##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the Fiscal Year Ended December 31,
    2003                                             
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File Number 0-27892

Sipex Corporation


(Exact name of registrant as specified in its
charter)


|                                                                                               |  |                                         
|---------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                       |  | 04-6135748                              
|(State of Incorporation)                                                                       |  | (IRS employer
    identification number)
|                                                                                              
|233 South Hillview Drive,
    Milpitas, California(Address of principal executive
    offices) |  | 95035(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 þ          No o

Indicate by check
mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the
Act).     Yes þ          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, 2003 was approximately
$65,900,000 based upon $4.72 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 8, 2004 was approximately 33,068,000.

DOCUMENTS INCORPORATED BY REFERENCE

Part III
incorporates by reference certain portions of information from
the Registrants Proxy Statement for the 2004 Annual
Meeting of Shareholders.



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INDEX

|             |  |                                                                                           |  |      |    | 
|------------ |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|             |  |                                                                                           |  | Page
|             |  |                                                                                           |  |     
|Part I      
|Item 1       |  | Business                                                                                  |  |      | 1  | 
|Item 2       |  | Properties                                                                                |  |      | 7  | 
|Item 3       |  | Legal Proceedings                                                                         |  |      | 7  | 
|Item 4       |  | Submission of Matters to a
    Vote of Security Holders                                   |  |      | 7  | 
|Part II     
|Item 5       |  | Market for Registrants
    Common Equity and Shareholder Matters                         |  |      | 9  | 
|Item 6       |  | Selected Financial Data                                                                   |  |      | 9  | 
|Item 7       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |  |      | 10 | 
|Item 7A      |  | Quantitative and Qualitative
    Disclosure about Market Risk                             |  |      | 33 | 
|Item 8       |  | Financial Statements and
    Supplementary Data                                           |  |      | 34 | 
|Item 9       |  | Changes in and Disagreements
    with Auditors                                            |  |      | 59 | 
|Item 9A      |  | Control and Procedures                                                                    |  |      | 59 | 
|Part III    
|Item 10      |  | Directors and Executive
    Officers of the Registrant                                    |  |      | 61 | 
|Item 11      |  | Executive Compensation                                                                    |  |      | 61 | 
|Item 12      |  | Security and Ownership of
    Certain Beneficial Owners and Management                    |  |      | 61 | 
|Item 13      |  | Certain Relationships and
    Related Transactions                                        |  |      | 62 | 
|Item 14      |  | Principal Accounting Fees
    and Services                                                |  |      | 62 | 
|Part IV     
|Item 15      |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                      |  |      | 63 | 
|             |  | Signatures                                                                                |  |      | 64 | 
|EXHIBIT 23.1
|EXHIBIT 23.2
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1
|EXHIBIT 32.2



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PART I






|        |          
|------- | ---------
|Item 1. | Business:

This Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties.
The statements 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 including statements regarding our belief
that recent initiatives will result in a return to positive cash
flow from operations. 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 Item 7.  Managements
Discussion and Analysis of Financial Condition and Results of
Operations 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 free of charge through a hyperlink to the
Securities and Exchange Commission website as soon as reasonably
practicable after we electronically file such material with, or
furnish such material to, the Securities and Exchange
Commission. Sipex intends to satisfy the disclosure requirements
under Item 10 of Form 10-K regarding amendment to, or
waiver from, our code of ethics by posting such information on
our website at www.sipex.com, provided such method of disclosure
is then in compliance with the rules of the NASDAQ National
Market and the rules of the Securities and Exchange Commission.

Company Overview

Sipex was incorporated in May 1965 under the laws
of the State of Massachusetts. Effective October 2003, we
changed our state of incorporation from Massachusetts to
Delaware. Sipex designs, manufactures and markets, high
performance, analog integrated circuits (ICs) that
are used primarily by original equipment manufacturers, or OEMs,
operating in the computing, consumer electronics, communications
and networking infrastructure markets. Some of the end product
applications that contain our ICs are cellular phones, base
stations, computers, DVD players, and digital cameras.

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. We possess a broad portfolio of analog
ICs, organized into three product families: power management,
serial interface and optical storage. Our wafer fabrication
facility in Milpitas, California along with a number of
third-party contractors fabricate, package and test our ICs. Our
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

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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.

Analog and digital IC manufacturers often share
the characteristics of the semiconductor industry including
cyclical market demands, capacity limitations, oversupply
conditions, manufacturing variation, accelerated product life
cycles, price erosion, global competition, requirement for
capital equipment expenditures and rapid technology changes.
Product life cycles in the analog IC market, with some
exceptions, 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

We supply our customers in target markets with an
array of standard product choices as well as custom products,
which compete on the basis of features, performance and
competitive pricing. 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, we have restructured our
operations during 2002 and 2003 to reduce costs and improve
quality.

Sipex Markets, Applications and
Products

We sell 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.

We currently support 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. We focus 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,

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which developed high voltage alternating current
(AC) signals from low voltage battery sources that provides
backlighting for liquid crystal displays (LCDs).


The power management product portfolio continued
to expand in 2003 with proprietary ICs including white LED
drivers, DC/DC regulators and controllers. These new products
deliver improved 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.

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 cameras. Multi-protocol ICs continue to be
used in networking and telecommunications equipment.

Optical Storage
Products The optical
storage product family, a recent addition to the Sipex product
portfolio, started shipping in volume during the second quarter
of 2002. This product family provides complete electronic
solutions for pick-up heads used in optical storage systems,
such as CD and DVD devices. Optical storage products tend to
have shorter design cycles, time-to-volume and product lives
than interface and power management products.

Optical storage products consist 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,
we have 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 has developed a family of laser diode
drivers that control the laser diode in the pick-up head. Our
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. We introduced our first
product in this product family during 2003.

Sales, Distribution and Marketing

Sipex sells its products to OEM customers
primarily through our 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, Massachusetts
and Milpitas, California facilities and in field offices in
China, France, Germany, Japan, Korea, Taiwan and the United
Kingdom (See Note 13 for Segment/Export Sales and Major
Customers).

Most of our sales are generated through the
worldwide distributor network. Most of our design
win activity is generated through our wide network of
independent representatives and through our direct sales force.
Design wins are decisions by customers to include our products
as a component of the designs for their own future products.

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Future Electronics Inc. (Future), a
related party, is our exclusive distributor for North America
and Europe. It is also our largest distributor worldwide, and
accounted for 16%, 24% and 21% of total net sales,, for the
years ended December 31, 2003, 2002 and 2001, respectively.
Before adjustment for the charge related to the fair value of
debt conversion rights, discussed in Note 2 to the
consolidated financial statements, Future represented 34% of
total net sales for 2003 (See Item 7 for a discussion of
non-GAAP measures). We have a distributor agreement that
provides for Future 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 its inventory of our products. We
maintain a separate price list for products sold to Future,
which is generally different from the prices charged to
customers in direct sales transactions. On a quarterly basis,
this distributor is permitted to return for credit up to 10% of
its total purchases during the most recent three-month period.
We recognize revenue on sales to Future 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. As of December 31,
2003, affiliates of Future held approximately 8.5 million
shares of our common stock, or approximately 30%, of our
outstanding common stock. During February 2004, the affiliates
of Future exercised the conversion rights to convert their notes
into an additional 4.6 million shares of our common stock,
bringing the total ownership to 13.1 million shares (see
Note 2 for Related Parties), or approximately 40% of our
outstanding capital stock as of March 15, 2004.

In Asia, we sell products through a number of
distributors. Distributor sales to this region in 2003, 2002 and
2001 were approximately $37.2 million, $30.4 million
and $18.3 million, respectively, representing 58.5%, 45.8%
and 25.4%, respectively, before adjustment for the charge
related to the fair value of debt conversion rights, as
discussed in Item 7. All sales to these international
locations are denominated in U.S. dollars. We maintain
separate price lists for products sold to distributors, which
typically reflect discounts from the prices charged to customers
in direct sales transactions, but generally do not provide price
protection to these distributors on items that are included in
their inventory. During 2003 on a semi-annual basis, these Asia
distributors except Japan were 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. Our distributors in Japan may return up to 5% of their
total purchases on a quarterly basis. Effective in the first
quarter of 2004, all distributors may return products on a
three-month cycle.

We are subject to normal semiconductor market
seasonality and are subject to the normal risks of conducting
business internationally, including exchange rate fluctuations.
To date, we have 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 industrial
distributors, original equipment manufacturers (OEMs), original
design manufacturers (ODMs), and electronic manufacturing
services companies (EMS). Industrial distributors provide
logistical and supply chain services to their customers. The
OEMs and ODMs use our products as components in their equipment
and systems. In certain cases, we sell our products to EMS
companies who buy our products and use them in the systems and
subsystems they manufacture for OEMs and ODMs.

The end users of our products include Cisco
Systems, Dell Computer, Hewlett-Packard, IBM, Nortel Networks,
Siemens AG and Toshiba.

See also our disclosure regarding Future, our
exclusive distributor for North America and Europe under
Sales, Distribution and Marketing above.

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Backlog

Our product backlog was approximately
$9.1 million at December 31, 2003 compared to
$12.8 million at December 31, 2002. The decrease in
Sipexs backlog as of December 31, 2003 was primarily
due to the phase out of legacy products, such as hybrid and
electroluminescent display driver (EL). 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. 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, we
ceased all test operations in Billerica, Massachusetts and
transferred those operations to the subcontractors in Asia.

Our 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. Production by third party foundries
represented approximately 25.5%, 29.6%, and 26.4% of Sipex
shipments in 2003, 2002 and 2001, respectively. In 2003, we
entered into an exclusive sourcing arrangement with PolarFab on
certain products in return for favorable pricing, delivery and
engineering support. We did not experience parts shortage
conditions in 2003.

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 Asia which have been certified as
ISO-9002, TL16949 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-9001-2000 certified and has continuously maintained its ISO
certification since 1996.

Patents, Licenses and Trademarks

We seek to protect our 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 we intend 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, we also rely
on trade secrets and confidential technological know-how in the
conduct of our business. There can be no assurance that our

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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 our products are or may be developed,
manufactured or sold, including Asia, Europe and Latin America,
may not protect our products and intellectual property rights to
the same extent as the laws of the United States of America.


Pursuant to license agreements, Sipex pays a
royalty to Maxim Integrated Products and Analog Devices for
certain interface product sales. We also paid a royalty to Timex
Corporation for certain electroluminescent product sales through
September 2003 when the contract ended. In addition, during 2002
we paid 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 and complexity of analog circuits have
increased, 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.

We spent approximately $13.1 million in 2003
and $12.9 million in 2002 and 2001 on research and
development, representing 26.4%, 19.5% and 17.9% of net sales
for these periods, respectively. We expect to focus more on the
productivity of our research and development investment through
better product definition, consistent strategy and improved
tools. Overall expenditures in support of research and
development activity are likely to increase slightly in absolute
dollars in the near future.

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

Competition

We compete 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. In
addition, there are foreign semiconductor makers that compete
primarily on a price basis. 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.

We believe 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, 2003, we had
314 full-time employees, as compared with
334 employees in the prior year. During the fourth quarter
of 2002 and the first quarter of 2003, as part of our
restructuring initiative, we

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outsourced back end test operations to Asia,
reducing headcount by 28 staff. This reduction in headcount
was partially offset by hiring in engineering and other critical
functions.


During the later part of 2002, we implemented a
restructuring program that included discontinuing the Billerica,
Massachusetts 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 in 2002 resulted in a
significant reduction of the Companys headcount compared
to our headcount at the end of 2001 which was 442 employees.

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   |        |              |  |                
|                      |  |                                             |  | Facility Size |        |              |  | Lease          
|Location              |  | Description                                 |  | (Square Feet) |        | Owned/Leased |  | Expiration Date
|                      |  |                                             |  |               |        |              |  |                
|Milpitas, CA          |  | Manufacturing/Design Center/ General Office |  |               | 91,700 |              |  |                 | Owned  |  |  |              
|Billerica, MA         |  | Design Center/ General Office               |  |               | 63,280 |              |  |                 | Leased |  |  | 01/31/2008    
|Munich, Germany       |  | General Office                              |  |               | 1,230  |              |  |                 | Leased |  |  | 09/30/2004    
|Tokyo, Japan          |  | General Office                              |  |               | 2,500  |              |  |                 | Leased |  |  | 01/31/2005    
|Zaventem, Belgium     |  | Design Center/ General Office               |  |               | 9,540  |              |  |                 | Leased |  |  | 09/30/2009    
|Shenzhen, China       |  | General Office                              |  |               | 1,310  |              |  |                 | Leased |  |  | 04/29/2005    
|Taipei, Taiwan        |  | General Office                              |  |               | 2,600  |              |  |                 | Leased |  |  | 03/31/2004    
|Ipoh, Perak, Malaysia |  | Warehouse                                   |  |               | 2,630  |              |  |                 | Leased |  |  | 6-month notice

We believe that our existing facilities
adequately serve our current needs. We are seeking to sublease
the unused portion of the facility located in Billerica,
Massachusetts and have established a restructuring reserve of
$1.1 million in October 2003.






|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings:

As of March 8, 2004, there were no material
pending legal proceedings to which we or our subsidiaries are a
party. 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 sought injunctive relief and
unspecified damages. During the second quarter of 2003, a
settlement was reached whereby Maxim granted Sipex a license
covering auto online functionality used in some
serial interface products. In addition, both companies dismissed
all pending legal claims in all jurisdictions.






|        |                                                         
|------- | --------------------------------------------------------
|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 fourth quarter ended
December 31, 2003.

7



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##### Table of Contents



Executive Officers of Sipex

Information relating to the executive officers of
Sipex is set forth below. All officers held office as of
December 31, 2003.

|                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name, Age & Position                                                                                    |  | Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Walid Maghribi  Age 51
    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
    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 54
    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 45
    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 43
    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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                

8



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##### Table of Contents






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 closing sale prices per share as
reported on The Nasdaq National Market:

Quarterly Stock Market Data

|                             |      |               |   |                |  |               |   |                |  |  |   |      |  |  |   |      | 
|---------------------------- | ---- | ------------- | - | -------------- |  | ------------- | - | -------------- |  |  | - | ---- |  |  | - | ---- | 
|Fiscal 2003                  |      | Dec. 31, 2003 |   | Sept. 27, 2003 |  | June 28, 2003 |   | March 29, 2003
|                             |      |               |   |                |  |               |   |               
|Stock price range per share: |      |               |   |                |  |               |   |                |  |  |   |      |  |  |   |     
|                             | High |               | $ | 10.76          |  |               | $ | 9.29           |  |  | $ | 5.17 |  |  | $ | 3.70 | 
|                             | Low  |               |   | 7.50           |  |               |   | 4.68           |  |  |   | 2.82 |  |  |   | 2.23 | 

|                             |      |               |   |                |  |               |   |                |  |  |   |       |  |  |   |       | 
|---------------------------- | ---- | ------------- | - | -------------- |  | ------------- | - | -------------- |  |  | - | ----- |  |  | - | ----- | 
|Fiscal 2002                  |      | Dec. 31, 2002 |   | Sept. 28, 2002 |  | June 29, 2002 |   | March 30, 2002
|                             |      |               |   |                |  |               |   |               
|Stock price range per share: |      |               |   |                |  |               |   |                |  |  |   |       |  |  |   |      
|                             | High |               | $ | 4.26           |  |               | $ | 4.93           |  |  | $ | 11.20 |  |  | $ | 13.45 | 
|                             | Low  |               |   | 0.96           |  |               |   | 1.60           |  |  |   | 4.09  |  |  |   | 9.51  | 

On December 31, 2003, there were
68 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 8, 2004
was $7.48 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.

As of December 31, 2003, affiliates of
Future, our largest distributor, held approximately
8.5 million shares of our common stock, or approximately
30%, of our outstanding common stock. During February 2004, the
affiliates of Future exercised the conversion rights to convert
their notes into our common stock for 4.6 million shares
which have not been registered with the Securities and Exchange
Commission. As of March 8, 2004, the affiliates of Future
held 13.1 million shares, or 40% of our outstanding capital
stock.






|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data:

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

|                                                 |                     |                          |         |       |    |      |         |        |    |       |         |       |    |   |         |      |   |   |        |      |  
|------------------------------------------------ | ------------------- | ------------------------ | ------- | ----- | -- | ---- | ------- | ------ | -- | ----- | ------- | ----- | -- | - | ------- | ---- | - | - | ------ | ---- | -
|                                                 |                     |                         
|                                                 |                     | Years Ended December 31,
|                                                 |                     |                         
|                                                 |                     | 2003                     |         | 2002  |    | 2001 |         | 2000   |    | 1999*
|                                                 |                     |                          |         |       |    |      |         |        |    |      
|Operating Results:                               |                     |                          |         |       |    |      |         |        |    |       |         |       |    |   |         |      |   |   |        |     
|Net sales                                        |                     | $                        | 49,412  |       |    | $    | 66,260  |        |    | $     | 72,062  |       |    | $ | 114,620 |      |   | $ | 89,820 |     
|Gross profit (loss)                              |                     |                          | (4,392  | )     |    |      | (8,488  | )      |    |       | (2,536  | )     |    |   | 35,742  |      |   |   | 32,106 |     
|                                                 | As a % of net sales |                          |         | (8.9  | )% |      |         | (12.8  | )% |       |         | (3.5  | )% |   |         | 31.2 | % |   |        | 35.7 | %
|Depreciation and amortization                    |                     |                          | 7,302   |       |    |      | 7,675   |        |    |       | 6,662   |       |    |   | 4,273   |      |   |   | 2,528  |     
|Research & development expenses                  |                     |                          | 13,054  |       |    |      | 12,944  |        |    |       | 12,858  |       |    |   | 13,159  |      |   |   | 10,623 |     
|Income (loss) from operations                    |                     |                          | (33,559 | )     |    |      | (47,455 | )      |    |       | (32,928 | )     |    |   | 3,473   |      |   |   | 2,321  |     
|Income (loss) before income taxes                |                     |                          | (34,305 | )     |    |      | (47,542 | )      |    |       | (32,282 | )     |    |   | 5,540   |      |   |   | 3,680  |     
|Net income (loss)                                |                     |                          | (34,623 | )     |    |      | (79,276 | )      |    |       | (19,692 | )     |    |   | 3,917   |      |   |   | 6,099  |     
|                                                 | As a % of net sales |                          |         | (70.1 | )% |      |         | (119.6 | )% |       |         | (27.3 | )% |   |         | 3.4  | % |   |        | 6.8  | %
|Net income (loss) per common share 
    basic   |                     |                          | (1.23   | )     |    |      | (2.92   | )      |    |       | (0.82   | )     |    |   | 0.18    |      |   |   | 0.28   |     
|Net income (loss) per common share 
    diluted |                     |                          | (1.23   | )     |    |      | (2.92   | )      |    |       | (0.82   | )     |    |   | 0.16    |      |   |   | 0.28   |     

9



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##### Table of Contents



|                                           |  |                          |         |      |  |      |        |      |  |       |         |    |  |   |         |  |  |   |         | 
|------------------------------------------ |  | ------------------------ | ------- | ---- |  | ---- | ------ | ---- |  | ----- | ------- | -- |  | - | ------- |  |  | - | ------- | 
|                                           |  |                         
|                                           |  | Years Ended December 31,
|                                           |  |                         
|                                           |  | 2003                     |         | 2002 |  | 2001 |        | 2000 |  | 1999*
|                                           |  |                          |         |      |  |      |        |      |  |      
|Balance Sheet and Financial Data:          |  |                          |         |      |  |      |        |      |  |       |         |    |  |   |         |  |  |   |         | 
|Cash and cash equivalents                  |  | $                        | 18,185  |      |  | $    | 6,489  |      |  | $     | 4,874   |    |  | $ | 1,732   |  |  | $ | 1,355   | 
|Short-term investment securities           |  |                          | 2,994   |      |  |      | 9,980  |      |  |       |        |    |  |   |        |  |  |   | 5,734   | 
|Restricted cash equivalents and securities |  |                          |        |      |  |      |       |      |  |       |        | ** |  |   | 36,750  |  |  |   | 36,750  | 
|Total assets                               |  |                          | 101,604 |      |  |      | 98,786 | ***  |  |       | 145,127 |    |  |   | 148,768 |  |  |   | 119,795 | 
|Long-term debt                             |  |                          | 21,323  |      |  |      | 10,455 |      |  |       | 7,396   |    |  |   | 7,057   |  |  |   |        | 
|Working capital                            |  |                          | 28,931  |      |  |      | 27,775 |      |  |       | 36,260  |    |  |   | 44,845  |  |  |   | 42,037  | 
|Current ratio                              |  |                          | 2.4     |      |  |      | 3.0    |      |  |       | 4.7     |    |  |   | 3.5     |  |  |   | 3.9     | 
|Capital expenditures                       |  |                          | 3,017   |      |  |      | 4,108  |      |  |       | 40,441  | ** |  |   | 19,467  |  |  |   | 9,214   | 
|Shareholders equity                       |  |                          | 59,261  |      |  |      | 74,520 |      |  |       | 127,822 |    |  |   | 122,797 |  |  |   | 105,101 | 



---



| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | 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, California, 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 write off of goodwill.






