SIPEX CORP 10-K/A

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Amendment No. 2)


(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 30, 2006
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 1-33403

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

Name of exchange on which registered:

The Nasdaq Capital Market

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

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

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 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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the issuer as of the last business day of the registrant’s most recently completed second fiscal quarter (July 1, 2006) was approximately $57,570,000 based upon the last reported price on the Pink Sheets of $5.98 per share. The number of shares outstanding reflects a 1-for-2 reverse stock split effected by the Registrant on February 23, 2007.

The number of shares of the registrant’s common stock outstanding on June 18, 2007 was 18,899,680 shares.

TABLE OF CONTENTS


		Page

PART II
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		3
Item 8.	Financial Statements and Supplementary Data		18

PART III
Item 11.	Executive Compensation		56

PART IV
Signatures			70
Exhibit Index			71
EXHIBIT 23.1
EXHIBIT 31.5
EXHIBIT 31.6
EXHIBIT 32.5
EXHIBIT 32.6

EXPLANATORY NOTE

We are filing this Amendment (“Amendment No. 2”) to our Form 10-K for the year ended December 30, 2006, as originally filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2007 (the “Original Filing”) and as previously amended by the Form 10-K/A (“Amendment No. 1”) filed with the SEC on April 19, 2007 (the Original Filing, as so amended, the “2006 Form 10-K”) to amend the following:


	•	To remove the reference to the appraisals and independent appraisal firms in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 8. Financial Statement and Supplementary Data as we did not intend to expertise the appraisal firms that assisted us and we are fully responsible for the determination of fair value of assets in the impairment analyses. No other changes have been made to the 2006 Form 10-K.

	•	To correct the inadvertent omission of the “Grant Date Fair Value of Stock and Option Awards” column in the “Grants of Plan-Based Awards in 2006” table in Item 11. Executive Compensation. No other changes have been made to Amendment No. 1 of the 2006 Form 10-K.

As a result of this amendment, we are also filing the certifications pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 as exhibits to this Amendment No. 2.

Except as otherwise expressly stated for the items amended in this Amendment No. 2, this Amendment No. 2 continues to speak as of the date of the Original Filing and we have not updated the disclosure contained herein to reflect events that have occurred since the date of the Original Filing. Accordingly, this Amendment No. 2 should be read in conjunction with our Original Filing and Amendment No. 1 and our other filings made with the SEC subsequent to the date of the Original Filing.


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

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

Significant Developments

In December 2006, we announced a workforce reduction plan that was implemented in response to our transitioning to a fabless semiconductor company, de-emphasizing optical products, reducing dependency on commodity products and with the goal of improving our cost structure. As a result, we recorded total restructuring costs of $1.1 million related to employee severance compensation, including $0.1 million for vesting acceleration of stock options in lieu of a severance payment for a senior executive officer. Of the $1.1 million, $0.1 million was paid during December 2006. Our current business plans focus our product development and marketing programs toward a greater emphasis on our power management and interface products as we believe these products align greater development synergies and provide greater opportunities for growth and profitability in contrast to other areas such as our optical products.

On September 20, 2006, we announced that we had received a notification from the Staff of the SEC that the investigation into matters related to our historical financial reports and revenue recognition practices had been terminated, and no enforcement had been recommended to the SEC with respect to the Company.

On September 8, 2006, we announced the appointment of Pierre Guilbault, Dan Casey, both members of the senior management team of Future, an affiliate of our largest stockholder, and Alan Krock, CFO of PMC Sierra, to our board of directors.

Based upon our plans initially announced in the third quarter of 2005, in early October of 2006, we completed the shut down of our Milpitas wafer fabrication operations. The products that we formerly manufactured at the Milpitas fab are now manufactured by our wafer fab partner Silan and a wafer fab operated by Episil. We anticipate the financial impact of this transition will require multiple quarters to be realized in our operating results as we sell through higher cost inventory manufactured at our Milpitas fab. The conversion to a fully fabless manufacturing model along with the use of third-party foundries should enable us to minimize fixed costs and capital expenditures

while providing access to diverse manufacturing technologies without bearing the full risk of the obsolescence of such technologies.

In conjunction with our previously announced internal investigation and restatement (as described in our annual reports on Forms 10-K for the year ended December 31, 2005), we were not in compliance with Nasdaq’s Marketplace Rule 4310(c)(14) because we did not timely file the annual report on Form 10-K for the year ended January 1, 2005 and quarterly report on Form 10-Q for the three months ended April 2, 2005. On June 21, 2005, a Nasdaq Listing Qualifications Panel, or the Panel, notified us that the Panel had denied our request for continued inclusion on the Nasdaq Global Market. Our common stock was delisted from the Nasdaq Global Market effective with the beginning of trading on June 23, 2005.

On August 17, 2006, we announced the completion of our restatement of our financial statements for the fiscal year 2003 and related fiscal quarters of 2003 as well as completing the restatement of the first three quarters of 2004. In addition, we filed our 2004 Annual Report on Form 10-K and 2005 Annual Report on Form 10-K along with our 2005 Quarterly Reports on Forms 10-Q.

On September 21, 2006, we filed our Forms 10-Q Quarterly Reports with the SEC for the first and second quarters of 2006. Together with these reports, along with our Form 10-K/A and Form 10-K for 2005, our Form 10-K for 2004 and our Forms 10-Q for 2005, we became current with our periodic SEC reporting requirements.

Business Overview

We design, manufacture and market, high performance, analog ICs that are used primarily by 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.

We focus on several key areas to drive operating and financial performance, including product mix, new product introductions, cost reductions, manufacturing yield improvements 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 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, typically have lower product margins. By contrast, our advanced power management product offerings, such as white LED (light emitting diode) drivers, and our Power Blox^tm family, are newer products, and contribute typically higher product margins. Many Interface products are commodity products as well, but overall the product family typically has more moderate margins, because of our higher margin multi-protocol interface products and our newer low-voltage interface products. Optical storage product margins are typically within range of our average product margin. The products in this family are typically proprietary, but alternative suppliers have introduced competitive solutions.

Capacity utilization of our wafer fabrication facility in Milpitas, California was historically an important factor in driving gross margin improvement. In the past, a large portion of our fabrication cost structure was fixed, such as depreciation and payroll expense for process engineering and manufacturing support, and this structure provided for lower per unit costs as the volume of completed wafers increased. In the third quarter of 2005, we decided to outsource all of our wafer fabrication operations and in October 2006, we completed the shut-down of our Milpitas, California wafer fabrication facility. We believe that this transition to an outsourced or “fabless” manufacturing model will improve the overall margins of our interface and certain of our commodity market power management products which we historically manufactured at the Milpitas facility. However, because of this transition away from a fixed cost structure in a captive wafer fab, we may not recognize the same decrease in per unit manufacturing costs as production volumes increase.

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 assembly and test yield improvements and test time reductions.

New product introductions represent a key driver of opportunities to improve our product margins. New products are typically proprietary in nature and therefore command a stronger market position and we typically have higher product margins. In 2006, we introduced 69 new products, 15 of which were proprietary in nature. We continuously strive to improve our product mix toward higher margin products by eliminating older legacy products and by focusing on increasing sales of our newer products introduced in our three core product families. Net sales of our three core product families were $78.7 million, $72.1 million, and $74.7 million in 2006, 2005 and 2004, respectively. Net sales attributed to legacy products were $0.1 million, $0.6 million, and $0.8 million in 2006, 2005 and 2004, respectively.

Our wafer fabrication operation in Milpitas produced approximately 45%, 84% and 81% of our wafer requirements in 2006, 2005 and 2004, respectively. Our wafer fabrication utilization in Milpitas was 58%, 56%, and 62% in 2006, 2005 and 2004, respectively. Wafer production declined by 20%, 12% and 10% in 2006, 2005 and 2004, respectively, as compared to each prior year.

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 revenue recognition, inventory valuation, restructurings and impairments, 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 in accordance with SEC Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition.” SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured.

Prior to January 1, 2004, we entered into arrangements that were not within the original contractual distributor agreements in that we allowed return rights and other concessions beyond the levels provided in the distributor agreements. As a result, our management concluded it is unable to reasonably estimate sales returns for arrangements with its distributors; accordingly, effective January 1, 2003, sales and related cost of sales on shipments to distributors are deferred until the resale to the end customer.

Sales to Future are made under an agreement that provides protection against price reductions of Sipex’s products in Future’s inventory. 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 5% of its total purchases during the most recent three-month period (reduced from 10%, effective April 1, 2006). In addition, effective April 1, 2006, Future is permitted a quarterly scrap allowance credit against accounts receivable for up to 2% of the most recent three-month purchases when they provide evidence of destruction of inventory of Sipex products up to this quarterly amount. As the price of products sold to Future is not fixed or determinable until resold by Future to the end customer, Sipex is using sell-through revenue accounting and deferring recognition of such sales and related cost of goods sold until the product is sold by Future to its customers.

Under sell-through revenue accounting, accounts receivable are recognized and inventory is relieved upon shipment to the distributor as title to the inventory is transferred upon shipment; at which point we have a legally enforceable right to collection under normal terms. The associated sales and cost of sales are deferred by recording “deferred income” (gross profit margin on these sales) as shown on the face of the consolidated balance sheet. When the related product is sold by our distributors to their end customers, we recognize previously deferred income as sales and cost of sales.

For non-distributor customers, we recognize revenue when title to the product is transferred to the customers, which occurs upon shipment or delivery, depending upon the terms of the customer order, provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of the resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Provisions for returns and allowances for non-distributor customers are provided for at the time product sales are recognized. An allowance for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating an allowance.

From time to time, we develop custom products for various customers under engineering service contracts culminating in delivery of known functional development samples. We recognize revenue under these agreements upon delivery of known functional development samples as delivery of such represents the culmination of utility of the contract to the customer and agreed to milestones. We recognize the costs as incurred associated with these contracts and present such costs as research and development expenses due to the uncertain nature of the development efforts until delivery of the known functional development samples. Certain of these engineering service contracts include payments in advance of delivery of known functional development samples. These payments are recorded in deferred income, other, until the time of delivery of the functional samples.

Valuation of Inventories. Sipex writes down the value of its inventories for estimated excess quantities, obsolescence, and/or marketability deficiencies. In addition, we write down inventory costs to the lower of cost or market which becomes the new cost basis. Excess and obsolete inventories are determined by comparing current inventory quantities to current backlog, anticipated future demand and shipment history. We also evaluate the net realizable value of inventories to be acquired under purchase commitments with our wafer foundries. If such inventories are also considered to be excess when compared to future demand, we record reserves and charges to cost of sales for these purchase commitments. 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. In estimating anticipated market pricing, we also consider current market conditions, industry performance, distributor inventory levels and sales to end-users and other relevant factors. If actual market conditions become less favorable than those anticipated by management, additional write-downs of inventories may be required in the future. Inventories, which had previously been written down to zero, with an original cost of $1.4 million, $1.0 million and $0.9 million, were sold in 2006, 2005 and 2004, respectively. The Company recorded inventory write-downs for excess and obsolete inventories of $5.0 million, $5.0 million and $8.6 million, during 2006, 2005 and 2004, respectively. In addition, during 2006, the Company recorded $1.4 million of charges to cost of sales for purchase commitments for excess inventories.

Restructuring and Fixed Asset 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, 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.

We account for restructuring charges in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which 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. The restructuring reserve represents the present value of future lease payments subsequent to abandonment less any estimated sublease income net of associated costs. However, due to the uncertainty of collectibility, our sublease income is recorded on a cash basis.

In December 2006, our board of directors approved a plan to reduce the workforce by approximately 75 positions. This reduction was part of a strategic restructuring plan implemented in response to our transition to a fabless semiconductor company and in an effort to de-emphasize optical products, reduce dependency on our commodity products and with a goal to improve cost structure. As a result, we recognized restructuring charges of approximately $1.1 million in the fourth quarter of 2006 related to this plan representing severance costs for the reduction in our workforce.

We review long-lived assets and certain identifiable intangibles for impairment in accordance with the guidelines of SFAS No. 144 “Accounting for Impairment of Disposal of Long Lived Assets” 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 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 original management estimates due to unforeseen circumstances that may result in additional impairment charges required to be recognized in the income statement.

In the second quarter of 2005, we tested our wafer fabrication asset grouping, for which cash flows from the wafer fabrication operations provide the lowest level of cash flows that are largely independent of the cash flows of our other assets and liabilities, for recoverability in accordance with SFAS No. 144 given that we believed that there was a significant decline in the market price of the asset grouping. An impairment loss of $9.4 million was recognized, representing the difference between the carrying value and the fair value of the wafer fabrication asset grouping.

In August 2005, our board of directors approved terminating the wafer fabrication operations and the sale of the related assets. Also in August 2005, we identified a potential buyer, Silan, who would purchase, take title to and be trained to use a substantial portion of our wafer fabrication asset grouping by the end of the third quarter of 2006. Accordingly, we continued to use the wafer fabrication assets until September 2006 and recorded depreciation expense based on the estimated remaining useful life at the time of impairment.

In September 2005, we tested our Milpitas corporate headquarters facility given that we believed that there was a significant decline in the market price of the facility and determined that the carrying amount might not be recoverable. Our headquarters facility housed the wafer fabrication operations as well as the sales and marketing department, the research and development department and the corporate administration functions. Our Milpitas corporate headquarters facility does not have identifiable cash flows that are largely independent of our cash flows of other assets and liabilities. Accordingly, our Milpitas corporate headquarters facility, which includes all assets located at the Milpitas facility except for the wafer fabrication asset grouping, is included in the asset grouping which includes all of our assets and liabilities. No impairment loss was recognized given the carrying value of all of our assets and liabilities was less than the fair value, determined based on the quoted market value of Sipex.

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 carry forwards. 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.

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 were deductible, management assessed that it is more likely than not that the deferred tax assets at December 30, 2006

will not be realized in the future. Therefore, we maintained a full valuation allowance against our deferred tax assets.

Results of Operations

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


	Years Ended
	2006			2005			2004

Net sales		100.0	%		100.0	%		100.0	%
Cost of sales		88.1			81.1			84.4

Gross profit		11.9			18.9			15.6
Operating expenses:
Research and development		22.0			23.7			19.5
Marketing and selling		19.7			14.6			11.4
General and administrative		17.1			19.8			13.0
Restructuring and impairment		2.4			13.8			2.3

Total operating expenses		61.2			71.9			46.2

Loss from operations		(49.3	)		(53.0	)		(30.6	)
Other income (expense), net		(2.9	)		0.8			0.3

Loss before income taxes		(52.2	)%		(52.2	)%		(30.3	)%

Fiscal Year Ended December 30, 2006 compared to Fiscal Year Ended December 31, 2005

Net Sales. The table in Note 16 to our consolidated financial statements shows details of our net sales by product family and geographic location for 2006, 2005 and 2004.

Net sales increased by 8.4% to $78.8 million for the year ended December 30, 2006, as compared to $72.7 million for the year ended December 31, 2005. The increase in net sales was due to a $6.1 million increase in net sales for the interface product family, and a $3.8 million increase in net sales for the power management product family, partially offset by a $3.3 million decline in net sales for the optical storage product family. The increase in net sales for the interface product family was driven by an increase in unit volume shipments, partially offset by a decline in average selling prices for this product family. The decline in average selling prices was driven by pricing pressures in the commodity related interface products. The increase in unit volume shipments was driven by gains in market share in this product category. The increase in net sales for the power management product family was driven by an increase in average selling prices as our mix of product sales shifted toward higher value proprietary products away from commodity power management products. The decline in net sales of our optical product family was driven by a reduction in unit volume shipments as certain product programs approached the end of their product life cycles.

Geographically during 2006, international net sales were $62.7 million or 80% of total net sales, as compared to $58.0 million or 80% in 2005. In 2006, sales in Japan declined by $4.7 million or 28%. This decline was principally driven by a decline in the optical storage product family. In Asia, other than Japan, net sales increased by $9.0 million or 35% related to growth in the interface and power management product families. Net sales in Europe and the rest of the world increased by $0.4 million or 2%, in 2006. Domestic net sales increased by $1.4 million or 9% in 2006.

Gross Profit (Loss). Gross profit decreased to $9.4 million in 2006 or 12% of net sales, as compared to $13.7 million or 19% in 2005. The reduction in gross profit was partially driven by a decline in standard gross profit due to a mix shift toward higher volumes of lower margin commodity products resulting in approximately $1.5 million of gross profit reduction. The gross profit was further reduced by approximately $2.9 million of added manufacturing yield and price variances as well as additional inventory write-downs, purchase commitments on

excess inventories and warranty reserves of $1.4 million. These additional costs were partially offset by $1.0 million of lower manufacturing overhead spending variances and a $0.5 million recovery of previously paid royalty costs.

Research and Development. Research and development expenses in 2006 were $17.3 million compared to $17.2 million in 2005. The increase of $0.1 million was primarily due to increased stock-based compensation expenses of $1.2 million (due to the adoption of SFAS 123R, effective January 1, 2006) along with higher salaries, benefits and employee travel costs of approximately $283,000 and higher spending on design automation software licenses of approximately $262,000. These higher costs were partially offset by reduced spending on prototype wafers and product development costs of approximately $650,000, an approximately $494,000 reduction in facilities costs, an approximately $324,000 reduction in outside design services costs and an approximately $200,000 reduction in depreciation expenses. As a percentage of net sales, research and development costs were 22.0% in 2006 compared to 23.7% in the prior year. This percentage reduction was due to the increase in net sales in 2006. We anticipate that research and development spending will decline in 2007, as we focus our research and development efforts in the power management and interface product families.

Marketing and Selling. Marketing and selling expenses were $15.5 million in 2006 compared to $10.6 million in 2005. The increase of $4.9 million was primarily due to increased headcount resulting in higher salary and benefits costs of approximately $2,960,000, along with approximately $816,000 for stock-based compensation expenses (due to the adoption of SFAS 123R, effective January 1, 2006). In addition, the increased sales and marketing headcount resulted in an approximately $501,000 increase in travel costs. Finally, the increase in net sales drove an approximately $385,000 increase in sales commissions paid to independent sales representatives. These increases were primarily due to increased sales and marketing efforts to grow our net sales. Marketing and selling expenses were 19.7% of net sales in 2006 compared to 14.6% of net sales in 2005. This percentage increase was primarily driven by marketing and selling expenses increasing at a higher percentage rate than the increase in the net sales growth rate in 2006 along with the increase in expenses. We anticipate that marketing and selling expenses will decline in 2007, as we focus our efforts in the power management and interface product families.

General and Administrative. General and administrative expenses were $13.5 million in 2006 compared to $14.4 million in 2005 or a decrease of $0.9 million. This decrease was principally due to a reduction in legal fees of approximately $1,706,000 associated with the completion of the internal investigation and resolution of related litigation, a reduction in audit and consulting fees of approximately $994,000 related to the completion of the financial restatement process filing our financial reports with the SEC, and a reduction in bad debt expense of approximately $340,000 associated with the collection of amounts previously reserved as bad debts. These expense reductions were partially offset by the inclusion of stock-based compensation expense of approximately $1,266,000 (due to the adoption of SFAS 123R, effective January 1, 2006) and higher salary and benefits costs of approximately $1.0 million. General and administrative expenses were 17.1% of net sales in 2006 compared to 19.8% of net sales in 2005. This percentage decrease was primarily driven by the reduction in these expenses along with an increase in net sales in 2006. We anticipate that general and administrative expenses will decline in 2007.

Restructuring and Fixed Asset Impairment. During the year ended December 30, 2006, we incurred additional restructuring costs of $677,000 that related to employee retention payments for the closure of the wafer fabrication operations located in Milpitas, California, announced in August 2005. For employee costs, we utilized $1.4 million and recognized an accrual expense adjustment of $54,000. We recognized approximately $200,000 in expense for contract termination in the fourth quarter of 2006 associated with gas usage and service agreements with a vendor. For facility costs related to the Milpitas wafer fabrication closure, restructuring charges utilized during 2006 totaling $91,000 was for facility decontamination. Additionally, the Company incurred $116,000 of facility costs related to the unused fabrication portion of the Company’s corporate headquarters facility in Milpitas, California, due to the transfer of wafer fabrication to Silan.

In the fourth quarter of 2006, we announced a workforce reduction plan that was implemented in response to our transitioning to a fabless semiconductor company, de-emphasizing optical products, reducing dependency on our commodity products and with a goal of improving cost structure. As a result, we recorded total restructuring costs of $1.1 million related to employee severance compensation, including $0.1 million for vesting acceleration of stock options in lieu of a severance payment to a senior executive officer. Of the $1.0 million (excluding the stock-based compensation charge), $0.1 million was paid during December 2006.

In 2006, we utilized restructuring accruals of $726,000 for the unused portion of the Billerica facility. The adjustment to the accrual for the Billerica facility primarily related to sub-lease income of $565,000 being received.

As of December 30, 2006, the balance of the restructuring accrual principally consisted of employee severance costs, contract termination costs and facility lease costs, which are anticipated to be paid over the next 15 months. The balance of the accrual as of December 30, 2006 was $1.8 million, of which $1.7 million was the short-term portion and $0.1 million was the long-term portion.

The following is a summary of the activities related to accrued restructuring costs and fixed asset impairment for fiscal years 2006 and 2005 (in thousands):


	Total
	Restructuring			Fixed Asset
	Costs			Impairment

Accrual balance January 1, 2005	$	1,847		$	—
Incurred 2005		871			9,377
Charges utilized		(726	)		(9,377	)
Sub-lease income received		293			—
Adjustments to accrual		(294	)		—

Accrual balance December 31, 2005		1,991			—
Incurred in 2006		2,010			—
Charges utilized		(2,299	)		(12	)
Employee stock options accelerated as severance pay		(137	)		—
Sub-lease income received		565			—
Adjustments to accrual		(263	)		12

Accrual balance, December 30, 2006	$	1,867		$	—

Other Income (Expense), Net. Other income (expense), net was $2.2 million of net other expense in 2006 compared to $0.6 million of net other income in the prior year. The increase in other expense, was primarily due to a $3.0 million increase in interest expense, $1.9 million of which related to the convertible senior notes issued in May 2006 and $0.9 million of which related to the lease financing obligation executed in March 2006. The interest expense was partially offset by a $0.5 million increase in interest income attributable to higher balances of interest bearing cash equivalents and short-term investments from the proceeds of the convertible senior notes.

Income Tax Expense. Our income tax expense primarily relates to our foreign operations as we continue to incur losses from domestic operations. In 2006, we recorded an income tax provision of $125,000, compared to a provision of $192,000 in 2005. Notwithstanding our net operating losses, we did not record a tax benefit as we believed that it was more likely than not, considering the level of historical taxable income and expectations for future taxable income, that the operating loss would not be utilized in the future.

Fiscal Year Ended December 31, 2005 compared to Fiscal Year Ended January 1, 2005

Net Sales. Net sales decreased by 3.7% to $72.7 million for the year ended December 31, 2005, as compared to $75.5 million for the year ended January 1, 2005. The decrease in net sales was due to a $2.2 million decline in net sales for the power management product line and a $1.1 million decline in the interface product line, partially offset by a $0.8 million increase in the optical storage product line. The decrease in net sales of the power product line was driven by an overall softness in demand that led to a unit volume decline as well as a decline in average selling prices. The decline in demand for the commodity products was only partially offset by increasing demand for our proprietary power management products. The decline in net sales of the interface product line was driven by a decline in average selling prices while unit volume increased. The increase in net sales for the optical storage product line was primarily driven by an increase in unit volume as demand for these products was strong.

