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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 0-27892

Registrant’s telephone number, including area code:

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

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

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

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

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

     The aggregate market value of common stock held by non-affiliates of the registrant as of June 28, 2003 was approximately $65,900,000 based upon $4.72 per share, the last reported sale price of the common stock on The Nasdaq National Market on that date.

     The number of shares of the registrant’s common stock outstanding on March 8, 2004 was approximately 33,068,000.

DOCUMENTS INCORPORATED BY REFERENCE

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

INDEX

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PART I

      This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future including statements regarding our belief that recent initiatives will result in a return to positive cash flow from operations. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot offer any assurance of future results, levels of activity, performance or achievements. Moreover, neither any other person nor we assume responsibility for the accuracy and completeness of such statements. Important factors that may cause actual results to differ from expectations include those discussed in “Factors Affecting Future Results” beginning on Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations in this document. The terms “Sipex,” “the Company,” “we,” “us,” “its” and “our” as used in this Annual Report on Form 10-K refer to Sipex Corporation and its subsidiaries and its predecessors as a combined entity, except where the context requires otherwise.

Availability of Reports and Other Information

      Our Internet website is www.sipex.com. On this web site, the public can access our annual, quarterly and current reports free of charge through a hyperlink to the Securities and Exchange Commission website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. Sipex intends to satisfy the disclosure requirements under Item 10 of Form 10-K regarding amendment to, or waiver from, our code of ethics by posting such information on our website at www.sipex.com, provided such method of disclosure is then in compliance with the rules of the NASDAQ National Market and the rules of the Securities and Exchange Commission.

Company Overview

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

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

Semiconductor Industry Background

      Integrated circuits, the essential building blocks of today’s electronic products, are classified as either digital or analog ICs. Digital ICs (e.g. memory products, microprocessors and digital signal processors, or

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

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

Sipex’s Business Strategy

      We supply our customers in target markets with an array of standard product choices as well as custom products, which compete on the basis of features, performance and competitive pricing. Sipex maintains close working relationships with strategic customers. We believe that our relationships enable us to create and follow future directed product and technology roadmaps, and shorten our customers’ product development cycles. In addition, we have restructured our operations during 2002 and 2003 to reduce costs and improve quality.

Sipex Markets, Applications and Products

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

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

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

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      The power management product portfolio continued to expand in 2003 with proprietary ICs including white LED drivers, DC/DC regulators and controllers. These new products deliver improved power efficiency, increased miniaturization and more power at lower voltage levels to portable power and distributed power applications.

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

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

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

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

      Sipex has developed a family of laser diode drivers that control the laser diode in the pick-up head. Our devices are designed to drive two lasers at high speed. This will allow the customer to build a 780nm and 650nm system on one pick-up head for combo CD/ DVD devices. We introduced our first product in this product family during 2003.

Sales, Distribution and Marketing

      Sipex sells its products to OEM customers primarily through our distributor network, as well as through a direct sales force and a network of independent sales representatives. The direct sales force consists of regional sales managers and field applications engineers who support our sales representatives, distributors and customers with technical support services. Our sales staff and field application engineers also manage, train and support our network of distributors and representatives. The sales and field applications staff are located in our Billerica, Massachusetts and Milpitas, California facilities and in field offices in China, France, Germany, Japan, Korea, Taiwan and the United Kingdom (See Note 13 for Segment/Export Sales and Major Customers).

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

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

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

      We are subject to normal semiconductor market seasonality and are subject to the normal risks of conducting business internationally, including exchange rate fluctuations. To date, we have not hedged the risks associated with fluctuations in exchange rates but may undertake such transactions in the future.

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

Customers

      Our customer base is comprised of industrial distributors, original equipment manufacturers (OEMs), original design manufacturers (ODMs), and electronic manufacturing services companies (EMS). Industrial distributors provide logistical and supply chain services to their customers. The OEMs and ODMs use our products as components in their equipment and systems. In certain cases, we sell our products to EMS companies who buy our products and use them in the systems and subsystems they manufacture for OEMs and ODMs.

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

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

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Backlog

      Our product backlog was approximately $9.1 million at December 31, 2003 compared to $12.8 million at December 31, 2002. The decrease in Sipex’s backlog as of December 31, 2003 was primarily due to the phase out of legacy products, such as hybrid and electroluminescent display driver (EL). We generally include in backlog all orders scheduled for delivery within one year. However, our business, and to a large extent the entire semiconductor industry, is characterized by short-term orders and shipment schedules. Sipex generally permits orders to be canceled or rescheduled without significant penalty to customers. As a result, the quantities of our products to be delivered and their delivery schedules may be revised by customers to reflect changes in their needs. Since backlog can be canceled or rescheduled, our backlog at any time is not necessarily indicative of future revenues. In addition, due to the high percentage of our sales going through the distributors’ channel, our backlog may be affected by inventory levels at our distributors.

Manufacturing

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

      Our manufacturing capabilities are broadened by using third-party foundries to produce complementary metal-oxide semiconductor (CMOS) processed wafers and BiCMOS processed wafers. The use of third-party foundries enables us to minimize fixed costs and capital expenditures while providing access to diverse manufacturing technologies without bearing the full risk of obsolescence. All of these foundries have been certified as ISO-9001 compliant. Production by third party foundries represented approximately 25.5%, 29.6%, and 26.4% of Sipex shipments in 2003, 2002 and 2001, respectively. In 2003, we entered into an exclusive sourcing arrangement with PolarFab on certain products in return for favorable pricing, delivery and engineering support. We did not experience parts shortage conditions in 2003.