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|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. To supplement
our consolidated financial statements presented in accordance
with GAAP, we are presenting non-GAAP measures of net sales,
which are adjusted from results based on GAAP, to present net
sales before considering the impact of the $14.1 million
non-cash charge related to the fair value of debt conversion
rights to a related party, which is described below. This
non-GAAP adjustment is provided to enhance the overall
understanding of our net sales compared to the GAAP results of
the prior year periods. Specifically, we believe that the
non-GAAP results provide useful information to both management
and investors by excluding this non-cash charge that we believe
is not indicative of our core operating performance. When such
comparisons are made below, the inclusion or exclusion of the
charge is clearly disclosed. The presentation of this additional
information is not intended to be considered in isolation or as
a substitute for results prepared in accordance with accounting
principles generally accepted in the United States, and is not
necessarily comparable to non-GAAP results published by other
companies.

Overview

We design, manufacture and market, 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. Some of the end product
applications that contain our ICs are cellular phones, base
stations, computers, DVD players, and digital cameras. Our
products fall into three major product families: power
management; interface; and optical storage.

Economic conditions in the analog semiconductor
industry began to improve in 2003 following a prolonged downturn
during 2001 and 2002. Capacity utilization for the nations
semiconductor makers reached 82.4% in November 2003, which was
the first time it had exceeded 80% since December 2000. For
Sipex, demand in the first half of 2003 continued to be soft,
while in the second half of the year there were signs of
increased end user demand. As with other semiconductor
manufacturers, we are affected by overall

10



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##### Table of Contents



market demand trends; however, we believe during
2003 our sales performance was more dependent on execution of
our internal initiatives than on overall market conditions.


We focus on several key areas to drive operating
and financial performance, including product mix, new product
introductions, capacity utilization, cost reductions and
productivity. All of these key areas are interrelated and
important in achieving improved gross margin.

Product mix between our three product families
and the sale of new products within each of our product families
can significantly impact overall gross margin. Power management
product gross margins have a wide range depending on the mix of
sales within this product family. The very high volume commodity
products sold into the Asian market, such as power regulators,
have generally lower margin. By contrast, our advanced power
management product offerings, such as white LED drivers, are new
products, and contribute higher margins. Interface products
generally bring higher margins than power management products,
because they are manufactured in our internal fab. Optical
storage product gross margins are generally above the Company
average, as all the products are new and proprietary.

Capacity utilization of our wafer fab in
Milpitas, California is also an important factor in driving
gross margin improvement. A large portion of our fab cost
structure is fixed, such as depreciation and payroll expenses
for process engineering and manufacturing support, which can be
leveraged over an increasing volume of completed wafers. We
build wafers for certain power management and all interface
products in our fab. We outsource all optical storage products.

Cost reductions and productivity improvements are
required in order to remain competitive in our marketplace. Cost
reductions are achieved in several ways, such as re-designing
the products to shrink the size of the
die, providing more individual products per wafer
produced. This generates increased output without adding
significant incremental cost. Other cost reductions and
productivity improvements come through product back end yield
improvement and test time reduction.

During 2003 we continued the transformation of
our product mix, eliminating legacy products, such as hybrid and
EL, while focusing on existing products and increasing the sale
of new products introduced in our three core product families.
Net sales attributed to legacy products decreased from
$17.8 million in 2002 to $2.5 million in 2003. Net
sales of our three core product families increased from
$48.5 million in 2002 to $61.1 million in 2003
(excluding the impact of the $14.1 million charge for the
fair value of debt conversion rights), or 25.9%. New products
introduced in optical storage enabled sales in this product
family to grow 263% compared to 2002. We also introduced several
new products in the interface and power management product
families.

Our wafer fab operation in Milpitas produced
approximately 84% of our wafer requirements. In 2003 we produced
13% more wafers than in 2002, leveraging our fab cost structure,
which contributed to our improved gross margin. In addition, we
reduced cost in the back end test operations by outsourcing more
of the test operations to contract manufacturers in Asia. These
cost reductions resulted from some of our restructuring
initiatives in 2002. In the second half of 2003, we converted
certain of our high volume interface products to two-micron
geometry from five- micron, thereby increasing the number of
circuits per wafer, and increasing the end product sales value
per wafer significantly with relatively minor increase in wafer
cost.

As a result of the sales product mix
transformation and the manufacturing improvements, our gross
margin improved from an $8.5 million loss in 2002 to a
$4.4 million loss in 2003. The gross loss of
$4.4 million in 2003 included a non-cash charge of
$14.1 million reflecting the impact of the fair value of
debt conversion rights with Future, related party (see
Note 2 for Related Parties). Our net cash used from
operations improved from a $15.2 million net use of cash in
2002 to a $7.3 million net use of cash in 2003.

Relationship with Future

Future Electronics Inc. (Future), is
our exclusive distributor for North America and Europe. It is
also our largest distributor worldwide, and accounted for 16%,
24% and 21% of total net sales for the years ended
December 31, 2003, 2002 and 2001, respectively. During
2003, Future increased its ownership of the Company and became a
related party. We anticipate that sales of its products to
Future will continue to

11



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##### Table of Contents



account for a significant portion of our
revenues. We have a distributor agreement that provides for
Future 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 our products. We recognize
revenue on sales to Future under the distribution agreement when
it sells the products through to the end customer.


On September 27, 2002, Sipex sold a
convertible secured note (the First Note) with an
attached warrant to an affiliate of Future for an aggregate cash
amount of $12.0 million. The private placement was
convertible into 1.6 million common shares at
$7.50 per share and 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 $2.9458.
The First Note was secured by a Deed of Trust on the
Companys land and building at Milpitas, California.

In June 2003, we received $10.6 million in
cash as part of a convertible note (the Second Note)
financing from an affiliate of Future. In December 2003, we
entered into an agreement with the affiliates of Future to amend
certain terms of the First Note and the Second Note. The
agreement, among other things, amended the Second Note to
provide for full acceleration and vesting of the holders
conversion rights under the Second Note. In addition, the
agreement provided that, upon expiration or termination of the
Hart-Scott Rodino Antitrust Improvements Act of 1976, as
amended (the HSR Act), regulatory waiting period,
the holder would convert the Second Note into 3.0 million
shares of our common stock at the original stated conversion
price of $3.52 per share. In exchange for the full
acceleration of the conversion rights under the Second Note, the
holder paid us an additional $3.0 million in cash, forgave
$411,000 in currently accrued interest and agreed to eliminate
our future interest obligations under the Second Note.

The agreement also provided that, upon the
expiration or termination of the HSR Act waiting period, the
holder would convert the First Note into 1.6 million shares
of our common stock at the original stated conversion price of
$7.50 per share. In addition, the holder agreed to
immediately eliminate our future interest obligations under the
First Note. The agreement also provided that, upon obtaining the
required HSR Act clearance, the holders would cancel and
otherwise release all security interests these entities may have
on any of our assets.

In February 2004, the U.S. Federal Trade
Commission granted early termination of the waiting period under
the HSR Act and the holders converted the First Note and the
Second Note into an aggregate of 4.6 million shares of our
common stock.

In connection with the Second Note, we recorded a
$14.1 million non-cash charge for the fair value of debt
conversion rights, which were accelerated. This charge will not
recur in the future.

Ownership by affiliates of Future is limited to
35% of total Sipex stock on a fully diluted basis. Affiliates of
Future are required to disgorge 50% of any profits through
sale of this stock if more than 25% of aggregate peak beneficial
ownership of the Companys voting stock is sold on or
before June 30, 2005; or more than 50% is sole on or before
June 30, 2005; or more than 75% of is sold on or before
June 30, 2007.

Affiliates of Future are not currently
represented on Sipexs board of directors and do not have
contractual rights to such representation or to any
participation in the corporate governance or management of the
Company. Sipexs board of directors have been granted proxy
to vote all 3.0 million shares of common stock converted
pursuant to the Second Note.

Critical Accounting Policies and
Estimates

The discussion and analysis of our financial
condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. 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

12



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##### Table of Contents



revenue recognition, sales returns, inventory
valuation, 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 recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the price is fixed or
determinable and collectibility is reasonable assured.

Future Electronics Inc. (Future), a
related party, is our exclusive distributor for North America
and Europe. Sales to this distributor are made under an
agreement that provides protection against price reduction for
Futures inventory of our products. In addition, Future has
stock rotation rights. Pursuant to these stock rotation rights,
Future is permitted on a quarterly basis to return for credit up
to 10% of its total purchases during the most recent three-month
period. As the price of products sold to Future is not fixed or
determinable until resold by Future to the end customer, we
recognize revenue on sales to Future when Future sells the
products through to the end customer. Accounts receivable are
recognized and inventory is relieved upon shipment as title to
inventories generally transfers upon shipment at which point the
Company has a legally enforceable right to collection under
normal terms.

For all other sales, revenue is recognized upon
title transfer and shipment because these distributors/customers
have no price protection and have limited return rights.
Distributors are permitted to return products limited to a
percentage of their purchases over a specified period of time.
We are able to estimate and establish appropriate reserves for
future returns from these distributors. For product sales
recognized at the time of shipment, we accrue for estimated
sales returns upon shipment based upon historical trends as well
as any known pending sales returns.

We account for the fair value of the debt
conversion rights of a convertible note payable to our related
party distributor as a charge against net sales in accordance
with Emerging Issues Task Force (EITF 01-1),
Accounting for a Convertible Instrument Granted or issued
to a Nonemployee for Goods or Services or a Combination of Goods
or Services and Cash. However, this accounting treatment
was discontinued on December 23, 2003 when Sipex entered
into an agreement with the affiliates of Future to terminate the
convertible debt pending termination of the waiting period under
the HSR Act. During February 2004, following early termination
of the HSR Act waiting period, the affiliates of Future
exercised the conversion rights to convert their notes into our
common stock for 4.6 million shares (See Note 2 for
Related Parties).

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.

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, weakness 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

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could have a material impact on our future
results of operations. Historically, our actual returns have
been materially within our expectations.


Inventory Valuation.We write down inventory for estimated excess quantities,
obsolescence or unmarketability. In addition, we write down
inventory costs to the lower of cost or market. Excess and
obsolete inventory is determined by comparing current inventory
to current backlog, anticipated future demand and shipment
history. Lower of cost or market adjustments are determined by
reviewing shipments during the quarter as well as quarter
beginning backlog 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 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 write-downs may be required.
Reviews of the valuation of inventory are performed on a
quarterly basis. In 2003, we recorded a $2.8 million
write-down for excess and slow moving inventory. Also, inventory
with an adjusted zero cost basis that was included in the
$5.4 million provision in 2002 was sold for
$1.0 million during 2003.

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. Restructuring
costs recorded in 2002 were subsequently adjusted for a
reduction of $330,000 in 2003.

We accounted for restructuring charges beginning
January 1, 2003 in accordance with Statement of Financial
Accounting Standards (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. Prior to January 1, 2003, we accounted for
restructuring in accordance with Emerging Issues Task Force
Issue No. 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.

During the fourth quarter of 2003 we established
a $1.1 million restructuring reserve for our facility in
Billerica, Massachusetts. This followed our 2002 restructuring
initiative in which we transferred our back end test operations
to Asia in the first quarter of 2003 and began to integrate
other support activities to Milpitas, California. By the fourth
quarter of 2003 we had vacated and segregated approximately 75%
of the Billerica, Massachusetts facility and are seeking a
lessee for this unoccupied space. The restructuring reserve
represents the present value of future lease payments subsequent
to abandonment less any estimated sublease income net of
associated costs. To estimate future sublease income, we worked
with an independent broker to estimate the length of time to
sublease the facility and the total amount to be received.
However, our estimates of expected sublease income could change
in the future based on factors that affect our ability to
sublease this facility such as general economic conditions and
the real estate market, among others.

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

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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 assessed that it is not 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. Our deferred tax assets at December 31, 2003
continue to have a full valuation allowance.

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,
|                         |                                     |                         
|                         |                                     | 2003                     |       | 2002 |  | 2001
|                         |                                     |                          |       |      |  |     
|Net sales                |                                     |                          | 100.0 | %    |  |      | 100.0 | %    |  |  | 100.0 | %   
|Cost of sales            |                                     |                          | 108.9 |      |  |      | 112.8 |      |  |  | 103.5 |     
|                         |                                     |                          |       |      |  |      |       |      |  |  |       |     
|Gross loss               |                                     |                          | (8.9  | )    |  |      | (12.8 | )    |  |  | (3.5  | )   
|Operating expenses:      |                                     |                          |       |      |  |      |       |      |  |  |       |     
|                         | Research and development            |                          |       | 26.4 |  |      |       | 19.5 |  |  |       | 17.9 | 
|                         | Marketing and selling               |                          |       | 15.0 |  |      |       | 12.2 |  |  |       | 13.8 | 
|                         | General and administrative          |                          |       | 16.1 |  |      |       | 12.2 |  |  |       | 9.8  | 
|                         | Restructuring                       |                          |       | 1.5  |  |      |       | 3.2  |  |  |       | 0.2  | 
|                         | Impairment of fixed assets          |                          |       |     |  |      |       | 7.2  |  |  |       |     | 
|                         | Amortization/impairment of goodwill |                          |       |     |  |      |       | 4.5  |  |  |       | 0.5  | 
|                         |                                     |                          |       |      |  |      |       |      |  |  |       |     
|Total operating expenses |                                     |                          | 59.0  |      |  |      | 58.8  |      |  |  | 42.2  |     
|                         |                                     |                          |       |      |  |      |       |      |  |  |       |     
|Loss from operations     |                                     |                          | (67.9 | )    |  |      | (71.6 | )    |  |  | (45.7 | )   
|Other expense, net       |                                     |                          | (1.5  | )    |  |      | (0.1  | )    |  |  | 0.9   |     
|                         |                                     |                          |       |      |  |      |       |      |  |  |       |     
|Loss before income taxes |                                     |                          | (69.4 | )%   |  |      | (71.7 | )%   |  |  | (44.8 | )%  
|                         |                                     |                          |       |      |  |      |       |      |  |  |       |     



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Fiscal Year Ended December 31, 2003
    compared to Fiscal Year Ended December 31,
    2002

Net Sales.Net sales
decreased 25.4% to $49.4 million for the year ended
December 31, 2003, as compared to $66.3 million for
the year ended December 31, 2002. The decrease in net sales
included a non-cash charge of $14.1 million reflecting the
fair value of conversion rights related to the 2003 convertible
note to Future (see Note 2 for Related Parties). Before
considering the impact of this charge, net sales for the year
2003 were $63.5 million, or a 4% decrease compared to 2002.
This decrease was attributable to our strategy to exit legacy
product lines, hybrid and EL for which net sales reduced by
$15.3 million, which was partially offset by a
$12.6 million increase in our core product families
including interface, power management and optical storage. The
increases in 2003 compared to 2002 for all three product
families were the following: interface was $4.9 million or
16.2%; power management was $751,000 or 4.7%; and optical
storage was $6.9 million or 263.0%. These increases were
primarily due to several factors, including the introduction of
several new products in all three families; cost reductions in
interface and power management products allowing the Company to
compete in commodity pricing market conditions; and increased
focus in managing the representative and distribution network to
increase design wins for interface and power management
products. All of the increase in optical storage products was
due to new products introduced in 2003. In the

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third quarter of 2002, we sold the hybrid product
family to SatCon Electronics Inc, which resulted in no net sales
for this product line in 2003. In addition, we discontinued
producing the EL product family by the first quarter of 2003.


Geographically, during 2003 international net
sales were flat year over year, however domestic sales decreased
$2.2 million. Sales in Japan grew by $8.0 million or
132% compared to 2002. The ramping of optical storage products
in 2003 accounted for this increase as all our optics sales were
generated in Japan. In Asia other than in Japan, net sales were
slightly down as the mix shifted from legacy products to power
management products. Net sales in Europe and the rest of the
world decreased $7.5 million due to the discontinuance of
the legacy product lines, partially offset by increases in both
interface and power management products.

Gross Profit (Loss).Gross loss of $4.4 million for the year ended
December 31, 2003 included a non-cash charge to sales
reflecting the fair value of debt conversion rights of
$14.1 million (see Note 2 for Related Parties). The
impact of this charge was to reduce gross profit from 15.3% of
net sales to a gross loss of 8.9%. Compared to 2002, gross loss
decreased by $4.1 million. This improvement comprised the
following: product mix, manufacturing yield and process
improvements of $6.0 million, cost reductions related to
restructuring initiatives of $5.8 million, lower inventory
write-downs of $3.8 million due to completion of our legacy
product line exit initiative in 2002, restructuring costs of
$1.6 million in 2002, and $1.0 million of revenue from
the sale of the inventory in 2003 that was written-off in 2002.
These were partially offset by the $14.1 million non-cash
charge for the fair value of debt conversion rights.
Manufacturing yield and process improvements were the result of
our continued effort primarily in standardized manufacturing
processes and improved design for manufacturability.

