      | 4,098  |      |  |   | 5,044  | 
|                                               |  |      |        |      |  |   |        | 
|                                               |  |      | 81,848 |      |  |   | 99,225 | 
|Less accumulated depreciation and amortization |  |      | 24,851 |      |  |   | 32,053 | 
|                                               |  |      |        |      |  |   |        | 
|                                               |  | $    | 56,997 |      |  | $ | 67,172 | 
|                                               |  |      |        |      |  |   |        | 

6. Accrued Expenses

Accrued expenses were as follows (in thousands):

|                                  |  |      |       |      |  |   |       | 
|--------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                  |  | 2002 |       | 2001
|                                  |  |      |       |     
|Accrued compensation and benefits |  | $    | 1,348 |      |  | $ | 1,108 | 
|Accrued royalties                 |  |      | 1,061 |      |  |   | 536   | 
|Accrued commissions               |  |      | 285   |      |  |   | 737   | 
|Other                             |  |      | 876   |      |  |   | 547   | 
|                                  |  |      |       |      |  |   |       | 
|                                  |  | $    | 3,570 |      |  | $ | 2,928 | 
|                                  |  |      |       |      |  |   |       | 

7. Long-term Debt

As of December 31, 2002, long-term debt consisted of a convertible secured
note amounting to $10,455,000.

Convertible Secured Note:

On September 27, 2002, Sipex sold a convertible secured note (the Note)
with an attached warrant to an affiliate of its largest distributor for an
aggregate cash amount of $12.0 million. The Company recorded the Note at $10.4
million and the warrant at $1.6 million (recorded to paid-in-capital) based
upon their estimated fair values at the date of issuance using the
Black-Scholes option pricing model. The Note pays a 5.75% coupon and is
convertible after one year into Sipex common stock at a conversion price of
$7.50 per share. Following the one year anniversary of the issuance of the
Note, the Company can require the conversion of the Note in installments if for
a period of time Sipex common stock trades at a price in excess of 150% of the
conversion price of $7.50. The private placement also included a warrant to
purchase 900,000 shares of Sipex common stock exercisable for a two-year period
beginning on the one-year anniversary of the date of issuance. The

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exercise
price for the warrant is equal to 110% of the average closing price for the 5
days preceding the closing or $2.9458. The warrant has been recorded as an
addition to paid-in capital with the offset recorded as a discount against the
Note. The discount on the Note of $1.6 million, recorded at the time of
purchase, is being amortized over the five-year term of the Note and may be
accelerated as a result of conversion. The Note matures on September
27, 2007. The Note is secured by a Deed of Trust
on the Companys land and building in Milpitas, California.

Bank Line-of-Credit:

On April 16, 2002, the outstanding bank line of credit balance of $6.9
million was paid down to zero using proceeds
from the private placement of Company common stock (see Note 9). On
September 27, 2002, the Company terminated its line of credit agreement with
its bank. The banks security interest in substantially all the Companys
assets was released.

8. Income Taxes

Total income tax expense (benefit) for the years ended December 31, 2002,
2001 and 2000 was allocated as follows (in thousands):

|                                                                                                                                |  |      |        |      |  |      |         |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                                                                                                |  | 2002 |        | 2001 |  | 2000
|                                                                                                                                |  |      |        |      |  |     
|Income (loss) from continuing operations                                                                                        |  | $    | 31,734 |      |  | $    | (12,590 | ) |  | $ | 1,623  |  
|Shareholders equity for compensation expense for tax purposes in
excess of amounts recognized for financial statement purposes |  |      |       |      |  |      | (1,734  | ) |  |   | (5,266 | )
|                                                                                                                                |  |      |        |      |  |      |         |   |  |   |        |  
|Total income tax expense (benefit)                                                                                              |  | $    | 31,734 |      |  | $    | (14,324 | ) |  | $ | (3,643 | )
|                                                                                                                                |  |      |        |      |  |      |         |   |  |   |        |  