Geographically during 2005, international net sales were $58.0 million or 80% of total net sales, as compared to $60.3 million or 80% in 2004. In 2005, sales in Japan declined by $1.7 million or 9%. This decline was driven by

declines in power management and interface products off-set by increases in optical storage products. In Asia, other than Japan, net sales decreased by $1.3 million or 5% related to the declines in power management and interface. Net sales in Europe and the rest of the world increased by $0.7 million or 5%, in 2005. Domestic net sales declined by $0.5 million or 3% in 2005.

Gross Profit (Loss). Gross profit increased to $13.7 million in 2005 or 19% of net sales, as compared to $11.8 million or approximately 16% in 2004. The improvement in gross profit was comprised of improvements in manufacturing yields lowering overall product costs as well as reductions in inventory write-downs for excess and obsolete products. These cost reductions were offset by recognition of $4.3 million of increased depreciation on the Milpitas, California facility after determination that the facility had a shorter economic useful life to Sipex recorded in the fourth quarter of 2005. The improvement in gross profit was comprised of the following: product mix, higher margins at standard cost due to manufacturing yield and process improvements.

Research and Development. Research and development expenses in 2005 were $17.2 million compared to $14.7 million in 2004. The increase of $2.5 million was primarily due to increased product development costs for outside design services costs of approximately $893,000 and prototype wafers costs of approximately $665,000. In addition, approximately $1.1 million of increased depreciation for the reduction in the economic life of the Milpitas, California facility was recorded in 2005. As a percentage of net sales, research and development costs were 23.7% in 2005 compared to 19.5% in the prior year. This was primarily due to the increase in research and development expenses along with the lower net sales in 2005.

Marketing and Selling. Marketing and selling expenses were $10.6 million in 2005 compared to $8.6 million in 2004. The increase of $2.0 million was primarily due to increased headcount resulting in higher salary and benefits costs of approximately $1,147,000, marketing activities and travel costs of approximately $440,000. In addition, approximately $313,000 of increased depreciation for the reduction in the economic life of the Milpitas, California facility was recorded in 2005. These increases were primarily due to increased sales and marketing efforts for our core product families. Marketing and selling expenses were 14.6% of net sales in 2005 compared to 11.4% of net sales in 2004. This was primarily due to the decline in net sales in 2005 as well as the increase in expenses.

General and Administrative. General and administrative expenses were $14.4 million in 2005 compared to $9.8 million in 2004 or an increase of $4.6 million. This increase was principally due to increase of approximately $2,320,000 of legal fees associated with the internal investigation and related litigation, approximately $707,000 of consulting and audit fees related to the financial restatement process and approximately $400,000 of higher salary and benefits costs as well as bad debt expense of approximately $256,000. In addition, approximately $707,000 of increased depreciation for the reduction in the economic life of the Milpitas, California facility was recorded in 2005.

Restructuring and Fixed Asset Impairment. During the year ended January 1, 2005, we incurred restructuring expenses reflecting the continuation of our plans initiated in 2003 to move our manufacturing operations from Billerica, Massachusetts to Milpitas, California. These restructuring expenses consisted of $1.4 million for future lease payments, $447,000 write-off of leasehold improvements and $32,000 for severance payments. For the same period, we utilized $1.0 million of restructuring reserves, which was primarily the $447,000 write-off of leasehold improvements, and $463,000 of lease costs associated with the unused portion of our Billerica facility. We made additional adjustments to the restructuring for changes to the lease obligation totaling $60,000. For the year ended January 1, 2005, the balance of the restructuring accrual principally consisted of facility lease costs, and was expected to be paid over the next three years. The balance as of the year ended January 1, 2005 was $1.8 million, of which $566,000 was the short-term portion and $1.3 million was long term portion.

In the second quarter of 2005, Sipex recognized a $9.4 million impairment charge for its long-lived assets. Based on changes in the planned use for its wafer fabrication assets and as we believed that there was a significant decline in the market price of the asset grouping, we performed an impairment evaluation in accordance with SFAS No. 144. Sipex determined that the appropriate grouping for this impairment evaluation was the wafer fabrication assets taken together and the associated cash flows for these assets. These assets were evaluated on a held-for-use basis as we were required to operate our wafer fabrication facility until new wafer fabrication partner processes were qualified. As the carrying value exceeded the undiscounted cash flows of the wafer fabrication assets for the period of planned use by us, an impairment charge was recorded for the difference between the carrying value and the fair value of the wafer fabrication assets. While we subsequently agreed to sell a substantial

portion of its wafer fabrication machinery and equipment to Silan by the end of the third quarter of 2006, the wafer fabrication assets remain in use and Sipex will continue to record depreciation expense based on the estimated remaining useful life at the time of impairment.

In August 2005, our board of directors approved a plan to close our wafer fabrication operations located in Milpitas, California and transfer the fabrication to Silan in China, Episil in Taiwan and other vendors to reduce costs and improve operating efficiencies. As a result, we recognized total restructuring charges of approximately $871,000 in the second half of 2005 including severance and retention benefits totaling $766,000 for approximately 70 employees and other exit costs of $105,000. In addition, during the third quarter of 2005, Sipex decided not to transfer the remaining operations in Billerica to Milpitas that was originally anticipated to be completed by the end of 2005. The adjustment to the restructuring accrual of $294,000 during 2005 primarily included exiting costs of $213,000, offset by sublease income of $293,000 and $195,000 recorded in the third quarter of 2005 as a reduction to future lease payment obligation for not transferring such remaining operations in Billerica. Sublease income is recorded on a cash basis due to the uncertainty of collectibility. The restructuring accrual balance as of December 31, 2005 consisted of a short-term portion of $1.4 million and a long-term portion of $584,000. The $2.0 million restructuring accrual balance included $1.2 million of facility lease costs to be paid out over the next two years and the remaining portion to be paid out in less than a year.

In November 2005, based on the previous decision to close our wafer fabrication operation located at the Milpitas, California headquarters facility, we decided to sell this facility. As a result of a decision, we reduced the remaining estimated depreciation life for our headquarters building and related improvements from 25 years to approximately four months. This change resulted in an increase in depreciation expense recorded in the fourth quarter of 2005 of $6.5 million (including $4.3 million included in cost of sales).

The following is a summary of the activity related to accrued restructuring costs and fixed asset impairment for fiscal years 2004 and 2005 (in thousands):


	Total
	Restructuring			Fixed Asset
	Costs			Impairment

Accrual balance December 31, 2003	$	1,070		$	—
Incurred 2004		1,858			—
Charges utilized		(1,036	)		—
Deferred rent adjustment		15			—
Adjustments to accrual		(60	)		—

Accrual balance January 1, 2005		1,847			—
Incurred 2005		871			9,377
Charges utilized		(726	)		(9,377	)
Sub-lease income received		293			—
Adjustments to accrual		(294	)		—

Accrual balance December 31, 2005	$	1,991		$	—

Other Income (Expense), Net. Other income (expense), net was $0.6 million in 2005 compared to $185,000 in the prior year. The increase in other income (expense), net was attributable to higher interest income on short-term investments, other income and lower interest expense associated with the two convertible notes with Future (See Note 2 to our consolidated financial statements for Related Parties). Both convertible notes were extinguished and converted into 2.3 million of our common shares as of February 18, 2004.

Income Tax Expense. Our income tax expense primarily relates to our foreign operations as we continue to incur losses from domestic operations. In 2005, we recorded an income tax provision of $192,000 in contrast to an income tax benefit of $133,000 in 2004 due to a reversal of the previously established 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 more likely than not, considering the level of historical taxable income and expectations for future taxable income, that the operating loss would not be utilized in the future to offset taxable income.

Financial Condition, Liquidity and Capital Resources

As of December 30, 2006, cash, cash equivalents and short-term investments, were $15.4 million as compared to $2.0 million at December 31, 2005. The increase of $13.5 million was principally due to our net cash inflows from financing activities during 2006 of $43.5 million along with a reduction in restricted cash of $0.6 million, partially offset by our net cash outflows from operations of $27.9 million along with our cash payments for capital expenditures of $3.8 million. The two most significant sources of cash from financing activities were the net proceeds from our convertible debt offering completed in May 2006 of $28.7 million and the $12.6 million net proceeds from our lease financing obligation completed in March 2006.

Operating Activities

Net cash used in operating activities was $27.9 million, $17.4 million, and $8.9 million in 2006, 2005, and 2004, respectively. We will continue to depend upon our cash and cash equivalents to fund our operations until such time that we generate cash from operating activities.

Net cash used in operating activities of $27.9 million in 2006 resulted primarily from a $41.2 million net loss and the unfavorable impact of a $9.3 million net change in assets and liabilities, partially offset by $22.6 million of non-cash adjustments to net loss. The changes in assets and liabilities primarily included an increase in inventory of $7.0 million, an increase in accounts receivable of $1.3 million, decreases in accrued restructuring costs of $1.9 million and accrued expenses of $1.5 million, partially offset by an increase in accounts payable of $2.8 million, respectively. Non-cash adjustments primarily comprised depreciation and amortization of $9.4 million, a $5.0 million provision for inventories and $1.4 million purchase commitments on excess inventories, $3.8 million of stock-based compensation expense as a result of adopting SFAS No. 123R, effective January 1, 2006, a $1.6 million net provision for restructuring costs, a provision for uncollectible receivables and sales returns and allowances of $0.9 million, and $0.5 million for amortization of the notes payable discount and issuance costs.

Net cash used in operating activities of $17.4 million in 2005 resulted primarily from a $38.1 million net loss and the unfavorable impact of a $6.9 million net change in assets and liabilities, partially offset by $27.5 million of non-cash adjustments to net loss. The changes in assets and liabilities included an increase in inventory of $5.3 million, a decrease in accounts payable of $3.4 million, a decrease in deferred income of $1.2 million and a decrease in accrued restructuring costs of $433,000, partially offset by a decrease in accounts receivable of $1.7 million and an increase in accrued expenses of $1.4 million, respectively. The $1.2 million decrease in deferred income comprises of a decrease of $0.2 million from Future and a decrease of $1.0 million from other distributors. Non-cash adjustments primarily comprised depreciation and amortization of $11.0 million, $9.4 million of fixed asset impairment charges, and a $5.0 million provision for inventories, a provision for uncollectible receivables and sales returns and allowances of $1.5 million, and a $577,000 net provision for restructuring costs.

Net cash used in operating activities of $8.9 million in 2004 resulted primarily from a $22.7 million net loss and increase of $4.6 million in net assets and liabilities, partially offset by $18.5 million of non-cash adjustments to net loss. The changes in assets and liabilities included an increase in inventory of $5.4 million, an increase in accounts receivable of $0.9 million, a decreases in accrued restructuring costs of $608,000, partially offset by an increase in accrued expenses of $1.4 million, an increase of deferred income of $620,000 and an increase in accounts payable of $391,000. The $620,000 increase in deferred income comprises of an increase of $1.1 million from Future offset by a decrease of $449,000 from other distributors. Non-cash adjustments primarily comprised $8.6 million provision for inventories, depreciation and amortization of $6.6 million, provision for uncollectible receivables and sales returns and allowances of $1.3 million, and a $1.8 million net provision for restructuring costs.

Accounts receivable, net of allowances, was $7.2 million and $6.7 million as of December 30, 2006 and December 31, 2005, respectively. The allowances for accounts receivable decreased to $0.9 million for 2006 from $1.3 million for 2005 primarily due to lower sales allowances for product returns.

In 2006, we recorded inventory write-downs for excess and obsolete inventories of $5.0 million. Similarly, we recorded write-downs of $5.0 million and $8.6 million, in 2005 and 2004, respectively. In addition, during 2006, we recorded $1.4 million of charges to cost of sales for purchase commitments for excess inventories. Inventories

previously written off with an original cost of $1.4 million, $1.0 million and $0.9 million, were sold in 2006, 2005 and 2004, respectively.

In 2005, we began the transfer of our manufacturing processes to foundries operated by Silan in China and Episil in Taiwan in conjunction with the planned closure of our Milpitas, California wafer fabrication facility in 2006. The transfer has been a complicated and time-consuming process that has been met with significant unforeseen complications that delayed the integration transfer and required additional allocation of our resources. In 2006, we incurred approximately $1.6 million of manufacturing process transfer and qualification costs, as reflected in cost of sales. We anticipate that we will continue to incur similar costs in the future. There can be no guarantees that additional unforeseen integration issues will not arise in the future related to the integration that could cause additional delays which could materially adversely affect our ability to timely produce our products.

In addition, we may be unable to achieve all or any of the expected benefits of the relationship within the anticipated time-frames. The anticipated synergies between Sipex and Silan or Episil may not be as significant as originally expected. We may be unable to qualify the manufacturing processes and wafer testing following the transfer from Sipex to Silan or Episil or the qualification process may take significantly longer than currently expected. This could result in additional operating costs, loss of customers, and business disruption.

Investing Activities

Net cash used in investing activities in 2006 was $4.4 million, consisting of $8.0 million of purchases of short-term investment securities and $3.8 million of capital expenditures, partially offset by $5.6 million from the proceeds of maturities of short-term securities, $1.1 million for the sale of machinery and equipment and $593,000 from reductions in restricted cash.

Net cash provided by investing activities in 2005 was $209,000, consisting of $850,000 proceeds from maturities of short-term securities, $838,000 from reductions in restricted cash, offset by $878,000 of capital expenditures and $601,000 of purchases of short-term investment securities.

Net cash used in investing activities in 2004 was $1.0 million, consisting of $6.3 million purchases of short-term securities, purchase of property, plant and equipment of $1.9 million and $1.8 million of deposit to restricted cash to meet a contractual obligation with a vendor, mostly offset by the $9.0 million proceeds from maturity of short-term securities.

Financing Activities

Net cash provided by financing activities in 2006 was $43.5 million, resulting primarily from $28.7 million of net proceeds from the issuance of convertible senior notes and warrants, $12.6 million of net proceeds from lease financing obligation, $7.0 million of proceeds from related party borrowings, $3.4 million from the issuance of common stock upon the exercise of warrants relating to the 2006 convertible notes and employee stock option plans, and $2.0 million from the proceeds from bank borrowings. These cash inflows were partially offset by $7.0 million of repayments of related party borrowings, $3.0 million of repayments of bank borrowing in 2005 under our bank line of credit and $0.2 million of payments against our lease financing obligation.

Net cash provided by financing activities in 2005 was $3.7 million, resulting primarily from $3.0 million of borrowings under our bank line of credit and $0.7 million of net proceeds from issuance of common stock under employee stock option plans. As of December 31, 2005, we violated the tangible net worth covenant under our bank line of credit. However, the borrowings of $3.0 million were subsequently repaid in January 2006.

Net cash provided by financing activities in 2004 was $7.1 million, resulting primarily from $2.7 million of net proceeds from the exercise of warrants relating to the 2002 convertible notes and $4.4 million of net proceeds from issuance of common stock under employee stock option plans.

On July 21, 2005, we entered into a Loan and Security Agreement, with Silicon Valley Bank, and this agreement was subsequently amended on October 7, 2005, November 10, 2005, January 19, 2006, May 18, 2006, August 1, 2006 and September 28, 2006. The agreement currently provides for a secured revolving line of credit with an aggregate principal amount of up to $5,000,000, which may be used to borrow revolving loans or to issue

lines of credit on our behalf. We have granted to Silicon Valley Bank a security interest in all presently existing and later acquired collateral, including but not limited to goods, equipment, inventory, contract rights, and financial assets, in order to secure the obligations and duties under such loan and security agreement. Advances accrue interest on the outstanding principal balance at an annual rate, decided by us, either equal to Silicon Valley Bank’s prime rate or LIBOR rate (depending upon the interest period of one, two or three months selected by us) plus 2.75%. In addition to the $5,000,000 secured revolving line of credit, we can borrow under term loans in an aggregate amount not to exceed $2,000,000. Each term loan shall be in an amount not less than $500,000. The number of term loans shall not exceed two (2). Interest accrues from the date of each term loan at a rate of 9.25%. Each term loan shall be payable in thirty-six (36) equal monthly installments of principal plus accrued interest. When repaid or prepaid, the term loan may not be re-borrowed. As of December 30, 2006, the unused portion of our line of credit was $3,735,000, and a $2,000,000 term loan was outstanding.

The agreement with Silicon Valley Bank has been extended to September 29, 2007 at which time all outstanding advances must be repaid, and all outstanding letters of credit must be cash collateralized. The agreement requires us to comply with a minimum liquidity ratio of 2.50:1.00 at each fiscal quarter end. It also requires us to retain a minimum tangible net worth as of the last day of each fiscal quarter. The liquidity ratio is calculated as the sum of (i) Sipex’s unrestricted cash and cash equivalents, short-term marketable securities and 50% of consolidated Accounts divided by (ii) the Obligations. Sipex must maintain, as of the last day of each fiscal quarter set forth below, a tangible net worth of at least the amount set forth below for each fiscal quarter ending date. For purposes of this calculation, up to $5,000,000 in an aggregate amount of non-cash charges relating to inventory write-downs and/or restructuring charges may be added to tangible net worth. Fiscal quarter ending date: September 30, 2006, minimum tangible net worth: $600,000; fiscal quarter ending date: December 30, 2006, minimum tangible net worth (deficit): (-$5,500,000); fiscal quarter ending date: March 31, 2007, minimum tangible net worth (deficit): (-$10,000,000); fiscal quarter ending date: June 30, 2007, minimum tangible net worth (deficit): (-$13,000,000); Each fiscal quarter thereafter, minimum tangible net worth (deficit): (-$13,000,000) plus 50% of any positive net income (with no adjustment for losses) and 50% of any new equity raised. The agreement contains additional affirmative covenants, including, among others, covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations. In addition, the agreement contains negative covenants limiting our ability to dispose of assets, change our business plans, be acquired or beneficially owned, merge or consolidate, incur indebtedness, grant liens, make investments, pay dividends, repurchase stock, and pay subordinated debt. The agreement contains events of default that include, among others, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violations of covenants, bankruptcy and insolvency events, any material adverse change, material judgments, cross defaults to certain other indebtedness and seizure of assets. The occurrence of an event of default will increase the applicable rate of interest by 5.0% and would, unless waived by Silicon Valley Bank, result in the immediate payment of all of our obligations under the agreement. As of December 30, 2006, total borrowing with Silicon Valley Bank was $2.0 million, of which $667,000 was the short-term portion and $1.3 million was the long-term portion. If we are unable to satisfy the financial covenant requirements and to obtain a waiver from the bank, we may be required to repay the outstanding borrowing amounts and/or classify such amounts as short-term bank borrowing.

On January 19, 2006, we announced the completion of a $7.0 million private loan financing in which we issued a 9% secured note with convertible interest due January 19, 2008 to Rodfre, an affiliate of Future. The note was secured by a deed of trust on our headquarters property located in Milpitas, California. The holder of the note could require repayment of the loan in the event of, among other things, the sale of the property subject to the deed of trust.

On March 9, 2006, we entered into an Agreement for Purchase and Sale of Real Property with Mission West Properties, L.P. The agreement provides for the sale of Sipex’s Hillview facility to Mission West Properties, L.P. for a price of $13.4 million in cash (net proceeds of $12.6 million). We used the proceeds from the sale of our Hillview facility to pay off and terminate the $7.0 million loan with Future. The remaining balance of $6.4 million from the sale of the property was used for operating activities.

Simultaneously with the sale of the Hillview property in March 2006, we entered into a Standard Form Lease agreement to lease back the facility from Mission West Properties, L.P. The lease term is 60 months. In addition, we provided a security deposit of $1,265,000 in the form of an irrevocable standby letter of credit issued to Mission

West Properties, L.P. under our line of credit with Silicon Valley Bank. The security deposit is held as security for our faithful performance of the terms, covenants, and conditions prescribed under the lease agreement.

On May 16, 2006, we placed $30.0 million of 5.5% Redeemable Convertible Senior Notes due 2026, or the 2006 Notes, in a private placement. The 2006 Notes bear interest of 5.5% per year, payable semi-annually on May 15 and November 15 of each year, commencing on November 15, 2006, and mature on May 16, 2026. The 2006 Notes are convertible into common stock at any time at a fixed conversion price of $5.36 per share. If fully converted, the principal amount of the 2006 Notes would convert into approximately 5,597,015 shares of our common stock. At any time following the effectiveness of a registration statement related to the resale of the common stock issuable upon the conversion of the 2006 Notes, we may, subject to certain conditions, elect to automatically convert the 2006 Notes into common stock if the average price of our common stock exceeds 150% of the conversion price for at least 20 trading days during any consecutive 30 trading-day period, ending within 5 days of the notice of automatic conversion. We have the right to redeem the 2006 Notes at par plus accrued interest at anytime after May 15, 2009 and the purchasers have the right to require us to repurchase the 2006 Notes at par plus accrued interest on May 15 in 2011, 2016 and 2021.

The 2006 Notes are convertible into Sipex’s common stock at any time prior to maturity, initially at a conversion price of $5.36 per share, subject to adjustment upon certain events, including, among other things, dividends, stock splits and recapitalizations. If fully converted, the principal amount of the 2006 Notes would convert into 5,597,015 shares of the Company’s common stock.

The 2006 Notes contains certain covenants including a covenant restricting the amount of indebtedness that we can incur that is senior or pari passu with the 2006 Notes to an aggregate principal amount of $7.5 million, unless such restriction is waived by holders of over 662/3% of the principal amount of the 2006 Notes then outstanding. Additionally, an event of default would occur under the 2006 Notes for a number of reasons, including our failure to pay when due any principal, interest or late charges on the 2006 Notes, the default and acceleration of indebtedness with our bank and other lenders in amounts greater than $2.5 million, certain events of bankruptcy and our breach or failure to perform certain representations and obligations under the 2006 Notes. Upon the occurrence of an event of default, our obligations under the 2006 Notes may become due and payable in accordance with the terms thereof.

The 2006 Notes provide that since we were not current in our SEC filings by August 15, 2006, we incurred additional interest on the 2006 Notes at an annual rate of 1.5% for the period beginning August 16, 2006 through the date that our filings became current. The Company filed all its late Forms 10-K and 10-Q to the SEC by September 21, 2006. In addition, as our common stock is not listed on the Nasdaq Global Market, the New York Stock Exchange or another national exchange or automated quotation system by December 31, 2006, we will pay additional interest on the 2006 Notes at an annual rate of 1.5% for the period beginning January 1, 2007 through the date that our common stock becomes listed for trading on one of the national exchanges. Likewise, the Registration Rights Agreement entered into in connection with the 2006 Notes provides that since we have not filed a registration statement for the shares of our common stock issuable upon conversion of the 2006 Notes or exercise of the warrants issued in connection with the 2006 Notes as of August 15, 2006, we must pay additional payments to the noteholders equal to a per annum rate of 0.8% times the principal amount of the 2006 Notes for the period beginning on August 16, 2006 through the date that the registration statement is filed. However, we have to pay increased interest payments at an annual rate of 1.2% as the filing of the registration statement was delayed by over 60 days, and the registration statement was not declared effective by December 31, 2006. We have not filed a registration statement as contemplated in the Registration Rights Agreement. Our common stock is not listed on any one of the national exchanges. As a result of our failure to meet these conditions, we are effectively obligated to pay up to an additional 2.7% of interest on the notes and our current effective interest rate is 8.2% per annum. A more detailed description of the terms of the 2006 Notes is presented in Note 12 to our consolidated financial statements included in this 10-K filing.

