Filing Compare · SIPEX CORP

basisTable to return for credit up to 10% of its total purchases during the most recent three-month period. As the price of products sold to Future is not fixed or determinable until resold by Future to the end customer, we recognize revenue on sales to Future when Future sells the products through to the end customer. Accounts receivable are recognized and inventory is released upon shipment as title to inventories generally transfers upon shipment at which point the Company has a legally enforceable right to collection under normal terms. Contents

TheTable table below presents the statements of operations for the three months and six months ended July 3, 2004 and June 28, 2003, as a percentage of net sales: Contents

GrossTable Profit of Contents

GeneralTable and administrative expenses were $1.7 million and $2.1 million for the second quarter of 2004 and 2003, respectively. The decrease of $0.4 million was primarily due to higher salaries and benefit expenses in the second quarter of 2003 due to severance expenses and relocation of the finance function from Billerica, Massachusetts to Milpitas, California. As a percentage of sales, general and administrative expense decreased from 14.4% in the second quarter of 2003 to 10.9% in the second quarter of 2004, due primarily to the changes in expenses described above. For the six months ended July 3, 2004, general and administration expenses were 13.1% of net sales, or $4.4 million, compared to 13.6% of net sales, or $4.1 million, for the six months ended June 28, 2003. The change as a percentage of sales were due to net sales have increased at a faster rate than the general and administrative expenses. The increase in absolute dollars in 2004 was primarily driven by additional financial and consulting resources engaged to prepare for compliance with the attestation of the effectiveness of our internal controls as mandated by Section 404 of the Sarbanes-Oxley Act of 2002. Contents

19 Table of Contents

20 Table of Contents

21 Table of Contents

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

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

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

WeTable haveof recently experienced significant changes in senior management and our corporate organization. Contents

•Table cause delays in product introductions and shipments; • result in increased costs and diversion of development resources; • result in increased product returns and cause us to incur costs due to unusable inventory or replacement of defective or incompatible products; or • require design modifications.Contents

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

WeTable could become involved in litigation or have claims made against us which could result in substantial costs, potential damages, and the diversion of management’s attention and resources, all of which could have a negative impact on our business and our financial results. Contents

MarketTable Risk of Contents

WeTable carried out an evaluation under the supervision and with the participation of our senior management, including Walid Maghribi, our Chief Executive Officer, and Clyde R. Wallin, our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of July 3, 2004. Contents

WeTable continue to evaluate further improvements, including formalizing our processes, procedures and policies, to our internal controls and disclosure controls and procedures. In this regard, we are expanding the finance staff resources to focus on account reconciliations and process improvements. We are also replacing our existing management information system, of which we expect to implement in 2005. Contents

None. Table of Contents

ItemTable 5.of Other InformationContents

SIGNATURES Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~FORM~~ Form 10-Q

(Mark One)

xþ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~July~~June 330, ~~2004~~2007 or

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


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

For the transition period from to

Commission file number: 01-~~27892~~ 33403

~~SIPEX~~Sipex Corporation

(Exact ~~Name~~name of ~~Registrant~~registrant as ~~Specified~~specified in its ~~Charter~~charter)

Delaware		04-6135748
(State or Other Jurisdiction of		(I.R.S. Employer
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
Incorporation or Organization)		Identification No.)
233 South Hillview Drive, Milpitas, California		95035
(Address of principal executive offices)		(Zip Code)

~~(408) 934-7500~~233 South Hillview Drive, ~~Registrant’s~~Milpitas, ~~telephone~~California ~~number~~95035 (Address of principal executive offices, including ~~area~~zip code )

~~Former~~(408) 934-7500 (Registrant’s ~~name~~telephone number, ~~former~~including ~~address~~area ~~and former fiscal year if changed since last report.~~code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. ~~(as~~See definition of “accelerated filer and large ~~defined~~accelerated filer” in Rule 12b-2 of the Exchange Act). ~~Yes x No o~~

~~There were~~Large ~~34,030,458 shares~~accelerated offiler ~~the~~o Accelerated ~~Registrant’s~~filer ~~Common~~o Non-accelerated ~~Stock~~filer ~~issued and outstanding as of August 6, 2004.~~ þ

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

~~SIPEX~~ Number ~~CORPORATION FORM~~of ~~10-Q SIX~~shares ~~MONTHS~~outstanding ~~ENDED~~of ~~JULY~~the 3registrant’s common stock, ~~2004~~$0.01 par value, as of August 9, 2007 was approximately 19,043,000.

SIPEX CORPORATION
FORM 10-Q
THREE MONTHS ENDED JUNE 30, 2007

INDEX

Item
Number	Page		~~Page~~
PART I:	FINANCIAL INFORMATION
PART I: FINANCIAL INFORMATION
Item 1.	Financial Statements
Item 1. Unaudited Financial Statements		3
	Condensed Consolidated Balance Sheets at July 3, 2004 and December 31, 2003			3
Condensed Consolidated Balance Sheets at June 30, 2007 and December 30, 2006		3
	Condensed Consolidated Statements of Operations for the three and six months ended July 3, 2004 and June 28, 2003 (as restated)			4
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and July 1, 2006		4
	Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 2004 and June 28, 2003 (as restated)			5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and July 1, 2006		5
Notes to Condensed Consolidated Financial Statements	~~Notes to Condensed Consolidated Financial Statements~~	6		6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3.	Quantitative and Qualitative Disclosure about Market Risk			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk		34
Item 4.	Controls and Procedures			30
Item 4. Controls and Procedures		35
PART II:	OTHER INFORMATION
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings			32
Item 1. Legal Proceedings		36
Item 2.	Change in Securities and Use of Proceeds			32
Item 1A. Risk Factors		37
Item 3.	Defaults Upon Senior Securities			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 4.	Submission of Matters to a Vote of Security Holders			32
Item 3. Defaults Upon Senior Securities		37
Item 5.	Other Information			32
Item 4. Submission of Matters to a Vote of Security Holders		37
Item 6.	Exhibits and Reports on Form 8-K			33
Item 5. Other Information		37
	SIGNATURES			34
Item 6. Exhibits		37
SIGNATURE		38
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

~~Part~~PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

SIPEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value) (Unaudited)

(In thousands, except per share data) (Unaudited)


	June 30, 2007			December 30, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	2,845		$	13,041
Restricted cash		—			350
Short-term investment securities		597			2,388
Accounts receivable, less allowances of $685 and $551, respectively		5,427			6,222
Accounts receivable, related party, less allowances of $406 and $306, respectively		2,069			949
Inventories, net		11,356			15,586
Prepaid expenses and other current assets		1,914			1,641

Total current assets		24,208			40,177
Property, plant, and equipment, net		19,301			19,113
Restricted cash — noncurrent		58			57
Other assets		204			202

Total assets	$	43,771		$	59,549


LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current portion of long-term bank borrowing	$	667		$	667
Current portion of lease financing obligation		220			191
Accounts payable		8,360			10,331
Accrued expenses		5,582			7,185
Accrued restructuring costs		524			1,728
Deferred income, related party		5,248			5,543
Deferred income, other		2,014			2,555

Total current liabilities		22,615			28,200
Long-term bank borrowing		1,000			1,333
Long-term lease financing obligation		12,033			12,152
Long-term accrued restructuring costs		—			139
Convertible senior notes		26,224			25,826
Other long-term liabilities		22			24

Total liabilities		61,894			67,674


Commitment and contingencies (Note 15)

Stockholders’ deficit:
Preferred stock, $0.01 par value, 1,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.01 par value, 60,000 shares authorized; 18,986 and 18,390 shares issued and outstanding at June 30, 2007 and December 30, 2006, respectively		190			184
Additional paid-in capital		239,063			234,785
Accumulated deficit		(257,357	)		(243,075	)
Accumulated other comprehensive loss		(19	)		(19	)

Total stockholders’ deficit		(18,123	)		(8,125	)

Total liabilities and stockholders’ deficit	$	43,771		$	59,549

	July 3, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	12,056		$	18,185
Restricted cash		525			—
Short-term investment securities		2,993			2,994
Accounts receivable less allowances of $444 and $353 at July 3, 2004 and December 31, 2003, respectively		6,783			8,793
Accounts receivable, net, related party (Note 4)		1,469			2,054
Inventories		18,712			15,956
Prepaid expenses and other current assets		1,393			1,434
Total current assets		43,931			49,416
Property, plant, and equipment, net		49,132			51,778
Restricted cash		1,312			—
Other assets		244			410
Total assets	$	94,619		$	101,604
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,175		$	11,340
Accrued expenses		4,044			4,087
Current portion of restructuring costs		409			422
Deferred income, related party (Note 4)		5,260			4,636
Total current liabilities		20,888			20,485
Restructuring costs		384			535
Long-term debt, related party (Note 4)		—			21,323
Total liabilities		21,272			42,343
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value, 1,000 shares authorized and no shares issued or outstanding		—			—
Common stock, $0.01 par value, 60,000 shares authorized; 33,113 shares issued and outstanding at July 3, 2004 and 28,426 shares issued and outstanding at December 31, 2003		331			284
Additional paid-in capital		216,264			194,786
Accumulated deficit		(143,228	)		(135,802	)
Accumulated other comprehensive loss		(20	)		(7	)
Total stockholders’ equity		73,347			59,261
Total liabilities and stockholders’ equity	$	94,619		$	101,604

See accompanying notes to condensed consolidated financial statements

SIPEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)

(In thousands, except per share data) (Unaudited)


	For the Three Months Ended						For the Six Months Ended
	June 30, 2007			July 1, 2006			June 30, 2007			July 1, 2006
Net sales	$	9,857		$	11,558		$	18,615		$	20,861
Net sales, related party		8,562			9,455			16,663			18,006

Total net sales		18,419			21,013			35,278			38,867

Cost of sales		8,177			9,781			15,250			19,959
Cost of sales, related party		6,241			7,366			11,588			15,237

Total cost of sales		14,418			17,147			26,838			35,196

Gross profit		4,001			3,866			8,440			3,671

Operating expenses:
Research and development		3,431			3,883			7,117			9,379
Marketing and selling		3,115			3,765			6,408			7,421
General and administrative		4,650			2,743			7,617			6,764
Restructuring and other		(103	)		(22	)		(40	)		285

Total operating expenses		11,093			10,369			21,102			23,849

Loss from operations		(7,092	)		(6,503	)		(12,662	)		(20,178	)

Other income (expense):
Interest income		60			221			191			270
Interest expense		(897	)		(582	)		(1,731	)		(765	)
Other, net		—			59			—			101

Total other expense, net		(837	)		(302	)		(1,540	)		(394	)

Loss before income tax expense		(7,929	)		(6,805	)		(14,202	)		(20,572	)
Income tax expense		51			53			68			85

Net loss	$	(7,980	)	$	(6,858	)	$	(14,270	)	$	(20,657	)

Net loss per common share — basic and diluted	$	(0.42	)	$	(0.39	)	$	(0.76	)	$	(1.16	)
Weighted average common shares outstanding — basic and diluted		18,798			17,775			18,673			17,775

	For the Three Months Ended						For the Six Months Ended
	July 3, 2004			June 28, 2003			July 3, 2004			June 28, 2003
				(As Restated,See Note 11)						(As Restated,See Note 11)
Net sales	$	7,847		$	10,235		$	18,374		$	20,811
Net sales, related party (Note 4)		7,889			4,656			15,459			9,197
Total net sales		15,736			14,891			33,833			30,008
Cost of sales		6,450			9,142			15,405			20,066
Cost of sales, related party (Note 4)		5,163			4,369			9,757			8,744
Total cost of sales		11,613			13,511			25,162			28,810
Gross profit		4,123			1,380			8,671			1,198
Operating expenses:
Research and development		4,039			3,427			7,599			6,360
Marketing and selling		2,178			1,444			4,153			3,368
General and administrative		1,711			2,139			4,439			4,064
Restructuring		59			(294	)		59			(300	)
Total operating expenses		7,987			6,716			16,250			13,492
Loss from operations		(3,864	)		(5,336	)		(7,579	)		(12,294	)
Other income (expense):
Interest income		37			23			82			64
Interest expense		(10	)		(252	)		(105	)		(497	)
Other income (expense), net		52			(4	)		107			117
Total other income (expense), net		79			(233	)		84			(316	)
Loss before income taxes		(3,785	)		(5,569	)		(7,495	)		(12,610	)
Income tax expense (benefit)		(100	)		83			(69	)		264
Net loss	$	(3,685	)	$	(5,652	)	$	(7,426	)	$	(12,874	)
Net loss per common share — basic and diluted	$	(0.11	)	$	(0.20	)	$	(0.23	)	$	(0.46	)
Weighted average common shares outstanding — basic and diluted		33,089			28,055			31,849			28,043

See accompanying notes to condensed consolidated financial statements

SIPEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

(In thousands) (Unaudited)


	For the Six Months Ended
	June 30, 2007			July 1, 2006
Operating activities:
Net loss	$	(14,270	)	$	(20,657	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		1,836			1,729
Depreciation and amortization		1,074			8,145
Provision for inventories		—			1,217
Reversal of provision for purchase commitments on excess inventories		(222	)		—
Provision for restructuring charges		(163	)		285
Loss on disposal of fixed assets		—			9
Amortization of discount and issuance costs on convertible notes		398			93
Provision for uncollectible receivables and sales returns and allowances		623			246
Consulting services provided by related party		—			5
Changes in assets and liabilities:
Accounts receivable		(948	)		(2,974	)
Inventories		3,492			(1,040	)
Prepaid expenses and other current assets		(260	)		(1,264	)
Other assets		(2	)		31
Accounts payable		(1,911	)		2,989
Accrued expenses		(573	)		(1,949	)
Accrued restructuring costs		(1,178	)		(176	)
Deferred income		(836	)		568
Other long-term liabilities		(2	)		27

Net cash used in operating activities		(12,942	)		(12,716	)

Investing activities:
Proceed from maturity of short-term investment securities		2,778			—
Purchase of short-term investment securities		(987	)		(3,944	)
Restricted cash (increase) decrease		350			(103	)
Purchase of property, plant, and equipment		(1,324	)		(842	)

Net cash provided by (used in) investing activities		817			(4,889	)

Financing activities:
Proceeds from issuance of common stock under employee stock plans		2,352			—
Proceeds from borrowing — related party		—			7,000
Repayment of borrowing — related party		—			(7,000	)
Repayment of short-term bank borrowing		(333	)		(3,000	)
Proceeds from issuance of convertible senior notes and warrants		—			30,000
Debt issuance costs related to convertible senior notes		—			(1,015	)
Net proceeds from lease financing obligation		—			12,578
Repayment of lease financing obligation		(90	)		(161	)

Net cash provided by financing activities		1,929			38,402

Increase (decrease) in cash and cash equivalents		(10,196	)		20,797
Cash and cash equivalents at beginning of period		13,041			1,969

Cash and cash equivalents at end of period	$	2,845		$	22,766


Supplemental cash flow information:
Cash paid during the period for:
Income taxes	$	26		$	14

Interest	$	1,155		$	466

Supplemental disclosure of non-cash investing and financing activities:
Purchase of property, plant and equipment not paid at end of period	$	109		$	1,900

Receivable from exercise of stock options	$	13		$	—

Debt issuance costs not paid at the end of period	$	—		$	290

	For the Six Months Ended
	July 3, 2004			June 28, 2003
				(As Restated, See Note 11)
Operating activities:
Net loss	$	(7,426	)	$	(12,874	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		3,454			4,028
Provision for uncollectible receivables and returns and allowances		721			(435	)
Provision for inventories		771			318
Amortization of discount and issuance costs on notes payable		57			158
Loss on disposal of capital assets		—			196
Compensation from acceleration of stock vesting		44			55
Changes in assets and liabilities:
Accounts receivable		1,875			(1,644	)
Inventories		(3,527	)		1,283
Prepaid expenses and other current assets		40			896
Other assets		(37	)		(136	)
Accounts payable		(165	)		758
Accrued expenses		(348	)		654
Accrued restructuring costs		(165	)		(676	)
Deferred income		887			1,130
Net cash used in operating activities		(3,819	)		(6,289	)
Investing activities:
Restricted cash		(1,837	)		—
Proceeds from maturity of short-term investment securities		4,000			10,000
Purchase of short-term investment securities		(3,998	)		(1,519	)
Purchase of property, plant & equipment		(808	)		(696	)
Net cash provided by (used in) investing activities		(2,643	)		7,785
Financing activities:
Net proceeds from issuance of note payable		—			10,432
Proceeds from issuance of common stock under employee stock plans		346			184
Net cash provided by financing activities		346			10,616
Effect of foreign currency exchange rate changes on cash and cash equivalents		(13	)		43
Increase (decrease) in cash and cash equivalents		(6,129	)		12,155
Cash and cash equivalents at beginning of period		18,185			6,489
Cash and cash equivalents at end of period	$	12,056		$	18,644
Supplemental cash flow information:
Cash paid during the period for:
Income taxes	$	19		$	—
Interest	$	—		$	170
Non-cash financing activities:
Conversion of convertible debt to common stock	$	21,176		$	—

See accompanying notes to condensed consolidated financial statements

SIPEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ~~(Unaudited)~~

~~Note 1 — Description of Business and Basis of Presentation~~ (Unaudited)

Note 1. Description of Business and Basis of Presentation

Description of Business

Based in Milpitas, California, Sipex Corporation (“Sipex” or ~~the~~ “Company”) iswas aincorporated ~~semiconductor~~in May 1965 ~~company~~under the laws of the State of Massachusetts. The state of incorporation was changed from ~~that~~Massachusetts to Delaware in October 2003. Sipex designs, manufactures and markets high performance, ~~value-added~~ analog integrated circuits (or “ICs”) that primarily 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 the Company’s ICs are cellular phones, base stations, computers, DVD players, and digital cameras. The Company’s products are sold either directly or through an international network of manufacturers’ representatives and distributors. The Company is a global company with operations in Asia, Europe and North America.