Total federal, state and foreign income tax expense (benefit), consists of
the following (in thousands):

|                  |  |          |        |         |  |       |      |          |  |         |        |       |  |          |         |         |  |       |      |   |  |   |         |   |  |   |       |   |  |   |      |   |  |   |       |  
|----------------- |  | -------- | ------ | ------- |  | ----- | ---- | -------- |  | ------- | ------ | ----- |  | -------- | ------- | ------- |  | ----- | ---- | - |  | - | ------- | - |  | - | ----- | - |  | - | ---- | - |  | - | ----- | -
|                  |  | 2002     |        | 2001    |  | 2000 
|                  |  |          |        |         |  |      
|                  |  | Deferred |        | Current |  | Total |      | Deferred |  | Current |        | Total |  | Deferred |         | Current |  | Total
|                  |  |          |        |         |  |       |      |          |  |         |        |       |  |          |         |         |  |      
|Federal           |  | $        | 26,457 |         |  | $     | (353 | )        |  | $       | 26,104 |       |  | $        | (10,082 | )       |  | $     | (684 | ) |  | $ | (10,766 | ) |  | $ | 2,217 |   |  | $ | (274 | ) |  | $ | 1,943 |  
|Loss carryforward |  |          |       |         |  |       |     |          |  |         |       |       |  |          |        |         |  |       |     |   |  |   |        |   |  |   |      |   |  |   |     |   |  |   |      |  
|State             |  |          | 5,394  |         |  |       | 30   |          |  |         | 5,424  |       |  |          | (1,770  | )       |  |       | (64  | ) |  |   | (1,834  | ) |  |   | (313  | ) |  |   | (7   | ) |  |   | (320  | )
|Loss carryforward |  |          |       |         |  |       |     |          |  |         |       |       |  |          |        |         |  |       |     |   |  |   |        |   |  |   |      |   |  |   |     |   |  |   |      |  
|Foreign           |  |          |       |         |  |       | 206  |          |  |         | 206    |       |  |          |        |         |  |       | 10   |   |  |   | 10      |   |  |   |      |   |  |   |     |   |  |   |      |  
|                  |  |          |        |         |  |       |      |          |  |         |        |       |  |          |         |         |  |       |      |   |  |   |         |   |  |   |       |   |  |   |      |   |  |   |       |  
|Total expense     |  | $        | 31,851 |         |  | $     | (117 | )        |  | $       | 31,734 |       |  | $        | (11,852 | )       |  | $     | (738 | ) |  | $ | (12,590 | ) |  | $ | 1,904 |   |  | $ | (281 | ) |  | $ | 1,623 |  
|                  |  |          |        |         |  |       |      |          |  |         |        |       |  |          |         |         |  |       |      |   |  |   |         |   |  |   |       |   |  |   |      |   |  |   |       |  

The actual tax expense (benefit) differs from the expected tax expense
as follows (in thousands):

|                                                     |  |      |         |      |  |      |         |   |  |   |       |  
|---------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ----- | -
|                                                     |  | 2002 |         | 2001 |  | 2000
|                                                     |  |      |         |      |  |     
|Computed expected tax expense (benefit)            |  | $    | (16,639 | )    |  | $    | (11,299 | ) |  | $ | 1,939 |  
|State income tax, net of federal income tax benefit  |  |      | 3,526   |      |  |      | (1,192  | ) |  |   | (201  | )
|Non-deductible expenses                              |  |      | 13      |      |  |      | 30      |   |  |   | 71    |  
|Goodwill amortization and impairment                 |  |      | 1,045   |      |  |      | 130     |   |  |   | 133   |  
|Rate differential on foreign taxes                   |  |      | 12      |      |  |      | (11     | ) |  |   |      |  
|Utilization of R&D credits                           |  |      | (258    | )    |  |      | (248    | ) |  |   | (353  | )
|Losses not benefited / change in valuation allowance |  |      | 44,035  |      |  |      |        |   |  |   | 41    |  
|Other                                                |  |      |        |      |  |      |        |   |  |   | (7    | )
|                                                     |  |      |         |      |  |      |         |   |  |   |       |  
|Actual tax expense (benefit)                         |  | $    | 31,734  |      |  | $    | (12,590 | ) |  | $ | 1,623 |  
|                                                     |  |      |         |      |  |      |         |   |  |   |       |  