On March 29, 2007, we entered into a Securities Purchase Agreement with Rodfre, an affiliate of Future, our largest distributor worldwide and an affiliate of our largest stockholder (Alonim Investment Inc.), to provide an unsecured promissory note facility of up to $10.0 million. This facility expires, and the borrowings and accrued interest under any notes issued under this facility are due and payable, on June 30, 2008, or upon certain other events such as a change of control. Borrowings under this promissory note facility bear interest of 9% per annum subject to

an increased interest rate of up to 20% in case of default or after maturity. This promissory note facility is subordinate to our Loan and Security Agreement with Silicon Valley Bank and to our 5.5% Redeemable Convertible Senior Notes due 2026.

Based on our current plans and business conditions, we believe that our existing cash, cash equivalents and short-term investments together with available borrowings under our bank line of credit and unsecured promissory note facility will be sufficient to meet our liquidity and capital spending requirements for at least the next twelve months. In addition, if desirable or necessary, we may seek to raise additional capital through the sale of debt or equity. There can be no assurances, however, that future borrowings and capital resources will be available on favorable terms or at all. Our cash flows are highly dependent on demand for our products, timing of orders and shipments with key customers and our ability to manage our working capital, especially inventory and accounts receivable, as well as controlling our production and operating costs in line with our revenue.

Off-Balance Sheet Arrangement

As of December 30, 2006, we had no off-balance sheet arrangements as defined in Item 303(a) (4) of the SEC’s Regulation S-K except for the $1,265,000 security deposit in the form of irrevocable standby letter of credit issued to Mission West Properties, L.P. as described under “Interest Rate Risk.”

Contractual Obligations

Our contractual obligations as of December 30, 2006 were as follows (in thousands):


			Less Than		1 - 3		3 - 5		More Than
	Total		1 Year		Years		Years		5 Years

Convertible note payable(1):
Principal	$	30,000	$	—	$	—	$	—	$	30,000
Interest		32,654		2,129		3,300		3,300		23,925
Long-term lease financing obligation(2)		5,797		1,329		2,776		1,692		—
Restructuring liability(3)		771		617		154		—		—
Operating leases(4)		1,642		676		627		315		24
Purchase commitment — Polar Fab		3,653		3,653		—		—		—
Purchase commitment — Cadence Design		974		857		117		—		—
Verification software tools — Mentor Graphics		419		157		262		—		—
Other(5)		2,022		1,964		58		—		—

Total contractual obligations	$	77,932	$	11,382	$	7,294	$	5,307	$	53,949


(1)		$30.0 million Convertible Senior Notes issued on March 18, 2006 due May 18, 2026 with 5.5% interest payable semi-annually on May 15 and November 15 of each year beginning on November 15, 2006.

(2)		Lease payments (excluding $11.2 million estimated final obligation settlement with the lessor by returning the Hillview facility due on our Hillview facility in Milpitas, California) under a 5-year Standard Form Lease agreement that we signed with Mission West Properties L.P. on March 9, 2006.

(3)		Represents estimated lease payments with related costs for the unused portion of our Billerica, Massachusetts facility.

(4)		Includes lease payments related to the used portion of our facility at our Billerica, Massachusetts facility.

(5)		Includes wafer and part purchases as well as other services with various vendors including Episil and BCD Semiconductor Manufacture Limited.

Effect of Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements for the discussion on effect of recent accounting pronouncements.


Item 8.	*Financial Statements and Supplementary Data:*

Sipex’s consolidated financial statements and related Report of Independent Registered Public Accounting Firm are presented in the following pages.


	Page

Report of Independent Registered Public Accounting Firm		19
Consolidated Balance Sheets as of December 30, 2006 and December 31, 2005		20
Consolidated Statements of Operations for the years ended December 30, 2006, December 31, 2005 and January 1, 2005		21
Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss for the years ended December 30, 2006, December 31, 2005, January 1, 2005		22
Consolidated Statements of Cash Flows for the years ended December 30, 2006, December 31 2005, January 1, 2005		23
Notes to consolidated financial statements		24

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.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Sipex Corporation:

We have audited the accompanying consolidated balance sheets of Sipex Corporation and subsidiaries (the “Company”) as of December 30, 2006 and December 31, 2005, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive loss, and cash flows for each of the three years in the period ended December 30, 2006. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. As of December 30, 2006, the Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting as of December 30, 2006. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the financial position of Sipex Corporation and subsidiaries as of December 30, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2006, in conformity with accounting principles generally accepted in the United States of America.

As described in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, effective January 1, 2006.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

March 30, 2007

SIPEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per-share data)


	December 30,			December 31,
	2006			2005

ASSETS
Current assets:
Cash and cash equivalents	$	13,041		$	1,969
Restricted cash		350			500
Short-term investment securities		2,388			—
Accounts receivable, less allowances of $551 and $820, respectively		6,222			3,735
Accounts receivable, related party, less allowances of $306 and $529, respectively		949			3,011
Inventories		15,586			13,400
Prepaid expenses and other current assets		1,641			1,300

Total current assets		40,177			23,915
Property, plant, and equipment, net		19,113			25,803
Restricted cash — noncurrent		57			500
Other assets		202			224

Total assets	$	59,549		$	50,442


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Short-term bank borrowing	$	—		$	3,000
Current portion of long-term bank borrowing		667			—
Current portion of lease financing obligation		191			—
Accounts payable		10,331			7,394
Accrued expenses		7,185			7,282
Accrued restructuring costs		1,728			1,407
Deferred income, related party		5,543			5,707
Deferred income, other		2,555			2,510

Total current liabilities		28,200			27,300
Long-term bank borrowing		1,333			—
Long-term lease financing obligation		12,152			—
Long-term accrued restructuring costs		139			584
Convertible senior notes		25,826			—
Other long-term liabilities		24			37

Total liabilities		67,674			27,921

Commitments and contingencies (Note 14)

Stockholders’ equity (deficit):
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; 18,390 and 17,775 shares issued and outstanding at December 30, 2006 and December 31, 2005, respectively		184			178
Additional paid-in capital		234,785			224,203
Accumulated deficit		(243,075	)		(201,841	)
Accumulated other comprehensive loss		(19	)		(19	)

Total stockholders’ equity (deficit)		(8,125	)		22,521

Total liabilities and stockholders’ equity (deficit)	$	59,549		$	50,442

See accompanying notes to consolidated financial statements

SIPEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per-share data)


	Years Ended
	December 30,			December 31,			January 1,
	2006			2005			2005

Net sales	$	44,733		$	40,847		$	46,219
Net sales, related party		34,017			31,827			29,234

Total net sales		78,750			72,674			75,453
Cost of sales		41,103			35,103			41,250
Cost of sales, related party		28,296			23,822			22,407

Total cost of sales		69,399			58,925			63,657
Gross profit		9,351			13,749			11,796
Operating expenses:
Research and development		17,332			17,248			14,710
Marketing and selling		15,524			10,642			8,570
General and administrative		13,486			14,420			9,784
Restructuring		1,863			577			1,798
Impairment of fixed assets		12			9,377			—

Total operating expenses		48,217			52,264			34,862

Loss from operations		(38,866	)		(38,515	)		(23,066	)
Other income (expense):
Interest income		721			208			176
Interest expense		(3,046	)		(35	)		(194	)
Other, net		82			427			203

Total other income (expense), net		(2,243	)		600			185

Loss before income tax expense (benefit)		(41,109	)		(37,915	)		(22,881	)
Income tax expense (benefit)		125			192			(133	)

Net loss	$	(41,234	)	$	(38,107	)	$	(22,748	)

Net loss per common share — basic and diluted	$	(2.32	)	$	(2.14	)	$	(1.38	)
Weighted average common shares outstanding — basic and diluted		17,807			17,772			16,468

See accompanying notes to consolidated financial statements

SIPEX CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND

COMPREHENSIVE LOSS


	Common Stock				Additional					Accumulated			Total
	Number of		$0.01 Par		Paid-In		Accumulated			Other			Stockholders’
	Shares		Value		Capital		Deficit			Comprehensive Loss			Equity (Deficit)
	(In thousands, except per share data)

Balances at December 31, 2003		14,213	$	142	$	195,084	$	(140,986	)	$	(7	)	$	54,233
Net loss		—		—		—		(22,748	)					(22,748	)
Foreign currency translation adjustments		—		—		—		—			(12	)		(12	)

Comprehensive loss		—		—		—		—			—			(22,760	)
Issuance of common stock under employee stock option plans		688		7		4,237		—			—			4,244
Issuance of common stock under employee stock purchase plan		46		—		426		—			—			426
Issuance of common stock on conversion of notes payable, net of discount and issuance costs		2,300		23		21,112		—			—			21,135
Issuance of common stock on exercise of warrants		450		5		2,646		—			—			2,651
Compensation from acceleration of stock option vesting		—		—		44		—			—			44
Other stock compensation expense		—		—		7		—			—			7
Consulting services provided by related party (see Note 2)		—		—		100		—			—			100

Balances at January 1, 2005		17,697		177		223,656		(163,734	)		(19	)		60,080
Net loss and comprehensive loss		—		—		—		(38,107	)		—			(38,107	)
Issuance of common stock under employee stock option plans		78		1		461		—			—			462
Compensation from acceleration of stock option vesting		—		—		60		—			—			60
Other stock compensation expense		—		—		9		—			—			9
Consulting services provided by related party (see Note 2)		—		—		17		—			—			17

Balances at December 31, 2005		17,775		178		224,203		(201,841	)		(19	)		22,521
Net loss and comprehensive loss		—		—		—		(41,234	)		—			(41,234	)
Issuance of common stock under employee stock option plans		195		2		727		—			—			729
Issuance of common stock on exercise of warrants		420		4		2,696		—			—			2,700
Beneficial conversion feature of convertible senior notes		—		—		1,639		—			—			1,639
Warrant issuance with convertible senior notes, net of issuance costs		—		—		1,568		—			—			1,568
Stock-based compensation		—		—		3,947		—			—			3,947
Consulting services provided by related party (see Note 2)		—		—		5		—			—			5

Balances at December 30, 2006		18,390	$	184	$	234,785	$	(243,075	)	$	(19	)	$	(8,125	)

See accompanying notes to consolidated financial statements

SIPEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended
	December 30,			December 31,			January 1,
	2006			2005			2005
	(In thousands)

Operating activities:
Net loss	$	(41,234	)	$	(38,107	)	$	(22,748	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		3,780			69			51
Depreciation and amortization		9,410			10,952			6,559
Provision for inventories		4,997			5,031			8,628
Provision for purchase commitments on excess inventories		1,417			—			—
Provision for restructuring charges		1,610			577			1,798
Loss on disposal of fixed assets		9			39			—
Impairment of fixed assets		12			9,377			—
Amortization of discount and issuance costs on convertible senior notes		472			—			57
Provision for uncollectible receivables and sales returns and allowances		909			1,484			1,323
Consulting services provided by related party		5			17			100
Changes in assets and liabilities:
Accounts receivable		(1,334	)		1,678			(863	)
Inventories		(7,016	)		(5,290	)		(5,365	)
Prepaid expenses and other current assets		(341	)		83			115
Other assets		22			261			(278	)
Accounts payable		2,856			(3,444	)		391
Accrued expenses		(1,532	)		1,427			1,374
Accrued restructuring costs		(1,850	)		(433	)		(608	)
Deferred income		(119	)		(1,191	)		620
Other long-term liabilities		(13	)		24			(21	)

Net cash used in operating activities		(27,940	)		(17,446	)		(8,867	)

Investing activities:
Proceeds from maturity of short-term investment securities		5,600			850			9,000
Purchase of short-term investment securities		(7,988	)		(601	)		(6,255	)
Purchase of property, plant, and equipment		(3,799	)		(878	)		(1,921	)
Net proceeds from sale of machinery and equipment		1,139			—			20
Restricted cash — decrease (increase)		593			838			(1,838	)

Net cash provided by (used in) investing activities		(4,455	)		209			(994	)

Financing activities:
Proceeds from issuance of common stock under employee stock option plans		729			683			4,449
Proceeds from issuance of common stock on exercise of warrants		2,700			—			2,651
Legal fees for conversion of convertible debt to common stock		—			—			(42	)
Proceeds from borrowing — related party		7,000			—			—
Repayment of borrowing — related party		(7,000	)		—			—
Proceeds from (repayment of) short-term bank borrowing		(3,000	)		3,000			—
Net proceeds from lease financing obligation		12,578			—			—
Repayment of lease financing obligation		(235	)		—			—
Proceeds from issuance of convertible senior notes and warrants		30,000			—			—
Debt issuance costs related to convertible senior notes		(1,305	)		—			—
Proceeds from long-term bank borrowing		2,000			—			—

Net cash provided by financing activities		43,467			3,683			7,058

Effect of foreign currency exchange rate changes on cash and cash equivalents		—			—			(12	)

Increase (decrease) in cash and cash equivalents		11,072			(13,554	)		(2,815	)
Cash and cash equivalents at beginning of period		1,969			15,523			18,338

Cash and cash equivalents at end of period	$	13,041		$	1,969		$	15,523

Supplemental cash flow information:
Cash paid during the period for:
Income taxes	$	32		$	48		$	13

Interest	$	1,972		$	—		$	5

Supplemental disclosure of non-cash investing and financing activities:
Purchase of property, plant and equipment not paid at end of period	$	169		$	88		$	113

Conversion of convertible debt to common stock	$	—		$	—		$	21,177

Receivable from exercise of stock options	$	—		$	—		$	221

See accompanying notes to consolidated financial statements

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.	Description of Business

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

While advances in digital technology have fueled the demand for digital ICs, 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, interface and optical storage. Sipex’s products are sold either directly to customers or through a global network of manufacturers’ representatives and distributors.

The Company’s wafer fabrication facility in Milpitas, California along with a number of third-party contractors fabricate, package and test its ICs. In an effort to achieve significant cost savings, in the third quarter of 2005 Sipex decided to close down the Milpitas wafer fabrication facility and transfer the IC manufacturing processes from there to a wafer fabrication facility operated by Hangzhou Silan Integrated Circuit Co., Ltd. (“Silan”) in China and a wafer fabrication facility operated by Episil Technologies, Inc. in Taiwan. The closure of the Milpitas wafer fabrication facility was fully completed in early October 2006.


Note 2.	Summary of Significant Accounting Policies

Basis of Presentation

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 those related to revenues, sales returns and allowances, deferred income, inventory valuation, restructuring reserves, asset impairments and income taxes.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Sipex GmbH and Sipex Nippon. All significant intercompany accounts and transactions have been eliminated in consolidation.

Effective January 1, 2004, the Company’s fiscal year was changed from a calendar year end to a 52 or 53-week fiscal year, which ends on the Saturday closest to December 31. The first quarter of fiscal year 2006 covered 91 days from January 1, 2006 to April 1, 2006, the second quarter covered 91 days from April 2, 2006 to July 1, 2006, the third quarter covered 91 days from July 2, 2006 to September 30, 2006, and the fourth quarter covered 91 days from October 1, 2006 to December 30, 2006. Hereinafter, the years ended December 30, 2006, December 31, 2005 and January 1, 2005 are also referred to as “2006,” “2005,” and “2004.”

Reverse Stock Split

On January 30, 2007, Sipex’s stockholders at a special meeting of stockholders approved a 1-for-2 reverse stock split. The reverse split became effective at 1:31 p.m. Pacific Standard Time on February 23, 2007. The par value of the common stock was not affected by the reverse stock split and remains at $0.01 per share. Consequently, the aggregate par value of the issued common stock was reduced by reclassifying the par value amount of the eliminated shares of common stock to additional paid-in capital in the Company’s consolidated balance sheets. The Company has paid cash in lieu of any fractional shares to which a holder of common stock would otherwise be entitled as a result of the reverse stock split. The number of authorized shares of common stock remains unchanged. All shares and per share amounts, including all common stock equivalents (stock options, warrants and convertible

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

notes) have been restated in the consolidated financial statements and in the notes to consolidated financial statements for all periods presented to reflect the reverse stock split.

Revenue Recognition

The Company recognizes revenue in accordance with Securities Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition.” SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured.

Prior to January 1, 2004, the Company entered into arrangements that were not within the original contractual distributor agreements in that the Company allowed return rights and other concessions beyond the levels provided in the distributor agreements. Company management concluded it is unable to reasonably estimate sales returns for arrangements with its distributor; accordingly, effective January 1, 2003, sales and related cost of sales on shipments to distributors are deferred until the resale to the end customer.

Sales to Future Electronics Inc. (“Future”), and a related party, are made under an agreement that provides protection against price reductions of Sipex’s products in Future’s inventory. 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. This credit will be reduced to 5% applicable to all purchases made by Future from Sipex starting April 1, 2006.

Additionally, the Company provides Future with a 2% scrap allowance also effective April 1, 2006. As the price of products sold to Future is not fixed or determinable until resold by Future to the end customer, Sipex is using sell-through revenue accounting and deferring recognition of such sales and related cost of goods sold until the product is sold by Future to its customers.

Under sell-through revenue accounting, accounts receivable are recognized and inventory is relieved upon shipment to the distributor as title to the inventory is transferred upon shipment, at which point the Company has a legally enforceable right to collection under normal terms. The associated sales and cost of sales are deferred by recording “deferred income” (gross profit margin on these sales) as shown on the face of the consolidated balance sheet. When the related product is sold by the Company’s distributors to their end customers, Sipex recognizes previously deferred income as sales and cost of sales.

For non-distributor customers, the Company recognizes revenue when title to the product is transferred to the customers, which occurs upon shipment or delivery, depending upon the terms of the customer order, provided that persuasive evidence of a sales arrangement exists, the price is fixed and determinable, title has transferred, collection of the resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Provisions for returns and allowances for non-distributor customers are provided for at the time product sales are recognized. An allowance for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating an allowance.

From time to time, Sipex develops custom products for various customers under engineering service contracts culminating in delivery of known functional development samples. The Company recognizes revenue under these agreements upon delivery of known functional development samples as delivery of such represents the culmination of utility of the contract to the customer and agreed to milestones. Sipex recognizes the costs as incurred associated with these contracts and presents such costs as research and development expenses due to the uncertain nature of the development efforts until delivery of the known functional development samples. Certain of these engineering service contracts include payments in advance of delivery of known functional development samples. These payments are recorded in deferred income, other, until the time of delivery of the functional samples.

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 a net loss in 2006, 2005 and 2004, stock options, warrants, and shares issuable in conversion of debt were excluded from the calculation of diluted net loss per share because the effect of such assumed conversion would be anti-dilutive.

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


	2006		2005		2004

Weighted average common shares outstanding — basic		17,807		17,772		16,468
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		17,807		17,772		16,468

Antidilutive potential common shares excluded from the weighted average common shares outstanding for net loss per share calculation are as follows (in thousands, except per-share information):


	December 30,		December 31,		January 1,
	2006		2005		2005

Option shares outstanding		3,761		3,259		2,726
Weighted average exercise price of option shares outstanding	$	5.88	$	5.74	$	11.96
Convertible notes of $30.0 million issued on May 18, 2006 (conversion price at $5.36)		5,597		—		—
Warrants issued on May 18, 2006 with the above convertible notes (exercise price at $6.432)		420		—		—

Concentration of Credit Risk

Financial instruments that potentially subject Sipex to concentrations of credit risk consist primarily of cash equivalents, short-term investments (see below) 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.

Concentration of Other Risks

The semiconductor industry is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns. The Company’s financial results are affected by a wide variety of factors, including general economic conditions worldwide, economic conditions specific to the semiconductor industry, the timely

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

implementation of new manufacturing technologies, the ability to safeguard patents and intellectual property in a rapidly evolving market and reliance on assembly and test subcontractors, third-party wafer fabricators and independent distributors. In addition, the semiconductor market has historically been cyclical and subject to significant economic downturns at various times. The Company is exposed to the risk of obsolescence of its inventory depending on the mix of future business. Additionally, the Company utilizes third-party wafer fabricators as sole-source suppliers, primarily Polar, Episil and Silan. As a result, the Company may experience significant period-to-period fluctuations in future operating results because of the factors mentioned above or other factors.

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 carrying value of bank borrowings approximates fair value as the fixed interest rate was set at the time of borrowing in December 2006. The carrying value of the Company’s convertible senior notes was $25.8 million, and the fair value was approximately $62.4 million as of December 30, 2006. The assumptions used for the fair value calculation included the Company’s stock price movements, interest rate changes, credit rating changes, timing on re-listing with Nasdaq Global Market, effectiveness on its Form S-1 filing with the SEC and other economic variables (See Note 12).

Short-term Investments

Short-term 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 short-term 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.

Valuation of Inventories

Sipex writes down the value of its inventories for estimated excess quantities, obsolescence, and/or marketability deficiencies. In addition, the Company writes down inventory costs to the lower of cost or market which becomes the new cost basis. Excess and obsolete inventories are determined by comparing current inventory quantities to current backlog, anticipated future demand and shipment history. The Company also evaluates the net realizable value of inventories to be acquired under purchase commitments with our wafer foundries. If such inventories are also considered to be excess when compared to future demand, we record reserves and charges to cost of sales for these purchase commitments. 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. In estimating anticipated market pricing, the Company also considers current market conditions, industry performance, distributor inventory levels and sales to end-users and other relevant factors. If actual market conditions become less favorable than those anticipated by management, additional write-downs of inventories may be required in the future. Inventories, which had previously been written down to zero, with an original cost of $1.4 million, $1.0 million and $0.9 million, were sold in 2006, 2005 and 2004, respectively. The Company recorded inventory write-downs for excess and obsolete inventories of $5.0 million, $5.0 million and $8.6 million, during 2006, 2005 and 2004, respectively. In addition, during 2006, the Company recorded $1.4 million of charges to cost of sales for purchase commitments for excess inventories.

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Related Parties

Future is a related party and its affiliates own approximately 8.6 million shares or 47% of Sipex’s outstanding common stock as of December 30, 2006. Sipex has a distribution agreement that provides for Future to act as the Company’s sole distributor for certain products within North America and Europe. Sales to Future are made under an agreement that provides protection against price reduction for its inventory of Sipex’s products. The Company recognizes revenue on sales to Future under the distribution agreement when Future sells the products to end customers. Future has historically accounted for a significant portion of the Company’s revenues. It is the Company’s largest distributor worldwide and accounted for 43%, 44% and 39% of its total net sales for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 respectively.

From time to time, Future provides services and/or incurs expenses on behalf of the Company. The fair value of the unreimbursed expenses and uncompensated services rendered by Future has been recorded in the Company’s consolidated financial statements as capital contributions totaling $5,000, $17,000 and $100,000 for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 respectively.

In addition, Sipex incurred expense to Future totaling approximately $23,000 for marketing promotional materials, temporary accounting services and used furniture sold to the Company for the year ended December 30, 2006. Sipex recorded $44,000 of reimbursement expense for marketing promotional materials charged by Future for the year ended December 31, 2005. For the year ended January 1, 2005, no such expenses were recorded.