During the second half of 2003 we converted a
portion of our capacity to two-micron geometry from five-micron
geometry that resulted in increasing the number of circuits per
wafer, and increasing the end product sales value per wafer
significantly with relatively minor increase in wafer cost. This
also contributed to our improved cost and yield performance. In
addition, we increased our wafer output while reducing direct
labor hours in 2003 compared to 2002.

Research and
Development.Research and development
expenses in 2003 were $13.1 million compared to
$12.9 million in 2002. During 2003 we added several
designers resulting in $0.8 million of expense and
obsoleted certain mask sets totaling $0.3 million. These
increases were partially offset by reduced occupancy costs. As a
percentage of net sales, research and development costs were
26.4% compared to 19.5% in the prior year. This was primarily
due to the reduction in net sales, which resulted from a
non-cash charge reflecting the fair value of debt conversion
rights (see Note 2 for Related Parties). We anticipate that
research and development spending will increase in 2004.

Marketing and
Selling.Marketing and selling
expenses of $7.4 million in 2003 were lower compared to
2002 by $0.7 million due to reduced occupancy costs,
marketing communications and travel, partially offset by
increased spending and headcount in our Japan and Taiwan sales
offices and increased sales representative commissions due to
increased sales in our core product families. Sales and
marketing expenses were 15.0% of net sales in 2003 compared to
12.2% of net sales in 2002. This increase in percentage of net
sales in 2003 was primarily due to the non-cash charge for the
fair value of debt conversion rights (see Note 2 for
Related Parties). The increase was also attributable to the
reduction in net sales before the non-cash charge, partially
offset by the reduced spending.

General and
Administrative.General and
administrative expenses were $7.9 million in 2003 compared
to $8.1 million in 2002 or a reduction of
$0.2 million. This decrease was largely due to lower
severance costs of $0.7 million and lower legal costs of
$0.5 million in 2003 compared to 2002, partially offset by
higher insurance costs, filing fees and other expenses.

Restructuring and Fixed Asset
Impairment.In 2002 we transferred our
back end test operations to Asia and completed the move of our
headquarters and major operations to Milpitas, California.
During 2003, $330,000 was reversed from the 2002 accrual for
management reorganization charges and employee severance costs.
In December of 2003, we established a restructuring reserve of
$1.1 million for our Billerica,

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Massachusetts facility which includes a design
center occupying approximately one-fourth of the space. We are
seeking a lessee for the unused portion of the building. Accrued
restructuring costs for the present value of future lease
payments net of sublease income and associated costs as of
December 31, 2003 for this facility included short-term
portion of $422,000 and long-term portion of $535,000,
respectively.


|                         |                        |               |     |            |   |                 |   |        |   |   |   |        |  
|------------------------ | ---------------------- | ------------- | --- | ---------- | - | --------------- | - | ------ | - | - | - | ------ | -
|                         |                        | Restructuring |     | Impairment |   |                
|                         |                        | Costs         |     | Costs      |   | Inventory Costs
|                         |                        |               |     |            |   |                
|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 |            |   |                 |  |        |   |   |  |       
|                         | Incurred 2003          |               |     | 1,067      |   |                 |   |        |   |   |   |       |  
|                         | Charges utilized       |               |     | (535       | ) |                 |   |       |   |   |   |       |  
|                         | Adjustments to accrual |               |     | (330       | ) |                 |   |       |   |   |   |       |  
|                         |                        |               |     |            |   |                 |   |        |   |   |   |       
|Accrual balance 12/31/03 |                        | $             | 957 |            |   | $               |  |        |   | $ |  |       
|                         |                        |               |     |            |   |                 |   |        |   |   |   |       

Other Income (Expense),
Net.Other income (expense), net was
$(746,000) in 2003 compared to $(87,000) in the prior year. The
increase in expense was attributable to the interest expense
associated with the two convertible notes with Future (See
Note 2 for Related Parties). During 2002 we incurred
interest on the first note in the fourth quarter only. During
2003 we incurred interest on the first note until
December 22, 2003 and incurred interest on the second note
from June 20, 2003 until December 22, 2003. As of
December 23, 2003 all future interest expense had been
forgiven. Both convertible notes were extinguished and converted
into 4.6 million of our common shares as of
February 18, 2004.

Income Tax Expense.Income tax expense in 2003 was $318,000 based on the expected
tax liability from our off-shore operations, primarily Belgium.
Notwithstanding our net operating losses, we did not record a
tax benefit as we believed that it was not 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, 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 product 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, excluding Canada,
increased 22% and domestic net sales decreased 68% for the year
ended December 31, 2002, as compared to 2001. International
sales represented 77% and 58% 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
$8.2 million in domestic sales for 2002, combined with a
$9.2 million increase in international sales.
Geographically, Sipex experienced sales growth of 51% in Asia
other than Japan and

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49% in Japan, which was driven by our power and
optical storage product families, while sales declined 8% in
Europe and the rest of the world and 50% in North America in
2002.


Gross Profit (Loss).Gross loss was $8.5 million or 12.8% of net sales in 2002,
as compared to a gross loss of $2.5 million or 3.5% of net
sales in 2001. The $6.0 million deterioration resulted from
the effect of decreased revenue due to lower average selling
prices and increased inventory write offs, 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 our 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.

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 Goodwill and Other Intangible Assets
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 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 the Company recorded goodwill
amortization of $376,000.

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

|                                        |                                      |      |         |         |  
|--------------------------------------- | ------------------------------------ | ---- | ------- | ------- | -
|                                        |                                      | 2001
|                                        |                                      |     
|Net loss as reported                    |                                      | $    | (19,692 | )      
|Goodwill amortization expense           |                                      |      | 376     |        
|                                        |                                      |      |         |        
|                                        | Pro forma net loss                   |      | $       | (19,316 | )
|                                        |                                      |      |         |        
|Basic net loss per share, as reported   |                                      | $    | (0.82   | )      
|Add back: Goodwill amortization expense |                                      |      | 0.02    |        
|                                        |                                      |      |         |        
|                                        | Pro forma basic net loss per share   |      | $       | (0.80   | )
|                                        |                                      |      |         |        
|Diluted net loss per share, as reported |                                      | $    | (0.82   | )      
|Add back: Goodwill amortization expense |                                      |      | 0.02    |        
|                                        |                                      |      |         |        
|                                        | Pro forma diluted net loss per share |      | $       | (0.80   | )
|                                        |                                      |      |         |        

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, California. These actions were taken to
reduce the Companys cost structure as a result of the
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 was completed toward 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 product families
consisting of 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 |     | Impairment |   | Inventory
|                         |                        | Costs         |     | 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 write downs. 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, California facility. These gross
restructuring charges were reduced in the fourth quarter of 2002
for a $661,000 reversal in accrued lease costs for the
Companys San Jose, California facility due to the
assumption of the lease by a third party in the first quarter of
2003 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, California facility to its

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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,
California, fabrication facility. The $1.9 million
inventory write down, which was recorded in cost of sales, was
established to properly value the discontinued analog display
and hybrid product families. In the fourth quarter of 2002, the
Company recognized a gain of $384,000 due to the 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 back end 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 were
subsequently reduced by $330,000 which was originated from
$1.7 million of management reorganization charges and
$524,000 of employee severance costs estimated in 2002. The
remaining accrual was paid primarily 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, California
fabrication facility and $1.8 million for the write down to
fair value of the machinery and equipment at the San Jose,
California 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, California fabrication
machinery and equipment were sold to an unrelated third party.
The gain on the sale of the San Jose, California
fabrication machinery and equipment has been and will be
recorded upon collection of the cash due to the length of time
and related uncertainties affecting their ultimate receipt.

During 2001 Sipex 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),
Net.Other income (expense), net was
$(87,000) and $646,000 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,
California 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

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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.


Financial Condition, Liquidity and Capital
Resources

As of December 31, 2003, we had available
funds of $21.2 million consisting of cash, cash equivalents
and short-term investments, as compared to $16.5 million at
December 31, 2002. The increase of $4.7 million was
primarily due to $13.6 million of capital which came
through the private placement of $10.6 million of
convertible debt with an affiliate of Future, a distributor for
the Company and related party, an additional $3.0 million
of proceeds from Future for acceleration of debt conversion
rights in December 2003 when an agreement was reached to
terminate the two convertible notes with Future (see Note 2
for Related Parties) and $1.7 million for the issuance of
common stock under employee stock plans. This was partially
offset by a use of $7.3 million in operating activities and
$3.0 million in capital expenditures.

In 2002, available cash increased from
$4.9 million to $16.5 million. Proceeds from a private
placement of common stock and a private placement of a
convertible note to Future, a related party, contributed
$23.5 million and $12.0 million, respectively. Net
cash used in operating activities was $15.2 million. This
was net of 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. Included in the
$54.7 million non-cash charge were a $31.8 million
valuation allowance for the full amount of our deferred income
tax assets, $7.7 million of depreciation, a provision of
$5.4 million for excess and obsolete inventory, a
$4.7 million charge for impairment of fixed assets, a
$3.0 million charge for goodwill impairment, and a
provision of $2.1 million for uncollectible receivables and
returns and allowances.

Net cash used in operating activities was
$7.3 million, $15.2 million, and $16.5 million in
2003, 2002, and 2001, respectively. Net cash used in operating
activities in 2003 resulted primarily from a $34.6 million
net loss, of which approximately $25.4 million was non-cash
related, partially offset by a $1.2 million net increase in
working capital. The $25.4 million primarily comprised of a
$14.1 million non-cash charge to sales for the fair value
of debt conversion rights (see Note 2 for Related Parties),
depreciation of $7.3 million, $934,000 loss on disposal of
capital assets and $737,000 net provision for
restructuring. The change in short term assets and liabilities
included a $3.3 million increase in deferred income
associated with shipments to our largest distributor, where
revenue is recognized on a sell-through basis,
increase in accounts payable of $3.2 million and decrease
in prepaid expenses and other current assets of
$2.0 million, partially offset by increases in accounts
receivable of $3.5 million and inventory of
$3.2 million. We anticipate that cash used in operating
activities will be further reduced through our efforts to
improve our operating results. The Company will continue to
depend upon its cash and cash equivalents to fund its operations
until such time that the Company generates cash from operating
activities.

The increase of $3.3 million in deferred
income resulted from shipments to Future, our largest
distributor and related party, in anticipation of higher
sell-through activity. During 2003, we shipped
$24.7 million of product to Future, and recognized
$21.9 million of sales through Future. Accounts payable was
$11.3 million and $8.1 million in December, 2003 and
2002, respectively. Accounts receivable was $10.8 million
and $7.3 million as of December 31, 2003 and 2002,
respectively. The increases in accounts payable and accounts
receivable are reflective of higher volume of manufacturing and
shipping activity in December 2003 compared to the prior year.
Reserves for accounts receivable decreased from $945,000 in 2002
to $353,000 in 2003 primarily due to a reduction in the sales
returns reserve as the Company experienced a reduction of
products returned associated in part with the Companys
revised product line focus. Inventory grew to $16.0 million
as of December 31, 2003 from $14.4 million as of 2002
due to a $1.9 million increase in finished goods in
anticipation of first quarter 2004 sales, partially offset by a
reduction in raw materials.

Net cash provided by investing activities was
$4.0 million in 2003. Proceeds from maturity of short-term
investments were $19.0 million compared to
$12.0 million of purchases of short term securities.
Capital expenditures were $3.0 million during 2003,
primarily consisting of $1.7 million of wafer fabrication
equipment and $0.7 million of computer and other equipment.
During 2002, net cash used in investing

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activities was $12.1 million. Proceeds from
maturity of short-term investments were $5.0 million
compared to $15.0 million of purchases of short term
securities. Additions to property, plant and equipment were
$4.1 million, partially offset by $2.0 million of
proceeds from sale of test equipment to our subcontractors in
Asia as part of our outsourcing initiative. The
$4.1 million capital spending in 2002 was primarily
composed of $1.8 million of wafer fabrication equipment,
$1.0 million of test equipment and $0.6 million of
mask sets. We expect our 2004 capital spending in absolute
dollars will be in the range of $3.0 million to
$4.0 million, similar to 2003 and 2002.


Net cash provided by financing activities in 2003
was $15.0 million. In the second quarter of 2003 we
received cash of $10.6 million through the private
placement of a convertible note with an affiliate of Future, a
related party. In December, 2003 we entered into an agreement to
terminate this note and accelerate the associated conversion
rights. As part of this agreement, we received $3.0 million
in cash for this note and forgiveness of $411,000 interest
charges on both outstanding notes. Also, during 2003, employee
stock option exercises added $1.7 million. In the second
quarter of 2002 we received cash of $23.5 million net of
placement agency fees and other costs, through the private
placement of 3.0 million shares of Sipex common stock.

On September 27, 2002 we sold a convertible
secured note (the First Note) with an attached
warrant to an affiliate of Future, a related party, for an
aggregate cash amount of $12.0 million. The First Note was
recorded at $10.4 million and the attached warrant was
recorded at $1.6 million (recorded to additional
paid-in-capital) based on their fair values at the date of
issuance using the Black-Scholes option pricing model. The First
Note paid a 5.75% coupon and was convertible after one year into
1.6 million shares of Sipex common stock at a conversion
price of $7.50 per share. 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 the issuance. The exercise
price for the warrant is equal to 110% of the average closing
price for the five days preceding the closing or $2.9458.

On June 20, 2003 we issued a convertible
secured note, Second Note, to an affiliate of
Future, a related party, for an aggregate cash amount of
$10.6 million. The Second Note paid a 1.5% coupon and was
convertible over a four-year period into 3.0 million shares
of Sipex common stock at $3.52, contingent upon Futures
attainment of certain sales of our product.

In December, 2003 we entered into an agreement
with the affiliates of Future to amend certain terms of the
First Note and the Second Note. The agreement, among other
things, amended the Second Note to provide for full acceleration
and vesting of the holders conversion rights under the
Second Note. In addition, the agreement provided that, upon
expiration or termination of the Hart-Scott Rodino
Antitrust Improvements Act of 1976, as amended (the
HSR Act), regulatory waiting period, the holder
would convert the Second Note into 3.0 million shares of
our common stock at the original stated conversion price of
$3.52 per share. In exchange for the full acceleration of
the conversion rights under the Second Note, the holder paid us
an additional $3.0 million in cash, forgave $411,000 in
currently accrued interest and agreed to eliminate our future
interest obligations under the Second Note.

The agreement also provided that, upon the
expiration or termination of the HSR Act waiting period, the
holder would convert the First Note into 1.6 million shares
of our common stock at the original stated conversion price of
$7.50 per share. In addition, the holder agreed to
immediately eliminate our future interest obligations under the
First Note. The agreement also provided that, upon obtaining the
required HSR Act clearance, the holders would cancel and
otherwise release all security interests these entities may have
on any of our assets.

In February 2004, the U.S. Federal Trade
Commission granted early termination of the waiting period under
the HSR Act and the holders converted the First Note and the
Second Note into an aggregate of 4.6 million shares of our
common stock. Our associated long-term debt obligations were
extinguished and recorded as equity.

Management believes that our existing cash and
cash equivalents are adequate to fund operations, capital
expenditures and research and development efforts for the next
twelve months, however in the event that we need to arrange
additional funds for operations, there is no guarantee that
financing will be available or that it

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will be on terms that we will accept. In the
long-term, management believes that the results of its recent
years restructuring activities, cost control actions and
revised product line focus will eventually result in a return to
positive cash flow from operations at which time it anticipates
that additional equity or debt financing would become available
for financing working capital requirements and capital
expenditure plans. However, there is no guarantee that the
Company will return to positive cash flow from operations or
that financing, if required, will be available or that it will
be on terms that we will accept.


Sipexs contractual obligations are as
follows (in thousands):

|                           |                               |       |        |           |  |       |       |       |  |           |       |       |  |   |        |        |  |   |     |     | 
|-------------------------- | ----------------------------- | ----- | ------ | --------- |  | ----- | ----- | ----- |  | --------- | ----- | ----- |  | - | ------ | ------ |  | - | --- | --- | 
|                           |                               |       |        | Less Than |  | 1-3   |       | 3-5   |  | More Than
|Contractual Obligations    |                               | Total |        | 1 Year    |  | Years |       | Years |  | 5 Years  
|                           |                               |       |        |           |  |       |       |       |  |          
|Long-term debt(1)          |                               | $     | 22,560 |           |  | $     |      |       |  | $         |      |       |  | $ | 22,560 |        |  | $ |    |    
|Restructuring liability(2) |                               |       | 1,047  |           |  |       | 443   |       |  |           | 499   |       |  |   | 105    |        |  |   |     |    
|Operating leases(3)        |                               |       | 1,933  |           |  |       | 496   |       |  |           | 718   |       |  |   | 569    |        |  |   | 150 |    
|Purchase commitment(4)     |                               |       | 2,512  |           |  |       | 2,512 |       |  |           |      |       |  |   |       |        |  |   |    |    
|Purchase commitment(5)     |                               |       | 2,140  |           |  |       | 906   |       |  |           | 1,234 |       |  |   |       |        |  |   |    |    
|                           |                               |       |        |           |  |       |       |       |  |           |       |       |  |   |        |        |  |   |     |    
|                           | Total contractual obligations |       | $      | 30,192    |  |       | $     | 4,357 |  |           | $     | 2,451 |  |   | $      | 23,234 |  |   | $   | 150 | 
|                           |                               |       |        |           |  |       |       |       |  |           |       |       |  |   |        |        |  |   |     |    



---



|    |                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents future payments if the convertible
    notes are not converted but no payment was required since the
    debt was subsequently converted to our common stock in February
    2004.
|   
|(2) | Represents the net present value of estimated
    future lease payments less sublease income for our unused
    portion of Billerica, Massachusetts facility.                                
|   
|(3) | Excludes the lease payments related to
    restructuring facility at Billerica, Massachusetts.                                                                                               
|   
|(4) | Minimum purchase commitments to PolarFab based on
    quarterly rolling forecasts extending out for one year.                                                                                
|   
|(5) | Fixed payment obligation for license to use
    software tool for circuit design.                                                                                                            



| |                                               
| | ----------------------------------------------
| | Effect of Recent Accounting
    Pronouncements

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, we adopted
SFAS No. 146 and at the time of adoption, there was no
material impact on our consolidated financial position or
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 adoption of
FIN 45 did not have a material impact on our consolidated
financial position or results of operations or cash flows.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). This
interpretation provides guidance on the identification of
entities controlled through means other than voting rights.
FIN 46 specifies how a business enterprise should evaluate
its interests in a variable interest entity to determine whether
to consolidate that entity. A variable interest entity must be
consolidated by its primary beneficiary if the entity does not
effectively disperse risks among the parties involved. In
December 2003 the FASB issued FIN 46R which defers the
implementation date for the Company to the first quarter of
2004. As the Company does not have an interest in a variable
interest entity, it does not expect the adoption to have a
material impact on the Companys financial position,
results of operations or cash flows.

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In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
(SFAS 149). SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other
contracts and for hedging activities under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 149 will be
effective for contracts entered into or modified after
June 30, 2003. Our adoption of SFAS 149 did not have a
material impact on our consolidated financial position, results
of operations or cash flows.