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at

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December 31, 2002 and
2001 are as follows (in thousands):

|                                                             |                                                                 |   |         |        |      |   |        |        |  
|------------------------------------------------------------ | --------------------------------------------------------------- | - | ------- | ------ | ---- | - | ------ | ------ | -
|                                                             |                                                                 |   | 2002    |        | 2001
|                                                             |                                                                 |   |         |        |     
|Current deferred tax assets:                                 |                                                                 |   |         |        |      |   |        |       
|                                                             | Inventories, primarily reserves not currently deductible        |   | $       | 2,574  |      |   | $      | 1,665  |  
|                                                             | Accounts receivable, primarily allowances for uncollectibles    |   |         | 369    |      |   |        | 961    |  
|                                                             | Accrued expenses and reserves not currently deductible          |   |         | 1,439  |      |   |        | 537    |  
|                                                             |                                                                 |   |         |        |      |   |        |       
|Total current deferred tax assets before valuation allowance |                                                                 |   | 4,382   |        |      |   | 3,163  |       
|Valuation allowance  current                                |                                                                 |   | (4,382  | )      |      |   |       |       
|Noncurrent deferred tax assets:                              |                                                                 |   |         |        |      |   |        |       
|                                                             | Net operating loss carryforwards                                |   |         | 47,629 |      |   |        | 31,944 |  
|                                                             | Tax credit carryforwards                                        |   |         | 3,739  |      |   |        | 3,623  |  
|                                                             |                                                                 |   |         |        |      |   |        |       
|                                                             | Total noncurrent deferred tax assets before valuation allowance |   |         | 51,368 |      |   |        | 35,567 |  
|Valuation allowance  noncurrent                             |                                                                 |   | (44,436 | )      |      |   |       |       
|Deferred tax liabilities:                                    |                                                                 |   |         |        |      |   |        |       
|                                                             | Fixed assets, due to differences in depreciation                |   |         | (6,932 | )    |   |        | (6,879 | )
|                                                             |                                                                 |   |         |        |      |   |        |       
|Net deferred tax assets                                      |                                                                 | $ |        |        |      | $ | 31,851 |       
|                                                             |                                                                 |   |         |        |      |   |        |       

At December 31, 2002, the Company has U.S. net operating loss
carryforwards of approximately $127.3 million, which are available to offset
future Federal taxable income. These losses expire during the years 2005
through 2022. As of December 31, 2002, a substantial amount of the net
operating loss carryforwards are subject to annual limitations as a result of
IRC Section 382 ownership changes, which have occurred in prior years.

At December 31, 2002, the Company has Massachusetts and California net
operating loss carryforwards of approximately $31.4 million and $21.0 million,
respectively. The Massachusetts net operating loss will expire during the
years 2005 though 2007, while the California net operating loss will expire
from 2010 through 2012.

The valuation allowance increased by $48.8 million during the year ended
December 31, 2002. In assessing the net realizable value of deferred tax
assets, management considers whether it is more likely than not that some
portion of all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
taxable. Management considers the scheduled reversals of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes that it is not more likely than not
that the deferred tax assets at December 31, 2002 will be realized in the
future. At December 31, 2002, approximately $30,000 of the valuation allowance
is attributable to stock compensation expense for tax purposes, that tax
benefit of which, when realized, will be credited to shareholders equity.

The Company also has federal, California and Rhode Island research and
development credits of approximately $1.6 million, $1.1 million and $56,000,
respectively, which expire from 2003 to 2022. The Company also has
approximately $1.8 million of California manufacturers investment credit
carryforwards and $123,000 of Massachusetts investment tax credit
carryforwards.

9. Shareholders Equity

Sipex currently maintains seven stock option plans. The 1994 Stock Option
and Incentive Plan, 1996 Stock Option Plan, 1996 Non-Employee Director Stock
Option Plan, 1997 Stock Option Plan, the 1999 Stock Option Plan, the 2000
Non-Qualified Stock Option Plan and the 2002 Nonstatutory Stock Option Plan
have had 1,187,900, 1,200,000, 300,000, 1,200,000, 1,200,000, 1,000,000 and
2,000,000 shares reserved for issuance, respectively. All plans allow for
options which vest ratably over five years from the date of grant and expire
ten years from the date of grant. In October 2002, the Board of Directors voted
to reduce the number of shares available for issuance under the 1994 Stock
Option and Incentive Plan, 1996 Stock Option Plan, 1996 Non-Employee Director
Stock Option Plan and the 2000 Nonqualified Plan to

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##### Table of Contents



802,217, 551,942, 82,000
and 671,990, respectively, and no additional shares will be granted from these
Plans. In addition to stock option plans, 1,683,500 shares of Sipex stock
have been reserved for issuance pursuant to options which have been granted to
new employees outside of the option plans. Options for 6,458,433 shares are
outstanding as of December 31, 2002.