During February 2004, the affiliates of Future exercised the conversion rights to convert their existing notes into Sipex common stock for an additional 2.3 million shares. On August 5, 2004, the affiliates of Future exercised a warrant to purchase 450,000 shares of Sipex common stock at $5.8916 per share. The warrant was issued to the affiliates of Future in conjunction with the $12 million convertible note issued in 2002, which was converted into Sipex common stock in February 2004. In connection with the warrant exercise, Sipex agreed to modify the standstill restrictions on the affiliates of Future to enable them to hold the lesser of (i) 49% of the Company’s issued and outstanding voting capital stock and (ii) 42.5% of the Company’s issued and outstanding voting capital stock, measured on a “Fully Diluted Basis,” as defined using the following equation: The numerator includes all voting capital stock and securities convertible into or exercisable for voting capital stock held by the affiliates of Future and the denominator is the greater of (i) all shares of the Company’s voting capital stock outstanding or issuable upon the exercise or conversion of vested securities convertible into or exercisable for voting capital stock and (ii) 20,000,000 (as adjusted for stock dividends, splits or like transactions). On August 9, 2004, the affiliates purchased 1.25 million shares of Sipex common stock in the open market.

On January 19, 2006, Sipex announced the completion of a $7.0 million private loan financing in which the Company issued a 9% secured note with convertible interest due January 19, 2008 to the affiliates of Future, which could provide these affiliates with the opportunity to obtain additional shares of Sipex common stock. The loan was repaid in March 2006. Sipex incurred interest expense totaling $86,000 related to the $7.0 million note with Future for the year ended December 30, 2006.

As discussed in Note 12, on May 16, 2006, Sipex placed $30.0 million of its 5.5% Redeemable Convertible Senior Notes (“2006 Notes”) due 2026 and related warrants in a private placement transaction to accredited investors in reliance on Regulation D under the Securities Act of 1933, as amended (the “Securities Act”). Rodfre Holdings LLC (“Rodfre”), an affiliate of Alonim Investments Inc., Sipex’s largest stockholder, and an affiliate of Future, purchased 50% of the 2006 Notes or $15.0 million aggregate principal amount being placed in this offering. The 2006 Notes will mature on May 18, 2026 and bear interest at an annual rate of 5.5% payable semi-annually on May 15 and November 15 of each year, beginning on November 15, 2006. On December 21, 2006, Rodfre paid $2.7 million to exercise its warrant for 419,776 shares of Sipex common stock at $6.432 per share. As of December 30, 2006, the affiliates of Future held 8.6 million shares, or 47% of the Company’s outstanding common stock.

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Interest expense incurred by Sipex relating to the $15.0 million portion of 2006 Notes sold to Rodfre totaled $936,000 for the year ended December 30, 2006. No interest expense was recorded for the year ended December 31, 2005 as both convertible notes, issued in 2002 and 2003, were extinguished and converted into 2.3 million of the Company’s common shares as of February 18, 2004. Sipex recorded interest expense related to the debt with Future totaling $90,000 for the year ended January 1, 2005.

On September 8, 2006, Sipex appointed two executive vice presidents working for Future to its Board of Directors. The Board has determined that both new directors are not independent within the meaning of Rule 4200(a) (15) of the NASDAQ Manual by virtue of their relationships with Future. Accordingly, the Board does not expect to appoint them to any standing committees of the Board. In connection with their appointment as directors, both new directors have agreed to excuse themselves from any Board discussions that relate to transactions between Sipex and Future.

On March 29, 2007, the Company entered into a Securities Purchase Agreement with Rodfre, an affiliate of Future, Sipex’s largest distributor worldwide and an affiliate of its largest stockholder (Alonim Investment Inc.), to provide an unsecured promissory note facility of up to $10.0 million. This facility expires, and the borrowings and accrued interest under any notes issued under this facility are due and payable, on June 30, 2008, or upon certain other events such as a change of control. Borrowings under this promissory note facility bear interest of 9% per annum subject to an increased interest rate of up to 20% in case of default or after maturity. This promissory note facility is subordinate to the Company’s Loan and Security Agreement with Silicon Valley Bank and to its 5.5% Redeemable Convertible Senior Notes due 2026.

Employee Advances

Included in other current assets is approximately $58,000 and $39,000 due from employees at December 30, 2006 and December 31, 2005, respectively, which consist mainly of amounts due to Sipex related to hiring and relocation costs. These amounts are normally forgiven over employee’s service periods as agreed upon between each 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 their expected useful lives:


		Useful Lives

Building and improvements		25 years (see Note 5)
Machinery and equipment		3-10 years (see Note 3)
Furniture, fixtures and office equipment		3-7 years
Leasehold improvements		Lesser of 10 years or lease term

Restricted Cash

As of December 30, 2006, restricted cash totaled $407,000 consisting of $350,000 held in a certificate of deposit as a guarantee payment to fulfill the terms of a software license agreement and $57,000 as a rental deposit related to the Company’s Belgium facility.

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

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

Prior to the third quarter of 2004, the functional currencies of the Company’s foreign subsidiaries are the local currencies. Effective beginning the third quarter of 2004, based on the Company’s reassessment of economic facts and circumstances of its foreign subsidiaries, the functional currencies of the Company’s foreign subsidiaries were changed to the U.S. dollar. Gains and losses from transactions denominated in currencies other than the functional currencies of the Company and its subsidiaries are included in operating expenses in the consolidated statements of operations.

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 carry forwards. 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

Adoption of SFAS No. 123R

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”), using the modified-prospective transition method. Under this transition method, stock compensation cost recognized beginning January 1, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted or modified on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. In addition, compensation cost to be recognized under SFAS No. 123R considers an estimate of options which will be forfeited prior to vesting.

The Company has elected to adopt the alternative transition method provided in the FASB Staff Position (“FSP”) No. FAS 123R-3 “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (FSP 123R-3) for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123R. The alternative transition method provides a simplified method to establish the beginning balance of the additional paid-in capital pool (“APIC Pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC Pool and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123R. SFAS No. 123R prohibits the recognition of a deferred tax asset for an excess tax benefit that has not yet been realized. As a result, the Company only recognizes a benefit from stock-based compensation in paid-in-capital if an incremental tax benefit is realized after all other tax attributes currently available to the Company have been utilized. In addition, the Company has elected to account for the indirect benefits of stock-based compensation on the research tax credit through the consolidated statement of operations rather than through paid-in-capital.

Prior to adopting SFAS No. 123R, the Company accounted for stock option grants under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees and related interpretations.” No compensation expense was recognized when the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of the grant. Compensation expense associated with the option repricing in 2005 was recorded up to the date of adoption of

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

SFAS No. 123R until the options were exercised, cancelled, or otherwise expired, and the expense or benefit for the increase or decrease, respectively, in the fair market value of the Company’s common stock in excess of the option’s exercise price was recognized immediately for vested options and was recognized over the vesting period using an accelerated method for unvested employee options.

As the Company was not current with its filing with the SEC, employees who terminated from the Company during this period had been unable to exercise their stock options during the contractual 90 days of post-termination exercise period. The Company made a decision effective February 1, 2006 to extend the post-termination exercise period for former employees with approximately 96,000 vested stock options for the year ended December 30, 2006, until the earlier of 1) such date that was ninety (90) days after the date that the former employees were able to freely exercise the options pursuant to a registration statement on Form S-8 filed by the Company or 2) December 31, 2006. As a result, the Company recorded stock-based compensation relating to such extension totaling $177,000 for the year ended December 30, 2006.

In the fourth quarter of 2006, the Company accelerated the vesting of 220,000 stock options for three former directors of its board upon their departures. As a result, the Company recorded additional $138,000 stock-based compensation expense for the year ended December 30, 2006. During the same period, Sipex recorded additional employee stock-based compensation of $137,000 as restructuring expense for accelerating the vesting of 125,000 stock options in lieu of a severance payment made to a senior executive officer.

A summary of the Company’s stock option plan activities for the year ended December 30, 2006 is as follows:


	2006
						Weighted
				Weighted		Average
	Number			Average		Remaining		Aggregate
	of			Exercise		Contractual		Intrinsic
	Options			Price		Term (in years)		Value
	(In thousands)							(In thousands)

Outstanding at beginning of year		3,259		$	5.74
Granted		912			6.20
Exercised		(195	)		3.73
Forfeited or expired		(215	)		7.04

Outstanding at end of year		3,761		$	5.88		7.81	$	17,518

Vested and expected to vest at December 30, 2006		3,553		$	5.91		7.76	$	16,587

Exercisable at December 30, 2006		1,867		$	6.47		6.83	$	9,010

Under SFAS No. 123R, stock-based compensation expenses for stock option grants are based on the fair value calculated from a stock option pricing model on the date of grant. The Company has utilized the Black-Scholes single option pricing model to determine the fair value for stock option grants. The fair value of stock option grants issued is recognized as compensation expense on a straight-line basis over the requisite service period, which is the vesting period of the grants. Compensation expense recognized is shown in the operating activities section of the consolidated statements of cash flows. In addition, SFAS No. 123R requires the cash flows resulting from the tax benefits from tax deductions in exercise of the compensation cost recognized (excess tax benefits) to be classified as financing cash flows.

As part of the requirements of SFAS No. 123R, the Company is required to estimate potential forfeitures of stock grants and adjust compensation cost recorded accordingly. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized in the period of change and will also impact the amount of stock compensation expenses to be recognized in future periods.

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table shows total employee and non-employee stock-based compensation expense recognized in the condensed consolidated statements of operations pursuant to SFAS No. 123R (in thousands):


	2006

Cost of sales	$	343
Research and development		1,219
Marketing and selling		816
General and administrative		1,265
Restructuring (see Note 3)		137

Stock-based compensation expense before income tax effect		3,780
Less income tax effect		—

Stock-based compensation expense after income tax effect	$	3,780

At December 30, 2006, there was $167,000 of total compensation cost capitalized in inventory.

As a result of adopting SFAS No. 123R on January 1, 2006, the Company’s loss before income taxes and net loss for the year ended December 30, 2006 included 3.7 million of employee stock-based compensation expense. At December 30, 2006, there was a total of $5.2 million unrecognized compensation cost, net of estimated forfeitures, related to non-vested stock option awards which is expected to be recognized over a weighted-average period of approximately 32 months.

During the year ended December 30, 2006, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $849,000, determined as of the date of option exercise.

Prior to the Adoption of SFAS No. 123R

Prior to 2006, the Company’s stock-based employee compensation plans were accounted for under the recognition and measurement provisions of APB 25. The Company also provided the required pro forma disclosures as required by SFAS No. 123. The ESPP qualified as a non-compensatory plan under APB 25; therefore, no compensation cost was recorded in relation to the discount offered to employees for purchases made under the ESPP.

Pro forma information under SFAS No. 123 for periods prior to the adoption of SFAS No. 123R has not been restated to reflect the effects of implementing SFAS No. 123R. For purposes of this pro forma disclosure, the value of stock options was estimated using the Black-Scholes single option pricing valuation approach with forfeitures recognized as they occur. The following table illustrates the effect on net loss and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock options granted under the Company’s

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

stock option plans and shares issued under the employee stock purchase plan (in thousands, except per-share amounts):


	2005			2004

Net loss as reported	$	(38,107	)	$	(22,748	)
Add employee stock-based compensation expense from accelerated stock option vesting and other employee stock option compensation included in reported net loss		60			51
Less employee stock-based compensation expense determined under fair value method		(5,107	)		(7,969	)

Pro forma net loss	$	(43,154	)	$	(30,666	)

Net loss per share
Basic and diluted — as reported	$	(2.14	)	$	(1.38	)
Basic and diluted — pro forma		(2.43	)		(1.86	)

On September 6, 2005, the Company informed the employees that certain options would be repriced to the then current market price of the Company’s stock which was $3.80 per share. The repricing applied to all options with an exercise price that was over $3.80 per share but excluded options granted to the Company’s CEO and board of directors. The repricing affected 1,227,983 stock options shares for 235 employees. The incremental employee compensation cost of the repricing was approximately $1.1 million calculated using the Black-Scholes stock option pricing model. The incremental employee compensation costs are included in the pro forma amounts above to the extent of vested options and the remaining cost will be recognized over the remaining vesting periods of the related options.

Valuation Assumptions

The fair value of the Company’s stock options granted was estimated at the date of grant using the Black-Scholes single option pricing model with the following weighted-averaged assumptions:


	2006			2005			2004

Expected life of options		6 years			4 years			4 years
Volatility		89	%		86	%		61	%
Risk-free interest rate		4.8	%		3.9	%		3.4	%
Dividend yield		—			—			—
Weighted average fair value of options granted	$	4.68		$	2.30		$	5.76

Effective January 1, 2006, the Company has elected to use the “Simplified Method” outlined in SAB 107 to determine the expected term of its stock option grants. The calculation of expected term for previous SFAS No. 123 disclosure fair value estimates was based solely on an analysis of historical exercises of stock options. The Company believes that using the “Simplified Method” provides a better estimate of future exercise patterns. Stock volatility is based upon the Company’s historical stock price volatility. The Company considered historical volatility of a period generally commensurate with the expected or contractual term, as applicable, of the share option. The Company continues to use the risk-free rate based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option to be valued. The Company does not currently intend to pay cash dividends. Therefore, the Company has assumed a dividend yield of zero.

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

No shares were issued under the Company’s Employee Stock Option Plan (ESPP) during 2005 and 2006. The fair value of each ESPP share issued during 2004 was estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions:


	2006		2005		2004

Expected life of options		—		—		0.5 year
Volatility:
First purchase period		—		—		61	%
Second purchase period		—		—		60	%
Risk-free interest rate		—		—		2.0	%
Dividend yield		—		—		—
Average fair value:
First purchase period		—		—	$	2.74
Second purchase period		—		—	$	2.70

Effect of Recent Accounting Pronouncements

In March 2004, the FASB issued EITF Issue No. 03-1, or EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” which provides new guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. The disclosure requirements are effective for annual periods ending after June 15, 2004. The adoption of EITF 03-1 did not have a material impact on the Company’s consolidated financial statements.

In October 2004, the FASB approved EITF Issue 04-10 “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds” which addresses an issue in the application of paragraph 19 of SFAS No. 131, Disclosures about Segments of an Enterprise and related information. EITF 04-10 is effective for fiscal years ending after September 15, 2005. The adoption of this issue did not have a material impact to the disclosures relating to the Company’s consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” The amendments made by SFAS No. 151 are intended to improve financial reporting by clarifying that abnormal amount of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred beginning on January 1, 2006. The adoption of SFAS No. 151 did not have a material impact on Sipex’s consolidated financial statements.

In December 2004, the FASB staff issued FSP FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004” (the “FSP”) to provide guidance on the application of Statement 109 to the provision within the American Jobs Creation Act of 2004 (the “Act”) that provides tax relief to U.S. domestic manufacturers. The FSP states that the manufacturer’s deduction provided for under the Act should be accounted for as a special deduction in accordance with Statement 109 and not as a tax rate reduction. A special deduction is accounted for by recording the benefit of the deduction in the year in which it can be taken in the Company’s tax return, rather than by adjusting deferred tax assets and liabilities in the period of the Act’s enactment (which would have been done if the deduction on qualified production activities were treated as a change in enacted tax rates). The FSP was effective upon issuance. The adoption of the FSP did not have a material impact on the Company’s consolidated financial position or results of operations.

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of Accounting Principles Board (APB) No. 29, Accounting for Nonmonetary Transactions.” SFAS No. 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits, or (2) the transactions lack commercial substance. SFAS No. 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of the standard did not have a material effect on the Company’s consolidated financial statements.

In May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 establishes new standards on accounting for changes in accounting principles. Pursuant to the new rules, all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. The Statement is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005. Adoption of SFAS No. 154 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In November 2005, the FASB issued FASB Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (FSP 115-1),” which replaces the measurement and recognition guidance set forth in the Emerging Issues Task Force (“EITF”) Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and codifies certain existing guidance on investment impairment. FSP 115-1 clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than-temporary, even if a decision to sell the security has not been made, and also provides guidance on the subsequent accounting for an impaired debt security. FSP 115-1 also requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in FSP 115-1 amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and is effective for reporting periods beginning after December 15, 2005. The Company adopted the provisions of FSP 115-1 beginning on January 1, 2006, and the adoption did not have a material impact on the Company’s financial condition or results of operations.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of FASB Statements No. 133 and 140. SFAS No. 155 will be effective for the Company beginning in the first quarter of 2007. The Statement permits interests in hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation, to be accounted for as a single financial instrument at fair value, with changes in fair value recognized in earnings. This election is permitted on an instrument-by-instrument basis for all hybrid financial instruments held, obtained, or issued as of the adoption date. The Company is assessing the impact of the Statement.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“SFAS 109”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on de-recognition of tax benefits previously recognized and additional disclosures for unrecognized tax benefits, interest and penalties. The evaluation of a tax position in accordance with this Interpretation begins with a determination as to whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement for recognition in the financial statements. FIN 48 is effective no later than fiscal years beginning after December 15, 2006, and is required to be adopted by the Company in the first quarter of its fiscal year 2007. The Company is assessing the impact of the adoption of FIN 48.

On September 13, 2006, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Misstatements in Current Year Financial Statements,” which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 is effective for companies with fiscal years ending after November 15, 2006 and is required to be adopted by the Company in its fiscal year ended December 30, 2006. The adoption of SAB 108 did not have a material impact on the Company’s financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This Statement is required to be adopted by the Company in the first quarter of its fiscal year 2008. The Company is currently assessing the impact of the adoption of this Statement.

In December 2006, the FASB staff issued FSP EITF Issue No. 00-19-2, “Accounting for Registration Payment Arrangements” which specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. This FSP shall be effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of issuance of this FSP. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of this FSP, this guidance shall be effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. The FSP is required to be adopted by the Company in the first quarter of its fiscal year 2007. Sipex is currently assessing the impact of the adoption of this FSP.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits companies to measure many financial instruments and certain other items at fair value at specified election dates. Unrealized gains and losses on these items will be reported in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument (with a few exceptions), is irrevocable and is applied only to entire instruments and not to portions of instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. This Statement is required to be adopted by the Company in the first quarter of its fiscal year 2008. The Company is currently assessing the impact of the adoption of this Statement.

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 3.	Restructuring and Impairment of Fixed Assets

Below is a summary of the activities related to restructuring and impairment of fixed assets (in thousands):


							Total
				Employee			Restructuring			Fixed Asset
	Facility			Costs			Costs			Impairment

Accrual balance, December 31, 2003	$	1,070		$	—		$	1,070		$	—
Incurred in 2004		1,826			32			1,858			—
Charges utilized		(1,004	)		(32	)		(1,036	)		—
Deferred rent adjustment		15			—			15			—
Adjustments to accrual		(60	)		—			(60	)		—

Accrual balance, January 1, 2005		1,847			—			1,847			—
Incurred in 2005		105			766			871			9,377
Charges utilized		(726	)		—			(726	)		(9,377	)
Sub-lease income received		293			—			293
Adjustments to accrual		(264	)		(30	)		(294	)

Accrual balance, December 31, 2005		1,255			736			1,991			—
Incurred in 2006		200			1,810			2,010			—
Charges utilized		(818	)		(1,481	)		(2,299	)		(12	)
Employee stock options accelerated as severance pay		—			(137	)		(137	)		—
Sub-lease income received		565			—			565			—
Adjustments to accrual		(209	)		(54	)		(263	)		12

Accrual balance, December 30, 2006	$	993		$	874		$	1,867		$	—

In addition to the restructuring costs incurred above, in the fourth quarter of 2006, the Company incurred $116,000 of facility costs related to the unused fabrication portion of the Company’s headquarters facility in Milpitas, California, due to the transfer of wafer fabrication to Silan.

Restructuring

During the third quarter of 2004, Sipex entered into a sublease arrangement for a portion of the facility and decided to relocate the remaining personnel to Milpitas, California. This resulted in Sipex incurring $1.9 million of an additional restructuring accrual which reflected the Company’s plan to move the majority of remaining operations to Milpitas, California and consisted of $1.4 million for future lease payments, $447,000 write-off of leasehold improvements and $32,000 for severance payments to 12 employees.

During the year ended January 1, 2005, the Company utilized $1.0 million of restructuring reserves, which primarily included $447,000 of write-off of leasehold improvements, and $463,000 of lease costs associated with the unused portion of its Billerica facility. The Company made additional adjustments to the restructuring for changes to the lease obligation totaling $60,000. For the year ended January 1, 2005, the balance of the restructuring accrual principally consisted of facility lease costs, and is expected to be paid over the next three years. The balance as of the year ended January 1, 2005 is $1.8 million, of which $566,000 was the short-term portion and $1.3 million was long-term portion.

On August 29, 2005, the Board of Directors of Sipex approved a plan to close its wafer fabrication operations located in Milpitas, California and transfer the fabrication to Silan in China to reduce costs and improve operating efficiencies. As a result, the Company recognized total restructuring charges of approximately $871,000 in the second half of 2005 including severance and retention benefits totaling $766,000 for approximately 70 employees and other exit costs of $105,000. In addition, during the third quarter of 2005, Sipex decided not to transfer the

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

remaining operations in Billerica to Milpitas that was originally anticipated to be completed by the end of 2005. The adjustment to restructuring accrual of $294,000 during 2005 primarily included exiting costs of $213,000, offset by sublease income of $293,000 and $195,000 recorded in the third quarter of 2005 as a reduction to future lease payment obligation for not transferring such remaining operations in Billerica. Sublease income is recorded on a cash basis due to uncertainty of collectibility. The restructuring accrual balance as of December 31, 2005 consisted of short-term portion of $1.4 million and long-term portion of $584,000. The $2.0 million restructuring accrual balance included $1.2 million of facility lease costs to be paid out over the next two years and the remaining portion to be paid out in less than a year.

During the year ended December 30, 2006, for the unused portion of Billerica facility initiated in October 2003, the Company utilized the restructuring accrual totaling $726,000 which was primarily consisted of lease costs. Adjustments to the accrual for the Billerica facility primarily related to sub-lease income of $565,000 recorded on a cash basis due to the uncertainty of collectibility.

During 2006, Sipex incurred additional restructuring costs of $677,000 that related to employee retention payments for the closure of its wafer fabrication operations located in Milpitas, California, announced in August 2005. For employee costs, the Company utilized $1.4 million and recognized an expense accrual adjustment of $54,000. For facility costs related to Milpitas wafer fabrication closure, the Company recognized approximately $200,000 in expense for contract termination in the fourth quarter of 2006 associated with gas usage and service agreements with a vendor. For facility costs related to the Milpitas wafer fabrication closure, restructuring charges utilized during 2006 totaling $91,000 was for facility decontamination.

In the fourth quarter of 2006, the Company introduced a workforce reduction plan involving approximately 75 positions that was implemented in response to its transitioning to a fabless semiconductor company, optical products, reducing dependency on the commodity products and with a goal of improving cost structure. As a result, Sipex recorded total restructuring costs of $1.1 million related to employee severance compensation including $137,000 for accelerating the vesting of stock options in lieu of a severance payment for a senior executive officer. Severance payments of $122,000 were made in December 2006.