On May 15, 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity (SFAS 150). SFAS 150 requires
issuers to classify as liabilities (or assets in some
circumstance) three classes of freestanding financial
instruments that embody obligations for the issuer. Generally,
SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003 and is otherwise
effective at the beginning of the first interim period beginning
after June 15, 2003. We adopted the provisions of
SFAS 150 on June 29, 2003, and the adoption did not
have an effect on our consolidated financial position, results
of operations or cash flows.

In December 2003, the SEC issued Staff Accounting
Bulletin (SAB) No. 104, Revenue
Recognition (SAB No. 104), which codifies, revises
and rescinds certain sections of SAB No. 101, Revenue
Recognition, in order to make this interpretive guidance
consistent with current authoritative accounting and auditing
guidance and SEC rules and regulations. The changes noted in SAB
No. 104 did not have a material effect on our consolidated
results of operations, consolidated financial position or
consolidated cash flows.

Factors Affecting Future Results



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                               

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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. For example, we have a minimum purchase
arrangement with one of our suppliers based on requirements
forecasted one year in advance. 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 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.

In addition, our quarterly and annual operating
results may continue to be affected by non-cash charges against
our net sales such as the fair value of conversion rights
associated with the note issued to an affiliate of Future, our
largest distributor. In this regard, non-cash charges of
$1.2 million for the quarter ended September 27, 2003
and $12.9 million for the quarter ended December 31,
2003 which reduced our net sales by such amounts and increased
our net loss by the same amounts, adversely impacting our net
loss per share. The note associated with these non-cash charges
has been extinguished, and we will not incur additional non-cash
charges to sales from the Second Note.

From 2001 through 2003, the semiconductor
industry experienced a prolonged and severe downturn that
adversely affected our results of operations. Our net sales
before the non-cash charge for the fair value of debt conversion
rights for the year ended December 31, 2003 decreased 4%
from the corresponding prior year period. 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.

Our auditors have informed our Audit Committee
of the existence of reportable conditions in our internal
control

As part of the communications by our independent
auditors, Deloitte & Touche LLP, or D&T, to our Audit
Committee with respect to D&Ts audit for the year
ended December 31, 2003, D&T informed the Audit
Committee that they had identified the following
reportable conditions in our internal control:



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | Deficiencies in our process for deferring costs
    related to deferred sales to our largest distributor, Future; and
|
| |  | Deficiencies in our accounting department and
    related reliance on manual reconciliations and analysis.           

The reportable conditions noted above, if not
addressed, could result in accounting errors such as those
underlying the restatements of our consolidated financial
statements more fully discussed in Note 14 to our consolidated
financial statements. Our failure to fully address these
reportable conditions could have a material adverse effect on
our business, results of operations and financial condition.
Please see Item 9A Controls and Procedures
below.

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| |                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 former auditors
noted certain matters involving internal control and its
operation that they considered 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 the 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 reconciliations, 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 reconciliations, as well as improve
the account analysis methodologies and increase the level of
supervisory and management review.

Our ability to implement our business plan
successfully in a volatile market requires effective management
systems and a system of financial processes and controls. In
that regard, we are in the process of implementing a new
enterprise requirements planning system. 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 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 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-

26



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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 85% of our net sales for the twelve
months ended December 31, 2003 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 three or six months shipments.
Effective in the first quarter of 2004, all distributors may
return products on a three-month cycle. 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. We defer revenue on
shipments to Future until the product is resold by the
distributor to the end user (sell-through). These provisions, as
well as the significant share ownership by Future, cause
management to conclude that reasonable estimates of price
concessions and returns cannot be made at the time of shipment
to Future.



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

Future has historically accounted for a
significant portion of our revenues. It is our largest
distributor worldwide, and accounted for 34% of total net sales
before taking into account non cash charges for the fair value
of debt conversion rights for the twelve months ended
December 31, 2003, and 24% and 21% of total net sales for
the years ended December 31, 2002 and 2001, respectively.
We anticipate that sales of our products to Future will continue
to account for a significant portion of our revenues. The loss
of Future as a distributor, or a significant reduction in orders
from Future would materially and adversely affect our operating
results, our business, our financial condition and our stock
price.

We have a distributor agreement with Future that
provides for Future 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, which may be different from the prices charged to
customers in direct sales transactions. Our distributor
agreement with Future does not contain minimum purchase
commitments. As a result, Future could cease purchasing our
products with short notice to us. In addition, Future 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,

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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.




| |                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Affiliates of Future, our largest
    distributor, beneficially own a significant percentage of our
    common stock, which will allow them to significantly influence
    matters requiring shareholder approval and could discourage
    potential acquisitions of our Company.

As of December 31, 2003, affiliates of
Future, our largest distributor, held approximately
8.5 million shares of our common stock, or approximately
30%, of our outstanding common stock. During February 2004, the
affiliates of Future exercised the conversion rights to convert
their notes into our common stock for an additional
4.6 million shares, bringing their ownership up to
13.1 million shares of our outstanding capital stock. The
affiliates of Future also continue to hold a warrant to purchase
900,000 shares of our common stock.

Affiliates of Future are not currently
represented on our board of directors and do not have
contractual rights to such representation or to any
participation in the corporate governance of Sipex management.
Due to their ownership of a significant percentage of our common
stock, these security holders will be able to exert significant
influence over actions requiring the approval of our
shareholders, including many types of change of control
transactions and amendments to our charter documents. The
significant ownership percentage of these security holders could
have the effect of delaying or preventing a change of control
Sipex or otherwise discouraging a potential acquirer from
obtaining control of Sipex.



| |                                                                           
| | --------------------------------------------------------------------------
| | 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, excluding Canada, in the
twelve months period ended December 31, 2003 were
$51.6 million or 81% of total net sales before fair value
of debt conversion rights and $51.2 million and
$42.0 million for the years ended 2002 and 2001,
respectively, or 77% and 58% 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

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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 our growth strategy
depends on increasing shipments in the optical storage market.
During 2003 and 2002, we derived all of our optical storage
sales from a limited number of customers in Japan. Local
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 we
have. 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.



| |                                                                    
| | -------------------------------------------------------------------
| | 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

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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, and 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.


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. Our
employees are employees at-will, 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.



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

Our Senior Vice President of Finance and Chief
Financial Officer, Senior Vice President of Sales and Vice
President of Engineering joined our company in 2003. 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.



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | 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 foundries
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
    certain of our wafers and those foundries may not produce at
    acceptable levels.

We rely on outside foundries to supply certain of
our 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.

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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 with the
exception of one of our foundries for whom we provide minimum
purchase commitments in accordance with our supply agreement
announced on August 11, 2003 (see Note 11 for
Commitments and Contingencies). 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.



| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. 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.

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| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | 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
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, 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
$12.0 million, net of costs of issuance. We obtained
funding from the private placement of a convertible secured note
on June 20, 2003 which provided approximately
$10.6 million, net of costs of issuance. In December, 2003
we entered into an agreement to amend both outstanding
convertible notes and accelerated the associated conversion
rights. In connection with this agreement, we received
$3.0 million in cash. During February 2004, the note
holders converted their notes into our common stock, resulting
in dilution to our shareholders. If we require additional
financing, it may not be available or available on terms
acceptable to us, and could result in additional dilution to
existing shareholders.



| |                                                                             
| | ----------------------------------------------------------------------------
| | 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 fourth quarter of 2002, our stock closing
price ranged from a high of $4.26 to a low of $0.96. In the
fourth quarter of 2003, our stock closing price ranged from a
high of $10.76 to a low of $7.50. 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

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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.



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are incurring additional costs and
    devoting more management resources to comply with increasing
    regulation of corporate governance and disclosure.

We are spending an increased amount of management
time and external resources to understand and comply with
changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley
Act of 2002, new SEC regulations and Nasdaq Stock Market rules
listing requirements. Devoting the necessary resources to comply
with evolving corporate governance and public disclosure
standards may result in increased general and administrative
expenses and a diversion of management time and attention to
these compliance activities.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | The implementation of a new management
    information system may disrupt our business.

We are implementing a new enterprise resource
planning and financial accounting and planning system starting
in the first quarter of 2004, and integrating this new system
with our customer relationship management system and our product
management system. Implementation of the new management
information system, including the integration with other
systems, is a very complex process that requires significant
financial resources and personnel time, as well as unifying
operating policies and procedures to ensure that the total
system operates efficiently and effectively. Delays or errors in
the implementation could result in additional costs and cause
disruptions to our business, which could adversely affect our
ability to accurately report our financial results on a timely
basis and could have a material adverse effect on our business,
financial condition and operating results.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    about Market Risk

Market Risk

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

Interest Rate Risk

Our financial investments consist primarily of
high quality commercial paper and money market funds. We do not
believe that it has a material exposure to interest rate risk.

Our exposure to market risk for changes in
interest rates relates primarily to the increase or decrease in
the amount of interest income we can earn on our investment
portfolio. The two debt instruments that we entered into had
fixed interest rates. We do not use derivative financial
instruments or engage in hedging activities in our investment
portfolio. We ensure the safety and preservation of our invested
principal funds by

33



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limiting default risks, market risk and
reinvestment risk. We mitigate default risk by investing in safe
and high-credit quality securities.


At December 31, 2003 we had short-term
investments of $3.0 million. Our short-term investments
consisted of highly liquid investments with original maturities
at the date of purchase of between 91 day and
180 days. These investments are subject to interest rate
risk and will fall in value if market interest rates increase.
The Company believes a hypothetical increase in market interest
rates by 10% from levels at December 31, 2003, would cause
the fair value of these short-term investments to fall by an
immaterial amount. Since we are not required to sell these
investments before maturity, we have the ability to avoid
realizing losses on these investments due to a sudden change in
market interest rates. On the other hand, declines in the
interest rates over time will reduce our interest income.

We had two outstanding convertible notes for
$21.3 million, at December 31, 2003. These instruments
had a fixed interest rate of 1.5% and 5.75% per annum.
Because the interest rates of these instruments were fixed, a
hypothetical 10% increase in interest rates will not have a
material effect on our financials. Interest rate increases,
however, will increase interest expense associated with future
borrowings by us, if any. We do not hedge against interest rate
fluctuations. Also, these two convertible notes were
subsequently converted to our common stock in February 2004.

Foreign Currency Exchange Risk

The majority of our sales, expense, and capital
purchasing activities are transacted in U.S. dollars.
However, since a portion of our operations consists of sales
activities outside of the U.S., we enter into transactions in
other currencies. We are primarily exposed to changes in
exchange rates for the euro, Japanese yen, and British pound.
Currently, we have no plan to enter into any foreign currency
hedging program since the amounts involved have not been
material. Foreign currency fluctuations did not have a material
impact on our consolidated financial position, results of
operations or cash flows in fiscal 2003, 2002 and 2001.






|        |                                                 
|------- | ------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data:

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

|                                                                                                                                             |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                             |  | Page
|                                                                                                                                             |  |     
|Independent Auditors Report 
    Deloitte & Touche LLP                                                                                     |  |      | 35 | 
|Independent Auditors Report 
    KPMG LLP                                                                                                  |  |      | 36 | 
|Consolidated Financial Statements:                                                                                                           |  |      |    | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                                             |  |      | 37 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001                                               |  |      | 38 | 
|Consolidated Statements of Shareholders
    Equity and Comprehensive Income (Loss) for the years ended
    December 31, 2003, 2002 and 2001 |  |      | 39 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001                                               |  |      | 40 | 
|Notes to Consolidated Financial Statements                                                                                                   |  |      | 41 | 

Schedules not listed above have been omitted
since they are not applicable or are not required, or the
information required to be set forth therein is included in the
Consolidated Financial Statements or Notes thereto.

34



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of

Sipex Corporation:


We have audited the accompanying consolidated
balance sheet of Sipex Corporation and subsidiaries (the
Company) as of December 31, 2003, and the
related consolidated statements of operations,
shareholders equity and comprehensive income (loss), and
cash flows for the year then ended. 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 audit.

We conducted our audit 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 audit
provides a reasonable basis for our opinion.

In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of Sipex Corporation and subsidiaries at
December 31, 2003, and the results of their operations and
their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

March 12, 2004


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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board Of Directors and Shareholders

Sipex Corporation:


We have audited the accompanying consolidated
balance sheet of Sipex Corporation (the Company) as
of December 31, 2002, and the related consolidated
statements of operations, shareholders equity and
comprehensive income (loss), and cash flows for each of the
years in the two-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 the results of their operations and
their cash flows for each of the years in the two-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


36



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##### Table of Contents



SIPEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per-share
data)


|                                            |                                                                                                                                                                                                                |                                            |   |          |         |  |   |          |        | 
|------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | -------- | ------- |  | - | -------- | ------ | 
|                                            |                                                                                                                                                                                                                |                                           
|                                            |                                                                                                                                                                                                                | Years Ended December 31,                  
|                                            |                                                                                                                                                                                                                |                                           
|                                            |                                                                                                                                                                                                                | 2003                                       |   | 2002    
|                                            |                                                                                                                                                                                                                |                                            |   |         
|ASSETS                                     
|Current assets:                             |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         
|                                            | Cash and cash equivalents                                                                                                                                                                                      |                                            | $ | 18,185   |         |  | $ | 6,489    |       
|                                            | Short-term investment securities                                                                                                                                                                               |                                            |   | 2,994    |         |  |   | 9,980    |       
|                                            | Accounts receivable, less allowances of $353 and
    $945 in 2003 and 2002, respectively                                                                                                                       |                                            |   | 8,793    |         |  |   | 7,278    |       
|                                            | Accounts receivable, net, related party                                                                                                                                                                        |                                            |   | 2,054    |         |  |   |         |       
|                                            | Inventories                                                                                                                                                                                                    |                                            |   | 15,956   |         |  |   | 14,393   |       
|                                            | Prepaid expenses and other current assets                                                                                                                                                                      |                                            |   | 1,434    |         |  |   | 3,446    |       
|                                            |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         
|                                            |                                                                                                                                                                                                                | Total current assets                       |   |          | 49,416  |  |   |          | 41,586 | 
|                                            | Property, plant, and equipment, net                                                                                                                                                                            |                                            |   | 51,778   |         |  |   | 56,997   |       
|                                            | Other assets                                                                                                                                                                                                   |                                            |   | 410      |         |  |   | 203      |       
|                                            |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         
|                                            |                                                                                                                                                                                                                | Total assets                               |   | $        | 101,604 |  |   | $        | 98,786 | 
|                                            |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         
|                                           
|LIABILITIES AND SHAREHOLDERS
    EQUITY   
|Current liabilities:                        |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         
|                                            | Accounts payable                                                                                                                                                                                               |                                            | $ | 11,340   |         |  | $ | 8,103    |       
|                                            | Accrued expenses                                                                                                                                                                                               |                                            |   | 4,087    |         |  |   | 3,570    |       
|                                            | Short-term portion of restructuring costs                                                                                                                                                                      |                                            |   | 422      |         |  |   | 755      |       
|                                            | Deferred income, related party                                                                                                                                                                                 |                                            |   | 4,636    |         |  |   | 1,383    |       
|                                            |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         
|                                            |                                                                                                                                                                                                                | Total current liabilities                  |   |          | 20,485  |  |   |          | 13,811 | 
|                                            | Long-term portion of restructuring costs                                                                                                                                                                       |                                            |   | 535      |         |  |   |         |       
|                                            | Long-term debt, related party                                                                                                                                                                                  |                                            |   | 21,323   |         |  |   | 10,455   |       
|                                            |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         
|                                            |                                                                                                                                                                                                                | Total liabilities                          |   |          | 42,343  |  |   |          | 24,266 | 
|                                            |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         
|Commitments and contingencies
    (Note 11) |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         
|Shareholders equity:                       |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         
|                                            | Preferred stock, $0.01 par value,
    1,000 shares authorized and no shares issued or outstanding                                                                                                              |                                            |   |         |         |  |   |         |       
|                                            | Common stock, $0.01 par value,
    60,000 shares authorized and 28,426 issued and outstanding
    at December 31, 2003 and 40,000 shares authorized and
    28,031 issued and outstanding at December 31, 2002 |                                            |   | 284      |         |  |   | 280      |       
|                                            | Additional paid-in capital                                                                                                                                                                                     |                                            |   | 194,786  |         |  |   | 175,489  |       
|                                            | Accumulated deficit                                                                                                                                                                                            |                                            |   | (135,802 | )       |  |   | (101,179 | )     
|                                            | Accumulated other comprehensive loss                                                                                                                                                                           |                                            |   | (7       | )       |  |   | (70      | )     
|                                            |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         
|                                            |                                                                                                                                                                                                                | Total shareholders equity                 |   |          | 59,261  |  |   |          | 74,520 | 
|                                            |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         
|                                            |                                                                                                                                                                                                                | Total liabilities and shareholders equity |   | $        | 101,604 |  |   | $        | 98,786 | 
|                                            |                                                                                                                                                                                                                |                                            |   |          |         |  |   |         

See accompanying notes to consolidated financial
statements

37



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##### Table of Contents



SIPEX CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per-share
data)


|                                                                                                       |                                     |                          |                                   |        |        |        |         |        |        |        |         |        |        |        | 
|------------------------------------------------------------------------------------------------------ | ----------------------------------- | ------------------------ | --------------------------------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | 
|                                                                                                       |                                     |                         
|                                                                                                       |                                     | Years Ended December 31,
|                                                                                                       |                                     |                         
|                                                                                                       |                                     | 2003                     |                                   | 2002   |        | 2001  
|                                                                                                       |                                     |                          |                                   |        |        |       
|Net sales                                                                                              |                                     | $                        | 41,625                            |        |        | $      | 66,260  |        |        | $      | 72,062  |       
|Net sales, related party (includes $14,131 charge
    in 2003 for debt conversion rights  see Note 2) |                                     |                          | 7,787                             |        |        |        |        |        |        |        |        |       
|                                                                                                       |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|                                                                                                       |                                     |                          | Total net sales                   |        |        | 49,412 |         |        |        | 66,260 |         |        |        | 72,062 | 
|Cost of sales                                                                                          |                                     |                          | 36,847                            |        |        |        | 74,748  |        |        |        | 74,598  |       
|Cost of sales, related party                                                                           |                                     |                          | 16,957                            |        |        |        |        |        |        |        |        |       
|                                                                                                       |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|                                                                                                       |                                     |                          | Total cost of sales               |        |        | 53,804 |         |        |        | 74,748 |         |        |        | 74,598 | 
|                                                                                                       |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|                                                                                                       |                                     | Gross loss               |                                   |        | (4,392 | )      |         |        | (8,488 | )      |         |        | (2,536 | )     
|                                                                                                       |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|Operating expenses:                                                                                    |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|                                                                                                       | Research and development            |                          |                                   | 13,054 |        |        |         | 12,944 |        |        |         | 12,858 |       
|                                                                                                       | Marketing and selling               |                          |                                   | 7,430  |        |        |         | 8,104  |        |        |         | 9,911  |       
|                                                                                                       | General and administrative          |                          |                                   | 7,946  |        |        |         | 8,091  |        |        |         | 7,070  |       
|                                                                                                       | Restructuring                       |                          |                                   | 737    |        |        |         | 2,126  |        |        |         | 177    |       
|                                                                                                       | Impairment of fixed assets          |                          |                                   |       |        |        |         | 4,718  |        |        |         |       |       
|                                                                                                       | Amortization/impairment of goodwill |                          |                                   |       |        |        |         | 2,984  |        |        |         | 376    |       
|                                                                                                       |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|                                                                                                       |                                     |                          | Total operating expenses          |        |        | 29,167 |         |        |        | 38,967 |         |        |        | 30,392 | 
|                                                                                                       |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|Loss from operations                                                                                   |                                     |                          | (33,559                           | )      |        |        | (47,455 | )      |        |        | (32,928 | )     
|                                                                                                       |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|Other income (expense):                                                                                |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|                                                                                                       | Interest income                     |                          |                                   | 122    |        |        |         |       |        |        |         |       |       
|                                                                                                       | Interest expense                    |                          |                                   | (1,114 | )      |        |         | (260   | )      |        |         | (559   | )     
|                                                                                                       | Other, net                          |                          |                                   | 246    |        |        |         | 173    |        |        |         | 1,205  |       
|                                                                                                       |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|                                                                                                       |                                     |                          | Total other income (expense), net |        |        | (746   | )       |        |        | (87    | )       |        |        | 646    | 
|                                                                                                       |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|Loss before income taxes                                                                               |                                     |                          | (34,305                           | )      |        |        | (47,542 | )      |        |        | (32,282 | )     
|Income tax expense (benefit)                                                                           |                                     |                          | 318                               |        |        |        | 31,734  |        |        |        | (12,590 | )     
|                                                                                                       |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|Net loss                                                                                               |                                     | $                        | (34,623                           | )      |        | $      | (79,276 | )      |        | $      | (19,692 | )     
|                                                                                                       |                                     |                          |                                   |        |        |        |         |        |        |        |         |       
|Net loss per common share  basic                                                                      |                                     | $                        | (1.23                             | )      |        | $      | (2.92   | )      |        | $      | (0.82   | )     
|Net loss per common share  diluted                                                                    |                                     | $                        | (1.23                             | )      |        | $      | (2.92   | )      |        | $      | (0.82   | )     
|Weighted average common shares
    outstanding  basic                                                 |                                     |                          | 28,137                            |        |        |        | 27,191  |        |        |        | 24,003  |       
|Weighted average common shares
    outstanding  diluted                                               |                                     |                          | 28,137                            |        |        |        | 27,191  |        |        |        | 24,003  |       