On April 16, 2002, the Company issued 3.0 million shares of common stock
through a private placement of securities, resulting in proceeds to the Company
of approximately $23.5 million, net of placement agent fees and other costs
related to the issuance. Proceeds from the offering of $6.9 million were used
to pay down the Companys bank line of credit to zero and the balance of $16.5
million was used to provide funding for general corporate purposes.

On October 10, 2002, the Company made a Tender Offer to exchange options
to purchase an aggregate of 2,495,052 shares of the Companys common stock,
whether vested or unvested, that have been granted under its 1996 Incentive
Stock Option Plan, 1997 Stock Option Plan, 2000 Non-Qualified Stock Option
Plan, 2002 Nonstatutory Stock Option Plan and certain stand-alone Option Plans
that have exercise prices greater than $7.50 per share and that are held by
eligible employees. The option exchange offer, including all withdrawal rights,
expired at 5 p.m. Pacific Time on Friday, November 8, 2002. Pursuant to the
terms and conditions of the option exchange offer, a total of 59 eligible
optionees participated in the option exchange program. On November 11, 2002,
the Company accepted for cancellation options to purchase 570,174 shares of its
common stock. Subject to the terms and conditions of the offer, the Company
will grant new options to purchase 245,054 shares of its common stock on May
12, 2003 in exchange for the options tendered and accepted. The exercise price
of the new options will be the fair market value of the Companys common stock
on the new grant date. The new options will be vested as to 25% of the shares
on the date of the new grant and thereafter will vest as to 25% of the shares
on each subsequent anniversary of the new option grant date.

In the fourth quarter of 2002, Sipex recorded $33,200 in compensation
expense due to the accelerated vesting of stock options to the former Chief
Executive Officer.

In January 1996, the Board of Directors approved the 1996 Employee Stock
Purchase Plan, pursuant to which Sipex is authorized to issue up to 500,000
shares of common stock to its full-time employees, nearly all of whom are
eligible to participate. In October 2002, the Board of Directors voted to
reduce the number of shares available for issuance under the 1996 Employee
Stock Purchase Plan to 400,000 shares. Under the terms of the Plan, employees
can choose to have up to 10 percent of their annual base earnings withheld each
year to purchase Sipexs common stock. The purchase price of stock is 85
percent of the lower of its beginning-of-period or end-of-period market price.
Under the Plan, Sipex sold 237,385 shares to employees since inception of the
plan.

A summary of the status of Sipexs stock option plans as of December 31,
2002, 2001 and 2000, and changes during the years then ended, is presented
below (in thousands, except per share amounts):