As of December 30, 2006, the balance of the restructuring accrual primarily consisted of employee severance costs, contract termination costs and facility lease costs. These costs are expected to be paid over the next 15 months. The balance of the accrual as of December 30, 2006 was $1.8 million of which $1.7 million was the short-term portion and $139,000 was the long-term portion.

Impairment

In the second quarter of 2005, Sipex tested its wafer fabrication asset grouping, for which cash flows from the wafer fabrication operations provide the lowest level of cash flows that are largely independent of the cash flows of other assets and liabilities of the Company, for recoverability in accordance with SFAS No. 144 given that management believed that there was a significant decline in the market price of the asset grouping. An impairment loss of $9.4 million was recognized, representing the difference between the carrying value and the fair value of the wafer fabrication asset grouping.

In August 2005, the Board of Directors approved terminating the wafer fabrication operations and the sale of the related assets. Also in August 2005, the Company identified a potential buyer, Silan, who would purchase, take title to and be trained to use a substantial portion of its wafer fabrication asset grouping by the end of the third quarter of 2006. Accordingly, the Company continued to use the wafer fabrication assets until September 2006 and recorded depreciation expense based on the estimated remaining useful life at the time of impairment.

The Company recognized an additional impairment loss of $12,000 resulting from the sale of wafer fabrication equipment and machinery in Milpitas, California, in the fourth quarter of 2006. These wafer fabrication assets had been impaired in the second quarter of 2005. Net proceeds from the sale totaled $1.1 million.

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 4.	Inventories

Inventories are as follows (in thousands):


	2006		2005

Raw materials	$	768	$	223
Work-in-process		10,518		10,297
Finished goods		4,300		2,880

	$	15,586	$	13,400


Note 5.	Property, Plant and Equipment

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


	2006		2005

Land	$	5,957	$	5,957
Building and improvements		23,614		23,614
Machinery and equipment		11,713		13,503
Furniture, fixtures and office equipment		7,454		6,926
Leasehold improvements		357		326

		49,095		50,326
Less accumulated depreciation and amortization		29,982		24,523

	$	19,113	$	25,803

In September 2005, the Company tested its Milpitas corporate headquarters facility given that management believed that there was a significant decline in the market price of the facility and determined that the carrying amount might not be recoverable. The headquarters facility housed the wafer fabrication operations as well as the sales and marketing department, the research and development department and the corporate administration functions. The Milpitas corporate headquarters facility does not have identifiable cash flows that are largely independent of the cash flows of other assets and liabilities of the Company. Accordingly, the Milpitas corporate headquarters facility, which includes all assets located at the Milpitas facility except for the wafer fabrication asset grouping, is included in the asset grouping which includes all assets and liabilities of the Company. No impairment loss was recognized given the carrying value of all assets and liabilities of the Company was less than the fair value, determined based on the quoted market value of the Company.

In November 2005, the Board of Directors approved the sale of the Company’s Milpitas corporate headquarters facility. As a result of this decision, the Company reduced the remaining estimated depreciable life for its headquarters building and related improvements from 25 years to approximately four months (See Note 11 regarding the sale and leaseback arrangement for Sipex’s headquarters facility), or through March 2006, the date the Company expected the sale leaseback of the Milpitas corporate headquarters facility would qualify as a sale. This change resulted in an increase in depreciation expense recorded in the fourth quarter of 2005 of $6.5 million (with $4.3 million included in cost of sales) and in the first quarter of 2006 of $6.7 million (with $4.5 million included in cost of sales). In March 2006, the Company revised the remaining depreciable life of the Milpitas corporate headquarters facility (see Note 2) when it was determined that the sale leaseback did not qualify as a sale transaction and was required to be accounted for as a financing transaction.


Note 6.	Accrued Expenses

Accrued expenses are as follows (in thousands):

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	2006		2005

Accrued compensation and benefits	$	2,815	$	2,959
Accrued provision for purchase commitment on excess inventories		1,417		—
Accrued interest and related derivative liaility		679		8
Accrued audit fees		574		2,607
Accrued commissions		444		309
Accrued income taxes		340		248
Accrued warranty		259		87
Accrued legal fees		251		365
Accrued royalties		19		185
Other		387		514

	$	7,185	$	7,282


Note 7.	Borrowing Arrangements

On July 21, 2005, Sipex entered into a Loan and Security Agreement (the “Agreement”), as amended, with Silicon Valley Bank, which has an expiration date of September 29, 2007. The Agreement provides for a secured revolving line of credit with aggregate borrowings up to $5,000,000 limited to the available borrowing base (eligible accounts receivable as defined in the Agreement) plus $2,000,000. Available borrowings are further reduced by letters of credit which may be issued under the Agreement on behalf of the Company. Borrowings under the revolving line of credit bear an interest rate, chosen by Company, either at the bank’s prime rate or LIBOR rate (depending upon the interest period of one, two or three months selected by Sipex) plus 2.75%. Under the Agreement, Sipex has granted the bank a security interest in all presently existing and later acquired collateral, including but not limited to goods, equipment, inventory, contract rights, and financial assets with the exception of Sipex’s headquarters property in Milpitas, California, which was sold in March 2006 (See Note 11). On March 9, 2006, Sipex entered into a sale and leaseback transaction with Mission West Properties, L.P. for its headquarters facility, located at 233 South Hillview Drive in Milpitas, California. Sipex has provided a security deposit of $1,265,000 in the form of an irrevocable standby letter of credit issued to Mission West Properties, L.P. under its $5,000,000 line of credit with Silicon Valley Bank. In respect to financial covenants, the Agreement requires the Company to maintain a minimum liquidity ratio for each quarter ended not less than 2.50:1.00 which is calculated as the sum of (i) unrestricted cash and cash equivalents, short-term marketable securities and 50% of consolidated accounts divided by (ii) the outstanding borrowings from the bank. In addition, Sipex is required to maintain a minimum amount of tangible net worth (as defined in the Agreement) as of the last day of each quarter.

The agreement contains additional affirmative covenants, including, among others, covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations. In addition, the agreement contains negative covenants limiting our ability to dispose of assets, change our business plans, be acquired or beneficially owned, merge or consolidate, incur indebtedness, grant liens, make investments, pay dividends, repurchase stock, and pay subordinated debt. The agreement contains events of default that include, among others, non-payment of principal, interest or fees, inaccuracy of representations and warranties, violations of covenants, bankruptcy and insolvency events, any material adverse change, material judgments, cross defaults to certain other indebtedness and seizure of assets. The occurrence of an event of default will increase the applicable rate of interest by 5.0% and would, unless waived by Silicon Valley Bank, result in the immediate payment of all of our obligations under the agreement. As of December 30, 2006, the unused portion of the line of credit was $3,735,000.

As part of the Agreement, in addition to the $5,000,000 secured revolving line of credit, Sipex can borrow under the term loans from September 28, 2006 to December 31, 2006 in an aggregate amount not to exceed

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$2,000,000. Interest accrues from the date of each term loan at a fixed rate of 9.25%. Each term loan shall be payable in thirty-six (36) equal monthly installments of principal plus accrued interest. When repaid or prepaid, the term loan may not be re-borrowed. As of December 30, 2006, $2,000,000 term loan was outstanding, of which $667,000 was the short-term portion and $1,333,000 was the long-term portion. If Sipex is unable to satisfy the financial covenant requirements and is unable to obtain a waiver from the bank, the Company may be required to repay the outstanding borrowing amounts and/or classify such amounts as short-term bank borrowing.

On January 19, 2006, Sipex announced the completion of a $7.0 million private loan financing in which Sipex issued a 9% secured note with convertible interest due January 19, 2008 to an affiliate of Future (See Note 2). The note was secured by a deed of trust on the Company’s headquarters property located in Milpitas, California. Accrued interest on the loan was convertible into Sipex’s common stock at the option of the holder on January 19, 2007 and January 19, 2008. The conversion price would be the volume weighted average price for sales of the common stock during the 20 trading days prior to the date of conversion. The holder of the note could require repayment of the note in the event of a change of control of Sipex or the sale of the property subject to the deed of trust. The note was subject to customary events of default. Interest on the note accrued at 9% compounded quarterly and was payable at maturity. The note was subsequently paid off in cash in March 2006.

On March 29, 2007, the Company entered into a Securities Purchase Agreement with Rodfre, an affiliate of Future. This agreement creates a promissory note facility that provides that from time to time the Company may issue to Rodfre up to $10.0 million worth of 9% Unsecured Junior Notes in exchange for cash equal to the principal amounts of each note. The notes have customary events of default, including defaults upon failure to pay interest or principal amounts when due, breach of covenants (with a 15 day grace period), breach of representations and warranties, default on other indebtedness in excess of $1.0 million, or upon insolvency events. The holders of the notes will also have the option of demanding repayment of any outstanding amounts owed pursuant to the notes within 30 days of a change of control of Sipex.


Note 8.	Income Taxes

In the accompanying consolidated statements of operations, “Loss before income tax expense (benefit)” includes the following components for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 (in thousands):


	2006			2005			2004

Domestic	$	(40,930	)	$	(37,910	)	$	(23,019	)
Foreign		(179	)		(5	)		138

Loss before income tax expense (benefit)	$	(41,109	)	$	(37,915	)	$	(22,881	)

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


	2006								2005						2004
	Deferred		Current			Total			Deferred		Current		Total		Deferred		Current			Total

Federal	$	—	$	—		$	—		$	—	$	—	$	—	$	—	$	—		$	—
State		—		(10	)		(10	)		—		4		4		—		(14	)		(14	)
Foreign		—		135			135			—		188		188		—		(119	)		(119	)

Total expense (benefit)	$	—	$	125		$	125		$	—	$	192	$	192	$	—	$	(133	)	$	(133	)

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	2006			2005			2004

Tax benefit at statutory rate	$	(14,388	)	$	(13,270	)	$	(8,008	)
State income tax, net of federal income tax expense (benefit)		(10	)		4			(14	)
Non-deductible expenses		872			40			39
Foreign taxes on branch income and tax rate differential		135			188			(119	)
Tax credits		(606	)		(928	)		(491	)
Losses not benefited/change in valuation allowance		14,122			14,158			8,460

Actual tax expense (benefit)	$	125		$	192		$	(133	)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 30, 2006 and December 31, 2005 are as follows (in thousands):


	2006			2005

Current deferred tax assets:
Inventories, primarily write-downs not currently deductible	$	4,127		$	5,049
Accounts receivable		389			503
Deferred revenue		3,170			3,064
Accrued expenses and reserves not currently deductible		7,944			2,659

Total current deferred tax assets before valuation allowance		15,630			11,275
Valuation allowance — current		(15,630	)		(11,275	)
Noncurrent deferred tax assets:
Net operating loss carryforwards		77,083			63,468
Tax credit carryforwards		5,405			5,232

Total noncurrent deferred tax assets before valuation allowance		82,488			68,700
Valuation allowance — noncurrent		(77,033	)		(67,810	)

Deferred tax liabilities:
Fixed assets, due to differences in depreciation		(5,455	)		(890	)

Net deferred tax assets	$	—		$	—

At December 30, 2006, the Company had U.S. net operating loss carry forwards of approximately $207.4 million, which are available to offset future Federal taxable income. These losses expire during the years 2007 through 2026. As of December 30, 2006, a substantial amount of the net operating loss carry forwards are subject to annual limitations as a result of IRC Section 382 ownership changes, which have occurred in prior years.

At December 30, 2006, the Company had Massachusetts and California net operating loss carry forwards of approximately $131.7 million and $73.6 million, respectively. The Massachusetts net operating loss expires during the years 2007 through 2011, while the California net operating loss expires from 2012 through 2016.

The valuation allowance increased by $13.6 million, $13.3 million and $9.6 million for the years ended 2006, 2005 and 2004, respectively. In assessing the net realizable value of deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become taxable. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income over the periods which the deferred tax assets are deductible. Based on these considerations, management believes that it is more likely than not that the deferred tax assets at December 30,

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2006 will not be realized in the future. At December 30, 2006, approximately $1.8 million of the valuation allowance was attributable to stock compensation expense for tax purposes, that tax benefit of which, when realized, will be credited to stockholders’ equity.

As of December 30, 2006, the Company also had federal and California research and development credit carry forwards of approximately $3.1 million and $3.5 million respectively. The federal credit expires from 2010 to 2026, and the California credit may be carried forward indefinitely. The Company also has approximately $2.1 million of California manufacturer’s investment credit carry forwards, which expire from 2007 to 2013, and $0.1 million of Massachusetts investment tax credit carry forwards, which may be carried forward indefinitely.

United States federal income taxes have not been provided for the undistributed earnings of the Company’s foreign subsidiaries. These undistributed earnings aggregated $195,000 at December 30, 2006, and it is the Company’s intention that such undistributed earnings be permanently reinvested offshore under APB 23. The Company would be subject to additional United States taxes if these earnings were repatriated. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). Among other provisions, the Act includes a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad. We currently do not intend to repatriate foreign earnings under the Act. It is not anticipated that the other provisions of the Act will have a material impact on the Company’s effective tax rate.


Note 9.	Stockholders’ Equity

Issuance of Common Stock to Related Party

In February 2004, the affiliates of Future exercised the conversion rights to convert the first note (sold on September 27, 2002) with an attached warrant and the second note (sold on June 20, 2003) into an aggregate of 2.3 million shares of the Company’s common stock. A total of $22.6 million of principal portion of long-term debt, net of $1.2 million in unamortized discount and $0.2 million in unamortized issuance cost, was extinguished. On August 5, 2004, the affiliates of Future exercised the warrant attached to the first note to purchase 450,000 shares of Sipex’s common stock at an exercise price of $5.8916 per share for a total of $2,651,000. On December 21, 2006 an affiliate of Future exercised its warrants attached to the 2006 Notes (see Note 12) to purchase 419,776 of the Company’s common stock at an exercise price of $6.432 per share for a total of $2,700,000.

Stock Option Plans

Sipex currently maintains five option plans. They are the 1997 Stock Option Plan, 1999 Stock Option Plan, 2000 Non-Qualified Stock Option Plan, 2002 Non-statutory Stock Option Plan and 2006 Equity Incentive Plan under which 0.6 million, 0.6 million, 0.3 million, 1.0 million and 0.8 million shares were 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 2000 Non-qualified Stock Option Plan to 335,995. Approximately 3,761,000 stock options were outstanding as of December 30, 2006 for all plans. As of December 30, 2006, approximately 930,000 stock options were available for grant under all plans.

In the fourth quarter of 2006, the Company accelerated the vesting of 220,000 stock options for three former directors of its board upon their departures. As a result, the Company recorded additional $138,000 stock-based compensation expense for the year ended December 30, 2006. During the same period, Sipex recorded additional employee stock-based compensation of $137,000 as restructuring expense for accelerating vesting of 125,000 stock options in lieu of a severance payment made to a senior executive officer.

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On August 29, 2005, Sipex’s Board of Directors approved the repricing of the employee stock options outstanding under its stock option plans, effective as of the close of business on September 6, 2005 with the exception that options granted pursuant to the Sipex Corporation 1999 Stock Plan and options granted to Sipex’s current CEO and directors would not be repriced. In addition, outstanding options with current exercise prices below the fair market value of Sipex’s common stock at the close of business on September 6, 2005 will also not be subject to the repricing. As such, approximately 1,228,000 options held by 235 employees, with a weighted-average exercise price of $12.44 were modified on September 6, 2005 to lower the option exercise price to $3.80 which equals to the fair market value of Sipex’s common stock at the close of business as disclosed on the “Pink Sheets” on that date. No other changes were made to the terms of the repriced stock options. Compensation expense associated with the option repricing was recorded until the options were exercised, cancelled, or otherwise expired and the expense or benefit for the increase or decrease, respectively, in the fair market value of the Company’s common stock in excess of the option’s exercise price was recognized immediately for the vested options and over the vesting period using an accelerated method for unvested employee options. For the year ended December 31, 2005, no compensation expense was recorded related to the repriced options as Sipex stock price at the end of the year was lower than the exercise price of the repriced options. The variable accounting associated with the repriced options ceased upon the adoption of SFAS No. 123R, effective January 1, 2006.

During 2005 Sipex recorded $60,000 in stock-based compensation expense due to the extension of the exercise period on a stock option granted to a former executive. During 2004, the Company recorded $44,000 in stock compensation resulting primarily from the accelerated vesting of stock options to former executives at the time of termination.

A summary of Sipex’s stock option activity for the years ended December 30, 2006, December 31, 2005 and January 1, 2005 is presented below (in thousands, except per-share amounts).


	2006					2005					2004
				Weighted					Weighted					Weighted
	Number			Average		Number			Average		Number			Average
	of			Exercise		of			Exercise		of			Exercise
	Shares			Price		Shares			Price		Shares			Price
	(In thousands)					(In thousands)					(In thousands)

Outstanding at beginning of year		3,259		$	5.74		2,726		$	11.96		3,285		$	11.02
Granted		912			6.20		1,409			3.70		823			11.31
Exercised		(195	)		3.73		(78	)		5.92		(689	)		6.16
Forfeited or expired		(215	)		7.04		(798	)		10.14		(693	)		12.44

Outstanding at end of year		3,761		$	5.88		3,259		$	5.74		2,726		$	11.96

Vested and expected to vest at December 30, 2006		3,553		$	5.91

Exercisable at December 30, 2006		1,867		$	6.47

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes information about Sipex’s stock options outstanding at December 30, 2006 (in thousands, except number of years and per-share data):


	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
	Number of		Contractual		Exercise		Number of		Exercise
Range of Exercise Prices	Shares		Life		Price		Shares		Price

$ 2.00 - $ 3.36		323		7.62 years	$	2.89		167	$	2.54
$ 3.40 - $ 3.40		651		7.85 years	$	3.40		339	$	3.40
$ 3.44 - $ 3.78		272		8.76 years	$	3.60		174	$	3.58
$ 3.80 - $ 3.80		975		6.50 years	$	3.80		698	$	3.80
$ 3.82 - $ 5.20		386		8.81 years	$	4.10		83	$	4.14
$ 5.62 - $ 6.90		419		9.50 years	$	6.28		23	$	6.72
$ 7.00 - $ 9.14		382		9.17 years	$	8.43		105	$	8.81
$ 9.56 - $43.00		331		6.38 years	$	16.99		256	$	17.96
$56.63 - $56.63		8		3.55 years	$	56.63		8	$	56.63
$57.50 - $57.50		14		3.59 years	$	57.50		14	$	57.50

		3,761		7.81 years	$	5.88		1,867	$	6.47

Employee Stock Purchase Plan

In January 1996, the Board of Directors approved the 1996 Employee Stock Purchase Plan, pursuant to which Sipex is authorized to issue up to 250,000 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 200,000 shares. On May 27, 2004, the Company’s stockholders approved an increase of 150,000 shares of common stock reserved for grant under such Plan. 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 30, 2006, approximately 122,000 shares were available for issuance under the Plan.


Note 10.	Accrued Warranty

Products are sold with warranties ranging from one to two years depending upon the customers. 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.

Changes in Sipex’s warranty liability during the years are as follows (in thousands):


	2006			2005			2004

Beginning balance	$	87		$	228		$	195
Warranty claims		(28	)		(60	)		(192	)
Accruals for the period		200			(81	)		225

Ending balance	$	259		$	87		$	228

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 11. Lease Financing Obligation

On March 9, 2006, the Company entered into an Agreement for Purchase and Sale of Real Property with Mission West Properties, L.P. The agreement provides for the sale of the Company’s headquarters facility, located at 233 South Hillview Drive in Milpitas, California (the “Hillview facility”), to Mission West Properties, L.P. for a price of $13.4 million in cash. The Company incurred commission and selling costs of $0.8 million. The Hillview facility primarily consists of two connected buildings with approximately 95,700 total square feet (which includes 20,000 square feet of Class 10 clean room), 293 on-site surface parking spaces, and the underlying land with improvements and all fixtures attached thereto. Simultaneously, the Company entered into a Standard Form Lease agreement to lease back the Hillview facility from Mission West Properties, L.P. The lease term is 60 months with average lease payments of approximately $1.4 million per year. Further, the Company will have an option to extend the lease for an additional five years when the current term expires.

The Company provides a security deposit of $1.3 million in the form of an irrevocable standby letter of credit issued to Mission West Properties, L.P. under its $5.0 million revolving line of credit with Silicon Valley Bank. The security deposit is held as security for the faithful performance by Sipex for all of the terms, covenants, and conditions prescribed under the lease agreement. Accordingly, the Company has accounted for this sale and leaseback transaction as a financing transaction shown on the condensed consolidated balance sheet as “lease financing obligation.” With the initial obligation recorded at $12.6 million which represents net proceeds from the sale of the Hillview facility, no gain or loss was recorded upon the sale. The effective-interest rate for the lease financing obligation is 9.3% which approximates the Company’s estimated borrowing rate at that time. Depreciation for the Hillview facility is recorded over the straight-line method for the remaining useful life.


Fiscal year ending December
2007	$	1,329
2008		1,368
2009		1,408
2010		1,449
2011		11,454

Total minimum lease payments		17,008
Less: amount representing interest		4,665

Present value of minimum lease payments		12,343
Less: current portion of lease financing obligation		191

Long-term lease financing obligation	$	12,152

For the year ended December 30, 2006, interest expense totaled $927,000 for the lease financing obligation.

Note 12. Convertible Senior Notes

Terms and Conditions

On May 18, 2006, Sipex issued $30.0 million of 5.5% Redeemable Convertible Senior Notes due 2026 (“2006 Notes”) in a private placement. Rodfre, an affiliate of Future, purchased 50% of the 2006 Notes or $15.0 million aggregate principal amount being sold in this offering. The remainder of the 2006 Notes was purchased by other accredited investors. The Company intends to use the net proceeds of approximately $29.0 million for general corporate purposes.

The 2006 Notes will mature on May 18, 2026 and bear interest at an annual rate of 5.5% payable semi-annually on May 15 and November 15 of each year, beginning on November 15, 2006. Sipex may pay interest in cash or, solely at its option, in shares of its common stock. However, Sipex may only make interest payments in shares of its

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

common stock if certain conditions in the indenture are met, including, among other things, that a registration statement related to shares issuable under the terms of the 2006 Notes and related warrants as noted below has been declared effective and is available for the resale of any such interest shares, or other exemption from federal securities laws is available for the resale of such interest shares, and that Sipex’s common stock is listed on the Nasdaq Global Market, the New York Stock Exchange or another national exchange. In addition, common stock used to pay any such interest will be valued at ninety percent (90%) of the market price of the common stock as of two days prior to the date of payment of such interest.

At any time prior to maturity, the Company may elect to automatically convert some or all of the 2006 Notes into shares of Sipex’s common stock if the daily closing price of its common stock exceeds one hundred fifty percent (150%) of the then applicable conversion price (initially $8.04 per share) for 20 trading days during any 30 trading-day period ending within 5 days of the notice of automatic conversion and either (a) a registration statement covering the resale of the common stock issued upon conversion is effective and available for use from the date Sipex notifies the holder of the 2006 Notes of the automatic conversion and Sipex reasonably expects such registration statement to remain effective through and including the earlier of the date of the automatic conversion or the last date on which the registration statement registering the resale of such common stock is required to be kept effective under the terms of the registration rights agreement, or (b) the common stock to be issued upon conversion may be sold pursuant to Rule 144(k) under the Securities Act.