See accompanying notes to consolidated financial
statements

38



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##### Table of Contents



SIPEX CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY AND

COMPREHENSIVE INCOME (LOSS)


For the Years Ended December 31, 2003,
2002 and 2001


|                                                                                       |                    |                                       |        |            |  |         |     |             |  |               |         |               |  |   |          |   |  |   |      |   |  |   |         |         |  
|-------------------------------------------------------------------------------------- | ------------------ | ------------------------------------- | ------ | ---------- |  | ------- | --- | ----------- |  | ------------- | ------- | ------------- |  | - | -------- | - |  | - | ---- | - |  | - | ------- | ------- | -
|                                                                                       |                    |                                       |        |            |  |         |     |             |  |              
|                                                                                       |                    | 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, 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  |        
|Net loss                                                                               |                    |                                       |       |            |  |         |    |             |  |               |        |               |  |   | (34,623  | ) |  |   |     |   |  |   | (34,623 | )      
|Foreign currency translation adjustments                                               |                    |                                       |        |            |  |         |     |             |  |               |         |               |  |   |          |   |  |   | 63   |   |  |   | 63      |        
|                                                                                       |                    |                                       |        |            |  |         |     |             |  |               |         |               |  |   |          |   |  |   |      |   |  |   |         |        
|                                                                                       | Comprehensive loss |                                       |        |            |  |         |     |             |  |               |         |               |  |   |          |   |  |   |      |   |  |   |         | (34,560 | )
|Issuance of common stock under option plans                                            |                    |                                       | 272    |            |  |         | 3   |             |  |               | 1,289   |               |  |   |         |   |  |   |     |   |  |   | 1,292   |        
|Issuance of common stock under stock purchase plan                                     |                    |                                       | 123    |            |  |         | 1   |             |  |               | 359     |               |  |   |         |   |  |   |     |   |  |   | 360     |        
|Fair value of debt conversion rights                                                   |                    |                                       |       |            |  |         |    |             |  |               | 17,542  |               |  |   |         |   |  |   |     |   |  |   | 17,542  |        
|Compensation from acceleration of stock vesting                                        |                    |                                       |       |            |  |         |    |             |  |               | 61      |               |  |   |         |   |  |   |     |   |  |   | 61      |        
|Consulting services provided by related party                                          |                    |                                       |       |            |  |         |    |             |  |               | 46      |               |  |   |         |   |  |   |     |   |  |   | 46      |        
|                                                                                       |                    |                                       |        |            |  |         |     |             |  |               |         |               |  |   |          |   |  |   |      |   |  |   |         |        
|Balance at December 31, 2003                                                           |                    |                                       | 28,426 |            |  | $       | 284 |             |  | $             | 194,786 |               |  | $ | (135,802 | ) |  | $ | (7   | ) |  | $ | 59,261  |        
|                                                                                       |                    |                                       |        |            |  |         |     |             |  |               |         |               |  |   |          |   |  |   |      |   |  |   |         |        

See accompanying notes to consolidated financial
statements

39



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##### Table of Contents



SIPEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |         |         |        |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ------ | ------ | ------ | ------- | ------ | ------ | ------- | ------- | ------- | ------ | ------- | -
|                                                                                  |                                                                                 |                                                                       
|                                                                                  |                                                                                 | Years Ended December 31,                                              
|                                                                                  |                                                                                 |                                                                       
|                                                                                  |                                                                                 | 2003                                                                   |                                           | 2002                                                    |        | 2001  
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |       
|                                                                                  |                                                                                 |                                                                       
|                                                                                  |                                                                                 | (In thousands)                                                        
|Operating activities:                                                             |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|                                                                                  | Net loss                                                                        |                                                                        | $                                         | (34,623                                                 | )      |        | $      | (79,276 | )      |        | $       | (19,692 | )      
|                                                                                  | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |         |        
|                                                                                  |                                                                                 | Fair value of debt conversion rights                                   |                                           |                                                         | 14,131 |        |        |         |       |        |         |         |        |       
|                                                                                  |                                                                                 | Decrease (increase) in deferred income taxes                           |                                           |                                                         |       |        |        |         | 31,851 |        |         |         | (11,852 | )     
|                                                                                  |                                                                                 | Compensation from acceleration of stock vesting                        |                                           |                                                         | 61     |        |        |         | 33     |        |         |         |        |       
|                                                                                  |                                                                                 | Depreciation                                                           |                                           |                                                         | 7,302  |        |        |         | 7,675  |        |         |         | 6,662   |       
|                                                                                  |                                                                                 | Amortization/ impairment of goodwill                                   |                                           |                                                         |       |        |        |         | 2,984  |        |         |         | 376     |       
|                                                                                  |                                                                                 | Provision for inventories                                              |                                           |                                                         | 1,620  |        |        |         | 5,395  |        |         |         | 5,637   |       
|                                                                                  |                                                                                 | Forgiveness of interest on notes payable                               |                                           |                                                         | 411    |        |        |         |       |        |         |         |        |       
|                                                                                  |                                                                                 | (Gain) loss on disposal of capital assets                              |                                           |                                                         | 934    |        |        |         | (123   | )      |         |         |        |       
|                                                                                  |                                                                                 | Impairment of fixed assets                                             |                                           |                                                         |       |        |        |         | 4,718  |        |         |         |        |       
|                                                                                  |                                                                                 | Amortization of discount and issuance costs on
    notes payable       |                                           |                                                         | 361    |        |        |         | 76     |        |         |         |        |       
|                                                                                  |                                                                                 | Provision for uncollectable receivables and
    returns and allowances |                                           |                                                         | (66    | )      |        |         | 2,084  |        |         |         | 4,555   |       
|                                                                                  |                                                                                 | Consulting services provided by related party                          |                                           |                                                         | 46     |        |        |         |       |        |         |         |        |       
|                                                                                  |                                                                                 | Changes in assets and liabilities:                                     |                                           |                                                         |        |        |        |         |        |        |         |         |         |       
|                                                                                  |                                                                                 |                                                                        | Accounts receivable                       |                                                         |        | (3,503 | )      |         |        | 1,604  |         |         |         | 5,167  |        
|                                                                                  |                                                                                 |                                                                        | Inventories                               |                                                         |        | (3,183 | )      |         |        | 5,507  |         |         |         | 2,392  |        
|                                                                                  |                                                                                 |                                                                        | Prepaid expenses and other current assets |                                                         |        | 2,013  |        |         |        | (1,575 | )       |         |         | (367   | )      
|                                                                                  |                                                                                 |                                                                        | Deferred taxes                            |                                                         |        |       |        |         |        |       |         |         |         | (37    | )      
|                                                                                  |                                                                                 |                                                                        | Other assets                              |                                                         |        | (44    | )      |         |        | (89    | )       |         |         | 75     |        
|                                                                                  |                                                                                 |                                                                        | Accounts payable                          |                                                         |        | 3,237  |        |         |        | 2,114  |         |         |         | (4,594 | )      
|                                                                                  |                                                                                 |                                                                        | Accrued expenses                          |                                                         |        | 517    |        |         |        | 642    |         |         |         | (1,938 | )      
|                                                                                  |                                                                                 |                                                                        | Accrued restructuring costs               |                                                         |        | 202    |        |         |        | 755    |         |         |         | (506   | )      
|                                                                                  |                                                                                 |                                                                        | Deferred income                           |                                                         |        | 3,252  |        |         |        | 391    |         |         |         | (971   | )      
|                                                                                  |                                                                                 |                                                                        | Other long-term liabilities               |                                                         |        |       |        |         |        |       |         |         |         | (1,396 | )      
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|                                                                                  |                                                                                 |                                                                        |                                           | Net cash used in operating activities                   |        |        | (7,332 | )       |        |        | (15,234 | )       |         |        | (16,489 | )
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|Investing activities:                                                             |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|                                                                                  | Proceeds from maturity of short-term investment
    securities                  |                                                                        |                                           | 19,000                                                  |        |        |        | 5,000   |        |        |         |        |        
|                                                                                  | Purchase of short-term investment securities                                    |                                                                        |                                           | (12,014                                                 | )      |        |        | (14,980 | )      |        |         |        |        
|                                                                                  | Proceeds from liquidation of restricted cash
    investment                     |                                                                        |                                           |                                                        |        |        |        |        |        |        |         | 36,750  |        
|                                                                                  | Purchase of property, plant, and equipment                                      |                                                                        |                                           | (3,017                                                  | )      |        |        | (4,108  | )      |        |         | (40,441 | )      
|                                                                                  | Proceeds from sale of machinery and equipment                                   |                                                                        |                                           |                                                        |        |        |        | 2,013   |        |        |         |        |        
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|                                                                                  |                                                                                 |                                                                        |                                           | Net cash provided by (used in) investing
    activities |        |        | 3,969  |         |        |        | (12,075 | )       |         |        | (3,691  | )
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|Financing activities:                                                             |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|                                                                                  | Proceeds from issuance of common stock under
    employee stock plans           |                                                                        |                                           | 1,652                                                   |        |        |        | 898     |        |        |         | 1,228   |        
|                                                                                  | Net proceeds from issuance of common stock
    through private placement        |                                                                        |                                           |                                                        |        |        |        | 23,522  |        |        |         | 21,611  |        
|                                                                                  | Net proceeds from issuance of note payable and
    related warrants             |                                                                        |                                           | 10,344                                                  |        |        |        | 12,000  |        |        |         |        |        
|                                                                                  | Proceeds from related party for acceleration of
    conversion rights           |                                                                        |                                           | 3,000                                                   |        |        |        |        |        |        |         |        |        
|                                                                                  | Proceeds from (payments of) line of credit                                      |                                                                        |                                           |                                                        |        |        |        | (7,396  | )      |        |         | 339     |        
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|                                                                                  |                                                                                 |                                                                        |                                           | Net cash provided by financing activities               |        |        | 14,996 |         |        |        | 29,024  |         |         |        | 23,178  |  
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|Effect of foreign currency exchange rate changes
    on cash and cash equivalents |                                                                                 |                                                                        | 63                                        |                                                         |        |        | (100   | )       |        |        | 144     |        
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|Increase in cash and cash equivalents                                             |                                                                                 |                                                                        | 11,696                                    |                                                         |        |        | 1,615  |         |        |        | 3,142   |        
|Cash and cash equivalents at beginning of period                                  |                                                                                 |                                                                        | 6,489                                     |                                                         |        |        | 4,874  |         |        |        | 1,732   |        
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|Cash and cash equivalents at end of period                                        |                                                                                 | $                                                                      | 18,185                                    |                                                         |        | $      | 6,489  |         |        | $      | 4,874   |        
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|Supplemental cash flow information:                                               |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|                                                                                  | Cash paid (refunded) during the period for:                                     |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |         |        
|                                                                                  |                                                                                 | Income taxes                                                           |                                           | $                                                       | 143    |        |        | $       | (205   | )      |         | $       | (238    | )     
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|                                                                                  |                                                                                 | Interest                                                               |                                           | $                                                       | 522    |        |        | $       | 81     |        |         | $       | 559     |       
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|Supplemental disclosure of non-cash investing
    activities:                     |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        
|                                                                                  | Tax benefit from disposition of stock acquired
    through stock options        |                                                                        | $                                         |                                                        |        |        | $      |        |        |        | $       | 1,734   |        
|                                                                                  |                                                                                 |                                                                        |                                           |                                                         |        |        |        |         |        |        |         |        

See accompanying notes to consolidated financial
statements

40



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##### Table of Contents



SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003, 2002 and
2001




|   |                        
|-- | -----------------------
|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 to
customers 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 of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of 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 valuation, restructuring reserves,
asset impairment and income taxes.



| |                    
| | -------------------
| | Revenue Recognition

Revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred, the price is fixed
or determinable and collectibility is reasonable assured.

Future Electronics Inc. (Future), a
related party, is our exclusive distributor for North America
and Europe. Sales to this distributor are made under an
agreement that provides protection against price reduction for
Futures inventory of our products. In addition, Future has
stock rotation rights. Pursuant to these stock rotation rights,
Future is permitted on a quarterly basis to return for credit up
to 10% of its total purchases during the most recent three-month
period. As the price of products sold to Future is not fixed or
determinable until resold by Future to the end customer, we
recognize revenue on sales to Future when Future sells the
products through to the end customer. Accounts receivable are
recognized and inventory is relieved upon shipment as title to
inventories generally transfers upon shipment at which point the
Company has a legally enforceable right to collection under
normal terms.

For all other sales, revenue is recognized upon
title transfer and shipment because these distributors/customers
have no price protection and have limited return rights.
Distributors are permitted to return products limited to a
percentage of their purchases over a specified period of time.
We are able to estimate and establish appropriate reserves for
future returns from these distributors. For product sales
recognized at the time of shipment, we accrue for estimated
sales returns upon shipment based upon historical trends as well
as any known pending sales returns.

In the fourth quarter of 2001, Sipex accepted
distributor orders from Future for certain products on a
discounted basis for which they had no rights of return other
than for product related issues, price protection or
cancellation rights and which were not governed by the terms of
the existing distributor contract. Revenue

41



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

from those orders were recognized at the time of
shipment, since those orders were non-cancelable, non-returnable
and for which such sales were 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.



| |              
| | -------------
| | 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 Loss Per Share

Basic net loss per share is based upon the
weighted average number of common shares outstanding. Diluted
net loss per share is based upon the weighted average number of
common and common equivalent shares outstanding assuming
dilution. Common equivalent shares, consisting of outstanding
stock options, convertible debt and warrants, are included in
the per share calculations where the effect of their inclusion
would be dilutive. As the Company had net losses in 2003, 2002
and 2001, the weighted average number of common and common
equivalent shares outstanding equals the weighted average number
of common and common equivalent shares assuming dilution.

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

|                                                                                                                                     |  |      |        |      |  |      |        |  |  |  |        | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                                                                                                                                     |  | 2003 |        | 2002 |  | 2001
|                                                                                                                                     |  |      |        |      |  |     
|Weighted average common shares
    outstanding  basic                                                                               |  |      | 28,137 |      |  |      | 27,191 |  |  |  | 24,003 | 
|Net effect of dilutive potential common shares
    outstanding based on the treasury stock method using the average
    market price |  |      |       |      |  |      |       |  |  |  |       | 
|                                                                                                                                     |  |      |        |      |  |      |        |  |  |  |        | 
|Weighted average common shares
    outstanding  diluted                                                                             |  |      | 28,137 |      |  |      | 27,191 |  |  |  | 24,003 | 
|                                                                                                                                     |  |      |        |      |  |      |        |  |  |  |        | 
|Antidilutive potential common shares excluded
    from the computation above                                                         |  |      | 7,590  |      |  |      | 5,804  |  |  |  | 4,995  | 
|                                                                                                                                     |  |      |        |      |  |      |        |  |  |  |        | 

42



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                             
| | ----------------------------
| | 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 on the 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. The
long-term related party debt (see Related Parties below) at
December 31, 2003 approximates its fair value as the
Company entered into an agreement with the affiliates of Future
Electronics, Inc. to terminate the debt. During February
2004, the affiliates of Future exercised their rights to convert
the debt into 4.6 million common shares of Sipex. This
related party debt was extinguished and recorded as equity in
the first quarter of 2004.



| |                       
| | ----------------------
| | Short-term Investments

Investments, which primarily consist of highly
rated commercial paper with original maturities greater than
90 days, 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.



| |            
| | -----------
| | Inventories

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



| |                    
| | -------------------
| | Inventory Valuation

Sipex writes down inventory for estimated excess
quantities, obsolescence or unmarketability. In addition, the
Company writes down inventory costs to the lower of cost or
market. Excess and obsolete inventory is determined by comparing
current inventory to current backlog, anticipated future demand
and shipment history. Lower of cost or market adjustments are
determined by reviewing shipments during the quarter as well as
quarter beginning backlog 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
estimating anticipated market pricing, the Company also
considers 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 write-downs may be required. Reviews of the valuation
of inventory are performed on a quarterly basis. In 2002, Sipex
recorded a $5.4 million write-down 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. During 2003,
inventory with an adjusted zero cost basis that was included in
the $5.4 million provision in 2002 was sold for
$1.0 million. In 2003, the Company recorded
$2.8 million related to write-downs for excess and slow
moving inventory.

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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                
| | ---------------
| | Related Parties



| |                         
| | ------------------------
| | Future Electronics, Inc.

Future Electronics, Inc. (Future) is
our exclusive distributor for North America and Europe. It is
also our largest distributor worldwide. During 2003, Future
increased its ownership of the Company and became a related
party. During 2002 and 2001, Future was not a related party,
however there were significant sales to Future. On
September 27, 2002, Sipex sold a convertible secured note
(the First Note) with an attached warrant to an
affiliate of Future for an aggregate cash amount of
$12.0 million. The Company recorded the First Note at
$10.4 million and the warrant at $1.6 million
(recorded to additional paid-in capital) based upon their
estimated fair values at the date of issuance using the
Black-Scholes option pricing model. The First Note paid a 5.75%
coupon and was 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 First Note, the
Company could require the conversion of the First Note in
installments if for a period of time Sipex common stock traded
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 $2.9458.
The First Note was secured by a Deed of Trust on the
Companys land and building at Milpitas, California.