|                                 |           |  |        |        |          |   |          |        |          |  |        |       |          |   |       |        |   |  |          |      |   |   |       |        |  
|-------------------------------- | --------- |  | ------ | ------ | -------- | - | -------- | ------ | -------- |  | ------ | ----- | -------- | - | ----- | ------ | - |  | -------- | ---- | - | - | ----- | ------ | -
|                                 |           |  | 2002   |        | 2001     |   | 2000    
|                                 |           |  |        |        |          |   |         
|                                 |           |  |        |        |          |   | Weighted |        |          |  |        |       | Weighted |   |       |        |   |  | Weighted
|                                 |           |  |        |        |          |   | Average  |        |          |  |        |       | Average  |   |       |        |   |  | Average 
|                                 |           |  | Shares |        | Exercise |   | Shares   |        | Exercise |  | Shares |       | Exercise
|                                 |           |  | (000)  |        | Price    |   | (000)    |        | Price    |  | (000)  |       | Price   
|                                 |           |  |        |        |          |   |          |        |          |  |        |       |         
|Outstanding at beginning of year |           |  | 4,995  |        |          | $ | 13.64    |        |          |  | 3,137  |       |          | $ | 16.87 |        |   |  | 3,675    |      |   | $ | 15.09 |       
|                                 | Granted   |  |        | 4,273  |          |   |          | 4.00   |          |  |        | 2,386 |          |   |       | 9.61   |   |  |          | 432  |   |   |       | 23.15  |  
|                                 | Exercised |  |        | (88    | )        |   |          | (5.69  | )        |  |        | (86   | )        |   |       | (5.86  | ) |  |          | (715 | ) |   |       | (11.69 | )
|                                 | Forfeited |  |        | (2,722 | )        |   |          | (13.95 | )        |  |        | (442  | )        |   |       | (15.31 | ) |  |          | (255 | ) |   |       | (16.30 | )
|                                 |           |  |        |        |          |   |          |        |          |  |        |       |          |   |       |        |   |  |          |      |   |   |       |       
|Outstanding at end of year       |           |  | 6,458  |        |          | $ | 7.33     |        |          |  | 4,995  |       |          | $ | 13.64 |        |   |  | 3,137    |      |   | $ | 16.87 |       
|                                 |           |  |        |        |          |   |          |        |          |  |        |       |          |   |       |        |   |  |          |      |   |   |       |       
|Options exercisable at year-end  |           |  | 1,733  |        |          | $ | 11.87    |        |          |  | 1,627  |       |          | $ | 13.48 |        |   |  | 458      |      |   | $ | 18.11 |       
|                                 |           |  |        |        |          |   |          |        |          |  |        |       |          |   |       |        |   |  |          |      |   |   |       |       

The following table summarizes information about Sipexs stock options
outstanding at December 31, 2002:

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|                  |  |                     |           |             |  |                 |       |  |  |             |           | 
|----------------- |  | ------------------- | --------- | ----------- |  | --------------- | ----- |  |  | ----------- | --------- | 
|                  |  | Options Outstanding |           |             |  |                
|                  |  |                     |           | Options    
|                  |  |                     |           |             |  |                 |       |  |  | Exercisable
|                  |  |                     |           |             |  | Weighted        |       | 
|                  |  | Number              |           | Average     |  | Number         
|                  |  | Outstanding         |           | Remaining   |  | Exercisable    
|Range of          |  | at December 31,     |           | Contractual |  | At December 31,
|Exercise Prices   |  | 2002                |           | Life        |  | 2002           
|                  |  |                     |           |             |  |                
|$0.20 - $1.70     |  |                     | 847,290   |             |  |                 | 9.77  |  |  |             | 101,290   | 
|$1.90 - $2.99     |  |                     | 530,000   |             |  |                 | 9.73  |  |  |             | 0         | 
|$3.07 - $3.15     |  |                     | 1,849,250 |             |  |                 | 12.05 |  |  |             | 35,000    | 
|$3.20 - $6.00     |  |                     | 807,820   |             |  |                 | 8.86  |  |  |             | 522,654   | 
|$6.87 - $9.11     |  |                     | 677,000   |             |  |                 | 8.85  |  |  |             | 117,200   | 
|$9.48 - $13.0625  |  |                     | 693,450   |             |  |                 | 7.34  |  |  |             | 313,512   | 
|$13.63 - $19.8125 |  |                     | 732,533   |             |  |                 | 6.35  |  |  |             | 443,520   | 
|$20.0625 - $33.00 |  |                     | 295,324   |             |  |                 | 6.55  |  |  |             | 175,369   | 
|$34.563           |  |                     | 1,687     |             |  |                 | 5.19  |  |  |             | 1,290     | 
|$35.188           |  |                     | 24,079    |             |  |                 | 5.13  |  |  |             | 23,240    | 
|                  |  |                     |           |             |  |                 |       |  |  |             |           | 
|                  |  |                     | 6,458,433 |             |  |                 |       |  |  |             | 1,733,075 | 
|                  |  |                     |           |             |  |                 |       |  |  |             |           | 