At any time on or after May 21, 2009, Sipex may redeem some or all of the 2006 Notes at 100% of the principal amount plus accrued and unpaid interest to, but excluding, the redemption date. If Sipex elects to redeem the 2006 Notes, it will provide notice of redemption to the holders of the 2006 Notes not less than 20 days and not more than 90 days before the redemption date.

The holders of the 2006 Notes may require Sipex to repurchase the 2006 Notes for cash on May 15, 2011, May 15, 2016 or May 15, 2021, at a price equal to 100% of the principal amount plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date.

Upon a change of control or a termination of trading that occurs after such time as Sipex’s common stock has been listed for trading on the Nasdaq Global Market, the New York Stock Exchange or other national automated quotation system or securities exchange, the holders of the 2006 Notes may require Sipex to repurchase the 2006 Notes in cash at a price equal to 100% of the principal amount of the 2006 Notes plus accrued and unpaid interest, if any, to, but excluding the applicable repurchase date.

The 2006 Notes contains certain covenants applicable to Sipex, including a covenant restricting the amount of indebtedness that Sipex can incur that is senior or pari passu with the 2006 Notes to an aggregate principal amount of $7.5 million, unless such restriction is waived by holders of over 662/3% of the principal amount of the 2006 Notes then outstanding. In addition, an event of default would occur under the 2006 Notes for a number of reasons, including the Company’s failure to pay when due any principal, interest or late charges on the 2006 Notes, the default and acceleration of indebtedness with the Company’s bank and other lenders in amounts greater than $2.5 million, certain events of bankruptcy and its breach or failure to perform certain representations and obligations under the 2006 Notes. Upon the occurrence of an event of default, the Company’s obligations under the 2006 Notes may become due and payable in accordance with the terms thereof. Further, the holders of the 2006 Notes have imposed dividend restriction on Sipex.

In conjunction with the issuance of the 2006 Notes, the Company issued warrants to purchase an aggregate of 839,552 shares of its common stock to the accredited investors. Each warrant is exercisable for one share of Sipex’s common stock at an initial exercise price of $6.432 per share, subject to adjustment upon certain events, including,

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

among other things, dividends, stock splits and recapitalizations. The warrants are exercisable (in whole or in part) at any time on or before May 18, 2011, unless earlier terminated by Sipex. On December 21, 2006, Rodfre paid $2.7 million to exercise its warrant for 419,776 of Sipex common stock at $6.432 per share. As of December 30, 2006, the affiliates of Future held 8.6 million shares, or 47% of the Company’s outstanding capital stock.

At any time after May 18, 2009, Sipex may terminate the remaining warrants if the closing price of its common stock exceeds 200% of the exercise price for at least 20 trading days during any 30 trading-day period. Such warrants will expire 90 days after the mailing date of the notice of termination. Any unexercised warrants with exercise prices below the then current fair market value as of the date of termination will automatically be deemed exercised in full pursuant to a cashless exercise. Each of the unexercised warrants will expire at 5:00 p.m., New York City time, on May 18, 2011, unless earlier terminated as described above.

As Sipex was not current in its SEC filings by August 15, 2006, Sipex incurred additional interest on the 2006 Notes at an annual rate of 1.5% for the period beginning August 16, 2006 and ending on September 21, 2006, the date that the Company’s filings became current. In addition, Sipex’s common stock was not listed on the Nasdaq Global Market, the New York Stock Exchange or another national exchange or automated quotation system by December 31, 2006. Sipex will pay additional interest on the 2006 Notes at an annual rate of 1.5% for the period beginning January 1, 2007 through the date that its common stock becomes listed for trading on one of the national exchanges.

As part of the 2006 Note agreements, Sipex also entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which Sipex has agreed to file with the SEC a registration statement covering the resale of the 2006 Notes, the warrants and the shares of Sipex’s common stock issuable upon conversion of the 2006 Notes and exercise of the warrants no later than August 15, 2006 and to have the registration statement declared effective no later than December 31, 2006. Since Sipex did not file the registration statement by August 15, 2006, Sipex will be required to pay certain “registration delay payments,” up to an annual rate of 1.2%, as calculated in the Registration Rights Agreement, with respect to solely the 2006 Notes.

The aforementioned additional interest and registration delay payments are collectively referred as the penalties (the “penalties”). The Company filed all its late Forms 10-K and 10-Q to the SEC by September 21, 2006 and incurred such penalties and recorded additional interest expense of $119,000 relating to the penalties for the year ended December 30, 2006.

Valuation of the 2006 Notes, Beneficial Conversion Feature, Warrants and Penalties

The 2006 Notes were initially recorded during the second quarter of 2006 at $25.4 million representing their face values of $30.0 million, less estimated fair values of the freestanding warrants ($1.6 million), beneficial conversion feature of the 2006 Notes ($1.6 million), derivatives liability relating to the additional interest expense and registration delay penalties ($134,000), and debt issuance costs ($1.2 million). The difference between the initial recorded value and the face value of the 2006 Notes is being amortized to interest expense using the effective interest method through May 2011. The effective interest rate is 9.5% which approximates the Company’s estimated borrowing rate.

The estimated fair value of the warrants of $1.6 million is accounted for as a freestanding warrant. The Company also recorded the $1.6 million estimated value of the beneficial conversion feature of the 2006 Notes. The Company applied the guidance from Emerging Issues Task Force, “EITF” Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments” in accounting for the 2006 Notes, the accompanying warrants and the value of the beneficial conversion feature. Pursuant to EITF Issue No. 05-04 “The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, ’Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,”’, the Company combined the obligation to make registration delay payments and other

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

interest penalty payments related to listing of the Company’s stock with the convertible senior notes for accounting purpose. Furthermore, these penalty obligations have been bifurcated from the combined instruments and accounted for as a derivative. The $134,000 derivative liability for the penalties recorded represents the estimate fair value of such obligation as of the date of issuance of the 2006 Notes relating to the penalties to be incurred in the event certain regulatory filings are not made in a timely manner and in the event of non-timely listing of the stock on an exchange. The fair value of the freestanding warrants and the estimated value of the beneficial conversion feature were recorded to increase the additional paid-in capital while the estimated fair value of the penalties was recorded as a derivative liability.

The issuance costs totaled $1.3 million of which $1.2 million related to debt issuance costs and $71,000 related to warrant issuance costs. The $1.2 million, which includes placement agent fees of $900,000 on the $15.0 million of the 2006 Notes not sold to Future, is being amortized as part of interest expense over a five-year period. The Company reduced additional paid-in-capital by $71,000 related to warrant issuance costs.

For the year ended December 30, 2006, Sipex recorded $452,000, which included $119,000 penalties, as an increase to interest expense resulting from the upward revaluation of the estimated fair value of the derivative liability. The estimated fair value of the derivative liability as of December 30, 2006 was $467,000. For the year ended December 30, 2006, the Company recorded interest expense of $1.5 million under the effective interest method which included $1.0 million for interest at 5.5% and $472,000 for amortization of discounts and debt issuance costs.


Note 13.	Employee Benefit Plan

The Company has a defined contribution 401(k) retirement plan, covering substantially all employees. Sipex discontinued its 50% match for contributions made by employees up to 6% of their annual compensation in 2002 and started to contribute again in 2003. During 2004 Sipex discontinued the 50% match again. In July 2005, the Company reinstated the 401(k) matching plan whereby the Company matches 50% of employee contribution of up to 3% of their annual compensation (or maximum of 1.5% of annual salary). 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 2006, 2005 and 2004, employer contributions to the plan were approximately $223,000, $106,000, and $137,000, respectively.


Note 14.	Commitments and Contingencies

Sipex leases facilities under operating leases expiring through 2015. Rent expense was approximately $614,000, $636,000 and $600,000 for the years ended December 30, 2006, December 31, 2005 and January 1, 2005, respectively. During 2006, the Company received approximately $565,000 in sublease income from four tenants at its facility in Billerica, Massachusetts.

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


2007	$	1,201
2008		522
2009		236
2010		168
2011		147
Thereafter		24

Total	$	2,298

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On August 21, 2003, Sipex announced an exclusive sourcing agreement with PolarFab, a US-based semiconductor foundry. The Company is under obligation to make minimum purchase commitments based on quarterly rolling forecasts extending out to one year. The Company has also agreed to purchase no less than 50% of the rolling forecast on an ongoing basis through the term of this agreement. The initial term of the agreement is five years with renewals on a negotiated basis. As of December 30, 2006, the minimum purchase commitment with PolarFab was approximately $3.7 million for the following twelve months.

On July 2, 2004, the Company entered into an agreement to use certain licensed tools for circuit design and development as well as maintenance support for a total future payment commitment of $2.5 million over the next three and one-half years. The contract requires the Company to deposit 75% of the total commitment in a certificate of deposit account. As of December 30, 2006, the deposit amount was at $350,000, which is included in the accompanying consolidated balance sheet as restricted cash.

On December 20, 2005, Sipex entered into an agreement to use a fast simulator software tool for improvement of its product development. A commitment of future payments including maintenance support fees totaled $467,000 to be paid over the next three years. The agreement expires on December 19, 2008.

On February 27, 2006, Sipex entered into a definitive Master Agreement with Silan. This transaction was related to closing the Company’s wafer fabrication operations located in Milpitas, California and that Sipex and Silan would work together to enable Silan to manufacture semiconductor wafers using the Company’s process technology. The Master Agreement includes a Process Technology Transfer and License Agreement which contemplates the transfer of eight (8) of the Company’s processes and related product manufacturing to Silan. Once Sipex confirms to Silan that the process qualification wafers and product qualification wafers (under a Wafer Transfer Agreement) conform to the Company’s specifications, Silan shall commence commercial manufacturing for the Company. Subject to the Company’s option to suspend in whole or in part, there is a purchase commitment under the Wafer Supply Agreement obligating Sipex to purchase from Silan an average of at least one thousand (1,000) equivalent wafers per week, calculated on a quarterly basis, for two years. As of December 30, 2006, Silan had not conformed to the Company’s specifications relating to the process qualification wafers and product qualification wafers.

In May 2006, Sipex entered into a private label agreement with BCD Semiconductor Manufacturing Limited (“BCD”). The Company is obligated to purchase parts no less than one-third of the amount of the rolling six-month forecast. As of December 30, 2006, the minimum purchase commitment with BCD was $0.4 million for the next six months.

In June of 2006, Sipex entered into an agreement for verification software tools used for IC design. A commitment of future payments including maintenance support fees totaled $489,000 to be paid over the next three years. The agreement expires in June 2009.

As of December 30, 2006, Sipex had future wafer purchase commitment totaling approximately $1.0 million with Episil for non-cancelable purchase orders issued. Currently, the Company does not have a minimum purchase agreement with Episil.

Legal Proceedings

The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business including those described below. The Company defends itself vigorously against any such claims. The outcome of certain of these matters below is currently not determinable, and an unfavorable outcome could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Class Action Securities Litigation

Beginning on or about January 24, 2005, four securities class action suits were filed against the Company’s and certain of its current and former officers and directors. All complaints were filed in the United States District Court for the Northern District of California, San Francisco. The captions of the cases were as follows: Keller v. Sipex Corporation, et al., (05-CV-00331) (WHA), Coil Partners LLC v. Sipex Corporation, et al., (05-CV-00392) (WHA), Levy v. Sipex Corporation, et al., (05-CV-00505) (WHA), and Jacobson v. Sipex Corporation, et al., (05-CV-00712) (WHA).

The securities class action suits were filed on behalf of the purchasers of Sipex’s common stock in various class periods, beginning on or about April 10, 2003 and ending on January 20, 2005. The plaintiffs in these cases alleged, among other things, violations of sections 10(b) and 20(a) of the Exchange Act, as amended, and Rule 10b-5 promulgated thereunder, and sought unspecified monetary damages and other relief against all defendants. Specifically, the complaints alleged that Sipex and the individual defendants made false or misleading public statements regarding its financial results during the class periods.

On March 25, 2005, four lead plaintiff motions were filed asking the Court to consolidate the class actions. Prior to the hearing on the lead plaintiff motions, the Levy and Keller plaintiffs voluntarily agreed to dismiss their complaints. On May 12, 2005, the Court consolidated the remaining cases under the caption In re Sipex Corporation Securities Litigation, Master File No. 05-CV-00392. Defendants Clyde Ray Wallin and Doug McBurnie were voluntarily dismissed from the action on August 16, 2005, and defendant Phil Kagel was granted a motion to dismiss on November 17, 2005.

On January 18, 2006, the Court preliminarily approved the settlement of the class action lawsuit. The settlement provided for a payment of $6.0 million to the plaintiffs and was entirely funded by proceeds from the Company’s directors’ and officers’ insurance policy. The specific terms for distribution of the settlement fund to class members were disclosed in a notice which was sent to the class members. On April 6, 2006, the United States District Court for the Northern District of California, San Francisco, approved the final settlement of the securities class action lawsuit.

Stockholder Derivative Litigation

On February 8, 2005, a putative stockholder derivative suit was filed in the Superior Court of the State of California, County of San Mateo, on behalf of Sipex against certain of its current and former officers and directors for alleged fiduciary duty violations, gross negligence, unjust enrichment and breach of contract (Lie v. McBurnie, et al., CIV444748). On March 25, 2005, a second putative stockholder derivative suit was filed in the Superior Court of the State of California, County of Santa Clara, on behalf of Sipex against certain of its current and former officers and directors for alleged fiduciary duty violations, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment (Nagdev v. Maghribi, et al., 105CV038114).

The derivative complaints were based on similar facts and events as those alleged in the securities class action suits. Specifically, the complaints alleged that the individual defendants deliberately damaged Sipex by, among other things, causing the Company to improperly recognize and report revenue, causing Sipex to issue false and misleading statements about its financial results, exposing Sipex to liability for securities fraud, and damaging its reputation.

On April 22, 2005, defendants in the Lie derivative action filed a petition with the Judicial Council of California to coordinate the cases in Santa Clara County Superior Court. The petition was granted on July 13, 2005 and the actions had since been coordinated and consolidated before Judge Komar in Santa Clara Superior Court, under the consolidated caption, Sipex Derivative Cases, Judicial Council Coordination Proceeding No. 4431, Lead Case No 1-05-CV-038114.

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On January 23, 2006, the Court approved the settlement of the stockholder derivative action. The settlement provided for a payment of $300,000 to the plaintiffs, pursuant to the terms of the settlement agreement, and the adoption of certain corporate governance measures and the payment of attorneys’ fees and expenses to the derivative plaintiff’s counsel, all of which were funded entirely by proceeds from the Company’s directors’ and officers’ insurance policy.

Government Investigations

On February 18, 2005, Sipex announced that the Securities and Exchange Commission (the “SEC”) had commenced a formal investigation into the same matters as those that were the subject of Sipex’s previously announced internal investigation into the Company’s financial and transactional records with regard to revenue recognition for the years ended December 31, 2003 and January 1, 2005. On September 20, 2006, the Company received a notification from the staff of the SEC that the investigation had been terminated, and no enforcement was recommended to the SEC with respect to Sipex.

DiPietro v. Sipex

In April 2003, Plaintiff Frank DiPietro (former CFO of Sipex Corp.) brought an action against Sipex for his severance benefits. Sipex counterclaimed for approximately $150,000 which was owed under a promissory note signed by Mr. DiPietro. In August 2004, Sipex filed two motions for summary judgment (one for Mr. DiPietro’s claims against it and one for its counterclaim against Mr. DiPietro under the promissory note). In June 2005, the Middlesex Superior Court granted both Sipex’s Motions for Summary Judgment. As a result, Mr. DiPietro was ordered to pay Sipex $149,486 plus costs and interest which has now appreciated to approximately $222,000 as of December 30, 2006. Interest is added to this amount at twelve (12%) percent per year. Mr. DiPietro filed a notice of appeal on July 19, 2005. In addition, the court has required Mr. DiPietro to post a bond in the amount of $150,000. On December 12, 2006, Sipex appeared before the Appeals Court, for oral arguments. Sipex expects to learn of the Court’s decision within the next six to twelve months.

Sipex v. Lestina

On or about October 26, 2006, Sipex initiated an arbitration proceeding before the American Arbitration Association against one of its distributors, Lestina International. Sipex’s Demand For Arbitration alleges that Lestina breached the Distributor Agreement between Sipex and itself by, inter alia, failing to make timely payments on invoices resulting in a $281,667 unpaid balance, plus interest, owing to Sipex. The Demand also seeks attorneys’ fees and costs of suit.

On or about January 15, 2007, Lestina filed an Answer denying the allegations of Sipex’s Demand and, at the same time, filed its Cross-Complaint for Damages against Sipex in the same arbitration proceeding. In the Cross-Complaint, Lestina asserts, inter alia, that Sipex breached the Distributor Agreement by failing to fulfill all outstanding orders placed by Lestina prior to that Agreement’s termination, and that Sipex committed other acts constituting interference with Lestina’s contractual relations and negligent misrepresentation. Lestina seeks damages in an amount according to proof at trial, attorneys’ fees and costs.

The arbitration is in its early stages, no discovery has taken place. The arbitration hearing has been set to commence on July 25, 2007. The Company believes that its claims against Lestina have merit and that Sipex has meritorious defenses to the claims alleged by Lestina in the Cross-Complaint, and the Company intends to defend against those claims vigorously.

Other Contingencies

Under the terms and conditions of the Company’s sales agreements, Sipex has offered limited intellectual property indemnification to its customers. The indemnity limits the time within which an indemnification claim can be made and the amount of the claim. It is not possible to determine the maximum potential amount due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

situation. Historically, payments made by the Company for this type of claim have not had a material impact on its operating results or financial position.


Note 15.	Valuation and Qualifying Accounts

The Company had the following activities for the allowance for sales returns and allowances and bad debt reserves (in thousands):


	Sales
	Returns and			Bad Debt			Total A/R
	Allowances			Reserves			Allowances

Balances at December 31, 2003	$	143		$	200		$	343
Provisions		1,355			(32	)		1,323
Charged to other account		350			—			350
Deductions		(489	)		(113	)		(602	)

Balances at January 1, 2005		1,359			55			1,414
Provisions		1,173			311			1,484
Charged to other account		53			—			53
Deductions		(1,485	)		(117	)		(1,602	)

Balances at December 31, 2005		1,100			249			1,349
Provisions		989			(80	)		909
Charged to other account		282			—			282
Deductions		(1,568	)		(115	)		(1,683	)

Balances at December 30, 2006	$	803		$	54		$	857

The increases in sales returns and allowances in 2005 and 2004 primarily reflect added provisions for general and specific future returns and allowances from customers as well as price reductions on the Company’s products sold to Future, a related party, under an exclusive distribution agreement. The decrease in sales returns and allowances in 2006 was primarily due to a reduction in the rate of sales returns and allowances.


Note 16.	Segment Information 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 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.

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


	2006		2005		2004

Interface	$	44,550	$	38,477	$	39,622
Power Management		22,780		19,027		21,223
Optical Storage		11,339		14,620		13,824
Other*		81		550		784

Total net sales	$	78,750	$	72,674	$	75,453


*		Mainly legacy and other discontinued products.

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Although Sipex has operations in Malaysia, China, Taiwan, Japan, South Korea, Germany, Canada and Belgium, substantially all the Company’s operations and long-lived assets reside in the United States.

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


	2006		2005		2004

United States	$	16,078	$	14,704	$	15,203
China		12,790		8,606		7,085
Japan		12,158		16,859		18,520
Singapore		12,058		9,381		9,391
United Kingdom		11,713		11,137		9,220
Taiwan		5,040		6,253		8,654
Asia, other than Japan, Taiwan, Singapore, and China		4,998		1,604		1,997
Germany		1,426		1,413		1,550
France		602		1,421		2,473
Rest of the World		1,887		1,296		1,360

Total net sales	$	78,750	$	72,674	$	75,453

Major customers who accounted for 10% or more as a percentage of total gross accounts receivable are as follows:


*		Less than 10%

Major customers who accounted for 10% or more as a percentage of total net sales are as follows:


	2006			2005			2004

Future Electronics, Inc., a related party		43	%		44	%		39	%
Microtek, Inc.		*	%		10	%		17	%
Komatsu		11	%		*	%		*	%


*		Less than 10%


Note 17.	Quarterly Data (Unaudited)

Following are summaries of quarterly consolidated operating results and per share data for the years ended December 30, 2006 and December 31, 2005. Net loss per share is 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, when added from the following table, may differ from the net loss per share for the respective total years reported elsewhere in this report.


	Quarters Ended
	December 30,			September 30,			July 1,			April 1,
	2006			2006			2006			2006
	(In thousands, except per share data)

Fiscal 2006
Net sales	$	18,859		$	21,024		$	21,013		$	17,854
Gross profit (loss)		(516	)		6,196			3,866			(195	)(2)
Net loss		(14,278	)		(6,299	)		(6,858	)		(13,799	)(2)
Net loss per common share — basic and diluted		(0.80	)		(0.35	)		(0.39	)		(0.78	)

SIPEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Quarters Ended
	December 31,			October 1,			July 2,			April 2,
	2005			2005			2005			2005
	(In thousands, except per share data)

Fiscal 2005
Net sales	$	17,242		$	17,373		$	18,332		$	19,727
Gross profit		501	(2)		4,626			3,245			5,377
Net loss		(11,693	)(2)		(5,161	)		(16,211	)(1)		(5,042	)
Net loss per common share — basic and diluted		(0.66	)		(0.29	)		(0.91	)		(0.28	)


(1)		As described in Note 3, in the second quarter of 2005, the Company recognized a $9.4 million impairment charge for its long-lived assets, based upon changes in the planned use for its wafer fabrication assets.

(2)		As described in Note 5, in the fourth quarter of 2005, the Company reduced the remaining estimated depreciation life for its headquarters building and related improvements from 25 years to approximately four months based upon its decision to sell the facility, resulting in an increase in depreciation expense of $6.5 million (including $4.3 million included in cost of sales) and in the first quarter of 2006 of $6.7 million (with $4.5 million included in cost of sales).


Note 18.	Subsequent Events

On January 30, 2007, Sipex’s stockholders at a special meeting of stockholders approved a 1-for-2 reverse stock split. The reverse split became effective at 1:31 p.m. Pacific Standard Time on February 23, 2007. The par value of the common stock was not affected by the reverse stock split and remains at $0.01 per share. Consequently, on the Company’s balance sheet, the aggregate par value of the issued common stock was reduced by reclassifying the par value amount of the eliminated shares of common stock to additional paid-in capital in the Company’s consolidated balance sheet. The Company has paid cash in lieu of any fractional shares to which a holder of common stock would otherwise be entitled as a result of the reverse stock split. The number of authorized shares of common stock remains unchanged.


Item 11.	*Executive Compensation*


	*Compensation Discussion and Analysis*


	*Introduction*

This Compensation Discussion and Analysis discusses the compensation policies and programs for our named executive officers, the process for reviewing and determining amounts paid to those officers and the governance oversight behind the decisions we have made in 2006.

Our named executive officers for 2006 were as follows:


	•	Ralph Schmitt, Chief Executive Officer

	•	Clyde R. Wallin, Senior Vice President of Finance, Chief Financial Officer and Secretary

	•	Ed Lam, Senior Vice President of Marketing and Business Development

	•	Lee Cleveland, Senior Vice President of Engineering

	•	Rick Hawron, Senior Vice President of Worldwide Sales. Mr. Hawron’s employment was terminated on January 19, 2007.