~~While~~In ~~advances~~an ineffort ~~digital~~to ~~technology~~achieve ~~have~~significant ~~fueled~~cost savings, in the ~~demand~~third ~~for~~quarter ~~digital integrated~~of ~~circuits~~2005, ~~they~~the ~~have~~Company decided ~~also~~to ~~created~~close adown ~~rapidly~~the ~~growing~~Milpitas ~~demand~~wafer ~~for~~fabrication ~~more precise,~~facility ~~faster~~ and ~~more~~transfer ~~power~~its ~~efficient~~IC ~~analog~~manufacturing processes ~~ICs.~~from ~~Sipex~~there ~~possesses~~to a ~~broad~~wafer fabrication facility operated by Hangzhou Silan Integrated Circuit ~~portfolio~~Co., ofLtd. ~~analog~~(“Silan”), ~~ICs~~in Hangzhou, ~~organized~~China ~~into~~and ~~three~~a ~~product~~wafer ~~families:~~fabrication ~~power~~facility operated by Episil ~~management~~Technologies, ~~serial~~Inc. ~~interface~~(“Episil”), ~~and~~in ~~optical storage~~Taiwan. ~~Sipex~~Definitive ~~uses~~agreements ~~its~~regarding ~~wafer~~this transfer were ~~fabrication~~entered ~~facility~~into in ~~Milpitas~~February 2006, ~~California~~ and athe ~~number~~closure of ~~third~~the ~~party~~Milpitas fabrication facility was completed ~~vendors~~in toearly ~~fabricate~~October 2006. In December 2006, ~~package~~the ~~and~~Company ~~test~~announced ~~its~~a ~~ICs.~~workforce ~~Sipex’s~~reduction ~~products~~plan ~~are~~that ~~sold~~was ~~either~~implemented ~~directly~~in response to ~~customers~~its ortransitioning ~~through~~to a ~~global~~fabless ~~network~~semiconductor ofcompany, ~~manufacturers’~~de-emphasizing ~~representatives~~optical products, reducing dependency on commodity products and ~~distributors~~with the goal of improving its cost structure.

~~Basis~~On May 7, 2007, Sipex entered into a definitive merger agreement with Exar Corporation (“Exar”) to combine the two companies. Under the terms of ~~Presentation~~the agreement, which was approved by the Boards of Directors of both companies, Sipex stockholders will receive 0.6679 of a share of Exar common stock for each share of Sipex common stock. Exar stockholders will own approximately 67.6% and Sipex stockholders will own approximately 32.4% of Exar common stocks after completion of the transaction, which assumes conversion to common stock of Sipex’s outstanding convertible senior notes and the exercise of the related warrants. Both companies have scheduled respective stockholders meetings on August 23, 2007 whereby the proposed merger will be subjected to the vote of the respective stockholders of both companies.

~~The~~Fiscal ~~accompanying consolidated unaudited financial statements have been~~Year prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to such rules and regulations. In the opinion of management, the consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the Company’s financial position and the operating results and cash flows for the periods presented. Actual results could differ materially from those estimates. Interim information is unaudited; however, in the opinion of the Company’s management, all adjustments considered necessary for a fair presentation of interim periods have been included. The results for interim periods are not necessarily indicative of results to be expected for the entire year.

The ~~consolidated~~Company’s ~~financial~~fiscal ~~statements~~year ~~include~~is the ~~accounts~~52 ofor 53 weeks ending on the ~~Company~~last Saturday in December. Fiscal 2007 and ~~its~~fiscal ~~wholly~~2006 ~~owned~~are ~~subsidiaries,~~52-week ~~Sipex~~fiscal ~~GmbH~~years. ~~and~~The ~~Sipex~~second ~~Nippon.~~quarter ~~All~~of ~~significant intercompany~~fiscal ~~accounts~~years 2007 and 2006 ~~transactions~~included ~~have~~91 days ~~been~~from ~~eliminated~~April 1, in2007 ~~consolidation.~~to June 30, 2007 and April 2, 2006 to July 1, 2006, respectively.

~~These~~The ~~consolidated~~Basis ~~financial~~of ~~statements~~Presentation and ~~accompanying~~Significant ~~notes~~Accounting ~~should be~~Policies read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for fiscal year ended December 31, 2003, filed with the SEC. Certain prior period amounts have been reclassified to conform to the current period presentation.

The accompanying interim unaudited condensed consolidated ~~balance~~financial ~~sheet~~statements athave ~~December 31,~~been prepared ~~2003~~by ~~has~~Sipex ~~been~~without ~~derived~~audit ~~from~~and ~~the~~reflect ~~audited~~all adjustments, consisting only of normal recurring ~~consolidated~~adjustments ~~financial~~which ~~statements~~are, atin ~~that~~the ~~date~~opinion ~~but~~of ~~does~~management, ~~not~~necessary ~~include~~for ~~all~~a fair presentation of the ~~information~~Company’s financial position, results of operations and ~~footnotes~~cash ~~required~~flows byfor the interim periods presented. The statements have been prepared in accordance with accounting principles ~~generally~~ generally accepted in the United States of America (“generally accepted accounting principles”) for ~~complete~~interim financial information and in accordance with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for annual consolidated financial statements.

~~Effective~~The ~~January 1,~~condensed ~~2004,~~financial ~~the~~statements ~~Company’s~~include ~~fiscal year has changed from calendar year end to a 52 or a 53 week fiscal year, which ends on~~ the ~~Saturday closest~~accounts ~~to December 31. As a result~~ of the ~~change~~Company inand ~~the~~its ~~fiscal reporting~~wholly-owned ~~period,~~subsidiaries. ~~the~~All ~~first~~significant ~~quarter~~inter-company ofaccounts ~~fiscal year 2004 covered 94 days from January 1, 2004 to April 3, 2004~~ and ~~the~~transactions ~~second~~have ~~quarter~~been ~~covered~~eliminated ~~91 days from April 4, 2004~~in ~~to July 3, 2004~~consolidation.

These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K, Form 10-K/A Amendments No. 1 and No. 2 for the year ended December 30, 2006. The results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of the operating results to be expected for the full fiscal year or future operating periods.

~~Restricted~~The ~~Cash~~accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, during the six months ended June 30, 2007, the Company used cash in operating activities of $12.9 million. Additionally, the Company used cash of $27.9 million for operating activities for the year ended December 30, 2006. As of June 30, 2007, the Company had cash, cash equivalents and short-term investments of $3.4 million and its accumulated deficit was $257.4 million. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

~~Restricted~~The ~~cash~~consolidated ~~consists~~financial statements do not include any adjustments relating to the recoverability and classification of ~~$1.8 million~~recorded ~~held~~asset inamounts aor ~~certificate~~the amounts and classification of liabilities ~~deposit~~that may be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a ~~guarantee~~going ofconcern ~~payment~~is dependent upon its ability to ~~fulfill~~generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of aits financing ~~software~~agreements, ~~license~~to ~~agreement~~obtain additional financing or refinancing as may be required, and ultimately to attain profitability. As noted above, the Company has entered into a definitive ~~The~~merger agreement ~~expires~~with onExar. ~~November 2~~Should the merger with Exar not be completed, ~~2007.~~management intends to actively engage in several steps designed to enable the Company to meet the capital requirements of its business, which include continuing the Company’s efforts to obtain additional short- and long-term financing to fund operations and implementing efforts to reduce corporate expenditures.

Reverse Stock~~-Based~~ ~~Compensation~~Split

~~The~~On ~~Company~~January 30, ~~measures~~2007, ~~compensation~~Sipex’s ~~expense~~stockholders ~~for~~at ~~its~~a ~~employee~~special ~~stock-based compensation~~meeting ~~plans~~of ~~using~~stockholders ~~the~~approved ~~intrinsic~~a 1-for-2 ~~value~~reverse ~~method~~stock ~~prescribed~~split. byThe ~~Accounting Principles~~reverse ~~Board~~split ~~(APB) Opinion~~became ~~No. 25,~~effective ~~“Accounting~~at ~~for~~1:31 ~~Stock~~p.m. ~~Issued~~Pacific toStandard Time ~~Employees~~on February 23, 2007.” The ~~Company~~par ~~applies~~value of the ~~disclosure~~common ~~provisions~~stock ofwas ~~Statement~~not ~~of Financial~~affected ~~Accounting~~by ~~Standards~~the ~~(SFAS) No. 123,~~reverse ~~“Accounting~~stock ~~for Stock-based~~split ~~Compensation,”~~and asremains ~~amended~~at by$0.01 ~~SFAS~~per Noshare. ~~148~~ Consequently, ~~“Accounting~~the ~~for~~aggregate ~~Stock-based Compensation~~par –value ~~Transition~~of ~~and~~the ~~Disclosure”~~issued ascommon ifstock was ~~the~~reduced ~~fair~~by ~~value-based~~reclassifying ~~method~~the ~~had been~~par ~~applied~~value inamount ~~measuring~~of ~~compensation~~the ~~expense.~~eliminated ~~Under~~shares ~~APB~~of ~~Opinion~~common ~~No. 25,~~stock ~~when~~to ~~the~~additional ~~exercise~~paid-in ~~price~~capital ofin the Company’s ~~employee~~condensed ~~stock~~consolidated ~~options~~balance ~~equals~~sheets. ~~the~~The ~~market~~Company has ~~price~~paid cash in lieu of ~~the~~any ~~underlying~~fractional ~~stock~~shares onto ~~the~~which ~~date~~a holder of ~~the~~common ~~grant,~~stock nowould ~~compensation~~otherwise ~~expense~~be isentitled ~~recognized.~~as Ina ~~certain~~result ~~situations,~~of ~~under~~the ~~these~~reverse ~~plans,~~stock ~~options~~split. toThe ~~purchase~~ number of authorized shares of common stock remains ~~may~~unchanged. beAll ~~granted~~shares atand ~~less~~per ~~than~~share ~~fair~~amounts, ~~market~~including ~~value,~~all ~~which results~~common instock ~~compensation~~equivalents ~~expense~~(stock options, ~~equal~~warrants toand ~~the~~convertible ~~difference~~notes) ~~between~~have ~~the~~been ~~market value~~restated onin the ~~date~~condensed ofconsolidated ~~grant~~financial statements and in the ~~purchase~~notes ~~price.~~to ~~This~~condensed ~~expense~~consolidated isfinancial ~~recognized over~~statements ~~the~~for ~~vesting~~all ~~period~~periods presented ofto reflect the ~~options~~reverse onstock ~~a straight-line basis and included in operations~~split.

~~As required under SFAS No. 123 and SFAS No. 148, the pro forma effects of stock~~Short-~~based compensation~~term ~~on net income (loss) and earnings per common share for employee stock~~Investments options granted and employee stock purchase plan share purchases have been estimated at the date of grant and beginning of the period, respectively, as if the Company had accounted for such awards under the fair value method of SFAS No. 123 using the Black-Scholes option-pricing model. For purposes of pro forma disclosures, the estimated fair value of the options and shares is amortized to pro forma net income over the vesting period.

~~The~~Short-term investments of the Company’s ~~pro~~primarily ~~forma~~consist ~~information~~of ~~for~~commercial ~~the~~papers ~~three~~and money market funds with original maturities greater than 90 days and ~~six~~less ~~months~~than ~~ended~~one year. Such investments are ~~July~~accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 3115, ~~2004~~“Accounting for Certain Investments in Debt and ~~June~~Equity Securities” issued by the Financial Accounting Standards Board (“FASB”). Pursuant to the provisions of SFAS No. 28115, ~~2003~~the isCompany has classified its short-term investments as ~~follows~~“held ~~(in~~to ~~thousands~~maturity” which represent investments that the Company intends to hold to maturity and are recorded at amortized cost. As of June 30, ~~except~~2007, ~~per~~short-term ~~share~~investments ~~data):~~consisted of $0.6 million commercial papers.

	For the Three Months Ended						For the Six Months Ended
	July 3, 2004			June 28, 2003			July 3, 2004			June 28, 2003
Net loss, as reported	$	(3,685	)	$	(5,652	)	$	(7,426	)	$	(12,874	)
Add: Stock-based employee compensation included in reported net loss		44			55			44			55
Less: Stock-based employee compensation determined under the fair value method for all awards		(1,561	)		(1,807	)		(3,382	)		(3,161	)
Pro forma net loss	$	(5,202	)	$	(7,404	)	$	(10,764	)	$	(15,980	)
Net loss per share
Basic and diluted - as reported	$	(0.11	)	$	(0.20	)	$	(0.23	)	$	(0.46	)
Basic and diluted - pro forma	$	(0.16	)	$	(0.26	)	$	(0.34	)	$	(0.57	)

Revenue Recognition

~~For~~The ~~pro~~Company ~~forma~~recognizes ~~net~~revenue ~~loss~~in ~~computation,~~accordance with the ~~fair~~Securities ~~value~~and ~~for~~Exchange ~~each~~Commission (“SEC”) ~~option~~Staff ~~grant~~Accounting Bulletin 104, “Revenue Recognition” (“SAB 104”). SAB 104 requires that ~~was~~four ~~estimated~~basic atcriteria ~~the~~must ~~date~~be ofmet ~~grant~~before ~~using~~revenue ~~the~~can ~~Black-Scholes~~be ~~option-pricing~~recognized: (1) persuasive evidence of an ~~model.~~arrangement ~~The~~exists; ~~assumptions~~(2) delivery ~~used~~has tooccurred ~~value~~or services rendered; (3) the ~~option~~fee ~~grants~~is ~~are~~fixed asor determinable; ~~follows:~~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. As a result, Company management concluded it is unable to reasonably estimate sales returns for arrangements with its distributor; accordingly, sales and related cost of sales on shipments to distributors are deferred until the resale to the end customer.