10. Other Income (Expense), Net

Other income (expense), net consisted of the following:

|                |                  |   |        |      |      |   |        |     |  |   |       |       | 
|--------------- | ---------------- | - | ------ | ---- | ---- | - | ------ | --- |  | - | ----- | ----- | 
|                |                  |   | 2002   |      | 2001 |   | 2000  
|                |                  |   |        |      |      |   |       
|Interest income |                  | $ | 210    |      |      | $ | 1,180  |     |  | $ | 2,514 |      
|Royalty expense |                  |   | (1,166 | )    |      |   | (1,040 | )   |  |   | (748  | )    
|Other, net      |                  |   | (37    | )    |      |   | 25     |     |  |   | 301   |      
|                |                  |   |        |      |      |   |        |     |  |   |       |      
|                | Total other, net |   | $      | (993 | )    |   | $      | 165 |  |   | $     | 2,067 | 
|                |                  |   |        |      |      |   |        |     |  |   |       |      

The reduction of interest income in 2002 was primarily due to the decrease
in restricted cash in the second quarter of 2001, which was used to buy the
land, building and equipment of the Milpitas wafer fabrication facility that
was formerly leased. Pursuant to license agreements, Sipex pays royalties on
sales of certain licensed products. Prior to 2001 Sipex also received
royalties under a licensing agreement that offset royalty expenses resulting in
the $292,000 increase in 2001 royalty expense.

11. Employee Benefit Plan

Sipex has a defined contribution retirement plan, 401(k), covering
substantially all employees. Sipex discontinued the 50% match for contributions
made by employees up to 6% of their annual compensation in the first quarter of
2002. Sipex can also make a discretionary contribution to the plan. Employee
contributions vest immediately and employer contributions vest ratably over
five years. Participants are entitled, upon termination or retirement, to their
vested portion of retirement fund assets which are held by a corporate trustee.
During 2002, 2001 and 2000, employer matching contributions to the plan were
approximately $23,000, $588,000 and $468,000, respectively.

12. Commitments and Contingencies

Sipex leases facilities under operating leases expiring through 2009. Rent
expense was approximately $1.0 million, $2.0 million, and $3.1 million for the
years ended December 31, 2002, 2001 and 2000, respectively.

Minimum lease payments under operating leases are approximately as follows
(in thousands):

|              |  |   |       | 
|------------- |  | - | ----- | 
|Calendar Year |  |   |       | 
|              |  |   |       | 
|2003          |  | $ | 850   | 
|2004          |  |   | 808   | 
|2005          |  |   | 690   | 
|2006          |  |   | 683   | 
|2007          |  |   | 683   | 
|Thereafter    |  |   | 200   | 
|              |  |   |       | 
|              |  | $ | 3,914 | 
|              |  |   |       | 

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In June 2001, Sipex purchased the land, building and equipment of its
Milpitas wafer fabrication facility, which was leased under a five-year
operating lease. In accordance with the provisions of the lease agreement,
Sipex paid $35.0 million, consisting of $6.0 million for the land, $16.9
million for the building and $12.1 million for machinery and equipment. The
recorded cost of the machinery and equipment purchased was reduced by a $1.4
million long-term liability recorded by Sipex through June 30, 2001 as its
estimated liability under the lease for the guaranteed residual value of the
equipment. Proceeds for the buyout were provided through the liquidation of
restricted cash investments of $36.8 million that had previously secured the
lease of the facility and equipment. This reduced rent expense in 2001 by
approximately $1.3 million.

In February 1999, Sipex filed a lawsuit against Maxim Integrated Products,
Inc. (Maxim) with the U.S. District Court for the District of Massachusetts
seeking a declaratory judgment that three of Sipexs products did not infringe
Maxim patents. Maxim filed counterclaims alleging certain products sold by
Sipex infringe a Maxim patent. The counterclaims seek injunctive relief and
unspecified damages. Sipex has denied infringement and alleges that the patent
is invalid. The results of any litigation or arbitration are inherently
uncertain, and Sipex can offer no assurance that in any future legal actions
Sipex will prevail. If Sipex does not prevail, we would be required to pay
cash damages, injunctive relief could be issued which would prohibit Sipex from
selling the infringing product and liquidity could be adversely affected. The
Company has accrued $450,000 toward a potential settlement.