      Sipex tests integrated circuits or “die” on the wafers produced internally and by its foundries for compliance with performance specifications before assembly. Our commercial products are assembled and tested by a variety of subcontractors in Asia which have been certified as ISO-9002, TL16949 compliant. Following testing, the packaged units are shipped directly from our subcontractors to our customers worldwide.

Product Quality Assurance and Reliability

      Sipex is committed to customer satisfaction and continuous improvement in all aspects of its business. This is accomplished through a comprehensive quality and reliability system founded on documented procedures. Quality tools such as statistical process control, cross-functional teaming and advanced statistical analysis are used in qualification, production processes and quality improvement activities. We maintain close relationships with our subcontractors and routinely qualify suppliers to established standards. Sipex is ISO-9001-2000 certified and has continuously maintained its ISO certification since 1996.

Patents, Licenses and Trademarks

      We seek to protect our proprietary technology through patents and trade secret protection. Currently, we hold a number of patents expiring between now and 2021 and have additional United States patent applications pending, although there can be no assurance that any patents will result from these applications. While we intend to continue to seek patent coverage for our products and manufacturing technology where appropriate, we believe that our success depends more heavily on the technical expertise and innovative abilities of our personnel than on our patent position. Accordingly, we also rely on trade secrets and confidential technological know-how in the conduct of our business. There can be no assurance that our

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      Pursuant to license agreements, Sipex pays a royalty to Maxim Integrated Products and Analog Devices for certain interface product sales. We also paid a royalty to Timex Corporation for certain electroluminescent product sales through September 2003 when the contract ended. In addition, during 2002 we paid Lemelson Medical, Education and Research Foundation and Syndia Corporation for certain CMOS and BiCMOS processes.

Research and Development

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

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

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

Competition

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

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

Employees

      At December 31, 2003, we had 314 full-time employees, as compared with 334 employees in the prior year. During the fourth quarter of 2002 and the first quarter of 2003, as part of our restructuring initiative, we

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      During the later part of 2002, we implemented a restructuring program that included discontinuing the Billerica, Massachusetts manufacturing activities, discontinuing the four-inch wafer fabrication in San Jose, California, the reorganization of the Company into functional groups and the full conversion to six-inch wafer fabrication facility in Milpitas, California. These actions in 2002 resulted in a significant reduction of the Company’s headcount compared to our headcount at the end of 2001 which was 442 employees.

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

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

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

      As of March 8, 2004, there were no material pending legal proceedings to which we or our subsidiaries are a party. Sipex may become involved in various legal actions arising in the ordinary course of business, including securities class actions and other actions.

      In February 1999, Sipex filed a lawsuit against Maxim Integrated Products, Inc. (“Maxim”) with the U.S. District Court for the District of Massachusetts seeking a declaratory judgment that three of Sipex’s products did not infringe Maxim patents. Maxim filed counterclaims alleging certain products sold by Sipex infringe a Maxim patent. The counterclaims sought injunctive relief and unspecified damages. During the second quarter of 2003, a settlement was reached whereby Maxim granted Sipex a license covering “auto online” functionality used in some serial interface products. In addition, both companies dismissed all pending legal claims in all jurisdictions.

      No matters were submitted to a vote of Sipex’s security holders during the fourth quarter ended December 31, 2003.

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Executive Officers of Sipex

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

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PART II

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

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

Quarterly Stock Market Data

      On December 31, 2003, there were 68 shareholders of record. We believe that the number of beneficial holders of common stock exceeds 3,000. The last reported sale price of the common stock on March 8, 2004 was $7.48 per share. We have never declared or paid a cash dividend on our capital stock. We currently intend to retain all of our earnings to finance future growth and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future.

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

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

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

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

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

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

      The following discussion should be read together with our financial statements and the related notes contained elsewhere in this Annual Report on Form 10-K. To supplement our consolidated financial statements presented in accordance with GAAP, we are presenting non-GAAP measures of net sales, which are adjusted from results based on GAAP, to present net sales before considering the impact of the $14.1 million non-cash charge related to the fair value of debt conversion rights to a related party, which is described below. This non-GAAP adjustment is provided to enhance the overall understanding of our net sales compared to the GAAP results of the prior year periods. Specifically, we believe that the non-GAAP results provide useful information to both management and investors by excluding this non-cash charge that we believe is not indicative of our core operating performance. When such comparisons are made below, the inclusion or exclusion of the charge is clearly disclosed. The presentation of this additional information is not intended to be considered in isolation or as a substitute for results prepared in accordance with accounting principles generally accepted in the United States, and is not necessarily comparable to non-GAAP results published by other companies.

Overview

      We design, manufacture and market, high performance, analog integrated circuits, or ICs, that are used primarily by original equipment manufacturers, or OEMs, operating in the computing, consumer, communications and networking infrastructure markets. Some of the end product applications that contain our ICs are cellular phones, base stations, computers, DVD players, and digital cameras. Our products fall into three major product families: power management; interface; and optical storage.

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

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

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

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

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

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

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

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

Relationship with Future

      Future Electronics Inc. (“Future”), is our exclusive distributor