On June 20, 2003, Sipex sold a convertible
secured note (the Second Note) to an affiliate of
Future $10.3 million (net of issuance costs of $216,000).
The Second Note paid a 1.5% coupon rate per annum. The principal
amount of the Second Note was contingently convertible into a
maximum of 3.0 million shares of Sipex common stock at a
conversion price of $3.52 per share, subject to Future
attaining predetermined annual and/or cumulative sales levels
over a three-year period. Accordingly, in accordance with
Emerging Issues Task Force (EITF) Issue No. 01-1,
Accounting for a Convertible Instrument Granted or Issued
to a Nonemployee for Goods or Services or a Combination of Goods
or Services and Cash, the Company was required to
recognize non-cash charges against net sales for the fair value
of these conversion rights earned by Future each period relative
to the sales target. The fair value of the conversion rights has
been measured pursuant to FASB No. 123,
Accounting for Stock-Based Compensation and EITF
Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. The Second
Note was secured by a Deed of Trust on the Companys land
and building at Milpitas, California as well as all other assets
of the Company, except for the Companys intellectual
property. In connection with the issuance of the Second Note,
the Company entered into a standstill agreement with affiliates
of Future, pursuant to which these security holders agreed not
to acquire more than 35% of our stock on a fully diluted basis.
Also, Sipex entered into a voting agreement with an affiliate of
Future, pursuant to which this security holder agreed that the
additional shares of the Companys common stock issuable
upon conversion of the Second Note (i) will not be voted or
(ii) will be voted in the same proportion as the votes cast
by all other shareholders of Sipex.

During the fourth quarter of 2003, Sipex entered
into an agreement with the affiliates of Future Electronics to
convert the First Note and Second Note into common stock subject
to obtaining regulatory approval. In connection with the
agreement we accelerated the conversion rights of the Second
Note and received $3.0 million and forgiveness of interest
on both notes of $411,000. As a consequence, non-cash charges of
$14.1 million have been recognized against sales in 2003
representing the fair value of the conversion rights earned by
Future as well as the net cost from terminating the sales
incentive feature of the Second Note (thereby vesting the
conversion rights). As of December 31, 2003, affiliates of
Future held approximately 8.5 million shares of
Sipexs common shares or approximately 30%. Upon the
regulatory approval in February 2004, the affiliates of Future
exercised their conversion rights to exchange both the First
Note and the Second Note for 4.6 million of common shares
of Sipex, bringing their ownership to approximately 40%. As a
result of the conversion, all the related collateral and sales
incentives have been

44



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SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

waived. The warrant to purchase
900,000 shares of Sipexs common stock for
$2.9458 per share has not been exercised.

The Company has a distributor agreement with
Future that provides for Future to act as Sipexs sole
distributor for certain products within North America and
Europe. Future has historically accounted for a significant
portion of the Companys revenues. It is the Companys
largest distributor worldwide, and accounted for 16% of total
net sales for the year ended December 31, 2003, and 24% and
21% of total net sales for the years ended December 31,
2002 and 2001, respectively. The Company anticipates that sales
of its products to Future will continue to account for a
significant portion of its revenues.



| |          
| | ---------
| | Employees

Sipex has included as other current assets
approximately $25,000 and $134,000 due from employees at
December 31, 2003 and 2002, 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 No. 142
Goodwill and Other Intangible Assets effective
January 1, 2002, thereby discontinuing annual goodwill
amortization of approximately $376,000. Upon adoption of
SFAS No. 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 No. 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. The
Company recorded goodwill amortization of $376,000 during 2001.

45



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The pro forma effects of the adoption of
SFAS No. 142 on net income and earnings per share for
the Company for the year ended December 31, 2001 are as
follows (in thousands):

|                                        |                                      |      |         |         |  
|--------------------------------------- | ------------------------------------ | ---- | ------- | ------- | -
|                                        |                                      | 2001
|                                        |                                      |     
|Net loss as reported                    |                                      | $    | (19,692 | )      
|Goodwill amortization expense           |                                      |      | 376     |        
|                                        |                                      |      |         |        
|                                        | Adjusted loss                        |      | $       | (19,316 | )
|                                        |                                      |      |         |        
|Basic net loss per share, as reported   |                                      | $    | (0.82   | )      
|Add back: Goodwill amortization expense |                                      |      | 0.02    |        
|                                        |                                      |      |         |        
|                                        | Pro forma basic net loss per share   |      | $       | (0.80   | )
|                                        |                                      |      |         |        
|Diluted net loss per share, as reported |                                      | $    | (0.82   | )      
|Add back: Goodwill amortization expense |                                      |      | 0.02    |        
|                                        |                                      |      |         |        
|                                        | Pro forma diluted net loss per share |      | $       | (0.80   | )
|                                        |                                      |      |         |        



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

Sipex reviews long-lived assets and certain
identifiable intangibles 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 (see Note 3).



| |                             
| | ----------------------------
| | 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 (loss) in the statements 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, amended by
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, Sipex
accounts for its employee stock plans and employee stock
purchase plan, using the intrinsic value method under APB
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. In general, as the
exercise price of all options granted under these plans is equal
to the market price of the underlying common

46



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

stock on the grant date, no stock-based employee
compensation expense is recognized. In certain situations, under
these plans, options to purchase shares of common stock may be
granted at less than fair market value, which results in
compensation expense equal to the difference between the market
value on the date of grant and the purchase price. This expense
is recognized over the vesting period of the options and
included in operations.

The table below sets out the pro forma amounts of
net loss and net loss per share that would have resulted for all
fiscal years presented, if Sipex accounted for its employee
stock plans under the fair value recognition provisions of
SFAS No. 123 (in thousands, except per-share data).

|                                                                                                                                |                                 |      |         |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ---- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                                |                                 | 2003 |         | 2002  |   | 2001
|                                                                                                                                |                                 |      |         |       |   |     
|Net loss as reported                                                                                                            |                                 | $    | (34,623 | )     |   | $    | (79,276 | )     |   | $ | (19,692 | )    
|Add stock-based compensation included in reported
    net loss, net of related tax effects                                      |                                 |      | 61      |       |   |      | 33      |       |   |   |        |      
|Less stock-based compensation expense determined
    under the fair value method for all awards, net of related tax
    effects |                                 |      | (6,429  | )     |   |      | (10,985 | )     |   |   | (8,686  | )    
|                                                                                                                                |                                 |      |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                                              |                                 | $    | (40,991 | )     |   | $    | (90,228 | )     |   | $ | (28,378 | )    
|                                                                                                                                |                                 |      |         |       |   |      |         |       |   |   |         |      
|Net loss per share                                                                                                              |                                 |      |         |       |   |      |         |       |   |   |         |      
|                                                                                                                                | Basic and diluted  as reported |      | $       | (1.23 | ) |      | $       | (2.92 | ) |   | $       | (0.82 | )
|                                                                                                                                | Basic and diluted  pro forma   |      | $       | (1.46 | ) |      | $       | (3.32 | ) |   | $       | (1.18 | )

The purpose of computing pro forma net loss, the
fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model. The
assumptions used to value the stock option shares are state
below.

|                         |  |      |          |      |  |      |          |   |  |  |          |  
|------------------------ |  | ---- | -------- | ---- |  | ---- | -------- | - |  |  | -------- | -
|                         |  | 2003 |          | 2002 |  | 2001
|                         |  |      |          |      |  |     
|Expected life of options |  |      | 5  years |      |  |      | 6  years |   |  |  | 6  years |  
|Volatility               |  |      | 100      | %    |  |      | 247      | % |  |  | 179      | %
|Risk-free interest rate  |  |      | 3.0      | %    |  |      | 4.0      | % |  |  | 5.3      | %
|Dividend yield           |  |      |         |      |  |      |         |   |  |  |         |  

The weighted-average fair value of options
granted during 2003, 2002, and 2001 was $3.80, $3.99 and $9.38,
respectively.

The fair value of each Employee Stock Purchase
Plan share issued during 2003, 2002 and 2001 was estimated on
the date of grant using the Black-Scholes option-pricing model
with no dividend yield and option lives of six months. For 2003,
volatility of 115% and 75% were used for the first and second
purchase periods, respectively. For 2002, volatility of 75% and
180% were used for the first and second purchase periods,
respectively. Volatility of 179% was used for the first and
second 2001 purchase periods. The risk free interest rate
assumed was 1%, 4% and 3% for 2003, 2002 and 2001, respectively.
The weighted-average fair value of Employee Stock Purchase Plan
shares granted was $1.75 and $5.90, $2.72 and $3.62, and $6.76
and $4.73, for the first and second periods of 2003, 2002 and
2001, respectively.



| |                                               
| | ----------------------------------------------
| | Effect of Recent Accounting
    Pronouncements

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 consolidated financial
position or results of operations.

47



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 adoption of FIN
did not have a material impact on the Companys
consolidated financial position or results of operations or cash
flows.

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. The
adoption of SFAS No. 148 on January 1, 2003 did
not have a material effect on the Companys consolidated
financial position or results of operations as Sipex does not
intend to adopt the fair value method of accounting for
stock-based employee compensation.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). This
interpretation provides guidance on the identification of
entities controlled through means other than voting rights.
FIN 46 specifies how a business enterprise should evaluate
its interests in a variable interest entity to determine whether
to consolidate that entity. A variable interest entity must be
consolidated by its primary beneficiary if the entity does not
effectively disperse risks among the parties involved. In
December 2003 the FASB issued FIN 46R which defers the
implementation date for the Company to the year ending
December 31, 2004. As the Company does not have an interest
in a variable interest entity, it does not expect the adoption
to have a material impact on the Companys financial
position, results of operations or cash flows.

In April 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.
SFAS 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities. SFAS 149 will be effective for contracts
entered into or modified after June 30, 2003. The adoption
of SFAS 149 did not have a material impact on the
Companys consolidated financial position, results of
operations or cash flows.

On May 15, 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity. SFAS 150 requires issuers to classify as
liabilities (or assets in some circumstance) three classes of
freestanding financial instruments that embody obligations for
the issuer. Generally, SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003 and
is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The Company adopted
the provisions of SFAS 150 on June 29, 2003, and the
adoption did not have an effect on its consolidated financial
position, results of operations or cash flows.

In December 2003, the SEC issued Staff Accounting
Bulletin (SAB) No. 104, Revenue
Recognition (SAB No. 104), which codifies, revises
and rescinds certain sections of SAB No. 101, Revenue
Recognition, in order to make this interpretive guidance
consistent with current authoritative accounting and auditing
guidance and SEC rules and regulations. The changes noted in SAB
No. 104 did not have a material effect on the
Companys consolidated results of operations, consolidated
financial position or consolidated cash flows.

48



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Reclassifications

Certain prior years 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, California.
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 the then
current business plan, which included the sale and
discontinuance of the hybrid product line at the end of the
third quarter of 2002 and the discontinuance of the analog
display product line which was 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 consolidated the Companys
operations and focused 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 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 |                  |   |           |  |        |   |   |  |       
|                         | Incurred 2003          |               |     | 1,067            |   |           |   |        |   |   |   |        |  
|                         | Charges utilized       |               |     | (535             | ) |           |   |        |   |   |   |        |  
|                         | Adjustments to accrual |               |     | (330             | ) |           |   |        |   |   |   |        |  
|                         |                        |               |     |                  |   |           |   |        |   |   |   |       
|Accrual balance 12/31/03 |                        | $             | 957 |                  |   | $         |  |        |   | $ |  |       
|                         |                        |               |     |                  |   |           |   |        |   |   |   |       



| |        
| | -------
| | General

Restructuring activities began in 2002 as the
Company transferred its back end manufacturing operations off
shore and completed the move of its headquarters and major
operations to Milpitas, California. During 2002, we recorded
restructuring charges of $2.9 million, $4.7 million of
fixed asset impairment charges and $1.9 million of
inventory 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,
California facility. These gross restructuring charges were
reduced in the fourth quarter of 2002 for a $661,000 reversal in
accrued lease costs for the Companys San Jose,
California facility due to the sale of the 4 inch facility
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. The remaining 2002 gross
restructuring charges of $2.2 million were further reduced
by $330,000 in 2003. In

49



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

October 2003, the Company established a
restructuring reserve of $1.1 million for the unused
portion of its Billerica, Massachusetts facility.

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, California 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,
California fabrication facility. The $1.9 million inventory
write down, which is recorded as cost of sales, was established
to provide for the discontinued analog display and hybrid
product families. In the fourth quarter of 2002, the Company
recognized a gain of $384,000 due to the sale of a portion of
the inventory.



| |              
| | -------------
| | Restructuring

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.

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, California fabrication facility.

In the fourth quarter of 2002, Sipex incurred
restructuring costs related to the transfer of the
Companys back end 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, Massachusetts test
related machinery and equipment with a net book value of
$1.7 million. Accrued severance costs as of
December 31, 2002 were subsequently reduced by $330,000
which was originated from $1.7 million of management
reorganization charges and $524,000 of employee severance costs
estimated in 2002. The remaining accrual was paid primarily
during the first half of 2003.

In October of 2003, the Company established a
restructuring reserve of $1.1 million for the unused
portion of its Billerica, Massachusetts facility. Sipex
currently has a design center occupying approximately one-fourth
of the space and are seeking a lessee for the unused balance of
the building. Accrued restructuring costs of future lease
payments net of estimated sublease income with associated costs
as of December 31, 2003 for this facility included
short-term portion of $422,000 and long-term portion of
$535,000, respectively.



| |           
| | ----------
| | 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, California
fabrication facility and $1.8 million for the write down to
fair value of the machinery and equipment at the San Jose,
California 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, California 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, California 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.

50



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |            
|-- | -----------
|4. | Inventories

Inventories were as follows (in thousands):

|                |  |      |        |      |  |   |        | 
|--------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                |  | 2003 |        | 2002
|                |  |      |        |     
|Raw materials   |  | $    | 424    |      |  | $ | 893    | 
|Work-in-process |  |      | 8,684  |      |  |   | 8,532  | 
|Finished goods  |  |      | 6,848  |      |  |   | 4,968  | 
|                |  |      |        |      |  |   |        | 
|                |  | $    | 15,956 |      |  | $ | 14,393 | 
|                |  |      |        |      |  |   |        | 



|   |                              
|-- | -----------------------------
|5. | Property, Plant and Equipment

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

|                                               |  |      |        |      |  |   |        | 
|---------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                               |  | 2003 |        | 2002
|                                               |  |      |        |     
|Land                                           |  | $    | 5,957  |      |  | $ | 5,957  | 
|Building and improvements                      |  |      | 23,387 |      |  |   | 23,370 | 
|Machinery and equipment                        |  |      | 37,031 |      |  |   | 37,260 | 
|Furniture, fixtures and office equipment       |  |      | 11,346 |      |  |   | 11,163 | 
|Leasehold improvements                         |  |      | 4,253  |      |  |   | 4,098  | 
|                                               |  |      |        |      |  |   |        | 
|                                               |  |      | 81,974 |      |  |   | 81,848 | 
|Less accumulated depreciation and amortization |  |      | 30,196 |      |  |   | 24,851 | 
|                                               |  |      |        |      |  |   |        | 
|                                               |  | $    | 51,778 |      |  | $ | 56,997 | 
|                                               |  |      |        |      |  |   |        | 



|   |                 
|-- | ----------------
|6. | Accrued Expenses

Accrued expenses were as follows (in thousands):

|                                  |  |      |       |      |  |   |       | 
|--------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                  |  | 2003 |       | 2002
|                                  |  |      |       |     
|Accrued compensation and benefits |  | $    | 1,443 |      |  | $ | 1,348 | 
|Accrued royalties                 |  |      | 817   |      |  |   | 1,061 | 
|Accrued commissions               |  |      | 318   |      |  |   | 285   | 
|Other                             |  |      | 1,509 |      |  |   | 876   | 
|                                  |  |      |       |      |  |   |       | 
|                                  |  | $    | 4,087 |      |  | $ | 3,570 | 
|                                  |  |      |       |      |  |   |       | 



|   |             
|-- | ------------
|7. | Income Taxes

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

|              |  |          |   |         |  |       |     |          |  |         |     |       |  |          |        |         |  |       |      |   |  |   |        |  |  |   |         |   |  |   |      |   |  |   |         |  
|------------- |  | -------- | - | ------- |  | ----- | --- | -------- |  | ------- | --- | ----- |  | -------- | ------ | ------- |  | ----- | ---- | - |  | - | ------ |  |  | - | ------- | - |  | - | ---- | - |  | - | ------- | -
|              |  |          |   |         |  |      
|              |  | 2003     |   | 2002    |  | 2001 
|              |  |          |   |         |  |      
|              |  | Deferred |   | Current |  | Total |     | Deferred |  | Current |     | Total |  | Deferred |        | Current |  | Total
|              |  |          |   |         |  |       |     |          |  |         |     |       |  |          |        |         |  |      
|Federal       |  | $        |  |         |  | $     |    |          |  | $       |    |       |  | $        | 26,457 |         |  | $     | (353 | ) |  | $ | 26,104 |  |  | $ | (10,082 | ) |  | $ | (684 | ) |  | $ | (10,766 | )
|State         |  |          |  |         |  |       | 16  |          |  |         | 16  |       |  |          | 5,394  |         |  |       | 30   |   |  |   | 5,424  |  |  |   | (1,770  | ) |  |   | (64  | ) |  |   | (1,834  | )
|Foreign       |  |          |  |         |  |       | 302 |          |  |         | 302 |       |  |          |       |         |  |       | 206  |   |  |   | 206    |  |  |   |        |   |  |   | 10   |   |  |   | 10      |  
|              |  |          |   |         |  |       |     |          |  |         |     |       |  |          |        |         |  |       |      |   |  |   |        |  |  |   |         |   |  |   |      |   |  |   |         |  
|Total expense |  | $        |  |         |  | $     | 318 |          |  | $       | 318 |       |  | $        | 31,851 |         |  | $     | (117 | ) |  | $ | 31,734 |  |  | $ | (11,852 | ) |  | $ | (738 | ) |  | $ | (12,590 | )
|              |  |          |   |         |  |       |     |          |  |         |     |       |  |          |        |         |  |       |      |   |  |   |        |  |  |   |         |   |  |   |      |   |  |   |         |  