13. Valuation and Qualifying Accounts

The Company had the following activity for the sales returns, bad debt and
inventory reserves (in thousands):

|                              |  |               |        |          |  |            |      |           |  |           |        |   |  |   |        |  
|----------------------------- |  | ------------- | ------ | -------- |  | ---------- | ---- | --------- |  | --------- | ------ | - |  | - | ------ | -
|                              |  |               |        |          |  |            |      |           |  | Total A/R |        |   |  |  
|                              |  | Sales Returns |        | Bad Debt |  | Allowances |      | Inventory
|                              |  |               |        |          |  |            |      |          
|Balance December 31, 1999     |  | $             | 529    |          |  | $          | 751  |           |  | $         | 1,280  |   |  | $ | 2,715  |  
|Charged to costs and expenses |  |               | 3,631  |          |  |            | 50   |           |  |           | 3,681  |   |  |   | 3,645  |  
|Deductions                    |  |               | (1,796 | )        |  |            | (276 | )         |  |           | (2,072 | ) |  |   | (2,171 | )
|                              |  |               |        |          |  |            |      |           |  |           |        |   |  |   |        |  
|Balance at December 31, 2000  |  |               | 2,364  |          |  |            | 525  |           |  |           | 2,889  |   |  |   | 4,189  |  
|Charged to costs and expenses |  |               | 4,245  |          |  |            | 310  |           |  |           | 4,555  |   |  |   | 5,637  |  
|Deductions                    |  |               | (4,609 | )        |  |            | (391 | )         |  |           | (5,000 | ) |  |   | (6,285 | )
|                              |  |               |        |          |  |            |      |           |  |           |        |   |  |   |        |  
|Balance at December 31, 2001  |  |               | 2,000  |          |  |            | 444  |           |  |           | 2,444  |   |  |   | 3,541  |  
|Charged to costs and expenses |  |               | 2,034  |          |  |            | 50   |           |  |           | 2,084  |   |  |   | 5,395  |  
|Deductions                    |  |               | (3,381 | )        |  |            | (202 | )         |  |           | (3,583 | ) |  |   | (4,071 | )
|                              |  |               |        |          |  |            |      |           |  |           |        |   |  |   |        |  
|Balance at December 31, 2002  |  | $             | 653    |          |  | $          | 292  |           |  | $         | 945    |   |  | $ | 4,865  |  
|                              |  |               |        |          |  |            |      |           |  |           |        |   |  |   |        |  

Inventory charged to costs and expenses for fiscal 2002 included $5.4
million for excess and slow moving inventory, of which $700,000 was for
discontinued electroluminescent products and $700,000 was for physical
inventory adjustments, and $1.7 million of cost adjustments.

14. Export Sales and Major Customers

Sipexs operations are classified into one reportable segment.
Substantially all the Companys operations and long-lived assets reside in the
United States although Sipex has sales operations in Munich, Belgium, Taipei,
Tokyo, Shenzhen and Seoul.

Revenues by geographic area are summarized as follows (in thousands):

|                       |  |      |        |      |  |      |        |  |  |   |         | 
|---------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------- | 
|                       |  | 2002 |        | 2001 |  | 2000
|                       |  |      |        |      |  |     
|United States / Canada |  | $    | 15,714 |      |  | $    | 27,702 |  |  | $ | 53,471  | 
|Europe                 |  |      | 18,210 |      |  |      | 22,274 |  |  |   | 18,778  | 
|Far East               |  |      | 26,288 |      |  |      | 18,037 |  |  |   | 32,173  | 
|Japan                  |  |      | 6,048  |      |  |      | 4,049  |  |  |   | 10,198  | 
|                       |  |      |        |      |  |      |        |  |  |   |         | 
|                       |  | $    | 66,260 |      |  | $    | 72,062 |  |  | $ | 114,620 | 
|                       |  |      |        |      |  |      |        |  |  |   |         | 

For the years ended 2002 and 2001, Snecma accounted for 14% and 10%,
respectively, of Sipexs direct end net sales. For the year ended 2000, no
individual customer represented more than 10% of the Companys sales. Sales to
Future Electronics, Sipexs largest distributor, accounted for 24%, 21%, and
23% of Sipexs net sales for the years ended December 31, 2002, 2001 and 2000,
respectively.