	For the Three Months Ended						For the Six Months Ended
	July 3, 2004			June 28, 2003			July 3, 2004			June 28, 2003
Expected life of options	5 years			5 years			5 years			5 years
Volatility		61	%		115	%		62	%		116	%
Risk-free interest rate		3.7	%		2.6	%		3.4	%		2.7	%
Dividend yield		—			—			—			—

Sales to Future Electronics Inc. (“Future”), a distributor and related party (See Note 5), 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.

~~The~~Additionally, ~~weighted-average~~the ~~fair~~Company ~~value~~is ofproviding ~~options~~Future ~~granted~~a quarterly scrap allowance credit against accounts receivable for up to 2% of the most recent three-month ~~months~~purchases when they provide the ~~ended~~evidence ~~July 3~~of destruction of inventory of Sipex’s 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 ~~2004~~is using sell-through revenue recognition and ~~June 28,~~deferring ~~2003~~recognition ~~was~~of ~~$3.23~~such sales and ~~$3.24,~~related cost ~~respectively~~of goods sold until the product is sold by Future to its customers.

~~The~~Under ~~fair~~sell-through ~~value~~revenue ofaccounting, ~~Employee~~accounts ~~Stock~~receivable ~~Purchase~~are ~~Plan~~recognized ~~shares~~and ~~issued~~inventory ~~during the~~is ~~second~~relieved ~~quarter~~upon ofshipment ~~2004~~to ~~and~~the ~~2003,~~distributor ~~respectively,~~as ~~was~~title ~~estimated~~to on the ~~date~~inventory ofis transferred upon shipment, ~~grant~~at ~~using~~which point the ~~Black-Scholes~~Company ~~option-pricing~~has ~~model~~a ~~with~~legally ~~the~~enforceable ~~following assumptions:~~right ~~volatility~~to ofcollection ~~61%~~under ~~and~~normal ~~115%,~~terms. ~~risk~~The associated ~~free~~sales ~~interest~~and ~~rate~~cost of ~~1.39%~~sales ~~and 1.08%~~are ~~for~~deferred ~~the~~by ~~second~~recording ~~quarter~~“deferred ofincome” ~~2004~~(gross ~~and~~profit ~~2003,~~margin on ~~respectively;~~these nosales) ~~dividend~~as ~~yield and~~shown ~~option~~on ~~life~~the face of ~~six~~the ~~months~~consolidated ~~for~~balance ~~both periods~~sheet. ~~The~~When ~~weighted-average~~the ~~fair value~~related ofproduct ~~Employee~~is sold ~~Stock~~by ~~Purchase~~the ~~Plan~~Company’s ~~shares~~distributors ~~was~~to ~~$1.37~~their ~~and~~end ~~$1.75~~customers, ~~for~~Sipex ~~the~~recognizes ~~second~~previously deferred ~~quarter~~income ofas ~~2004~~sales and ~~2003,~~cost ~~respectively~~of sales.

~~Note~~ For 2non-distributor —customers, ~~Net~~the ~~Loss~~Company ~~Per~~recognizes ~~Share~~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.

~~Basic~~From ~~net~~time ~~loss~~to ~~per~~time, ~~share~~Sipex isdevelops ~~based~~custom ~~upon~~products ~~the~~for ~~weighted~~various ~~average~~customers ~~number~~under ofengineering ~~common~~service ~~shares~~contracts ~~outstanding.~~culminating ~~Diluted~~in ~~net~~delivery ~~loss per share is based upon the weighted average number~~ of ~~common~~known ~~and~~functional ~~common~~development ~~equivalent shares outstanding assuming dilution~~samples. ~~Common~~The ~~equivalent shares, consisting of outstanding stock~~Company ~~options,~~recognizes ~~convertible~~revenue ~~debt~~under ~~and~~these ~~warrants,~~agreements ~~are~~upon ~~included~~delivery ~~in the per share calculations where the effect~~ of ~~their~~known ~~inclusion~~functional ~~would~~development besamples ~~dilutive. As the~~as ~~Company~~delivery ~~had net losses for the three and six months ended July 3, 2004 and June 28, 2003, respectively, the weighted average number~~ of ~~common~~such ~~shares outstanding~~samples ~~equals~~represents the ~~weighted~~culmination ~~average number~~ of ~~common~~utility ~~and common equivalent shares assuming dilution. In February 2004, affiliates~~ of ~~Future Electronics,~~the ~~Inc.~~contract ~~(“Future”) exercised their conversion rights~~ to ~~exchange both~~ the ~~First~~customer ~~Note (see Note 4)~~ and ~~the Second Note (see Note 4) for an aggregate~~ ofagreed-to 4milestones.~~6 million~~ ~~of common shares of~~ Sipex, ~~bringing~~recognizes ~~their~~the ~~ownership~~costs ~~to approximately~~associated ~~40%~~with ofthese ~~the~~contracts ~~Company’s~~as ~~outstanding~~research ~~common~~and development ~~stock.~~expenses ~~The~~due ~~increase~~to in the ~~weighted~~uncertain ~~average~~nature ~~number~~ of ~~common~~the ~~shares~~development ~~outstanding~~efforts ~~from~~until ~~the~~delivery ~~conversion~~ of ~~the~~ ~~notes reduced~~ the ~~net loss per share for the three and six months ended~~ ~~July 3,~~known ~~2004~~functional bydevelopment $0samples.02 ~~and~~Certain ~~$0.03,~~of ~~respectively.~~these ~~The~~engineering ~~warrant,~~service ~~held by~~contracts ~~affiliates of Future, to~~include ~~purchase~~payments ~~900,000~~in ~~shares~~advance of ~~Sipex’s~~delivery ~~common~~of ~~stock~~known ~~for~~functional $2development samples.~~9458~~ ~~per share~~These ~~had~~payments ~~not~~are recorded ~~been~~in ~~exercised~~deferred asincome, ~~of July 3~~other, ~~2004~~until ~~(see Note 12 for information regarding~~ the ~~subsequent~~time ~~exercise~~of delivery of the ~~warrant)~~functional samples.

~~Antidilutive potential common shares excluded from the dilution calculation represented 2~~Property,~~757,721~~ ~~and~~Plant ~~8,949,000 potential common shares for three months ended July 3, 2004~~ and ~~June 28, 2003, respectively,~~Equipment ~~and 4,390,249 and 8,959,000 potential common shares for the six months ended July 3, 2004 and June 28, 2003, respectively.~~

~~Note~~ Property, 3plant –and ~~Effect~~equipment ofare ~~Recent~~stated ~~Accounting~~at ~~Pronouncements~~cost. Depreciation is provided by using the straight-line method over their expected useful lives.

In ~~January~~September ~~2003~~2005, the ~~Financial~~Company ~~Accounting~~tested ~~Standards~~its ~~Board~~Milpitas ~~(FASB) issued FASB~~corporate ~~Interpretation~~headquarters ~~No. 46,~~facility ~~“Consolidation~~for impairment ofgiven ~~Variable~~that ~~Interest~~Sipex ~~Entities”~~believed ~~(“FIN 46”).~~that ~~This~~there ~~interpretation~~was ~~provides~~a ~~guidance~~significant ondecline in the ~~identification~~market ofprice ~~entities~~of ~~controlled~~the ~~through~~facility ~~means~~and ~~other~~determined ~~than~~that ~~voting~~the ~~rights.~~carrying ~~FIN~~amount 46might ~~specifies~~not ~~how~~be arecoverable. The Milpitas ~~business~~corporate ~~enterprise~~headquarters ~~should~~facility ~~evaluate~~housed ~~its~~the ~~interests~~wafer infabrication aoperations ~~variable~~as ~~interest~~well ~~entity~~as the sales and tomarketing ~~determine~~department, ~~whether~~the toresearch ~~consolidate~~and ~~that~~development ~~entity.~~department Aand ~~variable~~the ~~interest~~corporate ~~entity~~administration ~~must~~functions. beThe ~~consolidated~~headquarters byfacility ~~its~~does ~~primary~~not ~~beneficiary~~have ifidentifiable ~~the~~cash ~~entity~~flows ~~does~~that ~~not~~are largely ~~effectively~~independent ~~disperse~~of ~~risks~~the ~~among~~cash ~~the~~flows ~~parties~~of ~~involved.~~other Inassets ~~December 2003~~and liabilities of the Company. Accordingly, the ~~FASB~~Milpitas ~~issued~~corporate ~~FIN~~headquarters ~~46R~~facility, which ~~defers~~includes all assets located at the ~~implementation~~Milpitas facility ~~date~~except for the ~~Company~~wafer tofabrication asset grouping, is included in the asset grouping which ~~year~~includes ~~ending~~all ~~December 31,~~assets ~~2004.~~and Asliabilities of the Company. ~~does~~No ~~not~~impairment ~~have~~loss anwas ~~interest~~recognized ingiven ~~any~~the ~~variable~~carrying ~~interest~~value ~~entity,~~of all assets and liabilities of the ~~adoption~~Company ~~did~~was ~~not~~less ~~have~~than athe ~~material~~fair value, ~~impact~~determined based on the ~~Company’s~~quoted ~~financial~~market ~~position,~~value ~~results~~ of ~~operations~~the ~~or cash flows~~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 12 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 of $6.7 million (including $4.5 million included in cost of sales) recorded in the first quarter of fiscal year 2006. For the first six months of fiscal year 2007, no such additional depreciation was recorded.

~~Note~~ In 4March 2006, —the ~~Related~~Company ~~Party~~revised ~~Transactions~~the remaining depreciable life of the Milpitas corporate headquarters facility 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.

The Company has a distributor agreement with Future that provides for Future to act as the Company’s exclusive distributor within North America and Europe. During 2003, Future increased its ownership of the Company’s capital stock and became a related party. On September 27, 2002, Sipex sold a convertible secured note (“the First Note”) with an attached warrant to purchase 900,000 shares of Sipex common stock to an affiliate of Future for an aggregate cash amount of $12.0 million. The Company recorded the First Note at $10.4 million and the warrant at $1.6 million (recorded to additional paid-in capital) based upon their estimated fair values at the date of issuance using the Black-Scholes option pricing model. The First Note paid a 5.75% coupon and was convertible after one year into Sipex common stock at a conversion price of $7.50 per share. Following the one year anniversary of the issuance of the First Note, the Company could require the conversion of the First Note in installments if for a period of time Sipex common stock traded at a price in excess of 150% of the conversion price of $7.50. The attached warrant was exercisable for a two-year period beginning on the one-year anniversary of the date of issuance. The exercise price for the warrant was $2.~~9458.~~ ~~The~~Recent ~~First~~Accounting ~~Note was secured by a Deed~~Pronouncements ~~of Trust on the Company’s land and building at Milpitas, California.~~

OnIn ~~June~~February 202006, ~~2003,~~FASB ~~Sipex~~issued ~~sold~~SFAS aNo. 155, ~~second~~“Accounting ~~convertible~~for ~~secured~~Certain ~~note~~Hybrid ~~(“the~~Financial ~~Second Note~~Instruments,”) to an ~~affiliate~~amendment of ~~Future~~FASB ~~for~~Statements ~~$10~~No.6 ~~million.~~133 ~~The~~and ~~Second Note paid a 1~~140.5% ~~coupon~~SFAS ~~rate per annum~~No. 155 ~~The~~will ~~principal~~be ~~amount~~effective of for the ~~Second~~Company ~~Note~~beginning ~~was contingently~~in ~~convertible~~the ~~into~~first aquarter ~~maximum~~ of 32007.~~0 million~~ ~~shares~~The ofstatement ~~Sipex~~permits ~~common stock~~interests atin ~~a conversion price of $3.52 per share, subject to Future attaining~~hybrid ~~predetermined~~financial ~~annual~~instruments ~~and/or~~that ~~cumulative~~contain ~~sales~~an ~~levels~~embedded ~~over~~derivative athat ~~three-year~~would ~~period. In~~otherwise ~~accordance~~require ~~with Emerging Issues Task Force (EITF) Issue No. 01-1~~bifurcation, ~~“Accounting for a Convertible Instrument Granted or Issued~~ to abe ~~Nonemployee~~ accounted for ~~Goods~~as ~~or Services or~~ a ~~Combination~~single offinancial ~~Goods~~instrument orat ~~Services and Cash,” the Company was required to recognize non-cash charges against net sales for the~~ fair value, ofwith ~~these~~changes ~~conversion~~in ~~rights earned by Future each period relative to the sales target. The~~ fair value ~~of the conversion rights has been measured~~ ~~pursuant~~recognized toin ~~FASB No~~earnings. ~~123,~~ ~~“Accounting~~This ~~for~~election ~~Stock-Based~~is ~~Compensation”~~permitted ~~and~~on ~~EITF Issue~~an ~~No. 96~~instrument-~~18,~~by-instrument ~~“Accounting~~basis for ~~Equity Instruments That Are Issued to Other~~all ~~Than~~hybrid ~~Employees~~financial ~~for~~instruments ~~Acquiring~~held, ~~or in Conjunction with Selling~~obtained, ~~Goods~~ or ~~Services.”~~ ~~The~~issued ~~Second Note was secured by a Deed of Trust on the Company’s land and building at Milpitas, California~~ as ~~well as all other assets~~ of the ~~Company,~~ ~~except~~adoption ~~for the Company’s intellectual property~~date. InThe ~~connection~~adoption ~~with the issuance~~ of ~~the Second Note, the Company entered into a standstill agreement~~ ~~with~~SFAS ~~affiliates~~No. 155 ofdid ~~Future, pursuant to which these security holders agreed~~ not to ~~acquire~~have ~~more~~a ~~than~~material ~~35%~~impact ~~of the Company’s common stock~~ on ~~a fully diluted basis. Also, Sipex entered into a voting agreement with an affiliate of Future, pursuant to which this security holder agreed that~~ the ~~additional shares of the~~ Company’s ~~common~~financial ~~stock issuable upon conversion of the Second Note (i) will not be voted or (ii) will be voted in the same proportion as the votes cast by all stockholders of Sipex~~statements.