51



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                  |  |      |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                  |  | 2003 |         | 2002 |  | 2001
|                                                                  |  |      |         |      |  |     
|Tax benefit at statutory rate                                     |  | $    | (12,007 | )    |  | $    | (16,639 | ) |  | $ | (11,299 | )
|State income tax, net of federal income tax
    expense (benefit) |  |      | 10      |      |  |      | 3,526   |   |  |   | (1,192  | )
|Non-deductible expenses                                           |  |      | 11      |      |  |      | 13      |   |  |   | 30      |  
|Goodwill amortization and impairment                              |  |      |        |      |  |      | 1,045   |   |  |   | 130     |  
|Foreign taxes on branch income and tax rate
    differential      |  |      | 310     |      |  |      | 12      |   |  |   | (11     | )
|Research credits                                                  |  |      | (207    | )    |  |      | (258    | ) |  |   | (248    | )
|Losses not benefited/change in valuation allowance                |  |      | 12,201  |      |  |      | 44,035  |   |  |   |        |  
|                                                                  |  |      |         |      |  |      |         |   |  |   |         |  
|Actual tax expense (benefit)                                      |  | $    | 318     |      |  | $    | 31,734  |   |  | $ | (12,590 | )
|                                                                  |  |      |         |      |  |      |         |   |  |   |         |  

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
liabilities at December 31, 2003 and 2002 are as follows
(in thousands):

|                                                                 |                                                                                    |      |         |        |   |   |         |        |  
|---------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                                 |                                                                                    | 2003 |         | 2002  
|                                                                 |                                                                                    |      |         |       
|Current deferred tax assets:                                     |                                                                                    |      |         |        |   |   |         |       
|                                                                 | Inventories, primarily writedowns not currently
    deductible                     |      | $       | 1,640  |   |   | $       | 2,574  |  
|                                                                 | Accounts receivable and non-cash charge against
    sales not currently deductible |      |         | 5,583  |   |   |         | 369    |  
|                                                                 | Accrued expenses and reserves not currently
    deductible                         |      |         | 2,442  |   |   |         | 1,439  |  
|                                                                 |                                                                                    |      |         |        |   |   |         |       
|Total current deferred tax assets before
    valuation allowance |                                                                                    |      | 9,665   |        |   |   | 4,382   |       
|Valuation allowance  current                                    |                                                                                    |      | (9,665  | )      |   |   | (4,382  | )     
|Noncurrent deferred tax assets:                                  |                                                                                    |      |         |        |   |   |         |       
|                                                                 | Net operating loss carryforwards                                                   |      |         | 55,042 |   |   |         | 47,629 |  
|                                                                 | Tax credit carryforwards                                                           |      |         | 3,810  |   |   |         | 3,739  |  
|                                                                 |                                                                                    |      |         |        |   |   |         |       
|                                                                 | Total noncurrent deferred tax assets before
    valuation allowance                |      |         | 58,852 |   |   |         | 51,368 |  
|Valuation allowance  noncurrent                                 |                                                                                    |      | (52,804 | )      |   |   | (44,436 | )     
|                                                                 |                                                                                    |      |         |        |   |   |         |       
|Deferred tax liabilities:                                        |                                                                                    |      |         |        |   |   |         |       
|                                                                 | Fixed assets, due to differences in depreciation                                   |      |         | (6,048 | ) |   |         | (6,932 | )
|                                                                 |                                                                                    |      |         |        |   |   |         |       
|Net deferred tax assets                                          |                                                                                    | $    |        |        |   | $ |        |       
|                                                                 |                                                                                    |      |         |        |   |   |         |       

At December 31, 2003, the Company has
U.S. net operating loss carryforwards of approximately
$147.9 million, which are available to offset future
Federal taxable income. These losses expire during the years
2005 through 2023. As of December 31, 2003, a substantial
amount of the net operating loss carryforwards are subject to
annual limitations as a result of Internal Revenue Code
Section 382 ownership changes, which have occurred in prior
years.

At December 31, 2003, the Company has
Massachusetts and California net operating loss carryforwards of
approximately $117.8 million and $25.1 million,
respectively. The Massachusetts net operating loss will expire
during the years 2005 though 2008, while the California net
operating loss will expire from 2010 through 2013.

The valuation allowance increased by
$13.7 million during the year ended December 31, 2003.
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

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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003 will be realized in the future. At
December 31, 2003, approximately $0.7 million 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.

As of December 31, 2003, the Company also
has federal and California research and development credit
carryforwards of approximately $1.5 million and
$1.6 million, respectively. The federal credit will expire
from 2004 to 2023 and the California credit may be carried
forward indefinitely. The Company also has approximately
$2.0 million of California manufacturers investment
credit carryforwards, which expire from 2006 to 2011 and
$0.1 million of Massachusetts investment tax credit
carryforwards, which may be carried forward indefinitely.



|   |                     
|-- | --------------------
|8. | Shareholders Equity

Sipex currently maintains six stock option plans.
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 1,200,000, 300,000, 1,200,000,
1,200,000, 1,000,000 and 2,000,000 shares reserved for
issuance, respectively. The plans generally allow for options
which vest ratably over five years from the date of grant for
options granted before May 2002 and four years for options
granted after April 2002. These options 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
1996 Stock Option Plan, 1996 Non-Employee Director Stock Option
Plan and the 2000 Nonqualified Plan to 551,942, 82,000 and
671,990, respectively. In addition to stock option plans,
4,649,800 shares of Sipex stock have been reserved for
issuance pursuant to options which have been granted to
employees outside of the option plans. Options for
6,640,064 shares are outstanding as of December 31,
2003.

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 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
granted 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 was
the fair market value of the Companys common stock on the
new grant date of $3.95 per share. The new options are
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.

During 2002 and 2003, Sipex recorded $33,000 and
$61,000, respectively, in compensation expense due to the
accelerated vesting of stock options to the former executives.

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SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. As of December 31, 2003,
approximately 34,000 shares were available for issuance
under the Plan.

A summary of the status of Sipexs stock
option plans as of December 31, 2003, 2002 and 2001, and
changes during the years then ended, is presented below (in
thousands, except per-share amounts):

|                                 |           |                |       |          |   |                |      |          |  |                |       |          |   |   |       |        |   |  |       |       |   |   |       |        |  
|-------------------------------- | --------- | -------------- | ----- | -------- | - | -------------- | ---- | -------- |  | -------------- | ----- | -------- | - | - | ----- | ------ | - |  | ----- | ----- | - | - | ----- | ------ | -
|                                 |           |                |       |          |   |               
|                                 |           | 2003           |       | 2002     |   | 2001          
|                                 |           |                |       |          |   |               
|                                 |           |                |       | Weighted |   |                |      | Weighted |  |                |       | Weighted
|                                 |           |                |       | Average  |   |                |      | Average  |  |                |       | Average 
|                                 |           |                |       | Exercise |   |                |      | Exercise |  |                |       | Exercise
|                                 |           | Shares         |       | Price    |   | Shares         |      | Price    |  | Shares         |       | Price   
|                                 |           |                |       |          |   |                |      |          |  |                |       |         
|                                 |           | (In thousands) |       |          |   | (In thousands) |      |          |  | (In thousands) |       |         
|Outstanding at beginning of year |           |                | 6,458 |          |   | $              | 7.33 |          |  |                | 4,995 |          |   | $ | 13.64 |        |   |  | 3,137 |       |   | $ | 16.87 |       
|                                 | Granted   |                |       | 2,345    |   |                |      | 5.22     |  |                |       | 4,273    |   |   |       | 4.00   |   |  |       | 2,386 |   |   |       | 9.61   |  
|                                 | Exercised |                |       | (272     | ) |                |      | 4.72     |  |                |       | (88      | ) |   |       | (5.69  | ) |  |       | (86   | ) |   |       | (5.86  | )
|                                 | Forfeited |                |       | (1,891   | ) |                |      | 11.50    |  |                |       | (2,722   | ) |   |       | (13.95 | ) |  |       | (442  | ) |   |       | (15.31 | )
|                                 |           |                |       |          |   |                |      |          |  |                |       |          |   |   |       |        |   |  |       |       |   |   |       |       
|Outstanding at end of year       |           |                | 6,640 |          |   | $              | 5.52 |          |  |                | 6,458 |          |   | $ | 7.33  |        |   |  | 4,995 |       |   | $ | 13.64 |       
|                                 |           |                |       |          |   |                |      |          |  |                |       |          |   |   |       |        |   |  |       |       |   |   |       |       
|Options exercisable at year-end  |           |                | 1,923 |          |   | $              | 6.87 |          |  |                | 1,733 |          |   | $ | 11.87 |        |   |  | 1,627 |       |   | $ | 13.48 |       
|                                 |           |                |       |          |   |                |      |          |  |                |       |          |   |   |       |        |   |  |       |       |   |   |       |       
|Fair value of options granted    |           |                |       |          |   | $              | 3.80 |          |  |                |       |          |   | $ | 3.99  |        |   |  |       |       |   | $ | 9.38  |       
|                                 |           |                |       |          |   |                |      |          |  |                |       |          |   |   |       |        |   |  |       |       |   |   |       |       

The following table summarizes information about
Sipexs stock options outstanding at December 31, 2003:

|                |                 |                      |  |                     |       |                      |  |  |      |  |  |  |       | 
|--------------- | --------------- | -------------------- |  | ------------------- | ----- | -------------------- |  |  | ---- |  |  |  | ----- | 
|                |                 |                      |  |                    
|                |                 | Options Outstanding  |  | Options Exercisable
|                |                 |                      |  |                    
|                |                 |                      |  | Weighted Average    |       |                     
|Range of        |                 | Number Outstanding   |  | Remaining           |       | Number Exercisable  
|Exercise Prices |                 | at December 31, 2003 |  | Contractual Life    |       | at December 31, 2003
|                |                 |                      |  |                     |       |                     
|                |                 | (In thousands)       |  |                     |       | (In thousands)      
|                | $ 1.00 - $ 2.34 |                      |  |                     | 885   |                      |  |  | 9.85 |  |  |  | 270   | 
|                | $ 2.40 - $ 2.99 |                      |  |                     | 737   |                      |  |  | 9.88 |  |  |  | 139   | 
|                | $ 3.00 - $ 3.15 |                      |  |                     | 1,799 |                      |  |  | 8.64 |  |  |  | 592   | 
|                | $ 3.20 - $ 5.13 |                      |  |                     | 751   |                      |  |  | 9.10 |  |  |  | 86    | 
|                | $ 5.93 - $ 6.16 |                      |  |                     | 758   |                      |  |  | 6.69 |  |  |  | 277   | 
|                | $ 6.87 - $ 9.11 |                      |  |                     | 961   |                      |  |  | 8.49 |  |  |  | 107   | 
|                | $ 9.14 - $23.63 |                      |  |                     | 670   |                      |  |  | 6.48 |  |  |  | 396   | 
|                | $23.63 - $33.00 |                      |  |                     | 76    |                      |  |  | 6.23 |  |  |  | 53    | 
|                | $34.56 - $34.56 |                      |  |                     | 1     |                      |  |  | 4.19 |  |  |  | 1     | 
|                | $35.19 - $35.19 |                      |  |                     | 2     |                      |  |  | 4.13 |  |  |  | 2     | 
|                |                 |                      |  |                     |       |                      |  |  |      |  |  |  |       | 
|                |                 |                      |  |                     | 6,640 |                      |  |  | 8.50 |  |  |  | 1,923 | 
|                |                 |                      |  |                     |       |                      |  |  |      |  |  |  |       | 

54



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                 
|-- | ----------------
|9. | Accrued Warranty

Products are generally sold with a one-year
warranty. Reserve requirements are recorded in the period of
sale and are based on an assessment of the products sold with
warranty and historical warranty costs incurred. The Company
also assesses its pre-existing warranty obligations and may
adjust the amounts based on actual experience or changes in
future expectations.

|                                    |  |                  |      |  
|----------------------------------- |  | ---------------- | ---- | -
|                                    |  | Warranty Reserve
|                                    |  |                 
|                                    |  | (in thousands)  
|Accrued warranty, December 31, 2002 |  | $                | 69   |  
|Warranty claims                     |  |                  | (195 | )
|Accruals for the period             |  |                  | 321  |  
|                                    |  |                  |      |  
|Accrued warranty, December 31, 2003 |  | $                | 195  |  
|                                    |  |                  |      |  



|    |                      
|--- | ---------------------
|10. | Employee Benefit Plan

The Company has a defined contribution 401(k)
retirement plan, covering substantially all employees. Sipex
discontinued the 50% match for contributions made by employees
up to 6% of their annual compensation in 2002 and started to
contribute again in 2003. 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 2003, 2002 and
2001, employer contributions to the plan were approximately
$220,000, $23,000 and $588,000, respectively.



|    |                              
|--- | -----------------------------
|11. | Commitments and Contingencies

Sipex leases facilities under operating leases
expiring through 2009. Rent expense was approximately $900,000,
$1.0 million and $2.0 million for the years ended
December 31, 2003, 2002 and 2001, respectively.

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

|           |      |   |       |     | 
|---------- | ---- | - | ----- | --- | 
|           | 2004 |   | $     | 939 | 
|           | 2005 |   |       | 806 | 
|           | 2006 |   |       | 798 | 
|           | 2007 |   |       | 798 | 
|           | 2008 |   |       | 250 | 
|Thereafter |      |   | 150   |    
|           |      |   |       |    
|           |      | $ | 3,741 |    
|           |      |   |       |    

On August 21, 2003, Sipex announced an
exclusive sourcing agreement with PolarFab, a US-based,
semiconductor foundry. This arrangement provides Sipex with
favorable delivery terms and engineering support from PolarFab
in return for exclusive manufacturing rights for certain
products. The Company is under obligation to make minimum
purchase commitments based on quarterly rolling forecasts
extending out one year. The initial term of the agreement is
five years with renewals on a negotiated basis. As of
December 31, 2003, the minimum purchase commitment with
PolarFab was approximately $2.5 million for the following
twelve months.

In December 2002, Sipex entered into an agreement
to use certain licensed tools for circuit design and
development. The contract also provides maintenance support.
Under the agreement Sipex is obligated to

55



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

make $2.7 million in payments over three
years. As of December 31, 2003, the total future payment
commitment was $2.1 million.

In June 2001, Sipex purchased the land, building
and equipment of its Milpitas, California wafer fabrication
facility, which was leased under a five-year operating lease. In
accordance with the provisions of the purchase 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.



|    |                                  
|--- | ---------------------------------
|12. | 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
|                              |  |               |        |          |  |           
|Balance December 31, 2000     |  | $             | 2,364  |          |  | $          | 525  |   |  | $ | 2,889  |  
|Charged to costs and expenses |  |               | 4,245  |          |  |            | 310  |   |  |   | 4,555  |  
|Deductions                    |  |               | (4,609 | )        |  |            | (391 | ) |  |   | (5,000 | )
|                              |  |               |        |          |  |            |      |   |  |   |        |  
|Balance at December 31, 2001  |  |               | 2,000  |          |  |            | 444  |   |  |   | 2,444  |  
|Charged to costs and expenses |  |               | 2,034  |          |  |            | 50   |   |  |   | 2,084  |  
|Deductions                    |  |               | (3,381 | )        |  |            | (202 | ) |  |   | (3,583 | )
|                              |  |               |        |          |  |            |      |   |  |   |        |  
|Balance at December 31, 2002  |  |               | 653    |          |  |            | 292  |   |  |   | 945    |  
|Charged to costs and expenses |  |               | 26     |          |  |            | (92  | ) |  |   | (66    | )
|Deductions                    |  |               | (526   | )        |  |            |     |   |  |   | (526   | )
|                              |  |               |        |          |  |            |      |   |  |   |        |  
|Balance at December 31, 2003  |  | $             | 153    |          |  | $          | 200  |   |  | $ | 353    |  
|                              |  |               |        |          |  |            |      |   |  |   |        |  



|    |                                              
|--- | ---------------------------------------------
|13. | Segment/ Export Sales and Major
    Customers

The Companys Chief Executive Officer
(CEO) is considered to be the Companys chief
operating decision maker. The Company has organized its
operations based on a single operating segment: the development
and delivery of high performance analog integrated circuits that
are used primarily by original equipment manufacturers operating
in the computing, communications and networking infrastructure
markets. The CEO reviews financial information presented on a
consolidated basis accompanied by disaggregated information
about revenues by product family and geographic region for
purposes of making operating decisions and assessing financial
performance. The Company has aligned its organization with the
primary management objective of increasing overall sales unit
volume, regardless of whether a distributor or the Company is
the seller. The disaggregated revenue information reviewed on a
product family basis by the CEO includes the interface, power
management and optical storage families along with other legacy
product families.

56



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The disaggregated sales information reviewed on a
product line basis by the CEO is as follows (in thousands):

|                   |  |      |        |      |  |      |        |  |  |   |        | 
|------------------ |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                   |  | 2003 |        | 2002 |  | 2001
|                   |  |      |        |      |  |     
|Interface          |  | $    | 23,616 |      |  | $    | 29,986 |  |  | $ | 29,849 | 
|Power Management   |  |      | 14,040 |      |  |      | 15,870 |  |  |   | 10,783 | 
|Optical Storage    |  |      | 9,586  |      |  |      | 2,641  |  |  |   |       | 
|Other (Legacy/ EL) |  |      | 2,170  |      |  |      | 17,763 |  |  |   | 31,430 | 
|                   |  |      |        |      |  |      |        |  |  |   |        | 
|Total net sales    |  | $    | 49,412 |      |  | $    | 66,260 |  |  | $ | 72,062 | 
|                   |  |      |        |      |  |      |        |  |  |   |        | 

Substantially all the Companys operations
and long-lived assets reside in the United States although Sipex
has operations in Malaysia, China, Taiwan, Japan, Germany and
Belgium.

The Company markets its products primarily from
its operations in the United States. International sales are
made primarily to customers in Canada, Europe and Asia.
Information regarding the Companys net sales derived from
products shipped to different geographic regions is as follows
(in thousands):

|                                             |  |      |        |      |  |      |        |  |  |   |        | 
|-------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                             |  | 2003 |        | 2002 |  | 2001
|                                             |  |      |        |      |  |     
|Japan                                        |  | $    | 14,014 |      |  | $    | 6,048  |  |  | $ | 4,049  | 
|Canada                                       |  |      | 4,141  |      |  |      | 11,129 |  |  |   | 17,854 | 
|Taiwan                                       |  |      | 10,653 |      |  |      | 13,749 |  |  |   | 7,117  | 
|Singapore                                    |  |      | 3,258  |      |  |      | 5,698  |  |  |   | 2,600  | 
|USA                                          |  |      | 1,713  |      |  |      | 3,959  |  |  |   | 12,194 | 
|France                                       |  |      | 1,216  |      |  |      | 9,650  |  |  |   | 7,231  | 
|Asia, other than Japan, Taiwan and Singapore |  |      | 8,199  |      |  |      | 6,703  |  |  |   | 7,654  | 
|Rest of the world                            |  |      | 6,218  |      |  |      | 9,324  |  |  |   | 13,363 | 
|                                             |  |      |        |      |  |      |        |  |  |   |        | 
|Total net sales                              |  | $    | 49,412 |      |  | $    | 66,260 |  |  | $ | 72,062 | 
|                                             |  |      |        |      |  |      |        |  |  |   |        | 

Net sales to major customers as a percentage of
consolidated net sales are as follows:

|                        |  |      |    |      |  |      |    |   |  |  |     | 
|----------------------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | --- | 
|                        |  | 2003 |    | 2002 |  | 2001
|                        |  |      |    |      |  |     
|Future, a related party |  |      | 16 | %    |  |      | 24 | % |  |  | 21% | 
|Microteck, Inc.         |  |      | 18 |      |  |      |   |   |  |  |    | 
|Snecma                  |  |      |   |      |  |      | 14 |   |  |  | 10  | 

For the year ended December 31, 2003, Sipex
had three customers which accounted for 23%, 18% (related
party  see Note 2) and 10% of the gross accounts
receivable balance. For the year ended December 31, 2002,
Sipex had three customers which accounted for 11%, 14% and 16%
of the gross accounts receivable balance.



|    |                           
|--- | --------------------------
|14. | Quarterly Data (Unaudited)

Following is a summary of quarterly operating
results and share data for the years ended December 31,
2003 and 2002. Subsequent to the issuance of the Companys
interim financial statements for the quarters June 28 and
September 27, 2003, the Company determined that certain
errors occurred in the costing of inventory held at
subcontractors and in cut off associated with the accrual of
returned products. As a result, the operating results presented
below for the quarters ended June 28 and September 27,
2003 have been restated.