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For the year ended December 31, 2002, Sipex had three customers which
accounted for 11%, 14% and 16% of the gross accounts receivable balance. For
the year ended December 31, 2001, Sipex had four customers which accounted for
11%, 11%, 12% and 13% of the gross accounts receivable balance.

15. Quarterly Data(Unaudited)

Following is a summary of quarterly operating results and share data.
Quarterly information shown below does not vary from amounts reported on any
Form 10-Q previously filed by Sipex with the exception of the quarters ended
June 30, 2001 and September 29, 2001, which were revised and reported on Forms
10-Q/A.

Net income per share amounts are based on the weighted average common and
common equivalent shares outstanding during the quarter. Therefore, the total
of net loss per share for the four quarters may differ slightly from net loss
per share for the year.

|                                       |      |   |                                       |       |                |   |               |       |               |   |         |        |  |   |        |        | 
|-------------------------------------- | ---- | - | ------------------------------------- | ----- | -------------- | - | ------------- | ----- | ------------- | - | ------- | ------ |  | - | ------ | ------ | 
|                                       |      |   | Dec. 31, 2002                         |       | Sept. 28, 2002 |   | June 29, 2002 |       | March 30,2002
|                                       |      |   |                                       |       |                |   |               |       |              
|                                       |      |   | (in thousands, except per share data)
|Fiscal 2002                            |      |   |                                       |       |                |   |               |       |               |   |         |        |  |   |        |       
|Net sales                              |      | $ | 16,583                                |       |                | $ | 16,625        |       |               | $ | 16,988  |        |  | $ | 16,063 |       
|Gross profit (loss)                    |      |   | (998                                  | )     |                |   | (6,556        | )     |               |   | (1,943  | )      |  |   | 2,175  |       
|Net loss                               |      |   | (7,751                                | )     |                |   | (21,075       | )     |               |   | (47,493 | )      |  |   | (2,957 | )     
|Net loss per share  basic and diluted |      |   | (0.28                                 | )     |                |   | (0.75         | )     |               |   | (1.70   | )      |  |   | (0.12  | )     
|Stock price range per share:           |      |   |                                       |       |                |   |               |       |               |   |         |        |  |   |        |       
|                                       | High |   |                                       | 4.260 |                |   |               | 4.930 |               |   |         | 11.200 |  |   |        | 13.450 | 
|                                       | Low  |   |                                       | 0.960 |                |   |               | 1.600 |               |   |         | 4.090  |  |   |        | 9.510  | 

|                                       |      |   |                                       |        |                |   |               |        |               |   |        |        |  |   |        |        | 
|-------------------------------------- | ---- | - | ------------------------------------- | ------ | -------------- | - | ------------- | ------ | ------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                                       |      |   | Dec. 31, 2001                         |        | Sept. 29, 2001 |   | June 30, 2001 |        | March 31,2001
|                                       |      |   |                                       |        |                |   |               |        |              
|                                       |      |   | (in thousands, except per share data)
|Fiscal 2001                            |      |   |                                       |        |                |   |               |        |               |   |        |        |  |   |        |       
|Net sales                              |      | $ | 17,965                                |        |                | $ | 15,031        |        |               | $ | 19,372 |        |  | $ | 19,694 |       
|Gross profit (loss)                    |      |   | 3,157                                 |        |                |   | (3,251        | )      |               |   | (2,299 | )      |  |   | 897    |       
|Net loss                               |      |   | (1,896                                | )      |                |   | (6,463        | )      |               |   | (6,305 | )      |  |   | (5,028 | )     
|Net loss per share  basic and diluted |      |   | (0.08                                 | )      |                |   | (0.26         | )      |               |   | (0.26  | )      |  |   | (0.22  | )     
|Stock price range per share:           |      |   |                                       |        |                |   |               |        |               |   |        |        |  |   |        |       
|                                       | High |   |                                       | 13.380 |                |   |               | 14.040 |               |   |        | 13.440 |  |   |        | 25.563 | 
|                                       | Low  |   |                                       | 6.000  |                |   |               | 6.440  |               |   |        | 6.531  |  |   |        | 7.656  | 

F-20