~~During~~In July 2006, the ~~fourth~~FASB ~~quarter~~issued ofInterpretation ~~2003~~No. 48, ~~Sipex~~“Accounting ~~entered~~for ~~into~~Uncertainty anin ~~agreement with~~Income ~~the~~Taxes” ~~affiliates~~(“FIN of48”) ~~Future~~as toan ~~convert~~interpretation ~~the~~of ~~First~~FASB ~~Note~~Statement ~~and~~No. 109, ~~Second~~“Accounting ~~Note~~for ~~into~~Income ~~common stock~~Taxes” ~~subject~~(“SFAS ~~to obtaining regulatory approval~~109”). InThis ~~connection~~Interpretation ~~with~~clarifies the ~~agreement,~~accounting ~~the Company~~for ~~accelerated~~uncertainty ~~the~~in ~~conversion~~income ~~rights~~taxes recognized ofby ~~the~~prescribing ~~Second~~a ~~Note~~recognition threshold and ~~received~~measurement ~~$3.0 million~~attribute ~~and~~for ~~forgiveness~~the offinancial statement ~~interest~~recognition onand ~~both~~measurement ~~notes~~ of ~~$411,000. As~~ a ~~consequence,~~ ~~non-cash~~tax ~~charges~~position oftaken ~~$14.1 million~~or ~~had~~expected ~~been~~to ~~recognized~~be ~~against sales~~taken in ~~the~~a ~~second~~tax return. ~~half~~This ofInterpretation ~~2003~~also ~~representing~~provides ~~the~~guidance ~~fair~~on ~~value~~de-recognition of ~~the~~tax ~~conversion~~benefits previously ~~rights~~recognized ~~earned~~and byadditional ~~Future~~disclosures ~~during~~for ~~this~~unrecognized ~~period~~tax asbenefits, ~~well~~interest asand ~~the~~penalties. ~~net~~The evaluation ~~cost~~of ~~from terminating~~a ~~the~~tax ~~sales~~position ~~incentive~~in ~~feature~~accordance ofwith ~~the~~this ~~Second~~Interpretation ~~Note~~begins ~~(thereby~~with ~~vesting~~a ~~the~~determination as ~~conversion~~to ~~rights).~~whether Asit ofis ~~December 31,~~more ~~2003,~~likely ~~affiliates~~than ofnot ~~Future~~that ~~held approximately~~a ~~8.5 million~~tax ~~shares~~position ofwill ~~the~~be ~~Company’s~~sustained ~~common~~upon ~~shares~~examination orbased ~~approximately~~on ~~30%. Upon~~ the ~~receipt~~technical merits of ~~regulatory~~the ~~approval~~position. inA ~~February 2004,~~tax ~~the affiliates~~position ofthat ~~Future~~meets ~~exercised~~the ~~their~~more-likely-than-not recognition ~~conversion~~threshold ~~rights~~is tothen ~~exchange~~measured ~~both~~at the ~~First~~ ~~Note~~largest ~~and~~amount ~~the~~of ~~Second~~benefit ~~Note~~that ~~for~~is ~~4.6 million~~greater ~~common~~than ~~shares~~50 percent likely of ~~Sipex,~~being ~~bringing their~~realized ~~ownership~~upon toultimate ~~approximately~~settlement ~~40%~~for ofrecognition ~~our~~in ~~outstanding~~the ~~capital stock~~financial statements. AsSipex ~~a result~~adopted ofFIN ~~the~~48 ~~conversion,~~in ~~all~~ the ~~related~~first ~~collateral~~quarter ~~and~~of ~~sales~~fiscal ~~incentives~~year ~~have been~~2007, ~~waived.~~which ~~The~~resulted ~~warrant~~in tono material ~~purchase~~impact ~~900,000~~on ~~shares of~~ the Company’s ~~common stock~~financial ~~for~~statements ~~$2.9458 per share had not been exercised as of July 3, 2004~~ (~~see~~See Note ~~12 for information regarding the subsequent exercise of the warrant~~7).

~~Future~~In ~~has~~September 2006, ~~historically~~the ~~accounted~~FASB ~~for~~issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a ~~significant~~framework ~~portion~~for ofmeasuring ~~the~~fair value in generally accepted ~~Company’s~~accounting ~~revenues~~principles, and isexpands ~~the~~disclosures ~~Company’s~~about ~~largest~~fair ~~distributor~~value ~~worldwide~~measurements. ~~Revenue~~This Statement ~~from~~applies ~~Future~~under ~~accounted~~other ~~for~~accounting ~~50%~~pronouncements ~~and~~that ~~31%~~require ofor ~~total~~permit ~~net~~fair ~~sales~~value ~~for~~measurements, the FASB ~~three~~having ~~months ended~~previously ~~July 3,~~concluded ~~2004~~in ~~and~~those ~~June 28,~~accounting ~~2003,~~pronouncements ~~respectively~~that fair value is the relevant measurement attribute. Accordingly, ~~and~~this ~~46%~~Statement ~~and~~does ~~31%~~not ofrequire ~~total~~any new fair value ~~net~~measurements. ~~sales~~SFAS No. 157 is effective for ~~the~~financial ~~six~~statements ~~months~~issued ~~ended~~for ~~July 3,~~fiscal ~~2004~~years ~~and~~beginning after ~~June~~November 2815, ~~2003~~2007, ~~respectively~~ and interim periods within those fiscal years. ~~The~~This Statement is required to be adopted by the Company ~~anticipates~~in ~~that~~the ~~sales~~first quarter of its ~~products~~fiscal toyear ~~Future~~2008. ~~will continue~~The toCompany ~~account~~is ~~for~~currently assessing athe ~~significant~~impact ~~portion~~of the adoption of ~~its~~this ~~sales~~Statement.

In December 2006, the FASB staff issued the FASB Staff Position (“FSP”) Emerging Issues Task Force (“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 Company adopted this FSP in its first quarter of fiscal year 2007. The adoption did not have a material impact on the Company’s financial statements (See Note 4).

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.

Note 53. —Stock-Based ~~Restructuring Costs~~Compensation

~~For~~Stock-Based ~~the~~Compensation ~~six months ended July 3, 2004, the Company utilized $223,000 of~~Plans the restructuring reserve for payments of the Company’s Billerica, Massachusetts facility lease. The balance of the restructuring accrual as of July 3, 2004 consisted principally of facility related exit costs, and is expected to be paid in the next three and one-half years.

~~Below~~The isCompany acurrently ~~summary~~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 ~~activity~~date ~~related~~of grant. In October 2002, the Board of Directors voted to ~~restructuring~~reduce ~~costs~~the number of shares available for issuance under the 2000 Non-qualified Stock Option Plan to 335,995. ~~three~~Approximately ~~and~~3,419,000 ~~six~~shares ~~months~~of ~~ended~~stock options ~~July~~were outstanding as of June 330, ~~2004~~2007 ~~(in~~for ~~thousands):~~all plans. As of June 30, 2007, approximately 690,000 shares of stock options were available for grant under all plans.

	Restructuring
	Costs
Accrual balance, December 31, 2003	$	957
Charges utilized		(111	)
Adjustments to accrual		5
Accrual balance, April 3, 2004		851
Charges utilized		(112	)
Adjustments to accrual		54
Accrual balance, July 3, 2004	$	793

The Company also has an Employee Stock Purchase Plan (“ESPP”) under which eligible employees may purchase shares of the Company’s common stock through periodic payroll deductions of up to 10% of total compensation at the lesser of (i) 85% of the average market price of the common stock on the first business day of the six-month payment period and (ii) 85% of the average market price of the common stock on the last business day of the six-month payment period. The Company’s ESPP is considered compensatory under the provisions of SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”).

~~Note~~ Under 6SFAS —No. 123R, ~~Comprehensive~~stock-based ~~Loss~~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.

~~Comprehensive~~As ~~income~~part ~~(loss) is~~of the ~~total~~requirements of ~~net~~SFAS ~~income (loss)~~No. ~~and~~123R, ~~all~~the Company is required to estimate ~~other~~potential ~~revenue,~~forfeitures ~~expenses,~~of ~~gains~~stock grants and ~~losses~~adjust ~~recorded~~compensation ~~directly~~cost inrecorded ~~equity~~accordingly. ~~Sipex’s~~The ~~“other~~estimate ~~comprehensive~~of ~~loss”~~forfeitures ~~consists~~will ofbe ~~foreign~~adjusted ~~currency~~over ~~translation~~the requisite service period to the extent that ~~adjustments.~~actual ~~There~~forfeitures ~~was~~differ, noor ~~significant~~are ~~tax~~expected ~~effect~~to ondiffer, ~~the~~from ~~components~~such ofestimates. ~~other~~Changes in estimated ~~comprehensive~~forfeitures ~~loss~~will ~~for~~be recognized in the ~~three~~period of change and ~~six~~will ~~months~~also ~~ended~~impact ~~July 3,~~the ~~2004~~amount ~~and~~of ~~June 28,~~stock ~~2003~~compensation expenses to be recognized in future periods.

~~The~~Valuation ~~following table provides the comprehensive loss information (in~~Assumptions ~~thousands):~~

	For the Three Months Ended						For the Six Months Ended
	July 3, 2004			June 28, 2003			July 3, 2004			June 28, 2003
Net loss	$	(3,685	)	$	(5,652	)	$	(7,426	)	$	(12,874	)
Other comprehensive loss:
Foreign currency translation adjustment		(19	)		40			(13	)		43
Comprehensive loss	$	(3,704	)	$	(5,612	)	$	(7,439	)	$	(12,831	)

Valuation Method – The Company estimates the fair value of stock options granted by using the Black Scholes valuation model.

~~Note~~ Expected 7Term — ~~Segment~~The ~~Information~~Company ~~and~~has ~~Major~~elected ~~Customers~~to use the “Simplified Method” outlined in SAB 107 to determine the expected term of its stock option grants.

~~The~~Volatility ~~Company’s~~— ~~Chief~~Volatility ~~Executive Officer (CEO)~~ is ~~considered~~based toupon be the Company’s ~~chief~~historical ~~operating~~stock ~~decision~~price ~~maker~~volatility. The Company ~~has~~considered ~~organized~~historical ~~its operations~~volatility ~~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~~period ~~basis~~generally ~~accompanied~~commensurate by disaggregated information about revenues by product family and geographic region for purposes of making operating decisions and assessing financial performance. The Company has aligned its organization with the ~~primary~~expected ~~management objective of increasing~~or ~~overall~~contractual ~~sales~~term, ~~unit~~as ~~volume~~applicable, ~~regardless~~ of ~~whether a distributor or~~ the ~~Company is~~share ~~the seller~~option. ~~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.~~

Risk Free Interest Rate — 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.

Dividend Yield — The Company does not currently intend to pay cash dividends. Therefore, the Company has assumed a dividend yield of zero.

The ~~disaggregated~~fair ~~sales~~value ~~information~~of ~~reviewed~~the onCompany’s astock-based ~~product~~awards ~~line~~to ~~basis~~employees by was estimated using the following ~~CEO~~weighted-average isassumptions asfor ~~follows~~the (grants made in ~~thousands)~~the three and six months ended June 30, 2007 and July 1, 2006:

	For the Three Months Ended				For the Six Months Ended
Employee Stock Option Plans	For the Three Months Ended				For the Six Months Ended
	July 3, 2004		June 28, 2003		July 3, 2004		June 28, 2003
	June 30, 2007		July 1, 2006		June 30, 2007		July 1, 2006
Interface	$	9,904	$	7,901	$	20,437	$	15,825
Expected life of options	6 years		6 years		6 years		6 years
Power Management		4,388		4,162		9,940		7,262
Volatility		79%		89%		82%		91%
Optical Storage		1,444		2,442		3,456		4,638
Risk-free interest rate		4.7%		5.0%		4.7%		4.8%
Other (Legacy/EL)		—		386		—		2,283
Dividend yield		—		—		—		—
Total net sales	$	15,736	$	14,891	$	33,833	$	30,008
Weighted average fair value options granted	$	6.44	$	4.96	$	6.82	$	3.80

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

ESPP

For the Three Months Ended

For the Six Months Ended

June 30, 2007

July 1, 2006

June 30, 2007

July 1, 2006

Expected life of options

6 months

N/A*

6 months

N/A

Volatility

46%

N/A

46%

N/A

Risk-free interest rate

5.1%

N/A

5.1%

N/A

Dividend yield

—

N/A

—

N/A

Weighted average fair value options granted

2.76

N/A

2.76

N/A

	For the Three Months Ended				For the Six Months Ended
	July 3, 2004		June 28, 2003		July 3, 2004		June 28, 2003
United States	$	4,175	$	2,939	$	7,929	$	5,841
Singapore		2,571		1,333		4,905		2,906
United Kingdom		2,482		1,285		4,879		2,583
Japan		2,399		3,396		5,723		6,490
Taiwan		1,949		2,416		4,622		5,309
Asia, other than Japan, Taiwan, & Singapore		1,268		1,974		3,733		3,893
Rest of the world		892		1,548		2,042		2,986
Total net sales	$	15,736	$	14,891	$	33,833	$	30,008


*		Employee Stock Purchase Plan (ESPP) was not available to Sipex employees in the first six months of fiscal year 2006 due to delisting of the Company’s stock from Nasdaq.

~~Substantially all the Company’s operations and long~~Stock-~~lived~~Based ~~assets~~Compensation ~~reside in~~Expense ~~the United States although Sipex has operations in Malaysia, China, Taiwan, Japan, Germany and Belgium.~~

~~Information~~The onfollowing ~~major~~table ~~customers~~shows ~~which~~total ~~accounted~~employee ~~for~~and ~~10%~~non-employee orstock-based ~~more~~compensation expense recognized in the condensed consolidated statements of operations for the ~~Company’s~~ ~~total~~three ~~net~~and ~~sales~~six months ended June 30, 2007 and ~~total~~July 1, ~~gross~~2006, ~~accounts~~pursuant ~~receivable~~to isSFAS asNo. 123R ~~follows~~(in thousands):

	% of Total Net Sales						% of Total Net Sales						% of Total Gross
	For the Three Months Ended						For the Six Months Ended
	For the Three Months Ended						For the Six Months Ended						Accounts Receivable
	June 30, 2007			July 1, 2006			June 30, 2007			July 1, 2006
	July 3, 2004			June 28, 2003			July 3, 2004			June 28, 2003			July 3, 2004			December 31, 2003
Cost of sales	$	124		$	(59	)	$	235		$	68
Future, a related party		50	%		31	%		46	%		31	%		18	%		18	%
Research and development		142			311			373			649
Microtek, Inc.		*			19			*			17			12			23
Marketing and selling		242			235			499			425
Prohubs International		*			*			*			*			13			10
General and administrative		424			309			729			587
Stock-based compensation expense before income tax effect		932			796			1,836			1,729
Less income tax effect		—			—			—			—
Stock-based compensation expense after income tax effect	$	932		$	796		$	1,836		$	1,729

* At ~~Less~~June 30, ~~than~~2007, ~~10%~~there was approximately $248,000 of total unamortized compensation cost capitalized in inventory.

At June 30, 2007, there was a total of $5.8 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 31 months.

For the three and six months ended June 30, 2007, the Company’s loss before income taxes and net loss included approximately $0.9 million and $1.8 million, respectively, of employee stock-based compensation expense. For the three and six months ended July 1, 2006, the loss before income taxes and net loss included approximately $0.8 million and $1.7 million, respectively, of employee stock-based compensation expense.

~~Note~~ During 8the —three ~~Inventories~~months ended June 30, 2007, the Company modified the stock options held by two key employees as part of their retention in the separation agreements with the Company. The agreements provide for acceleration of the vesting of approximately 51,000 shares of stock options. The Company recognizes the related stock-based compensation expense resulting from these modifications over the related requisite service period. For the three months ended June 30, 2007, the Company recorded an additional $111,000 stock-based compensation expense resulting from these modifications.

~~Inventories~~Also ~~were~~during asthe ~~follows~~three (months ended June 30, 2007, the Company modified the employment agreement of an officer. This modification will result in ~~thousands):~~an acceleration of the unvested options held by the officer at the time of a change in control of the Company.

	July 3, 2004		December 31, 2003
Raw materials	$	509	$	424
Work-in-process		9,959		8,684
Finished goods		8,244		6,848
Total	$	18,712	$	15,956

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 25,000 and 88,000 vested stock options for the three and six months ended July 1, 2006, respectively, until the earlier of 1) such date that is ninety (90) days after the date that the former employees are 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 $7,000 and $24,000 for the three and six months ended July 1, 2006, respectively.