Compensation Philosophy

Our executive compensation program is designed to help us attract, motivate and retain qualified executives by providing a market competitive compensation opportunity where rewards are significantly linked to individual and corporate performance while ensuring that the interests of our executives are closely linked to those of our stockholders.

Our programs are designed to provide appropriate incentives to maximize the value created for our stockholders as reflected by our short- and long-term financial and operating performance. We have reflected this by including those metrics as part of our annual incentive plan and through our use of stock options as the primary equity vehicle to align executive equity compensation with long-term stock appreciation. We strive to establish performance objective criteria, evaluate results and establish each component of pay for our decision makers based upon company and individual performance.

In order to meet these objectives, we have chosen the following components for our executive compensation program to reflect Sipex’s compensation philosophy:


	(a)	Base salaries — the fixed component of executive compensation, set according to the individual’s role and skills against typical market practices for like positions at similar companies. We consider practices to reflect the “typical market practices” if they are within a range of the median to the 75^th percentile of market data for companies in our industry, local market, and of similar size. Base salaries are reviewed annually and adjusted with consideration given to the individual’s performance and the affordability of pay increases to our company.

	(b)	Variable short-term compensation/Annual Bonus — a plan that rewards company, group or team and/or individual performance based on the successful achievement of established financial and operating performance measures (profitability and operating profit improvement, revenue growth, gross margin improvement) tied to our Annual Operating Plan (our annual financial plan and budget) goals and objectives, succession planning and development and recruitment and employee retention. Overall profitability of Sipex, however, is the primary determinant of whether, and how much, any bonuses are paid to executives.

	(c)	Long-term compensation/Equity/Stock Options — stock option grants, under the long term component of executive compensation, are designed to incentivize and reward executive officers and key employees for delivering value to our stockholders over a longer period of time. As is typical in our industry, we place more emphasis on the equity component of the executive compensation.


	(d)	Benefits — a comprehensive benefits program including cost sharing for medical and dental plans, company paid life and disability insurance, a flexible 401(k) Tax Deferred Saving Plan including company match and an Employee Stock Purchase Plan. The benefits provided to our executives are the same as those made available to all Sipex employees.

	(e)	Severance arrangements and change in control agreements/provisions — are in place to provide a reasonable level of post-termination compensation to mitigate the risk of involuntary termination or changes in control of Sipex, so that executives are encouraged to focus on the business at hand.

	(f)	Other special compensation or arrangements — are not emphasized at Sipex. Facts and circumstances may warrant certain payments such as housing and relocation for key individuals if it is in the Sipex’s best interests in attracting or retaining that executive.

We strive to have a balanced approach to our executive compensation program with each pay element designed to play a specific integrated role. Our mix of pay allocated to base salary, cash incentive opportunities and equity is based upon the typical practices found in our industry and rewards for the achievement of strategic goals and objectives, with an emphasis on returning to profitability.

In 2006, we did not achieve our key goals. Accordingly, our named executives voluntarily recommended that they not be considered for annual salary increases and were awarded no bonus payouts for 2006 results. Consistent with our emphasis on equity compensation, stock option grants were made to all the named executive officers excluding CEO in order to provide an incentive to move towards profitability as well as to serve as a retention tool.

Corporate Governance

Compensation Committee Authority

Executive officer compensation is administered by the Compensation Committee of the board of directors, which is composed of two independent members, Mr. Hilton who is the Compensation Committee chairman and Mr. Redfern. Mr. Hilton joined this committee in September 2006. Prior to Mr. Hilton’s joining the committee, the committee consisted of Mr. Olmer and Mr. Redfern. Both Mr. Hilton and Mr. Redfern approved the 2006 compensation arrangements described in this compensation discussion and analysis. Mr. Pierre Guilbault, a non-independent director representing Sipex’s largest shareholder, is an observer to this Committee. Mr. Guilbault’s role is to provide input, opinion and perspective of a major shareholder, but the Committee is in no way bound to act on Mr. Guilbault’s recommendations, and he does not have approval over or voting power on the Committee. Our board of directors appoints the committee members and delegates to the Compensation Committee the following responsibilities and authority, among other matters:


	•	To annually review and approve annual base salaries, annual incentive bonus, including the specific goals and amount, equity compensation, employment agreements, severance arrangements, and change in control provisions, and any other benefits, compensation or arrangements, for the CEO and the other executive officers. In doing so, the Compensation Committee may consider as appropriate factors such as financial and operating performance, the alignment of the interests of the executive officers and our stockholders, the performance of our common stock and our ability to attract and retain qualified individuals.

	•	To annually make recommendations about compensation issues to the board of directors for final review and approval, including approval by a majority of the independent directors of the board of directors. In doing so, the Compensation Committee makes regular reports to the board of directors.

	•	To act, in its discretion, as administrator of our existing employee benefit plans and any future employee benefit plans adopted and approved by our board of directors and stockholders, and if appropriate, make recommendations to the board of directors with respect to incentive compensation plans.

	•	To review and approve the compensation policy for the directors of Sipex, subject to the approval by the full board of directors and to approve the fees members of the Compensation Committee are entitled to receive for their service as Compensation Committee members.


	•	To prepare a report (to be included in our proxy statement and annual report on Form 10-K) which describes: (a) the criteria on which compensation paid to the CEO for the last completed fiscal year was based; (b) the relationship of such compensation to Sipex’s performance; and (c) the Compensation Committee’s executive compensation policies applicable to our named executive officers.

	•	To review and reassess the adequacy of the Compensation Committee Charter annually and recommend any proposed changes to the board of directors for approval as well as review its own performance annually.

	•	To retain and terminate, with sole authority, any compensation consultant to be used by Sipex to assist in the evaluation of CEO or executive officer compensation. The Compensation Committee has sole authority to approve the consultant’s fees and other retention terms and also has authority to obtain advice and assistance from internal or external legal, accounting or other advisors. The Compensation Committee did not retain the assistance of a compensation consultant in exercising its duties in 2006.

Our board of directors has determined that Mr. Hilton and Mr. Redfern are independent under the listing standards of the Nasdaq Capital Market, the SEC rules and the relevant securities laws, and that each member is an “outside director” as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended.

The Compensation Committee meets at least monthly and met twenty-three (23) times in 2006. Monthly meetings provide the forum for approval of equity grants which are generally considered on a monthly basis. Additional meetings in 2006 were conducted to discuss and approve matters related to determination and approval of non-executive retention bonuses, executive stock option grants, new-hire stock option awards, and changes to the equity plan and other equity grant amendments to non-executive employees. Our CEO, general counsel, and stock administrator were in attendance at the majority of the meetings and our vice president of human resources has attended as requested. Our CEO did not attend the Compensation Committee meetings when the matters of his compensation were discussed.

Compensation Review Process

Our Compensation Committee is responsible for reviewing and approving all compensation decisions as they relate to our executive officers as well as recommending changes to our equity plan and practices to the board of directors.

The Compensation Committee prepares a written performance evaluation for our CEO, with input from the board of directors, by utilizing the Harvard Business Review’s description of five key tasks (define the business, recruit the team, arrange financing, set the culture and shape the product strategy) of reviewing performance of the CEO, who then responses to the Committee in a written statement.

Management’s Role in Compensation Decisions

Our CEO prepares recommendations regarding annual adjustments in base salary, achievement of bonus awards and whether stock option grants should be made for the executive team (except the CEO). The CEO’s recommendations are reviewed with the Compensation Committee for approval. The recommendations take into account a variety of interrelated factors including achievement of our financial and operating performance goals, individual performance and contribution to company successes, market competitive pressures, business conditions, the status of current equity grants with regards to vesting and retention value, and the recommendations’ potential financial impact to Sipex.

Recommendations regarding changes to the CEO’s compensation follow the same methodology as that of other named officers; however, his performance is evaluated and recommendations regarding any changes in compensation arrangements are independently prepared by the Compensation Committee. The Compensation Committee reviews these recommendations and approves any changes to the CEO’s compensation arrangements. Recommendations are then submitted for the final approval by the board of directors and require approval by the majority of the independent directors.

Sources of Competitive Data

We believe it is in our shareholders’ best interests to ensure our executive compensation plans are competitive with those of other companies seeking to attract similar levels of talent and experience. Our last formal competitive executive pay study was conducted in 2002 and utilized market data from Radford survey (AON Consulting) and compared our compensation to those reported by the following company groupings:


	•	San Francisco Bay Area companies — 444 companies reported

	•	Semiconductor companies — 136 companies reported

	•	Companies with $49.9 to $100.0 million in revenues — 127 companies reported

Based on the market data obtained, in 2002 we developed market competitive salary ranges for all positions, including the executives. Since that time, these ranges were updated annually based on the market median movement of salary structures as reported by the Radford survey.

Elements of Executive Compensation and Decisions Made in 2006

Base Salary Adjustments

Executive salaries are established upon hire based on a number of factors including the individuals’ current pay levels, relevant experience, expected contribution, and the competitive marketplace as referenced under the Sources of Competitive Data. We target our executive salaries to a range based on market median to the 75^th percentile, but exceptions are sometimes made based on our needs to attract certain executives with special skills and qualifications.

Base salaries are reviewed annually and adjustments are made to recognize and reward individual contributions and performance, and recognize the impact of the position within our organizational structure as well as to reflect competitive market forces necessary to retain our executive talent. Any base salary adjustment is considered in connection with our profitability and what it can afford.

As a result of Sipex’s performance in 2006, our named executives did not receive salary increases. The Compensation Committee believes their current base salaries are appropriately set according to our philosophy and in line with our financial results for the year. Thus far, no changes to the executive salaries have been made in 2007.

Cash Incentives and Total Cash Compensation

Cash incentives are designed to motivate our executives to meet our quarterly and annual financial and operating goals and to reward the achievement of these goals. Consistent with our pay for performance culture, annual bonus payouts are not guaranteed, and are based on Sipex’s performance and the achievements of our executives. The actual bonus payment awards for the named executives are determined by the Compensation Committee and approved by the board of directors. Ultimately, our overall profitability dictates whether bonuses are paid, and to what extent, regardless of whether specific objectives have been achieved.

However, in 2005, the CEO recommended and the Compensation Committee approved that a 2^nd Half 2005 Executive Bonus Program be established. Under this plan, no profitability component was established in order to allow Sipex to provide a reward to our executives in recognition of their efforts in restructuring and turning around our company. The objectives, and related weightings, established for the second half of 2005 were:


	•	Revenue improvement each quarter (10%)

	•	Spending — less than $19 million (10%)

	•	Fab transition deliverables (20%)

	•	Complete financial restatement (20%)

	•	Secure cash alternative (15%)


	•	New company strategy documented and established (5%)

	•	Inventory reduction per the Annual Plan (5%)

	•	Introduction of new products per the Annual Plan (5%)

	•	Quality metrics per the Annual Plan (5%)

	•	Information technology deliverables per the Annual Plan (5%)

Each executive received a target bonus opportunity as defined by a percentage of their base salaries. These targets were based on the market data obtained from the Radford survey.

It was determined by the CEO and recommended to, and approved by the board of directors, that executives had achieved 65% of their objectives at the end of fiscal 2005, which resulted in bonus payouts for all named executives of 65% of their target bonus amounts.

The following table outlines the 2005 target bonus levels, target bonus amounts and the actual payments received. Mr. Schmitt’s target opportunity was voluntary reduced due to higher than forecasted losses during that period.


	Target Bonus as %		Target Bonus Amount
Executive	of Salary		($)	Amount Paid Out ($)

Schmitt		50%	$200,000 (voluntarily reduced to $100,000)	$	65,000
Wallin		40%	$80,000	$	52,000
Lam		40%	$58,000	$	37,700
Cleveland		40%	$80,000	$	52,000
Hawron		40%	$90,000	$	58,500

These bonus payments were made in January 2006 and are reported in the Summary Compensation Table.

A new bonus plan, the Key Employee Incentive Plan (“KEIP”), was designed in 2006 to closely link actual rewards to achievement of key financial and operating goals. However, this plan has not been finalized and approved by the Compensation Committee. It has been designed to payout only when we achieves profitability and then to the extent that the specific, quantifiable objectives are achieved. Because we did not expect to achieve profitability in 2006, the plan was not finalized or approved by the Compensation Committee. It is our intent to gain approval for finalize this plan as we approaches profitability.

Equity Grants

Stock options, serving as our long-term incentive pay element, are granted to align interests of our executives and stockholders and provide a reward for increases in share value. By issuing stock options, the executives only receive value if our stock price rises above that of the options’ strike price which is set at the fair market value as of the closing price of the shares on the date of grant. We have not utilized discounted options where the strike price is below that of the share price on the date of grant, as this approach of providing a built-in-value at grant would be counter to our pay-for-performance culture.

Consistent with our philosophy of paying for performance, no executive is entitled to an automatic annual equity grant. Recommendations regarding the number of stock options to be granted take into account each executive’s contribution to Sipex’s performance, their ability to influence future performance, relative role of the position within our organizations structure, their current equity holdings and the extent to which prior grants are vested, current in-the-money gains, competitive market practices, financial impact on our profitability and dilution of our stockholders.

Generally, our stock option awards to all employees, including our named executive officers, are scheduled to vest in equal amounts over four years; 25% is vested on the first year’s anniversary date of the grant then 1/48^th of the award vests monthly thereafter in each case subject to continued service through the applicable service date.

Options awarded expire ten years from the date of the grant. Pursuant to Sipex’s stock option plan agreements, in the event of a change in control, and if the existing options are not assumed by the acquiring company, then participants become fully vested in all option awards that will be exercisable for fifteen days from receiving a notice of this event.

We do not have a set annual policy related to the timing and size of employee stock options grants. In December of 2006, all named executives with the exception of Mr. Schmitt and Mr. Hawron received options to purchase additional shares. Mr. Wallin, Mr. Lam, Mr. Schaeffer, Mr. Cleveland and Mr. Camarda received options to purchase 25,000 shares and Mr. Chalmers and Mr. Hudon received the options to purchase 12,500 shares. These grants were recommended by the CEO based on several factors including the total pool of shares approved for equity grants by the Compensation Committee and board of directors, the level of the executive as it related to other levels in the organization and the executives’ current stock option holdings. These grants were reflective of our emphasis on equity compensation and the desire to provide the executive team with an incentive to continue their efforts in restructuring Sipex and improving its performance. The absence of adjustments to cash compensation in 2006 was also considered.

In addition, Mr. Wallin, our CFO, received an additional grant in January 2006 of 62,500 stock options. The board of directors, upon the recommendation of the CEO granted 62,500 stock options to Mr. Wallin to bring Mr. Wallin’s equity level position in line with the other new senior executive officers of Sipex.

We do not have equity ownership requirements for our executives nor for our outside directors.

Executive Benefits and Perquisites

With the exception of one housing allowance arrangement (paid to Mr. Hawron whose employment terminated in January 2007) to assist in his commuting expenses between the U.S. and Canada, our executive officers do not receive any other benefits or perquisites beyond those broadly offered to other employees. No additional benefits, perquisites or supplemental payments were made in 2006 nor are anticipated in 2007.

Our employees receive medical, dental, vision, life and disability insurance benefits, eligibility to participate in a flexible spending account and to receive company’s contributions under 401(k) Tax Deferred Saving Plan and an Employee Stock Purchase Plan.

Employment Agreements and Post Employment Termination Benefits

Consistent with practices typical for our industry, and to mitigate some of the risk associated with joining a company in the historically volatile semiconductor industry, Sipex provides employment agreements to certain key officers that contain post-employment termination benefits, including termination benefits connected with change in control events. All agreements provide for “at will” employment and describe the role, base salary, annual bonus opportunity and initial equity grants made to each executive. They also include Sipex’s standard Confidential Information and Invention Assignment Agreement which protects Sipex’s proprietary property and knowledge. Additionally, the definition of a change in control is an event that changes 60% or more of the voting power of shares, changes composition of the board of directors by a more than half over a two year period or the sale or disposition of most of Sipex’s assets.

Individual provisions for the named executives vary based on arms-length, individually negotiated terms stated in their offer letter agreements and are summarized below:

Mr. Schmitt, June 7, 2005 — Provides that Mr. Schmitt will serve as chief executive officer and a member of the board of directors. His initial base salary was set at $400,000 with a target annual bonus opportunity of $400,000.

The agreement also provides for salary continuation for 12 months in the event of involuntary termination without cause prior to a change in control or more than 12 months after a change in control. In addition, had the involuntary termination without cause occurred within the first year of the agreement, 25% of the shares subject to outstanding stock option awards would have vested and became exercisable for 12 months following the termination.

If involuntary termination without cause had occurred within 12 months following a change in control, severance payments provide for salary continuation for 12 months and full acceleration of all unvested stock option awards that will be exercisable for 12 months following the termination.

The agreement also states that all options will become unexercisable in the event of termination for cause, which is defined as failure to perform duties, acts of dishonesty or fraud, conviction of a crime, violation of state or federal laws, breach of obligations or confidentiality or termination of the business.

Mr. Wallin, April 5, 2004 — Provides that Mr. Wallin receive an initial base salary of $200,000. In the event of involuntary termination without cause, severance arrangements provide for salary continuation for 6 months.

In the event a termination for good reason occurs in connection with a change in control, Mr. Wallin severance arrangements provide for salary continuation for 6 months and full acceleration of all unvested stock option awards that will be exercisable for 12 months.

Had the involuntary termination for good reason or without cause occurred within the first two years of the agreement, in addition to the salary continuation for 6 months, 50% of the shares subject to outstanding stock option awards would have become exercisable.

“Good Reason” is defined in Mr. Wallin’s agreement as one of the following:


	•	material change in the executive’s position at Sipex

	•	material reduction to the executive’s base salary or benefits and perquisites

	•	required relocation by more than 50 miles from Sipex’s headquarters

Mr. Lam, August 24, 2005 — Provides that Mr. Lam receive an initial base salary of $287,000 and the opportunity to participate in the annual bonus plan once we returned to profitability.

In the event of involuntary termination without cause prior to a change in control or more than 12 months after a change in control, it provides for severance benefits of salary continuation for 12 months. In addition, had the termination occurred within the first year of the agreement, 25% of the shares subject to outstanding stock option awards would have become exercisable.

In the event of involuntary termination without cause within 12 months following change in control, it provides for severance benefits of salary continuation for 12 months and acceleration of 50% of unvested stock option awards that will be exercisable for 12 months.

Mr. Cleveland, August 13, 2004 — Provides for an initial base salary of $200,000 annually and a maximum payout under the bonus plan of 50% of base salary.

At December 31, 2006, other than those offered to a broad employee population, there were no severance benefits that would have been available to Mr. Cleveland.

Mr. Hawron did not have termination provisions in his offer letter. His employment terminated on January 19, 2007. He did not receive severance payments; however, the vesting of his stock options was fully accelerated.

While not explicitly stated in the executives’ offer letter agreements, it is implied by our past practices that in addition to the provisions described above, these executives are entitled to receive COBRA continuation for the period of time during which the salary continuation occurs.

We have implemented these programs in order to ensure we are able to continue to attract and retain top talent as well as ensure that during the uncertainty associated with involuntary termination not for cause or a Change in Control of Sipex, the executives remain focused on their responsibilities and ensure a maximum return for the stockholders.

Our equity plan incorporates provisions for change of control as well as voluntary and involuntary termination associated with death, disability or misconduct. These provisions apply to all participants. Our executives are entitled to only those additional benefits not available to other plan participants as described in their employment agreements. The provisions were developed to be competitive with high technology industry practices. Full definitions regarding the specific provisions and triggering events are outlined in our equity plans.

Tables depicting the post termination compensation arrangements for our named executive officers are included in the Executive Compensation section below.


	Accounting and Tax Considerations

In designing our compensation programs, Sipex takes into consideration the accounting and tax effect that each element will or may have on Sipex and the named executives. We aims to keep the expense related to our compensation programs as a whole within our affordability levels. We recognize a charge to earnings for accounting purposes when stock options are granted. We also considered the fact that our 401(k) Plan provides tax-advantaged retirement planning vehicles for our executives.

We do not provide our named executives with a gross-up or other reimbursement for tax amounts the executive might pay pursuant to Section 280G of the Internal Revenue Code. Section 280G and related Internal Revenue Code sections provide that executive officers, directors who hold significant stockholder interests and certain other service providers could be subject to significant additional taxes if they receive payments or benefits in connection with a change in control that exceeds certain limits, and that we could lose a deduction on the amounts subject to the additional tax.

In addition, under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), Sipex cannot deduct, for federal income tax purposes, compensation in excess of $1,000,000 paid to certain executive officers. This deduction limitation does not apply, however, to compensation that constitutes “qualified performance-based compensation” within the meaning of Section 162(m) of the Code. We have considered the limitations on deductions imposed by Section 162(m) of the Code, and it is our intention that, for so long as it is consistent with its overall compensation objective, substantially all executive compensation is designed to be “qualified performance-based compensation” and therefore tax deductible under Section 162(m). All of our executive compensation expenses were deductible in 2006.

Compensation Committee Report

The Compensation Committee has reviewed the Compensation Discussion and Analysis and discussed its analysis with management. Based on its review and discussions with management, the Compensation Committee recommended to our board of directors that the Compensation Discussion and Analysis be included in Sipex’s 2007 Annual Report on Form 10-K, as amended and the proxy statement for Sipex’s 2007 annual meeting of stockholders. This report is approved by the following independent directors, who comprise the committee:

Mr. Brian Hilton (Chairman)

Mr. Tom Redfern

Executive Compensation

Summary Compensation Table

The following table sets forth information concerning the compensation of our chief executive officer, chief financial officer and three most highly paid executive officers who served in such capacities during the fiscal year ended December 30, 2006, our named executive officers:


												Change in
												Pension Value
												and Nonqualified
										Non-Equity		Deferred
							Stock	Option		Incentive Plan		Compensation		All Other
			Salary		Bonus²		Awards	Awards³		Compensation		Earnings⁴		Compensation⁵		Total
Name and Principle Position	Year		($)		($)		($)	($)		($)		($)		($)		($)

Ralph Schmitt		2006	$	400,000	$	65,000		$	275,280		—		—	$	—	$	740,280
President & CEO
Ray Wallin		2006	$	222,428	$	52,000		$	276,289		—		—	$	909	$	551,626
Chief Financial Officer
Ed Lam		2006	$	287,000	$	37,700		$	143,632		—		—	$	6,071	$	474,404
Sr. VP, Marketing & Business Development
Lee Cleveland		2006	$	229,327	$	52,000		$	376,244		—		—	$	2,466	$	660,038
Sr. VP, Engineering
Richard Hawron¹		2006	$	235,000	$	58,500		$	183,137		—		—	$	45,957	$	522,595
VP, World Wide Sales


1	Mr. Hawron’s employment with us terminated on January 19, 2007.

2	Represents the short-term incentive awards earned under The 2nd Half 2005 Bonus Program payout performance.

3	This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2006 fiscal year for the fair value options granted in 2006 as well as prior fiscal years, in accordance with SFAS 123R. Pursuant to the SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.

4	This column represents the sum of the change in pension value and non-qualified deferred compensation earnings in 2006 for each of the named executives. Nonqualified plans are not available to our executives.