57



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##### Table of Contents



SIPEX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Net loss 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, 2003                         |         | Sept. 27, 2003 |  | June 28, 2003 |        | March 29, 2003
|                                       |      |                                       |         |                |  |               |        |               
|                                       |      |                                       |         | (restated)     |  | (restated)    |        |               
|                                       |      |                                      
|                                       |      | (In thousands, except per-share data)
|Fiscal 2003                            |      |                                       |         |                |  |               |        |                |  |   |        |      |  |   |        |     
|Net sales                              |      | $                                     | 4,207   |                |  | $             | 15,198 |                |  | $ | 14,891 |      |  | $ | 15,117 |     
|Gross profit (loss)                    |      |                                       | (7,850  | )              |  |               | 2,261  |                |  |   | 1,380  |      |  |   | (182   | )   
|Net loss                               |      |                                       | (17,095 | )              |  |               | (4,653 | )              |  |   | (5,652 | )    |  |   | (7,222 | )   
|Net loss per share  basic and diluted |      |                                       | (0.60   | )              |  |               | (0.17  | )              |  |   | (0.20  | )    |  |   | (0.26  | )   
|Stock price range per share:           |      |                                       |         |                |  |               |        |                |  |   |        |      |  |   |        |     
|                                       | High |                                       |         | 10.76          |  |               |        | 9.29           |  |   |        | 5.17 |  |   |        | 3.70 | 
|                                       | Low  |                                       |         | 7.50           |  |               |        | 4.68           |  |   |        | 2.82 |  |   |        | 2.23 | 

|                                       |      |                                       |        |                |  |               |         |                |  |   |         |       |  |   |        |       | 
|-------------------------------------- | ---- | ------------------------------------- | ------ | -------------- |  | ------------- | ------- | -------------- |  | - | ------- | ----- |  | - | ------ | ----- | 
|                                       |      | 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)                    |      |                                       | (1,414 | )              |  |               | (6,706  | )              |  |   | (2,243  | )     |  |   | 1,875  |      
|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 |                                       |        | 4.26           |  |               |         | 4.93           |  |   |         | 11.20 |  |   |        | 13.45 | 
|                                       | Low  |                                       |        | 0.96           |  |               |         | 1.60           |  |   |         | 4.09  |  |   |        | 9.51  | 

The following table compares the operating
results for the quarters ended June 28 and
September 27, 2003 previously reported and as restated (in
thousands):

|                                       |  |                |        |               |  |            |        |          |  |   |        |   |  |   |        |  
|-------------------------------------- |  | -------------- | ------ | ------------- |  | ---------- | ------ | -------- |  | - | ------ | - |  | - | ------ | -
|                                       |  |                |        |              
|                                       |  | Sept. 27, 2003 |        | June 28, 2003
|                                       |  |                |        |              
|                                       |  | As             |        |               |  | As         |        |         
|                                       |  | Previously     |        | As            |  | Previously |        | As      
|                                       |  | Reported       |        | Restated      |  | Reported   |        | Restated
|                                       |  |                |        |               |  |            |        |         
|Net sales                              |  | $              | 15,198 |               |  | $          | 15,198 |          |  | $ | 14,891 |   |  | $ | 14,891 |  
|Gross profit                           |  |                | 3,569  |               |  |            | 2,261  |          |  |   | 2,395  |   |  |   | 1,380  |  
|Net loss                               |  |                | (3,345 | )             |  |            | (4,653 | )        |  |   | (4,637 | ) |  |   | (5,652 | )
|Net loss per share  basic and diluted |  |                | (0.12  | )             |  |            | (0.17  | )        |  |   | (0.17  | ) |  |   | (0.20  | )



|    |                 
|--- | ----------------
|15. | Subsequent Event

In connection with the agreement that Sipex
entered into with the affiliates of Future during the fourth
quarter of 2003 to terminate the First Note and the Second Note
(see Note 2 for Related Parties), the affiliates of Future
exercised their rights to convert both notes into
4.6 million common shares of Sipex. Subsequent to this
conversion, affiliates of Future own approximately 40% of the
Companys outstanding common stock and hold a warrant to
purchase another 900,000 shares. The long-term related
party debt was extinguished and recorded as equity in the first
quarter of 2004.

58



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##### Table of Contents








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

(a) Previous Principal Independent
Accountants and Auditors.

KPMG LLP (KPMG) was previously the
principal accountants for Sipex Corporation (the
Company). On June 6, 2003, KPMG resigned.

In connection with the audits of the two fiscal
years ended December 31, 2002 and 2001 and the subsequent
interim period through June 6, 2003, there were no
disagreements with KPMG on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope
or procedures, which disagreements, if not resolved to their
satisfaction, would have caused them to make reference in
connection with their opinion to the subject matter of the
disagreement.

The audit reports of KPMG on the consolidated
financial statements of the Company and subsidiaries as of and
for the years ended December 31, 2002 and 2001 did not
contain an adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or
accounting principles.

In addition, there were no reportable events as
set forth in Item 304(a)(1)(v) of Regulation S-K
during the two fiscal years ended December 31, 2002 or the
subsequent interim period through June 6, 2003, except as
described below:

KPMGs management letter issued in
connection with their audit for the Companys fiscal year
ended December 31, 2002 identified material
weaknesses (as defined under standards established by the
American Institute of Certified Public 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. The area most
significantly impacted by the material weaknesses related to
inventory, including costing systems, reserves, work in-process
and variance analysis. The material weaknesses identified in
KPMGs management letter for the fiscal year ended
December 31, 2002 were described in the Companys
Annual Report on Form 10-K for this period.

KPMGs management letter issued in
connection with their audit for the Companys fiscal year
ended December 31, 2001 identified material
weaknesses relating to the processing of product returns
from distributors and customers and credit memos, and the
accounting for the reserve for returns. In addition, such
management letter identified a reportable condition
(as defined under standards established by the American
Institute of Certified Public Accountants) relating to the
preparation of reconciliations and lack of proper management
review.

The Audit Committee of the Companys Board
of Directors and the Companys management discussed these
reportable events with KPMG. The Company has authorized KPMG to
respond fully to any inquiries of any successor accountant
concerning the subject matter of the reportable events.

The KPMGs letter, dated June 12, 2003,
to the Securities and Exchange Commission was filed as an
exhibit to the Form 8-K by the Company on June 13,
2003.

(b) New Principal Independent Accountants
and Auditors.

On July 10, 2003, Deloitte & Touche
LLP was engaged as the Companys new independent auditors.

During each of our two most recent fiscal years
and through the date of this report, the Company did not consult
Deloitte & Touche LLP with respect to the application
of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might
be rendered on our financial statements, or any other matters or
reportable events as set forth in Items 304(a)(i) and
(ii) of Regulation S-K.






|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures:

Evaluation of disclosure controls and
procedures

As of December 31, 2003, 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

59



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##### Table of Contents



Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and
procedures. Senior management and our Audit Committee were
informed by our previous independent auditors as part of the
December 31, 2002 audit that they had identified
material weaknesses (as defined under standards
established by the American Institute of Certified Public
Accountants) relating to the deficiencies in the systems and
processes used in the preparation of the consolidated 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. At the end of the third quarter of
2003, certain key accounting personnel resigned. While we hired
temporary replacements and continue to seek permanent
replacements, the 2003 year end closing process took longer
than anticipated and continued to require a significant level of
manual reconciliations and adjustments. In connection therewith,
errors were identified by the Company that required restatement
of our second and third quarter of 2003 results of operations.


On March 12, 2004, Deloitte & Touche LLP
advised management and the Audit Committee of two reportable
conditions in our internal controls. According to the American
Institute of Certified Public Accountants, a reportable
condition is a matter that comes to an auditors
attention that represents a significant deficiency in the design
or operation of internal control that could adversely affect an
entitys ability to initiate, record, process and report
financial data consistent with the assertions of management in
financial statements. The first reportable condition related to
our process for determining the deferral of costs associated
with the deferred sales to our major distributor, Future. Errors
impacting cost of sales were detected in the process to
determine the deferral of such costs. The second reportable
condition related to staffing of the accounting department and
our reliance on manual reconciliations and analysis.

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



| |   |                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 are implementing improved inventory control
    systems and procedures throughout our manufacturing lines;                                                                                                                                                                 
|
| |  | we are implementing 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. In
this regard, we are expanding the finance staff resources to
focus on account reconciliations and process improvements. We
are also replacing our existing management information system.

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 has been recorded, processed,
summarized and reported as required. Based upon their evaluation
and as of the end of the period covered by this annual report,
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.

60



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##### Table of Contents



Changes in Internal Control Over Financial
Reporting

Other than as described above, there have been no
significant changes in our internal control over financial
reporting that occurred during our fourth quarter of fiscal year
2003 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.




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 2004 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, 2003, 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 2004 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, 2003, 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 2004 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, 2003, 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, 2003 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.

|                                                           |  |                         |           |                      |  |                         |      |  |  |  |           | 
|---------------------------------------------------------- |  | ----------------------- | --------- | -------------------- |  | ----------------------- | ---- |  |  |  | --------- | 
|                                                           |  | (a)                     |           | (b)                  |  | (c)                    
|                                                           |  |                         |           |                      |  |                        
|                                                           |  |                         |           |                      |  | Number of securities   
|                                                           |  |                         |           |                      |  | remaining available for
|                                                           |  |                         |           |                      |  | future issuance under  
|                                                           |  | Number of securities to |           | Weighted-average     |  | equity compensation    
|                                                           |  | be issued upon exercise |           | exercise price of    |  | plans (excluding       
|                                                           |  | of outstanding options, |           | outstanding options, |  | securities reflected in
|Plan Category                                              |  | warrants and rights     |           | warrants and rights  |  | column (a))            
|                                                           |  |                         |           |                      |  |                        
|Equity compensation plans approved by security
    holders |  |                         | 3,264,814 |                      |  | $                       | 7.34 |  |  |  | 1,119,932 | 
|Equity compensation plans not approved by
    stockholders |  |                         | 3,375,250 |                      |  | $                       | 3.76 |  |  |  | 1,246,400 | 
|                                                           |  |                         |           |                      |  |                         |      |  |  |  |           | 
|Total                                                      |  |                         | 6,640,064 |                      |  | $                       | 5.52 |  |  |  | 2,366,332 | 
|                                                           |  |                         |           |                      |  |                         |      |  |  |  |           | 

Above table does not include approved 1996
Employee Stock Purchase Plan in which 33,972 shares are
currently available to issue.

61



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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 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 2004 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, 2003, under the caption Certain
Transactions.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by this item is
incorporated by reference from Sipexs definitive proxy
statement in connection with its 2004 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, 2003, under the caption Policy on Audit
Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors.

62



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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 Reports                                
|
| | Consolidated Balance Sheets at December 31,
    2003 and 2002



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated Statements of Operations for the
    Years Ended December 31, 2003, 2002 and 2001                                              
|
| | Consolidated Statements of Shareholders
    Equity and Comprehensive Income (Loss) for the Years Ended
    December 31, 2003, 2002 and 2001
|
| | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2003, 2002 and 2001                                              



| |                                           
| | ------------------------------------------
| | Notes to Consolidated Financial Statements



| |                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. Consolidated Financial Statement
    Schedules.Consolidated financial
    statement schedules have been omitted because they are either
    not required or are 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 23, 2003, Sipex filed a Current
Report on Form 8-K (SEC file number 00027892) to announce
that it had entered into an agreement with Rodfre Lending LLC
(Rodfre Lending) and Rodfre Holding LLC, both
affiliates of the Registrants largest distributor, Future
Electronics Inc. (Future), to amend certain of the
terms of the Registrants two outstanding convertible notes
held by Rodfre Lending.

On December 19, 2003, Sipex filed a Current
Report on Form 8-K (SEC file number 00027892) to announce
that on December 9-11, 2003, Walid Maghribi, the Chief
Executive Officer of SIPEX Corporation (the
Registrant), and Phillip A. Kagel, the
Registrants Chief Financial Officer, would make a
financial and business related presentation to certain analysts
and investors.

On November 17, 2003, Sipex submitted a
Current Report on Form 8-K (SEC file number 00027892) to
announce that issued a press release announcing revised results
for the Registrants fiscal quarter ended
September 27, 2003.

On November 19, 2003, Sipex filed a Current
Report on Form 8-K/ A (SEC file number 00027892) to amend
the Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 30, 2003.

On October 30, 2003, Sipex filed a Current
Report on Form 8-K (SEC file number 00027892) to amend the
Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 30, 2003 announcing the
completion of its previously announced reincorporation from the
Commonwealth of Massachusetts into the State of Delaware.

On October 14, 2003, Sipex submitted a
Current Report on 10-K (SEC file number 00027892) to announce
expected revenue for the fiscal quarter ended September 28,
2003.

63



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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 15th day of
March, 2004.



| |                  
| | -----------------
| | 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 MAGHRIBIWalid Maghribi           |  | Chief Executive Officer, President and Director
    (Principal Executive Officer)                                          |  | March 15, 2004
|                                          
|/s/ PHILLIP A. KAGELPhillip A. Kagel       |  | Senior Vice President, Finance,
    Chief Financial Officer and Treasurer (Principal Financial
    and Accounting Officer) |  | March 15, 2004
|                                          
|/s/ JOHN D. ARNOLDJohn D. Arnold           |  | Director                                                                                                                   |  | March 15, 2004
|                                          
|/s/ JOSEPH C. CONSOLIJoseph C. Consoli     |  | Director                                                                                                                   |  | March 15, 2004
|                                          
|/s/ DOUGLAS M. MCBURNIEDouglas M. McBurnie |  | Chairman of the Board of Directors                                                                                         |  | March 15, 2004
|                                          
|/s/ LIONEL H. OLMERLionel H. Olmer         |  | Director                                                                                                                   |  | March 15, 2004
|                                          
|/s/ THOMAS P. REDFERNThomas P. Redfern     |  | Director                                                                                                                   |  | March 15, 2004
|                                          
|/s/ JOHN L. SPRAGUEDr. John L. Sprague     |  | Director                                                                                                                   |  | March 15, 2004

64



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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     |             |  | Amended and Restated Certificate of Incorporation
    (incorporated herein by reference from the Companys
    Registration Statement on Form 8-A filed with the
    Securities and Exchange Commission on October 28, 2003)                                                                                                         
|        | 3.2     |             |  | Bylaws (incorporated herein by reference from the
    Companys Registration Statement on Form 8-A filed
    with the Securities and Exchange Commission on October 28,
    2003)                                                                                                                                                    
|        | 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)                                                                                                                                                



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##### Table of Contents



|        |         |             |  |                                                                                                                                                                                                                                                                                                                                                                         
|------- | ------- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 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 (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 as an
    Exhibit to the Companys Annual report on Form 10-K
    for the year ended December 31, 2002, and incorporated
    herein by reference)                                                                                                                
|        | 10.21** |             |  | Employment Agreement dated September 11,
    2002 by and between the Company and Joseph T. Rauschmayer (filed
    as an Exhibit to the Companys Annual report on
    Form 10-K for the year ended December 31, 2002, and
    incorporated herein by reference)                                                                                                         
|        | 10.22** |             |  | Employment Agreement dated August 23, 2002
    by and between the Company and Kevin Plouse (filed as an Exhibit
    to the Companys Annual report on Form 10-K for the
    year ended December 31, 2002, and incorporated herein by
    reference)                                                                                                                     
|        | 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 as an Exhibit to the
    Companys Annual report on Form 10-K for the year
    ended December 31, 2002, and incorporated herein by
    reference)                                                            
|        | 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 as an Exhibit to the
    Companys Annual report on Form 10-K for the year
    ended December 31, 2002, and incorporated herein by
    reference)                 
|        | 10.29   |             |  | Securities Purchase Agreement dated as of
    May 27, 2003, by and between the Company and Alonim
    Investments Inc. (previously filed as Exhibit 99.1 to the
    Companys Form 8-K filed on May 29, 2003 and
    incorporated herein by reference)                                                                                                                  
|        | 10.30   |             |  | Form of Company Convertible Secured Note to be
    issued to Alonim Investments Inc. (previously filed as
    Exhibit 99.1 to the Companys Form 8-K filed on
    May 29, 2003 and incorporated herein by reference)                                                                                                                                                    
|        | 10.31   |             |  | Form of Registration and Standstill Agreement by
    and between the Company and Alonim Investments Inc., and its
    affiliates which are signatories thereto, namely: Future
    Electronics Inc., and S&F Financial Holdings Inc.
    (previously filed as Exhibit 99.1 to the Companys
    Form 8-K filed on May 29, 2003 and incorporated herein
    by reference)
|        | 10.32   |             |  | Form of Voting Agreement by and between the
    Company and Alonim Investments Inc. (previously filed as
    Exhibit 99.1 to the Companys Form 8-K filed on
    May 29, 2003 and incorporated herein by reference)                                                                                                                                                     



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                           
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.33 |             |  | Form of Security Agreement by and between the
    Company and Alonim Investments Inc. (previously filed as
    Exhibit 99.1 to the Companys Form 8-K filed on
    May 29, 2003 and incorporated herein by reference)                     
|        | 10.34 |             |  | Form of Deed of Trust to be issued to Alonim
    Investments Inc. (previously filed as Exhibit 99.1 to the
    Companys Form 8-K filed on May 29, 2003 and
    incorporated herein by reference)                                         
|        | 10.35 |             |  | Modification Agreement dated as of
    December 23, 2003 by and among the Company and Rodfre
    Lending LLC and certain of its affiliates (previously filed as
    Exhibit 99.1 to the Companys Form 8-K filed on
    December 24, 2003)
|        | 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 DELOITTE & TOUCHE LLP,
    independent auditors                                                                                                                                                                                
|        | 23.2  |             |  | Consent of KPMG LLP, independent auditors                                                                                                                                                                                                 
|        | 31.1  |             |  | Certification of Chief Executive Officer pursuant
    to Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                                                                                 
|        | 31.2  |             |  | Certification of Chief Financial Officer pursuant
    to Section 302(a) of the Sarbanes-Oxley Act of 2002                                                                                                                                 
|        | 32.1  |             |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the SarbanesOxley Act of 2002                                                                                 
|        | 32.2  |             |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                                                 



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|  |                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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.