~~Note~~Stock 9Options ~~— Accrued Warranty~~Activities

~~Products~~The ~~are~~following ~~generally~~is ~~sold with~~ a ~~one-year~~summary ~~warranty. Reserve requirements are recorded in the period~~ of ~~sale~~option ~~and~~activity ~~are~~for ~~based on an assessment of~~ the ~~products~~ ~~sold with warranty and historical warranty costs incurred. The~~ Company ~~also~~’s ~~assesses~~stock ~~its~~option ~~pre-existing~~plans ~~warranty~~for ~~obligations and may adjust~~ the ~~amounts~~six ~~based~~months onended ~~actual~~June 30, ~~experience or changes in future expectations.~~2007:

The following table summarizes the activity in the warranty reserve for the six months ended July 3, 2004 and June 28, 2003 (in thousands):


						Weighted
	Number			Weighted		Average		Aggregate
	of			Average		Remaining		Intrinsic
	Options			Exercise		Contractual		Value
	(in thousands)			Price		Term (in years)		(in thousands)
Outstanding at December 30, 2006		3,761		$	5.88		7.81	$	17,518
Granted		435		$	9.21
Exercised		(563	)	$	3.75
Forfeited or expired		(214	)	$	10.84

Outstanding at June 30, 2007		3,419		$	6.34		7.73	$	11,757

Vested and expected to vest at June 30, 2007		3,207		$	6.35		7.67	$	11,147

Exercisable at June 30, 2007		1,581		$	6.49		6.65	$	6,472

	For the Six Months Ended
	July 3, 2004			June 28, 2003
Beginning accrued warranty	$	195		$	69
Warranty claims		(68	)		(21	)
Accruals for the period		169			130
Ending accrued warranty	$	296		$	178

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of our common stock that were in-the-money at June 30, 2007 and July 1, 2006. During the three and six months ended June 30, 2007, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $1.4 million and $3.1 million, respectively. For the six months ended July 1, 2006, no stock options were exercised during that period.

~~Note~~ During 10the —second ~~Commitments~~quarter ~~and~~of ~~Contingencies~~fiscal year 2007, 33,312 shares of common stock were purchased under the Company’s Employee Stock Purchase Plan. No shares were issued under ESPP during the first six months of fiscal year 2006. As of June 30, 2007, approximately 89,000 shares were available for issuance under ESPP. As part of the merger agreement with Exar, the Company suspended the ESPP for the second purchase period that would otherwise have started on July 1, 2007.

Commitments

On August 21, 2003, Sipex announced an exclusive sourcing agreement with PolarFab, a US-based, semiconductor foundry. This arrangement provides Sipex with favorable delivery terms and engineering support from PolarFab in return for exclusive manufacturing rights for certain products. The Company is under obligation to make minimum purchase commitments based on quarterly rolling forecasts extending out one year. The initial term of the agreement is five years with renewals on a negotiated basis. As of July 3, 2004, the minimum purchase commitment with PolarFab was approximately $4.1 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 July 3, 2004, Sipex recorded $1.8 million as restricted cash, which is included in the consolidated balance sheet.

Contingencies

Under the terms and conditions of the Company’s sale agreement, 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~~Note ~~history of prior indemnification claims and the unique facts and circumstances involved in each particular situation~~4. ~~Historically,~~Stockholder’s ~~payments~~Deficit ~~made by the Company for this type of claim have not had a material impact on its operating results or financial position.~~

~~Note~~ Net 11Loss —per ~~Restatement~~Share

~~Subsequent~~Basic tonet loss per share is based upon the ~~issuance~~weighted average number of common shares outstanding. Diluted net loss per share is based upon the ~~Company’s~~weighted ~~interim~~average ~~financial~~number ~~statements~~of common and ~~for~~common ~~the~~equivalent ~~quarter~~shares ~~ended~~outstanding ~~June 28~~assuming dilution. Common equivalent shares, ~~2003~~consisting of outstanding stock options, ~~the~~convertible ~~Company~~debt ~~determined~~and ~~that~~warrants, ~~certain~~are ~~errors occurred~~included in the ~~costing~~per-share calculations where the effect of ~~inventory~~their ~~held~~inclusion atwould ~~subcontractors~~be dilutive. As ~~a result,~~ the ~~operating~~ ~~results~~Company ~~presented~~had ~~below~~net losses for the three and six months ended June 2830, 2007 and July 1, 2006, the weighted average number of ~~2003~~common ~~have~~shares ~~been~~outstanding ~~restated~~equals the weighted average number of common and common equivalent shares assuming dilution. Approximately 3,419,000 shares of stock options were outstanding with an average exercise price of $6.34 per share as of June 30, 2007 compared to approximately 3,576,000 shares of stock options with an average exercise price of $5.64 per share at July 1, 2006.

	For the Three Months Ended						For the Six Months Ended
	June 28, 2003						June 28, 2003
	As Previously						As Previously
	Reported			As Restated			Reported			As Restated
Cost of sales	$	12,496		$	13,511		$	27,795		$	28,810
Gross profit		2,395			1,380			2,213			1,198
Net loss		(4,637	)		(5,652	)		(11,859	)		(12,874	)
Net loss per share		(0.17	)		(0.20	)		(0.42	)		(0.46	)

As of July 1, 2006, the Company’s $30.0 million of convertible notes issued in May 2006 were convertible into approximately 5,597,000 shares, if fully converted, of its common stock at an initial conversion price of $5.36 per share. In conjunction with the issuance of the notes, the Company issued warrants to purchase approximately 839,500 shares of its common stock. 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. 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 Holdings LLC (“Rodfre”), an affiliate of Alonim Investments Inc., Sipex’s largest stockholder and an affiliate of Future, Rodfre paid $2.7 million to exercise its warrant for 419,776 shares of Sipex common stock at $6.432 per share. In addition, the Company may pay interest in cash or, solely at its option, in shares of its common stock related to the notes. However, Sipex may only make interest payments in shares of its common stock if certain conditions are met (See Note 13).

~~Note~~ Comprehensive ~~12 — Subsequent Event~~Loss

OnComprehensive ~~August~~loss 5,is ~~2004, affiliates of Future exercised~~ the ~~outstanding warrant to purchase 900,000 shares of Sipex’s common stock at an exercise price of $2.9458 per share for a~~ total of ~~$2,651,220. The~~net ~~warrant~~loss ~~was~~and ~~issued~~all toother ~~the affiliates of Future in connection with the $12 million convertible note issued in 2002~~revenue, ~~which was converted into the Company’s common stock in February 2004. In connection with the warrant exercise~~expenses, ~~Sipex~~gains ~~agreed~~and ~~to modify the~~losses ~~standstill~~recorded ~~restrictions~~directly onin ~~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~~equity.5% ofThe ~~the~~ Company’s ~~issued and outstanding voting capital stock, measured on a~~ “~~Fully~~accumulated ~~Diluted~~other ~~Basis,~~comprehensive loss” as ~~defined~~consists ~~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~~foreign ~~and~~currency ~~the~~translation ~~denominator~~adjustments. isThe ~~the~~comprehensive ~~greater~~loss ofequals ~~(i) all shares of~~ the ~~Company’s~~net ~~voting~~loss ~~capital stock~~for ~~outstanding or issuable upon~~ the ~~exercise or conversion of vested securities convertible~~three ~~into or exercisable for voting capital stock~~ and ~~(ii)~~six ~~40,000,000~~months ~~(as~~ended ~~adjusted for stock dividends~~June 30, ~~splits~~2007 orand ~~like transactions). Based on currently outstanding shares~~July 1, ~~the~~2006 ~~affiliates of~~as ~~Future~~there ~~could~~were ~~purchase~~no ~~approximately~~foreign ~~2.7~~currency ~~million shares on the open market. On August 9, 2004,~~translation ~~affiliates~~adjustments ofand ~~Future~~no ~~purchased~~tax ~~2.5~~effect ~~million shares of the Company’s common stock~~ on the ~~open market~~components ~~bringing their aggregate ownership to approximately 47%~~ of ~~the~~accumulated ~~Company’s~~other ~~issued~~comprehensive ~~and outstanding~~loss ~~voting~~for ~~capital stock~~such periods.

Stockholders’ Deficit

In the first fiscal quarter of 2007, the Company adopted 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.” As a result of the adoption, the Company’s beginning balance for accumulated deficit and the derivative liability were increased by $12,000. A reconciliation of the activity in the stockholders’ deficit accounts for the three and six months ended June 30, 2007 is as follows (in thousands, except per-share information):


										Accumulated
	Common Stock									Other			Total
	Number of				Additional Paid-		Accumulated			Comprehensive			Stockholders’
	Shares		$0.01 Par Value		in Capital		Deficit			Loss			Equity (Deficit)
Balances at December 30, 2006		18,390	$	184	$	234,785	$	(243,075	)	$	(19	)	$	(8,125	)

Cumulative effect of adoption of FSP EITF Issue No. 00-19-2								(12	)					(12	)
Net loss and comprehensive loss		—		—		—		(6,290	)		—			(6,290	)
Issuance of common stock under employee stock option plans		297		3		1,065		—			—			1,068
Stock-based compensation		—		—		956		—			—			956

Balances at March 31, 2007		18,687		187		236,806		(249,377	)		(19	)		(12,403	)
Net loss and comprehensive loss		—		—		—		(7,980	)		—			(7,980	)
Issuance of common stock under employee stock plans		299		3		1,295		—			—			1,298
Stock-based compensation		—		—		962		—			—			962

Balances at June 30, 2007		18,986	$	190	$	239,063	$	(257,357	)	$	(19	)	$	(18,123	)

~~Item~~Note 25. ~~Management’s~~Related ~~Discussion~~Party ~~and Analysis of Financial Condition and Results of Operations~~Transactions

~~This~~Future ~~section~~is ~~and~~a ~~other~~related ~~parts~~party ofand ~~this~~its ~~Form~~affiliates ~~10-Q~~own ~~contain~~approximately ~~forward-looking statements~~8.6 million ~~that~~shares ~~involve~~or ~~risks~~45% ~~and uncertainties. Forward-looking statements~~of ~~can~~Sipex’s ~~also~~outstanding becommon ~~identified~~stock ~~by words such~~ as ~~“anticipates,”~~of ~~“expects~~June 30,” ~~“believes,” “plans,”~~2007. ~~“predicts,”~~Sipex ~~and~~has ~~similar~~a ~~terms.~~distribution ~~Forward-looking~~agreement ~~statements are not~~that ~~guarantees~~provides offor ~~future~~Future ~~performance~~to ~~and~~act as the Company’s ~~actual~~sole ~~results~~distributor ~~may~~for ~~differ significantly~~certain ~~from~~products ~~the~~within ~~results~~North America ~~discussed~~and ~~in the forward-looking statements~~Europe. ~~Factors~~ ~~that~~Sales ~~might~~to ~~cause~~Future ~~such differences include, but~~ are ~~not~~made ~~limited~~under ~~to, those~~an ~~discussed~~agreement inthat ~~the~~provides ~~subsection~~protection ~~entitled~~against price ~~“Factors~~reduction ~~That~~for ~~May~~its ~~Affect~~inventory ~~Future Results~~of ~~and~~Sipex’s ~~Financial Condition” below~~products. The ~~following~~Company recognizes ~~discussion~~revenue ~~should~~on besales ~~read in~~to ~~conjunction~~Future ~~with~~under the ~~Company’s~~distribution ~~Annual~~agreement ~~Report~~when onFuture ~~Form~~sells ~~10-K for~~ the ~~year ended~~ ~~December 31,~~products ~~2003~~to ~~and~~end ~~the~~customers. ~~condensed~~Future ~~consolidated~~has ~~financial~~historically ~~statements~~accounted ~~and~~for ~~notes thereto~~a ~~included~~significant ~~elsewhere~~portion inof ~~this~~the Company’s ~~Form 10-Q~~revenues. ~~All~~It ~~information~~ is ~~based on~~ the Company’s ~~fiscal~~largest ~~calendar.~~distributor ~~Unless~~worldwide ~~otherwise~~and ~~stated,~~accounted ~~references~~for in46% ~~this report~~and to45%, ~~particular~~respectively, ~~years~~of orits ~~quarters~~total ~~refer~~net tosales for the ~~Company’s~~three ~~fiscal~~months ~~years~~ ended ~~in December~~June 30, 2007 and ~~the~~July 1, 2006, ~~associated~~and ~~quarters~~accounted offor ~~those~~47% ~~fiscal~~and ~~years.~~46%, ~~The~~respectively, ~~Company~~of ~~assumes no~~its ~~obligation~~total tonet ~~revise~~sales orfor ~~update~~the ~~any~~six ~~forward-looking~~months ~~statements for any~~ended ~~reason~~June 30, ~~except~~2007 asand ~~required~~July 1, ~~by law~~2006.

~~Available~~ From ~~Information~~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 condensed consolidated financial statements as capital contributions. For the three and six months ended June 30, 2007, there were no such un-reimbursed expenses or uncompensated services rendered by Future. For the three and six months ended July 1, 2006, the Company recorded none and $5,000 of such expenses, respectively.

~~The~~In ~~Company’s Annual Report on Form 10-K~~addition, ~~Quarterly~~Sipex ~~Reports~~incurred onexpense ~~Form~~to ~~10-Q, Current~~Future ~~Reports~~totaling onapproximately ~~Form 8-K~~$35,000 and ~~amendments~~$37,000 ~~to reports filed pursuant to~~for ~~Sections~~marketing ~~13(a)~~promotional ~~and 15(d) of the Securities Exchange Act of 1934~~materials, astemporary ~~amended, are~~accounting ~~available~~services ~~on its website at www.sipex.com/investor when such reports are available on the Securities~~ and ~~Exchange~~used ~~Commission~~furniture ~~(SEC) website.~~sold ~~The~~to ~~public may read and copy any materials filed by~~ the Company ~~with~~for the ~~SEC~~three atand ~~the~~six ~~SEC’s Public~~months ~~Reference~~ended ~~Room at 450 Fifth Street~~June 30, ~~NW, Washington, DC 20549~~2007. ~~The public~~No ~~may~~such ~~obtain~~expenses ~~information~~were onrecorded ~~the~~for ~~operation of~~ the ~~Public Reference Room by~~ ~~calling~~three ~~the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy~~ and ~~information~~six ~~statements~~months ~~and~~ended ~~other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further~~July 1, ~~the~~ ~~Company’s references to the Uniform Resource Locators (URLs) for these websites are intended to be inactive textual references only~~2006.

~~As discussed~~On January 19, 2006, Sipex completed a $7.0 million private loan financing in which ~~Note~~the Company issued a 9% secured note with convertible interest due January 1119, 2008 to the affiliates ~~condensed~~of ~~consolidated~~Future, ~~financial~~which ~~statements,~~could provide these affiliates with the opportunity to obtain ~~Company~~additional shares of Sipex’s ~~financial~~common ~~statements~~stock. ~~for~~The loan was repaid in March 2006. For the three and six months ended ~~June~~ July 281, ~~2003~~2006, ~~have~~Sipex ~~been~~incurred ~~restated.~~interest ~~The~~expense ~~accompanying~~totaling ~~management’s discussion~~$86,000 ~~and~~related ~~analysis~~to ~~gives~~the ~~effect~~$7.0 million tonote ~~that~~with ~~restatement~~Future.

~~Overview~~ As discussed in Note 13, 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. Rodfre has agreed to convert its $15 million aggregate principal amount of the 2006 Notes into Sipex common stock with such conversion to be effective immediately prior to the effective time of the merger. As of June 30, 2007, the affiliates of Future held 8.6 million shares, or 45% of the Company’s outstanding common stock.