5	See the All Other Compensation Table below for additional information. Primarily represents employer contributions to the 401(k) plan and a housing allowance for Mr. Hawron.

All Other Compensation Table

The following table describes each component of the All Other Compensation column in the Summary Compensation Table.


			Payments
			relating to
	Other		Employee
Name of Executive	Benefits¹		Savings Plan²		Total

Ray Wallin	$	—	$	909	$	909
Chief Financial Officer
Ed Lam	$	—	$	6,071	$	6,071
Sr. VP, Marketing & Business Development
Lee Cleveland	$	—	$	2,466	$	2,466
Sr. VP, Engineering
Richard Hawron	$	40,187	$	5,770	$	45,957
VP, World Wide Sales


1		This amount represents housing allowance provided to Mr. Hawron. No other supplemental executive perquisites are offered to our executives.

2		This column reports company matching contributions to the named executive’s 401(k) savings account of 1.5% of pay up to the limitations imposed under IRS rules.

Grants of Plan-Based Awards in 2006

The following table provides information about equity and non-equity awards granted to the named executives in 2006:


																All Other
														All Other		Option				Grant Date
														Stock		Awards:		Exercise		Fair
		Estimated Future Payouts						Estimated Future Payouts						Awards:		Number of		or Base		Value of
		Under Non-Equity						Under Equity						Number of		Securities		Price of		Stock
		Incentive Plan Awards						Incentive Plan Awards						Shares of		Underlying		Option		and Option
	Grant	Threshold		Target		Maximum		Threshold		Target		Maximum		Stock or		Options		Awards		Awards
Name	Date	($)		($)		($)		(#)		(#)		(#)		Units (#)		(#)		($/Sh)		($)¹

Ralph Schmitt	None		—		—		—		—		—		—		—		—		—		—
President & CEO
Ray Wallin	1/17/2006		—		—		—		—		—		—		—		62,500	$	4.15		201,450
Chief Financial Officer	12/4/2006		—		—		—		—		—		—		—		25,000	$	8.50		158,135
Ed Lam	12/4/2006		—		—		—		—		—		—		—		25,000	$	8.50		158,135
Sr. VP, Marketing & Business Development
Lee Cleveland	12/4/2006		—		—		—		—		—		—		—		25,000	$	8.50		158,135
Sr. VP, Engineering
Richard Hawron	N/A		—		—		—		—		—		—		—		—		—		—
VP, World Wide Sales


1		The value of a stock option award is based on the fair value as of the grant date of such award determined pursuant to FAS 123R. The exercise price for all options granted to the named executive officers is 100% of the fair market value of the shares on the grant date. Regardless of the value placed on a stock option on the grant date, the actual value of the option will depend on the market value of Sipex common stock at such date in the future when the option is exercised. The proceeds to be paid to the individual following this exercise do not include the option exercise price.

Outstanding Equity Awards at 2006 Fiscal Year-End

The following table provides information on the current holdings of stock option awards by the named executives. This table includes unexercised and unvested option awards. Each equity grant is shown separately for each named executive.

Option Awards

Equity Incentive

Plan Awards:

Number of

Securities

Underlying

Option

Unexercised

Exercise

Option

Grant

Options

Unearned Options

Price

Expiration

Name

Date

(#) Exercisable

(#) Unexercisable

(#)

($)

Date

Ralph Schmitt
President & CEO

6/27/2005

187,500

312,500

—

3.40

6/27/2015

Ray Wallin
Chief Financial Officer

12/20/2004

12,500

8.80

12/20/2014

9/6/2005

^2,3

35,000

50,000

3.80

4/5/2014

1/17/2006

—

62,500

—

4.15

1/17/2016

12/4/2006

—

25,000

8.50

12/4/2016

Total

47,500

150,000

Ed Lam
Sr. VP, Marketing & Business Development

9/19/2005

66,406

146,094

4.00

9/19/2015

12/4/2006

—

25,000

—

8.50

12/4/2016

Total

66,406

171,094

Lee Cleveland
Sr. VP, Engineering

9/6/2005

^2,3

75,000

25,000

3.80

9/2/2013

12/4/2006

—

25,000

—

8.50

12/4/2016

9/6/2005

^2,3

25,000

3.80

12/9/2014

Total

100,000

75,000

Richard Hawron¹VP, World Wide Sales

2/2/2004

25,000

17.22

2/2/2014

10/19/2005

35,673

14,327

—

3.50

10/19/2015

9/6/2005

12,500

3.80

12/17/2014

Total

73,173

51,827


1		Mr. Hawron’s employment with us terminated on January 19, 2007.

2		These grants were made as a part of the Option Reprice Program that took place in September of 2005.

3		Mr. Wallin’s award vests 25% one year from grant, then 1/48th per month. Grant is fully vested on April 5, 2008. Mr. Cleveland’s grant vests similarly and is fully vested respectively on September 2, 2007 and December 9, 2008.

Unless otherwise indicated, 25% of each award vests one year from the date of grant then 1/48^th of the award on a monthly basis for the remainder of a four year period. For grants made on September 6, 2005 (Mr. Cleveland and Mr. Wallin), 25% of the award vests one year after the original grant date then 1/48^th of the award on a monthly basis thereafter.

Option Exercises and Stock Vested in Fiscal 2006

The following table provides information, for the named executives, on stock option exercises during 2006, including the number of shares acquired upon exercise and the value realized and before payment of any applicable withholding tax and broker commissions. Only Mr. Wallin exercised any of his stock option holdings during 2006.


	Option Awards
	Number of Shares		Value Realized
	Acquired on Exercise		on Exercise¹
Name of Executive	(#)		($)

Ray Wallin Chief Financial Officer		15,000	$	75,000


1		The value realized equals the difference between the option exercise price and the fair market value of Sipex common stock on the date of exercise, multiplied by the number of shares for which the option was exercised.

Pension Benefits in Fiscal 2006

Our named executive officers received no benefits in fiscal 2006 from Sipex under any defined benefit pension plan or nonqualified, supplemental executive retirement program.

Nonqualified Deferred Compensation in Fiscal 2006

Sipex does not offer any nonqualified deferred compensation program to its executives or any employees of the company.

Other Potential Post-Employment Payments

As described in the CD&A, some of our named executives’ receive severance payments and benefits under certain termination events generally including involuntary termination and involuntary or termination without cause including in connection with a change in control event. The information below quantifies certain compensation that would become payable under existing plans and arrangements if the named executive’s employment had terminated on December 31, 2006, given the named executive’s compensation as of such date and, if applicable, based on Sipex’s closing stock price on that date. These benefits are in addition to benefits available generally to salaried employees, such as distributions under our 401(k) savings plan, disability benefits and accrued vacation pay.

Due to the number of factors that affect the nature and amount of any benefits provided upon the events discussed below, any actual amounts paid or distributed may be different. Factors that could affect these amounts include the timing during the year of any such event and Sipex’s stock price.

Termination Scenarios


*Ralph Schmitt*	*President & CEO*
	Change				Involuntary	Involuntary
	in Control¹	Voluntary	Death	Disability	With Cause	Without Cause	Retirement

Severance²	$400,000	—	—	—	—	$400,000	—
Intrinsic Value of Accelerated Equity³	$1,943,750	—	—	—	—	—	—
Intrinsic Value of Current Exercisable Equity⁴	$1,166,250	$1,166,250	$1,166,250	$1,166,250	—	$1,166,250	$1,166,250
Health Benefits⁵	$16,653	—	—	—	—	$16,653	—
*Total Benefit to Employee⁶*	*$3,526,653*	*$1,166,250*	*$1,166,250*	*$1,166,250*	—	*$1,582,903*	*$1,166,250*
Total Termination Benefits	$2,360,403	—	—	—	—	$416,653	—


1		Change in Control and all terminations are assumed to occur on 12/31/2006.

2		Represents 12 months of base salary.


3		Value of unvested options accelerated 100% upon involuntary termination within 12 months of CIC at 12/31/06 @ $9.62/share price. Options are exercisable for 12 months following termination.

4		Current value of shares owned as of 12/31/06 @ $9.62/share price (direct and indirect ownership).

5		Represents current monthly COBRA rates which are paid by the employer through the term of the severance award (12 months).

6		Total termination benefits are the total benefit to employees less the intrinsic value of current exercisable equity.


*Ray Wallin*	*Chief Financial Officer*
	Change				Involuntary	Involuntary
	in Control¹	Voluntary	Death	Disability	With Cause	Without Cause	Retirement

Severance²	$112,500	—	—	—	—	$112,500	—
Intrinsic Value of Accelerated Equity³	$671,125	—	—	—	—	—	—
Intrinsic Value of Current Exercisable Equity⁴	$213,950	$213,950	$213,950	$213,950	$213,950	$213,950	$213,950
Health Benefits⁵	$8,327	—	—	—	—	$8,327	—
*Total Benefit to Employee*	*$1,005,902*	*$213,950*	*$213,950*	*$213,950*	*$213,950*	*$334,777*	*$213,950*
Total Termination Benefits⁶	$791,952	—	—	—	—	$120,827	—


1		Change in Control and all terminations are assumed to occur on 12/31/2006.

2		Represents 6 months of base salary.

3		Value of unvested options accelerated 100% upon involuntary termination for Good Reason in connection with CIC at 12/31/06 @ $9.62/share price and are exercisable for the earlier of the term of the option or 12 months from the date of termination.

4		Current value of shares owned as of 12/31/06 @ $9.62/share price (direct and indirect ownership).

5		Represents current monthly COBRA rates which are paid by the employer through the term of the severance award (6 months).

6		Total termination benefits are the total benefit to employees less the intrinsic value of current exercisable equity.


*Ed Lam*	*Sr. VP, Marketing & Business Development*
	Change				Involuntary	Involuntary
	in Control¹	Voluntary	Death	Disability	With Cause	Without Cause	Retirement

Severance²	$287,000	—	—	—	—	$287,000	—
Intrinsic Value of Accelerated Equity³	$424,524	—	—	—	—	—	—
Intrinsic Value of Current Exercisable Equity⁴	$373,202	$373,202	$373,202	$373,202	—	$373,202	$373,202
Health Benefits⁵	$16,653	—	—	—	—	$16,653	—
*Total Benefit to Employee*	*$1,101,379*	*$373,202*	*$373,202*	*$373,202*	—	*$676,855*	*$373,202*
Total Termination Benefits⁶	$728,177	—	—	—	—	$303,653	—


1		Change in Control and all terminations are assumed to occur on 12/31/2006.

2		Represents 12 months of base salary.

3		Value of unvested options 50% of which are accelerated upon involuntary termination and CIC at 12/31/06 @ $9.62/share price. Options are exercisable for 12 months following the termination.

4		Current value of shares owned as of 12/31/06 @ $9.62/share price (direct and indirect ownership).

5		Represents current monthly COBRA rates which are paid by the employer through the term of the severance award (12 months).

6		Total termination benefits are the total benefit to employees less the intrinsic value of current exercisable equity.

Non-management Directors’ Compensation for Fiscal 2006

Our non-employee directors’ compensation program is designed in a way that helps us compensate our directors fairly, pay directors for work required for a company of Sipex’s size and scope, aligns directors’ interests with the long-term interests of shareowners with a structure that is simple, transparent and easy to understand.

The table below presents each element of our non-management directors’ compensation package:


Annual Cash Retainer		$28,000
Additional Audit Committee Chair Retainer		$10,000
Additional Audit Committee Retainer		$4,000
Additional Compensation Committee Chair Retainer		$2,000
New Director Stock Option Grant		22,500 stock options vesting one-fourth on each anniversary date of the grant
Annual Stock Option Grant		10,000 stock options vesting quarterly over 1 year

The following table shows compensation information for Sipex’s current and former non-employee directors for fiscal 2006:


									Change in
									Pension
									Value and
									Nonqualified
	Fees Earned						Non-Equity		Deferred
	or Paid		Stock		Option		Incentive Plan		Compensation		All Other
Name	in Cash¹ ($)		Awards² ($)		Awards³ ($)		Compensation² ($)		Earnings²		Compensation⁴ ($)		Total

Joe Consoli	$	35,500		—	$	42,961		—		—		—	$	78,461
Brian Hilton	$	32,500		—	$	27,888		—		—		—	$	60,388
John D. Arnold	$	35,000		—	$	41,738		—		—		—	$	76,738
Thomas Redfern	$	29,000		—	$	38,494		—		—		—	$	67,494
Lionel Olmer	$	29,500		—	$	56,863		—		—		—	$	86,363
Douglas McBurnie	$	28,000		—	$	108,565		—		—		—	$	136,565
Alan Krock	$	14,000		—	$	11,736		—		—		—	$	25,736
Pierre Guilbault	$	14,000		—	$	11,736		—		—		—	$	25,736
Dan Casey	$	14,000		—	$	11,736		—		—		—	$	25,736


1		This column reports the amount of cash compensation earned in 2006 for board and committee service.

2		No stock awards or Non-Equity Incentive Plan compensation were made in 2006. Sipex does not provide any retirement or other benefits/perquisites to its non-employee board members (other than direct business expense reimbursement).

3		This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2006 fiscal year for the fair value of stock options previously granted to the directors. The fair value was estimated using the Black-Scholes option-pricing model in accordance with SFAS 123R.

4		No other compensation was provided.

As of December 30, 2006, the outstanding stock option awards held by each director at December 30, 2006 were: Mr. Consoli, 36,250; Mr. Hilton; 28,750; Mr. Arnold, 32,500; Mr. Redfern, 25,000; Mr. Olmer, 55,989; Mr. McBurnie, 135,000; Mr. Krock, 16,250; Mr. Guilbault, 16,250 and Mr. Casey, 16,250.

In the fourth quarter of 2006, we also accelerated the vesting of 220,000 stock options for three former directors of our board upon their departures. As a result, we recorded additional $138,000 in stock-based compensation expense for the year ended December 30, 2006.

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 June 22, 2007.

SIPEX CORPORATION

By:

/s/ Ralph Schmitt

Ralph Schmitt

Chief Executive Officer and Director

EXHIBIT INDEX


Exhibit
Number			Description

	3	.1	Restated Certificate of Incorporation of Sipex Corporation dated March 20, 2007 (previously filed on March 30, 2007 as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 30, 2006, and incorporated herein by reference).
	3	.2	Bylaws (incorporated herein by reference from the Company’s Registration Statement on Form 8-A file with the Securities and Exchange Commission on October 28, 2003).
	3	.3	Certificate of Amendment of Bylaws of Sipex Corporation (previously filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on December 5, 2006 and incorporated herein by reference).
	4	.2	Form of Indemnification Agreement for directors and officers (previously filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-1, File No. 333-1328, and incorporated herein by reference).
	4	.4	Indenture dated May 16, 2006 (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on May 22, 2006, and incorporated herein by reference).
	10	.1**	1996 Incentive Stock Option Plan (previously 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	.2**	1996 Employee Stock Purchase Plan, as amended (previously filed as Appendix A to the Company’s Definitive Notice and Proxy Statement on April 29, 2004, and incorporated herein by reference).
	10	.3**	1997 Incentive Stock Option Plan (previously 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	.4**	Sipex Corporation 1999 Stock Plan (previously filed as Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A, No. 1000-27897, and incorporated herein by reference).
	10	.5**	2000 Non-Qualified Stock Option Plan (previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000, and incorporated herein by reference).
	10	.6**	2006 Equity Incentive Plan (previously filed as Appendix C to the Company’s Definitive Notice and Proxy Statement on October 24, 2006, and incorporated herein by reference).
	10	.7	Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Incorporated (previously 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	.8	Amendment dated October 1, 2002 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.1 to the Company’s Quarterly Report of Form 10-Q for the quarter ended July 1, 2006, and incorporated herein by reference).
	10	.9	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 (previously 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	.10*	Amendment dated August 26, 2003 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.2 to the Company’s Quarterly Report of Form 10-Q for the quarter ended July 1, 2006, and incorporated herein by reference).
	10	.11	Amendment dated September 15, 2003 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.3 to the Company’s Quarterly Report of Form 10-Q for the quarter ended July 1, 2006, and incorporated herein by reference).


Exhibit
Number			Description

	10	.12	Amendment dated April 25, 2006 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.4 to the Company’s Quarterly Report of Form 10-Q for the quarter ended July 1, 2006, and incorporated herein by reference).
	10	.13	Amendment dated September 27, 2006 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 3, 2006, and incorporated herein by reference).
	10	.14	Amendment dated November 1, 2006 to Worldwide Authorized Distributor Market Price Agreement dated July 22, 1993, by and between the Company and Future Electronics Inc. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 7, 2006, and incorporated herein by reference).
	10	.15**	Letter agreement as of 6/7/05 concerning the terms of the newly appointed Chief Executive Officer Ralph Schmitt (previously filed as Exhibit 99.2 to the Company’s Form 8-K filed on June 30, 2005, and incorporated herein by reference).
	10	.16	Loan and Security Agreement as of 7/21/05, with Silicon Valley Bank (previously filed as Exhibit 99.1 to the Company’s Form 8-K filed on 7/25/05, and incorporated herein by reference).
	10	.17**	Bonus plan as of August 29, 2005, for an executive bonus plan for the remainder of 2005 for certain of its officers (previously filed as Exhibit 99.1 to the Company’s Form 8-K filed on September 2, 2005, and incorporated herein by reference).
	10	.18**	Separation Agreement and General Release as of 9/2/05 with Joseph T. Rauschmayer, Senior Vice President of Operations (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on September 2, 2005, and incorporated herein by reference).
	10	.19**	Separation Agreement and General Release as of April 26, 2005 with Kevin Plouse (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on September 15, 2005, and incorporated herein by reference).
	10	.20**	Letter agreement as of September 12, 2005 with Mr. Edward Lam joining Sipex as the new Senior Vice President of Marketing and Business Development (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on September 23, 2005, and incorporated herein by reference).
	10	.21**	Letter agreement as of October 7, 2005 with Joel Camarda joining Sipex as Senior Vice President of Operations (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on October 12, 2005, and incorporated herein by reference).
	10	.22	Amendment No. 1 dated October 7, 2005, to the Loan and Security Agreement with Silicon Valley Bank, dated July 21, 2005 (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on October 12, 2005, and incorporated herein by reference).
	10	.23	Amendment No. 2 dated November 12, 2005 to the Loan and Security Agreement with Silicon Valley Bank, dated July 12, 2005 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on 11/16/05, and incorporated herein by reference).
	10	.24	Amendment No. 3 dated January 19, 2006 to the Loan and Security Agreement with Silicon Valley Bank, dated July 12, 2005 (previously filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on 1/25/06, and incorporated herein by reference).
	10	.25	Amendment No. 4 dated May 18, 2006 to the Loan and Security Agreement with Silicon Valley Bank, dated July 12, 2005, (previously filed as Exhibit 10.4 to Company’s Current Report on Form 8-K filed on 5/22/06, and incorporated herein by reference).
	10	.26	Amendment No. 5 dated August 1, 2006 to Loan and Security Agreement between Sipex Corporation and Silicon Valley Bank, dated July 12, 2005 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed 8/7/06, and incorporated herein by reference).
	10	.27	Amendment No. 6 dated September 28, 2006 to Loan and Security Agreement between Sipex Corporation and Silicon Valley Bank, dated July 12, 2005 (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed 10/4/06, and incorporated herein by reference).


Exhibit
Number			Description

	10	.28*	Master Agreement between Sipex, Hangzhou Silan Microelectronics Co. Ltd. and Hangzhou Silan Integrated Circuit Co., Ltd., dated as of February 27, 2006 (previously filed as Exhibit 10.1 to the Company Current Report on Form 8-K/A filed on July 26, 2006, and incorporated herein by reference).
	10	.29	Agreement for Purchase and Sale of Real Property dated March 9, 2006, by and between Sipex Corporation and Mission West Properties, L.P. (previously filed as Exhibit 10.1 to the Company Current Report on Form 8-K filed on March 13, 2006, and incorporated herein by reference).
	10	.30	Standard Form Lease for 233 Hillview dated March 9, 2006, by and between Sipex Corporation and Mission West Properties, L.P. (previously filed as Exhibit 10.2 to the Company Current Report on Form 8-K filed on March 13, 2006, and incorporated herein by reference).
	10	.31	Securities Purchase Agreement, dated as of May 16, 2006, by and among Sipex and the Buyers listed on the Schedule of Buyers (previously filed as Exhibit 10.1 to Company’s Current Report on Form 8-K filed on 5/22/06, and incorporated herein by reference).
	10	.32	Amendment No. 1 dated May 24, 2006 to Securities Purchase Agreement, dated as of May 16, 2006 by and among Sipex and the Buyers listed on the Schedule of Buyers (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 30, 2006, and incorporated herein by reference).
	10	.33	Registration Rights Agreement, dated as of May 16, 2006, by and among Sipex and the Buyers listed on the Schedule of Buyers (previously filed as Exhibit 10.2 to Company’s Current Report on Form 8-K filed on 5/22/06, and incorporated herein by reference).
	10	.34	Warrant Agent Agreement, dated as of May 16, 2006, between Sipex and Wells Fargo Bank, National Association, as Warrant Agent (which includes the Form of Warrant) (previously filed as Exhibit 10.1 to Company’s Current Report on Form 8-K filed on 5/22/06, and incorporated herein by reference).
	10	.35	Separation Agreement and General Release as of January 15, 2007 with Rick Hawron (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on January 19, 2007, and incorporated herein by reference).
	10	.36	Securities Purchase Agreement, dated as of March 29, 2007, by and between Sipex and Rodfre Holdings LLC (previously filed on March 30, 2007 as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 30, 2006, and incorporated herein by reference).
	12	.1	Computation of Ratio of Earnings to Fixed Cost Charges (previously filed on March 30, 2007 as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 30, 2006, and incorporated herein by reference).
	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 incorporate herein by reference.)
	23	.1	Consent of Independent Registered Public Accounting Firm.
	31	.1	Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 (previously filed on March 30, 2007 as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 30, 2006, and incorporated herein by reference).
	31	.2	Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 (previously filed on March 30, 2007 as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 30, 2006, and incorporated herein by reference).
	31	.3	Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 (previously filed on April 19, 2007 as an exhibit to the Amendment No. 1 of Company’s Annual Report on Form 10-K for the year ended December 30, 2006, and incorporated herein by reference).
	31	.4	Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 (previously filed on April 19, 2007 as an exhibit to the Amendment No. 1 of Company’s Annual Report on Form 10-K for the year ended December 30, 2006, and incorporated herein by reference).
	31	.5	Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
	31	.6	Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.


Exhibit
Number			Description

	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 (previously filed on March 30, 2007 as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 30, 2006, and incorporated herein by reference).
	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 (previously filed on March 30, 2007 as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 30, 2006, and incorporated herein by reference).
	32	.3	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 (previously filed on April 19, 2007 as an exhibit to the Amendment No. 1 of Company’s Annual Report on Form 10-K for the year ended December 30, 2006, and incorporated herein by reference).
	32	.4	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 (previously filed on April 19, 2007 as an exhibit to the Amendment No. 1 of Company’s Annual Report on Form 10-K for the year ended December 30, 2006, and incorporated herein by reference).
	32	.5	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	.6	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.


*		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 a double asterisk (**) are management contracts or compensatory plans or arrangements.

Future Electronics, Inc., a related party

Jetronic Technology