WeInterest ~~design,~~expense ~~manufacture~~incurred ~~and~~by ~~market,~~Sipex ~~high~~relating ~~performance,~~to ~~value-added~~the ~~analog integrated~~$15.0 million ~~circuits,~~portion orof ~~ICs, serving~~ the ~~broad~~2006 ~~analog~~Notes sold ~~signal~~to ~~processing~~Rodfre ~~market. We~~totaled ~~produce interface~~$265,000 ~~power management~~ and ~~optical~~$496,000 ~~storage ICs~~ for ~~use in~~ the ~~automotive,~~ ~~portable~~three ~~products,~~and ~~computing,~~six ~~communications~~months ~~and~~ended ~~networking infrastructure~~June 30, ~~markets~~2007. ~~End~~For the ~~product~~three ~~applications~~and ~~that~~six ~~contain~~months ~~our~~ended ~~ICs~~July 1, ~~include cellular phones~~2006, ~~base~~interest ~~stations,~~expenses ~~computers,~~incurred ~~DVD~~by ~~players,~~Sipex ~~and~~relating ~~digital~~to ~~cameras~~the $15.0 million Weportion ~~categorize~~of ~~our~~the ~~products~~2006 ~~into~~Notes ~~three~~were ~~major product families: interface; power management; and optical storage~~$140,000.

~~Net sales~~On ~~for the second quarter of 2004 increased by 5.7% to $15.7~~September ~~million~~8, as2006, ~~compared~~Sipex toappointed ~~net~~two ~~sales~~executive ofvice ~~$14.9 million~~presidents ~~in the corresponding period~~ of ~~2003.~~Future Weto ~~experienced~~its aBoard ~~decrease in net sales~~ of ~~13.0% from~~ ~~$18~~Directors.~~1 million~~ ~~as compared~~The toBoard ~~the~~has ~~first~~determined ~~quarter~~that ofboth ~~2004.~~new ~~The~~directors ~~increase~~are innot ~~net~~independent ~~sales~~within in the ~~second~~meaning ~~quarter~~ of ~~2004~~Rule as4200(a) ~~compared to the corresponding quarter~~ (15) of the ~~previous~~NASDAQ ~~year was~~Manual ~~driven~~ by ~~increases~~virtue ~~in net sales~~ of ~~our~~their ~~core~~relationships ~~product~~with ~~lines of interface and~~Future. ~~power management products~~Accordingly, ~~partially offset by lower sales on optical storage products. The decline in net sales in~~ the ~~second~~Board ~~quarter~~does ofnot ~~2004~~expect ~~as compared~~ to ~~the~~appoint ~~first~~them ~~quarter was primarily due~~ to aany ~~delay~~standing incommittees ~~the ramp up to production~~ of ~~new~~the ~~optical storage products caused by constraints in capacity at our wafer foundry and back end assembly and test subcontractors for these products~~Board. ~~These constraints also limited the improvement in our gross margins in the~~In ~~second~~connection ~~quarter~~with oftheir ~~2004~~appointment as ~~compared~~directors, toboth ~~the~~new ~~first~~directors ~~quarter of 2004 as our optical storage products typically~~ have ~~higher~~agreed ~~gross~~to ~~margin~~recuse ~~than our other product~~themselves ~~families.~~from ~~Changes~~any inBoard ~~product~~discussions ~~mix~~that ~~and~~relate ~~the~~to ~~sale~~transactions ofbetween ~~new~~Sipex ~~products within each of our product families can significantly impact overall gross margins. We anticipate achieving a greater balance of supply~~ and ~~demand in the third quarter for our optical storage products; however, we cannot assure that such a balance will be achieved~~Future.

~~During~~On March 29, 2007, the ~~second~~Company ~~quarter~~entered ofinto ~~2004,~~a weSecurities ~~continued~~Purchase ~~the~~Agreement ~~transformation~~with ofRodfre ~~our~~to ~~product~~provide ~~mix,~~an ~~focusing~~unsecured onpromissory ~~existing~~note ~~products~~facility ~~and~~of ~~increasing~~up ~~the~~to ~~sale~~$10.0 million. ofThis ~~new~~facility expires, and ~~products~~the ~~introduced~~borrowings inand ~~our~~accrued ~~three~~interest ~~core~~under ~~product~~any ~~families.~~notes ~~New~~issued ~~products~~under ~~introduced in~~this ~~interface~~facility ~~increased~~are ~~product~~due ~~sales~~and bypayable, on ~~$2.0~~June ~~million~~30, 2008, or ~~25%~~upon incertain ~~the~~other ~~second quarter~~events ofsuch ~~2004~~as ~~compared~~a tochange ~~the corresponding period~~ of ~~2003;~~control. ~~and~~Borrowings ~~new~~under ~~power~~this ~~management~~promissory ~~products~~note ~~enabled~~facility ~~sales~~bear ininterest ~~this~~of ~~product~~9% ~~family~~per toannum ~~grow $0.2 million, or~~subject 5%to inan ~~the~~increased ~~second~~interest ~~quarter~~rate of ~~2004, compared~~ up to ~~the~~20% ~~corresponding~~in ~~period~~case of ~~2003.~~ ~~Due~~default toor ~~the~~after ~~manufacturing~~maturity. ~~constraints~~This ~~mentioned~~promissory ~~above,~~note ~~our~~facility ~~sales~~is insubordinate ~~optical~~to ~~storage~~the ~~products~~Company’s ~~declined~~Loan ~~41%,~~and orSecurity ~~$1.0 million,~~Agreement inwith ~~the~~Silicon ~~second~~Valley ~~quarter~~Bank ~~of 2004~~and ~~compared~~ to ~~the~~ ~~corresponding~~its ~~period of 2003~~5.5% ~~Net~~Redeemable Convertible ~~sales~~Senior ofNotes ~~our~~due ~~three~~in ~~core~~2026. ~~product~~No ~~families increased~~borrowing towas ~~$15.7 million~~made inunder the ~~second~~promissory ~~quarter~~note offacility ~~2004~~in ~~from~~the ~~$14.5 million~~three ~~in the~~and ~~corresponding~~six ~~period~~months ofended ~~2003~~June 30, 2007.

WeNote ~~continually face both aggressive pricing practices as well as the emergence of new competitors in these markets~~6. InRestructuring ~~an effort to remain competitive, we intend to continue focusing on the 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 affecting our gross margin. Cost reductions and productivity improvements are also 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.~~

~~Capacity~~Below ~~utilization of our wafer fab in Milpitas, California~~ is ~~also~~a ~~an important~~summary ~~factor impacting our gross margin. 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 the ~~production of~~activities ~~optical~~related ~~storage~~to ~~products.~~restructuring ~~Our wafer fab operation~~ (in ~~Milpitas,~~thousands): ~~California produced approximately 84% of our wafer requirements in the second quarter of 2004.~~

With the sales product mix transformation and the manufacturing improvements, our gross profit improved from a $1.4 million profit in the second quarter of 2003 to a $4.1 million profit in the second quarter of 2004. Gross profit as a percentage of net revenue, or gross margin, was 26.2% in the second quarter of fiscal 2004 compared to 9.3% in the corresponding quarter of 2003. The increase is attributable to the mix shift to higher margin products in our interface and power management product lines, improvements in average selling prices and improvements in manufacturing yields and processes as a result of our continued efforts to standardize our manufacturing processes and improve our product design for manufacturability.


							Total
				Employee			Restructuring
	Facility Costs			Costs			Costs
Accrual balance, December 30, 2006	$	993		$	874		$	1,867
Incurred		—			8			8
Charges utilized		(209	)		(384	)		(593	)
Sub-lease income received		69			—			69
Adjustments to accrual		18			(23	)		(5	)

Accrual balance, March 31, 2007		871			475			1,346
Incurred		—			9			9
Charges utilized		(435	)		(316	)		(751	)
Sub-lease income received		95			—			95
Adjustments to accrual		(25	)		(150	)		(175	)

Accrual balance, June 30, 2007	$	506		$	18		$	524

~~Our~~In ~~net~~addition ~~cash~~to ~~used~~the inrestructuring ~~operating~~costs ~~activities~~incurred ~~decreased~~above, ~~to $3.8 million~~ for the three and six months ended ~~July~~June 330, ~~2004~~2007, ~~from $6.3 million in~~ the ~~comparable~~Company ~~period~~incurred ~~of 2003.~~$63,000 ~~This~~and ~~was primarily attributable to the~~ $~~5.4 million~~123,000, ~~reduction~~respectively, inof ~~net~~facility ~~loss~~costs ~~for~~related to the ~~six~~unused ~~months~~fabrication ~~ended~~portion ~~July 3,~~of ~~2004 compared with~~ the ~~corresponding~~Company’s ~~period~~headquarters facility in Milpitas, ~~2003~~California, ~~offset~~due byto the ~~increase~~transfer inof ~~inventories~~wafer offabrication $3to Silan.~~5 million.~~

~~Critical~~ During ~~Accounting~~the ~~Policies~~three and six months ended June 30, 2007, for the unused portion of the Billerica facility initiated in October 2003, the Company utilized the restructuring accrual totaling $206,000 and $394,000, respectively, which primarily consisted of lease costs. Adjustments to the accrual for the Billerica facility for the three and six months ended June 30, 2007, were primarily related to sub-lease income of $95,000 and $164,000, respectively, recorded on a cash basis due to the uncertainty of collectibility. And the adjustment to the accrual for employee costs during the second quarter of fiscal year 2007 was primarily due to the change in management’s restructuring plan for Belgium employees.

~~The~~During ~~discussion~~the ~~and~~three ~~analysis of our financial condition~~ and ~~results~~six ~~of operations~~months isended ~~based~~June 30, ~~on our condensed consolidated financial statements~~2007, ~~which have~~for ~~been~~a ~~prepared~~workforce inreduction ~~accordance~~plan ~~with accounting principles generally accepted~~initiated in the ~~United~~fourth ~~States.~~quarter ~~The preparation~~ of ~~these~~2006, ~~financial statements requires management to make estimates and assumptions that affect~~ the ~~reported~~Company ~~amounts of~~utilized ~~assets~~$316,000 and ~~liabilities~~$700,000, ~~and~~respectively. ~~disclosure of contingent assets and liabilities~~For atfacility ~~the~~costs ~~date~~related ofto the ~~condensed~~Milpitas ~~consolidated~~wafer ~~financial~~fabrication ~~statements~~closure, ~~and~~restructuring ~~the~~charges ~~reported~~utilized ~~amounts~~for ofthe ~~revenues~~three and ~~expenses~~six ~~during~~months ~~the~~ended ~~reporting~~June 30, ~~period. On an ongoing basis~~2007, wetotaling ~~evaluate~~zero ~~our~~and ~~estimates~~$21,000, ~~including~~respectively, ~~those significant estimates that~~for ~~are~~facility ~~particularly~~decontamination. ~~susceptible~~For tothe ~~change,~~three ~~which~~and ~~include~~six ~~revenue~~months ~~recognition, sales~~ended ~~returns~~June 30, ~~inventory valuation~~2007, ~~restructuring~~the ~~and~~Company ~~impairment~~utilized $228,000 ~~and~~for ~~income taxes.~~settling Wecontractual ~~base~~obligation ~~our~~related ~~estimates on historical experience and on various other assumptions that are believed~~ to bethe ~~reasonable~~closure ~~under~~of the ~~circumstances~~Milpitas fabrication facility. There is were no ~~assurance~~such ~~that~~activities ~~actual~~in ~~results~~the ~~will~~first ~~not~~three ~~differ~~months ~~from~~of fiscal ~~those~~year ~~estimates~~2007.

WeAs ~~have~~of ~~identified~~June 30, 2007, the ~~accounting~~balance ~~policies~~of ~~below as~~ the ~~policies~~restructuring ~~most critical~~accrual toprimarily ~~our~~consisted ~~business~~of ~~operations~~employee severance ~~and~~costs, ~~the~~Milpitas ~~understanding~~facility ofdecontamination ~~our~~costs ~~results~~and ~~of operations.~~Billerica ~~The~~facility ~~impact~~lease ~~and~~costs. ~~any~~These costs ~~associated~~are ~~risks~~expected ~~related~~ to ~~these~~be ~~policies~~paid ~~on our~~over ~~business~~the ~~operations~~next isnine ~~discussed~~months. ~~throughout~~The ~~Management’s~~balance ~~Discussion and Analysis~~ of ~~Financial~~the ~~Condition~~accrual ~~and~~as ~~Results~~ of ~~Operations~~June 30, 2007 ~~where~~was ~~such~~approximately ~~policies affect~~$0.5 million, ~~our~~all ~~reported~~of ~~and~~which ~~expected~~was ~~financial~~the ~~results~~short-term portion.

~~Revenue~~Note ~~recognition~~7. WeIncome ~~recognize~~Tax ~~revenue when persuasive evidence of an~~Expense ~~arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured.~~

~~Future~~The Company adopted FIN 48 on December 31, 2006. As a ~~related~~result ~~party~~of the implementation of FIN 48, the isCompany ~~our~~recognized ~~exclusive~~no ~~distributor~~material adjustment in the liability for ~~North~~unrecognized ~~America~~income tax ~~and~~benefits. ~~Europe~~At the adoption date of December 31, 2006, the Company had approximately $2.8 million ~~Sales~~of unrecognized totax ~~this~~benefits, ~~distributor~~all ~~are~~of ~~made~~which ~~under~~would anaffect ~~agreement~~its ~~that~~effective ~~provides~~tax rate if recognized before ~~protection~~consideration ~~against~~of ~~price~~changes ~~reduction~~in ~~for~~valuation ~~Future’s~~allowance. ~~inventory~~At June 30, 2007, the Company had $2.9 million of unrecognized ~~our~~tax ~~products~~benefits. In addition, ~~Future~~the ~~has~~Company ~~stock~~recognizes ~~rotation~~interest ~~rights.~~and ~~Pursuant~~penalties related to uncertain ~~these~~tax ~~stock~~positions in income tax expense. At the adoption date of December 31, 2006, the ~~rotation~~Company ~~rights~~had approximately $53,000 ~~Future~~of isaccrued ~~permitted~~interest onand apenalties ~~quarterly~~for uncertain tax positions primarily from its foreign operations. For the three and six months ended June 30, 2007, the Company accrued $6,000 and $10,000 of interest and penalties related to its uncertain tax positions, respectively.

15 At December 30, 2006, the Company had approximately $207.4 million, $73.6 million, and $131.7 million of federal, California, and Massachusetts net operating loss carryforwards, respectively. The Company believes it has had multiple ownership changes, as defined by Section 382 of the Internal Revenue Code (IRC), due to significant stock transactions in previous years that will limit the future realization of its net operating loss carryforwards.

~~Table of Contents~~15

~~For~~Based ~~all~~on ~~other~~estimates ~~sales~~prepared to date, ~~revenue~~the isCompany ~~recognized~~believes ~~upon~~Section 382 ~~title~~could ~~transfer~~result ~~and shipment~~in ~~because~~the ~~these~~forfeiture ~~distributors/customers~~of ~~have~~approximately no$75.4 million ~~price~~of ~~protection~~net ~~and~~operating ~~have limited~~loss ~~return~~carryforwards ~~rights.~~for ~~Distributors~~federal ~~are~~income ~~permitted~~tax topurposes ~~return~~and ~~products~~$31.5 million ~~limited to~~of anet ~~percentage~~operating ofloss ~~their~~carryforwards ~~purchases~~for ~~over~~Massachusetts aincome ~~specified~~tax ~~period~~purposes. ofManagement ~~time.~~believes Wethere ~~believe~~could ~~that~~also webe ~~are~~an ~~able~~impact ~~to estimate~~on ~~and~~the ~~establish~~Company’s ~~appropriate~~ability ~~reserves~~to ~~for~~utilize ~~future~~California ~~returns~~net ~~from~~operating ~~these~~loss ~~distributors.~~carryforwards ~~For~~as ~~product~~a ~~sales~~result ~~recognized~~of atSection 382. As the ~~time~~Company’s ofanalysis ~~shipment~~is incomplete, wethese ~~accrue~~estimates ~~for~~are ~~estimated~~uncertain. ~~sales~~The ~~returns~~net ~~upon~~operating ~~shipment~~loss ~~based~~carryforwards ~~upon~~begin ~~historical~~to ~~trends~~expire asin ~~well~~2007 for federal and asMassachusetts ~~any~~purposes ~~known~~and ~~pending~~2012 ~~sales~~for ~~returns~~California purposes.

~~Sales~~As ~~returns.~~of ToDecember 30, ~~estimate~~2006, ~~reserves~~the ~~for~~Company ~~future~~had ~~sales~~research ~~returns,~~and wedevelopment ~~regularly review~~tax ~~our~~credit ~~history~~carryforwards of approximately ~~actual~~$3.1 million, ~~returns~~$3.5 million, ~~for~~and ~~each~~$0.1 million ~~major~~which ~~product~~can ~~line.~~be Weused ~~also~~to reduce future ~~communicate~~federal, ~~monthly~~California, and ~~with~~Massachusetts ~~our~~income ~~channel~~taxes, ~~partners~~respectively. toFederal ~~gather~~research ~~information~~and ~~about~~development tax credit ~~sell-through~~carryforwards ~~activity,~~will ~~end~~expire ~~user~~beginning ~~satisfaction~~in ~~and~~fiscal to2010 ~~determine~~through ~~the~~2026. ~~volume~~California ofand Massachusetts ~~inventory~~research inand ~~the~~development ~~channel.~~tax Wecredits ~~use~~will ~~the~~carry ~~results~~forward ofindefinitely. ~~this~~In ~~analysis~~addition, tobased ~~estimate the~~on ~~reserves~~estimates ~~for~~prepared ~~sales~~to ~~returns.~~date, Wethe ~~adjust~~Company ~~our~~believes ~~reserves~~that ~~for~~$2.0 million ~~future~~of ~~returns~~the asfederal research tax ~~necessary,~~credit ~~based~~carryforwards oncould ~~returns~~be ~~experience,~~subject ~~returns~~to ~~expectations~~forfeiture ~~and~~due ~~our communications~~to ~~with~~Section 382 ~~our~~ownership ~~channel~~changes ~~partners~~under IRC Section 383.

InAs ~~estimating reserves, we also consider unusual events and market conditions. It is possible that future events such as the introduction~~ of ~~a competitive product~~December 30, ~~product obsolescence~~2006, ~~price~~the ~~competition,~~Company ~~weakness~~had inunused ~~the semiconductor~~California ~~industry and distributors~~manufacturers’ ~~desire~~investment ~~to decrease levels of inventory~~credits in the distribution channel could result in significant changes in customer demand and cause future returns to increase beyond historical levels. Management believes that it is able to estimate returns and establish appropriate reserves for returns from customers for which Sipex recognizes revenue as of ~~shipment,~~approximately ~~using the process described above~~$2. ~~However~~1 million, ~~since reserves~~which ~~for~~will ~~estimated~~expire ~~sales~~beginning ~~returns are recorded as a reduction~~ in ~~revenues, any~~fiscal ~~significant~~2007 ~~difference~~through ~~between~~2013. ~~our estimated and actual returns experience,~~Management orbelieves ~~changes~~there incould ~~our~~also ~~estimate of reserves for future returns, would~~ be ~~reflected in~~an ~~our~~impact ~~reported~~on ~~net sales in~~ the ~~period~~Company’s weability ~~determine~~to ~~that~~utilize ~~difference,~~the ~~and could~~California ~~have~~manufacturers’ ainvestment ~~material~~credits ~~impact~~as ona ~~our~~result ~~future results~~ of ~~operations~~Section 382.

~~Inventory~~The ~~valuation.~~Company Wehas ~~write~~recorded ~~down~~a ~~inventory~~100% ~~for~~valuation ~~estimated~~allowance ~~excess quantities,~~against ~~obsolescence~~its ornet ~~marketability.~~deferred Intax ~~addition~~assets, ~~we write down inventory~~due ~~costs~~ to the ~~lower~~uncertainty ofregarding ~~cost~~the ormagnitude ~~market.~~of ~~Excess~~the ~~and~~Section 382 ~~obsolete inventory is determined by comparing current inventory to current backlog, anticipated future demand~~ and ~~shipment~~383 ~~history.~~limitations ~~Lower of cost or market adjustments are determined by reviewing shipments during the quarter~~ as well as ~~quarter ending~~ ~~backlog~~uncertainty ~~and~~concerning ~~comparing~~future ~~standard~~taxable ~~cost to anticipated market pricing~~income. ~~Inventories~~ are written down to the lower of cost or market which becomes the new cost basis. 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 are less favorable than those projected by management, additional inventory write-downs may be required. Reviews of the valuation of inventory reserves are performed on a quarterly basis.

~~Restructuring~~Sipex’s ~~and~~income ~~impairment.~~tax ~~The~~expense ~~determination~~primarily ofrelates ~~the~~to ~~estimated restructuring~~its ~~accrual~~foreign ~~and~~operations ~~impairment~~as ~~requires significant management judgment. To estimate~~ the ~~restructuring accrual, we prepare a plan that includes the~~Company ~~number~~continues ~~of employees~~ to beincur ~~terminated~~losses ~~and~~from ~~the~~domestic ~~related~~operations. ~~severance~~The ~~cost,~~Company ~~the~~recorded ~~amount of~~income ~~impairment~~tax ~~for~~expense ~~certain fixed assets and inventory, the termination costs~~ of ~~certain~~$51,000 ~~leases~~ and ~~the~~$53,000 ~~related~~for ~~actions required to execute~~ the ~~plan.~~three Itmonths ~~is possible~~ended ~~that~~June 30, ~~future~~2007 ~~events~~and ~~such~~July 1, as2006, ~~voluntary employee terminations~~respectively, ~~sublease~~and ~~agreements~~recorded or$68,000 aand ~~shift~~$85,000 infor the ~~timing~~six ofmonths ~~the~~ended ~~execution~~June 30, of2007 ~~the~~and ~~plan~~July 1, ~~could~~2006, ~~result in significant changes to the original estimate~~respectively.

WeNote ~~accounted for restructuring charges beginning January 1, 2003 in accordance with Statement of Financial Accounting Standards (SFAS) No~~8. ~~146, “Accounting~~ ~~for Costs Associated with Exit or Disposal Activities.” SFAS No.~~Inventories 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. Prior to January 1, 2003, we accounted for restructuring in accordance with Emerging Issues Task Force Issue No. 94-3 (“EITF 94-3”), “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and SEC Staff Accounting Bulletin No. 100 (“SAB 100”), “Restructuring and Impairment Charges.”

16 Inventories, net, are as follows (in thousands):


	June 30, 2007		December 30, 2006
Raw materials	$	160	$	768
Work-in-process		8,312		10,518
Finished goods		2,884		4,300

Total	$	11,356	$	15,586

~~During~~Note ~~the fourth quarter of 2003 we established a $1~~9.~~1 million restructuring~~ ~~reserve~~Accrued ~~for our facility in Billerica, Massachusetts. This~~Expenses followed our 2002 restructuring initiative in which we transferred our back end test operations to Asia in the first quarter of 2003 and began to integrate other support activities to Milpitas, California. By the fourth quarter of 2003 we had vacated and segregated approximately 75% of the Billerica, Massachusetts facility and are seeking a lessee for this unoccupied space. The restructuring reserve represents the present value of future lease payments subsequent to abandonment less any estimated sublease income net of associated costs. To estimate future sublease income, we worked with an independent broker to estimate the length of time to sublease the facility and the total amount to be received. However, our estimates of expected sublease income could change in the future based on factors that affect our ability to sublease this facility such as general economic conditions and the real estate market, among others.

WeAccrued ~~review~~expenses long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an impairment is indicated, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are ~~reported~~as atfollows the lower of the carrying amount or fair value less cost to sell. In estimating future net cash flows, management makes certain assumptions including future sales levels, gross profit margins and expense levels and proceeds from disposition. The future net cash flows can vary from management estimates due to unforeseen circumstances that may result (in ~~additional impairment charges required to be recognized in~~thousands): ~~the income statement.~~

Income taxes. In assessing the net realizable value of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become taxable. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management assessed that it is not more likely than not that the deferred tax assets will be realized in the future. Our deferred tax assets at July 3, 2004 continue to have a full valuation allowance.


	June 30, 2007		December 30, 2006
Accrued compensation and benefits	$	2,942	$	2,815
Accrued audit fees		445		574
Accrued provision for purchase commitment on excess inventories		375		1,417
Accrued income taxes		367		340
Accrued commissions		364		444
Accrued warranty		334		259
Accrued interest and related derivative liability		283		679
Accrued legal fees		53		251
Accrued royalties		47		19
Other		372		387

	$	5,582	$	7,185

~~Results of Operations~~16

	For the Three Months Ended						For the Six Months Ended
	July 3, 2004			June 28, 2003			July 3, 2004			June 28, 2003
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		73.8			90.7			74.4			96.0
Gross profit		26.2			9.3			25.6			4.0
Operating expenses:
Research and development		25.7			23.0			22.4			21.2
Marketing and selling		13.8			9.7			12.3			11.2
General and administrative		10.9			14.4			13.1			13.6
Restructuring		0.4			(2.0	)		0.2			(1.0	)
Total operating expenses		50.8			45.1			48.0			45.0
Loss from operations		(24.6	)		(35.8	)		(22.4	)		(41.0	)
Other income (expense), net		0.5			(1.6	)		0.2			(1.0	)
Loss before income taxes		(24.1	)%		(37.4	)%		(22.2	)%		(42.0	)%

Note 10. Borrowing Arrangements

17 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 the Company, at the bank’s prime rate plus 3%. 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 12). 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. The agreement was amended on June 26, 2007, which requires the Company to comply with a minimum liquidity ratio of 1.50:1.00 at each fiscal month end. 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 (as defined in the Agreement) divided by (ii) the Obligations as defined in the agreement. In addition, the Company must maintain, as of the last day of each fiscal quarter, a tangible net worth (deficit) (as defined in the Agreement) of at least the amount set forth below:


Fiscal Quarter Ending		Minimum Tangible Net Worth (Deficit)
September 30, 2006		$600,000
December 30, 2006		($ 5,500,000)
March 31, 2007		($ 10,000,000)
June 30, 2007		($ 20,000,000)
Each fiscal quarter thereafter		$2,500,000 plus 50% of any positive net income for each fiscal quarter thereafter

~~Net~~ The ~~Sales~~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 the Company’s ability to dispose of assets, change its 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 its obligations under the agreement. As of June 30, 2007, the unused portion of the line of credit was $3,735,000. This amount was subsequently borrowed by the Company in July 2007 (See Note 16).

~~Net~~As ~~sales~~part ~~were~~of ~~$15.7 million~~the ~~and~~Agreement, ~~$14.9 million~~in ~~for~~addition to the ~~second~~$5,000,000 ~~quarter~~secured revolving line of credit, ~~2004~~Sipex ~~and~~can ~~2003~~borrow under the term loans from September 28, ~~respectively~~2006 to December 31, ~~representing~~2006 in an ~~increase~~aggregate amount ofnot ~~5.7%~~to orexceed $02,000,000.~~8 million. For~~ Interest accrues from the ~~six~~date ~~months~~of ~~ended~~each ~~July 3,~~term ~~2004,~~loan ~~net~~at ~~sales~~a ~~increased~~fixed 12rate of 9.725% toper ~~$33~~annum.8 Each term loan shall be payable in thirty-six (36) equal monthly installments ~~million~~of ~~compared~~principal toplus ~~$30~~accrued interest.~~0 million~~ ~~for~~When repaid or prepaid, the ~~six~~term ~~months~~loan ~~ended~~may not be re-borrowed. As of June 2830, ~~2003~~2007, $1,667,000 was outstanding under the term loan, of which $667,000 was the short-term portion and $1,000,000 was the long-term portion. The ~~increases~~ ~~were~~Company ~~driven~~currently bydoes ~~several~~not ~~factors,~~expect ~~including~~to maintain compliance with the ~~introduction~~financial covenants as of ~~several~~the ~~new~~end ~~products;~~of ~~cost~~the ~~reductions~~fiscal inquarter ~~interface~~ending ~~and~~September 29, ~~power~~2007. ~~management~~If ~~products~~the Company is unable to obtain a waiver ~~allowing~~from Silicon Valley Bank, the Company may be required to ~~compete~~repay inthe ~~commodity~~unpaid ~~pricing~~portion ~~market~~of ~~conditions;~~the ~~and~~term loan ~~increased~~at ~~focus~~such ondate ~~managing~~upon ~~the~~demand ~~sales~~by ~~channel~~Silicon ofValley ~~representatives~~Bank. For the three and ~~distributors~~ tosix ~~increase~~months ~~design~~ended ~~wins~~June 30, 2007, the interest expense incurred for ~~interface~~the loan was approximately $40,000 and ~~power~~$84,000, ~~management products~~respectively.

~~Our international net sales were 73% and 80% of the total net sales for~~17 the second quarter of 2004 and 2003, respectively, and 77% and 81% for the six months ended July 3, 2004 and June 28, 2003, respectively. In dollar terms, the international net sales were $11.6 million and $12.0 million for the second quarter of 2004 and 2003, respectively. For the six months ended July 3, 2004 and June 28, 2003, international sales were $25.9 million and $24.2 million, respectively. Geographically, we experienced sales growth of 42% in the United States and 44% in the Europe for the second quarter of 2004 as compared to the same period in 2003. For the six months ended July 3, 2004, sales growth was 36% in the United States and 48% in Europe as compared to the six months ended June 28, 2003. Net sales in Asia other than Japan was flat in the second quarter of 2004, as compared to the same period in 2003 but showed 10% growth for the six months ended July 3, 2004 as compared to the six months ended June 28, 2003. The increases were primarily attributable to increases in shipment of interface and power management products in 2004 compared to 2003. Net sales declined 29% and 12% in Japan for the three and six months ended July 3, 2004 as compared to the corresponding periods in 2003. This decrease was driven by lower shipment of optical storage products.

~~Gross profit~~Any ~~improved~~borrowings tounder ~~$4.1 million, or 26.2%, in~~ the ~~second~~ ~~quarter~~line of ~~2004~~credit ~~from~~are ~~$1.4 million,~~due orand ~~9.3%,~~all inoutstanding ~~the corresponding~~advances ~~period~~must ofbe ~~2003. For the six months ended July 3~~repaid, ~~2004,~~and ~~gross~~all ~~profit increased to 25.6%, or~~outstanding ~~$8.7 million,~~letters ~~compared to 4.0%, or $1.2 million, for the six months ended June 28, 2003. The increase was primarily attributable to the improvements in manufacturing yields and processes as a result~~ of ~~our~~credit ~~continued~~must ~~efforts~~be tocash ~~standardize our~~collateralized ~~manufacturing~~upon processes and improve our product designs for manufacturability. These manufacturing process improvements include our continuing efforts to convert our manufacturing capacity to two-micron geometry from five-micron geometry. This conversion increases the ~~number~~earlier of ~~circuits per wafer~~September 29, ~~and increases~~2007 ~~the~~or ~~end~~a ~~product sales value per wafer significantly~~liquidity ~~with~~event ~~relatively~~which ~~minor~~includes ~~increases~~changes in ~~wafer cost. The conversion has improved our cost and yield performance. In addition~~ownership, ~~we decided to run our business through our Asian distribution network in~~ a ~~more~~merger, ~~disciplined~~an ~~manner~~acquisition byor ~~rejecting~~the ~~some~~receipt ~~customer orders~~of ~~that~~net ~~did not make sense~~ proceeds from ~~a pricing or product profitability perspective. This discipline contributed to~~ the ~~improvement~~consummation inof ~~our gross profits and~~ an ~~increase~~equity infinancing ~~our~~of ~~average~~no ~~selling~~less ~~prices~~than ~~in the second quarter of 2004~~$10,000,000.

~~Future~~On ~~Electronics~~March 29, ~~has~~2007, ~~historically~~the ~~accounted~~Company ~~for~~entered into a ~~significant portion~~Securities ofPurchase ~~our~~Agreement ~~revenues~~with ~~and~~Rodfre, ~~gross~~an affiliate ~~profits~~of Future. AsThis ~~our~~agreement ~~largest distributor,~~creates ~~Future~~a ~~accounted~~promissory ~~for~~note facility ~~50%~~which ~~and~~provides ~~46%~~from oftime to ~~total~~time ~~net~~the ~~sales for~~Company ~~the~~may ~~three~~issue ~~and~~to ~~six~~Rodfre ~~months~~up ~~ended~~to ~~July~~$10.0 3,million ~~2004, respectively.~~of ~~Future also accounted for 66~~9% ofUnsecured ~~our~~Junior ~~gross~~Notes ~~profits~~in exchange for ~~both~~cash ~~the~~equal ~~three~~to ~~months~~the ~~and~~principal ~~six~~amounts ~~months~~of ~~ended~~each ~~July 3, 2004~~note. The ~~gross~~notes ~~profit~~have oncustomary ~~net~~events ~~sales~~of default, toincluding ~~Future~~defaults ~~was~~upon ~~34.6%~~failure ~~for~~to ~~the three~~pay ~~months~~interest ~~ended~~or ~~July 3,~~principal ~~2004~~amounts when due, asbreach ~~compared~~of covenants to(with ~~6.2%~~a ~~for~~15-day ~~the corresponding~~grace period), breach of ~~2003.~~representations ~~The~~and ~~gross~~warranties, ~~profit~~default on ~~net sales to~~other ~~Future~~indebtedness ~~for~~in ~~the~~excess ~~six~~of ~~months ended July~~$1.0 3million, ~~2004~~or ~~was~~upon 36insolvency events.~~9%,~~ ~~as compared~~The toholders ~~4.9%~~of ~~for~~the notes will also have the ~~corresponding~~option ~~period~~of demanding repayment of ~~2003.~~any ~~The increases~~outstanding inamounts owed pursuant to the ~~gross~~notes within ~~profit~~30 days ~~percentages~~of ~~for~~a ~~these~~change ~~periods~~in ~~were driven~~control byof ~~lower~~Sipex. ~~product~~As ~~costs~~of ~~achieved~~June 30, by2007, ~~the~~there ~~manufacturing process~~was ~~and~~no ~~cost~~borrowing against ~~improvements~~the ~~noted~~promissory ~~above~~note facility.

~~Research~~Note ~~and~~11. ~~Development~~Accrued Warranty

~~Research~~The ~~and~~Company’s ~~development~~products ~~expenses~~are ~~were~~sold ~~$4.0 million~~with ~~and~~warranties ~~$3.4 million~~ranging ~~for the second quarter of 2004 and 2003, respectively. The $0.6 million increase resulted primarily~~ from aone ~~$0.7 million~~to ~~increase~~two inyears ~~salary~~depending ~~and benefits due to~~upon ~~increases~~the ~~in headcount and a $0~~customers.~~3 million~~ ~~increase~~Reserve inrequirements ~~purchases~~are ofrecorded ~~masks set and prototype wafers used~~ in product development activities. These increases resulted from increased new product development and process improvement activities. These increases were offset by lower depreciation and amortization expenses as fixed asset additions were reduced and as the ~~equipment~~period ~~reached the end~~ of ~~its~~sale ~~economic~~and ~~useful~~are ~~life.~~based Ason ~~a percentage of net sales, research and~~an ~~development~~assessment ~~expenses increased to 25.7% for the second quarter~~ of ~~2004 as compared to 23.0% for~~ the ~~same~~products ~~quarter~~sold inwith ~~2003.~~warranty ~~For the six months ended July 3, 2004, research~~ and ~~development~~historical ~~expenses~~warranty ~~increased~~costs ~~to 22~~incurred.4% ofThe ~~net~~Company ~~sales,~~also ~~or $7.6 million,~~assesses ~~compared~~its topre-existing ~~21.2%~~warranty ofobligations ~~net~~and ~~sales,~~may ~~or $6.4 million,~~adjust ~~for~~ the ~~six~~amounts ~~months ended~~based ~~June 28, 2003. These percentage increases were primarily attributable to higher spending~~ on ~~additional headcount and new product and manufacturing~~actual ~~technologies~~experience ~~including~~or ~~mask~~changes ~~sets~~in ~~and~~future ~~prototype wafers~~expectations.

~~Marketing~~ Changes in Sipex’s warranty liability for the six months ended June 30, 2007 and ~~Selling~~July 1, 2006 are as follows (in thousands):

Marketing and selling expenses were $2.2 million and $1.4 million for the second quarter of 2004 and 2003, respectively. The net increase of $0.8 million was primarily attributable to a $0.4 million increase in commission expenses on higher sales and a $0.3 million increase in salaries and benefits expenses driven by additional sales and marketing headcount compared to the corresponding period of 2003. As a percentage of net sales, marketing and sales were higher in the second quarter of 2004 compared to the corresponding period of 2003, or 13.8% and 9.7%,


	For the Six Months Ended
	June 30, 2007			July 1, 2006
Beginning accrued warranty	$	259		$	87
Warranty claims		(38	)		(9	)
Accruals for the period		113			(46	)

Ending accrued warranty	$	334		$	32

18Note 12. Lease Financing Obligation

~~Table~~ On March 9, 2006, the Company entered into an Agreement for Purchase and Sale of ~~Contents~~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.

~~respectively.~~ The ~~For~~Company ~~the~~provides ~~six months~~a ~~ended~~security ~~July~~ deposit of $1.3, million ~~2004,~~in ~~marketing~~the ~~and~~form ~~selling~~of ~~expenses~~an ~~increased~~irrevocable standby letter of credit issued to ~~12.3%~~Mission ~~of net~~West ~~sales~~Properties, orL.P. under its $45.20 million, ~~compared~~revolving line toof 11credit with Silicon Valley Bank (See Note 10).2% The security deposit is held as security for the faithful performance by Sipex for all of ~~net~~the ~~sales~~terms, orcovenants, and conditions prescribed under $3the lease agreement.~~4 million~~ Accordingly, the Company has accounted for this sale and leaseback transaction as a financing transaction shown on the ~~six~~condensed ~~months~~consolidated ~~ended~~balance ~~June~~sheet as “lease financing obligation.” With the initial obligation recorded at $12.6 28million, ~~2003.~~which ~~These~~represents ~~percentage~~net ~~and~~proceeds ~~absolute~~from ~~dollar~~the ~~increases~~sale ~~were~~of the Hillview facility, no gain or loss was recorded upon the sale. The ~~primarily~~effective-interest ~~driven~~rate byfor ~~higher~~the ~~spending~~lease onfinancing ~~headcount~~obligation inis ~~marketing~~9.3% ~~and~~which ~~sales~~approximates asthe ~~well~~Company’s asestimated ~~additional~~borrowing ~~commission~~rate ~~expenses~~at ~~incurred~~that ~~during~~time. Depreciation for the ~~second~~Hillview ~~quarter~~facility ofis ~~2004~~recorded over the straight-line method for the remaining useful life.

~~General and Administrative~~18

~~Restructuring~~ Future minimum lease payments for the lease financing obligation as of June 30, 2007 are as follows (in thousands):

Restructuring consisted principally of facility exit costs. For the three and six months ended July 3, 2004, restructuring expenses of $59,000 represented adjustments to facility exit costs for our Billerica, Massachusetts facility lease. For the three and six months ended June 28, 2003, restructuring credit of $(294,000) and $(300,000), respectively, represented adjustments to facility exit costs for closing of our San Jose fabrication facility in the third quarter of 2002, and anticipated severance costs being less than originally expected.


Fiscal year ending December

2007 (remaining 6 months)	$	668
2008		1,368
2009		1,408
2010		1,449
2011		11,453


Total minimum lease payments		16,346
Less: amount representing interest		4,093


Present value of minimum lease payments		12,253
Less: current portion of lease financing obligation		220

Long-term lease financing obligation	$	12,033

~~Other~~ For ~~Income~~the ~~(Expense)~~three and six months ended June 30, ~~Net~~2007, interest expense totaled $285,000 and $571,000, respectively, for the lease financing obligation. For the three and six months ended July 1, 2006, interest expense totaled $289,000 and $352,000, respectively.

~~Other~~Note ~~income (expense), net, was $79,000 and $(233,000) in the second quarter of 2004 and 2003, respectively~~13. ~~For~~Convertible ~~the~~Senior ~~six months ended July 3, 2004,~~Notes other income (expense), net, was $84,000 compared to $(316,000) for the same period in prior year. These increases were primarily attributable to a decrease in interest expense related to the convertible debt issued to the affiliates of Future which was converted to the Company’s common stock in February of 2004.

~~Income~~ Terms ~~Tax~~and ~~Expense (Benefit)~~Conditions

~~Income~~On ~~tax~~May 18, ~~expense~~2006, ~~consisted~~Sipex ~~principally~~issued $30.0 million of ~~accruals~~5.5% ~~for~~Redeemable ~~income~~Convertible ~~taxes~~Senior Notes ~~relating~~due toin ~~our~~2026 ~~international~~(“2006 ~~locations.~~Notes”) Inin ~~the~~a ~~second~~private ~~quarter~~placement. Rodfre, an affiliate of ~~2004~~Future, ~~income~~purchased 50% of ~~tax~~the ~~benefit~~2006 ~~resulted~~Notes ~~from~~or ~~the~~$15.0 million ~~resolution~~aggregate principal amount being sold in this offering. The remainder of ~~certain~~the ~~prior~~2006 ~~year~~Notes ~~foreign~~was ~~taxes~~purchased atby other accredited investors. The Company intends to use ~~less~~the ~~than~~net ~~estimated~~proceeds ~~amounts~~of approximately $29.0 million for general corporate purposes.

~~Financial~~ The ~~Condition~~2006 Notes will mature on May 18, ~~Liquidity~~2026 and ~~Capital~~bear ~~Resources~~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 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 Capital Market Exchange, 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.

~~Financial~~ The ~~Condition~~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.

AsAt ofany ~~July 3,~~time ~~2004~~prior to maturity, wethe ~~had~~Company ~~available~~may ~~funds~~elect to automatically convert some or all of ~~$15.0 million~~the ~~consisting~~2006 Notes into shares of Sipex’s common stock if the daily closing price of its common ~~cash~~stock ~~and~~exceeds ~~cash~~one ~~equivalents~~hundred fifty percent (150%) of the then applicable conversion price (initially $128.~~0 million~~04 ~~and~~per ~~short~~share) for 20 trading days during any 30 trading-~~term~~day ~~investments~~period ending within 5 days of ~~$3.0~~the ~~million,~~notice asof ~~compared~~automatic toconversion ~~$21.2 million~~and ateither ~~December~~(a) ~~31,~~a ~~2003.~~registration ~~The~~statement ~~decrease~~covering the resale of the ~~$6.2 million~~common ~~was~~stock ~~used~~issued ~~principally~~upon toconversion ~~fund~~is ~~our~~effective ~~ongoing~~and ~~operations~~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 ~~provide~~remain effective through and including the earlier of the date of the ~~restricted~~automatic ~~cash~~conversion or the last date on which the registration statement registering the resale of such common stock is required to be kept effective under athe ~~contractual~~terms ~~arrangement.~~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.

~~Net cash used in operations was $3.8 million for the six months ended July~~19 3, 2004, resulting primarily from the $7.4 million net loss, of which $5.0 million was non-cash related, offset by a $2.2 million decrease in working capital (primarily in inventories) and partially offset by a $0.9 million increase in deferred income. Net cash used in operating activities for the six months ended June 28, 2003 was $6.3 million, resulting primarily from the $12.9 million net loss, of which $4.3 million was non-cash related, partially offset by a $1.1 million increase in working capital and a $1.1 million increase in deferred income.

~~Table~~ Pursuant to a lock-up and standstill agreement entered in connection with the merger with Exar, Rodfre, the holder of ~~Contents~~50% of the outstanding amount of the 2006 Notes, has agreed to convert the 2006 Notes into Sipex common stock effective immediately prior to the effective time of the merger. The remaining holders of the 2006 Notes have also agreed to convert their 2006 Notes into Sipex common stock immediately prior to the effective time of the merger, subject to the conditions that (a) the average price of Sipex common stock has exceeded one hundred fifty percent (150%) of the conversion price then in effect for at least twenty trading days during the thirty trading day period ending one day prior to closing of the merger and (b) the Average Daily Volume (as defined in the Indenture entered into in connection with the 2006 Notes) for Sipex common stock shall not be less than three hundred seventy-five thousand dollars ($375,000) during such period.

~~Net~~At ~~cash~~any ~~used~~time inon ~~investing~~or ~~activities~~after ~~was $2.6~~May ~~million~~21, ~~for~~2009, ~~the~~Sipex ~~six~~may ~~months ended~~redeem ~~July 3,~~some ~~2004,~~or ~~resulting~~all ~~primarily~~of ~~from~~the ~~$1.8 million~~2006 ~~for~~Notes ~~restricted~~at ~~cash~~100% ~~and~~of ~~$0.8 million~~the ~~from~~principal ~~purchases~~amount ofplus ~~property~~accrued and ~~equipment.~~unpaid ~~Net~~interest ~~cash~~to, ~~provided by~~but ~~investing~~excluding, ~~activities~~the ~~was~~redemption $7date.~~8 million~~ ~~for~~If Sipex ~~the~~elects ~~six~~to ~~months~~redeem ~~ended~~the ~~June 28~~2006 Notes, ~~2003,~~ ~~resulting~~it ~~primarily~~will ~~from~~provide ~~$10.0 million~~notice of ~~proceeds~~redemption ~~from~~to ~~maturity~~the holders of the ~~short-term~~2006 ~~investments,~~Notes ~~offset~~not byless ~~$1.5~~than 20 ~~million~~days ~~from~~and ~~purchases~~not ofmore ~~short-term investments~~than ~~and $0.7~~90 ~~million~~days ~~purchases~~before ofthe ~~property~~redemption ~~and equipment~~date.

~~Net~~The ~~cash~~holders ~~provided~~of ~~by financing activities was $0.3 million for~~ the ~~six months~~2006 ~~ended~~Notes ~~July 3,~~may ~~2004,~~require ~~resulting~~Sipex ~~from~~to ~~$0.3 million~~repurchase inthe ~~proceeds~~2006 ~~from issuance~~Notes offor ~~stock options under employee stock plans. Net~~ cash ~~provided by~~on ~~financing activities was $10.6~~May ~~million for the six months ended June 28~~15, ~~2003~~2011, ~~resulting~~ ~~primarily from $10.4~~May ~~million~~15, of2016 ~~net~~or ~~proceeds from issuance of convertible secured note referred as the Second Note. In February~~May ~~2004~~15, ~~the affiliates~~2021, ofat ~~Future~~a ~~exercised~~price ~~the~~equal ~~conversion rights~~ to ~~convert~~100% ~~the~~of ~~First Note and~~ the ~~Second Note into an aggregate of 4.6 million shares of our common stock. A total of $22.6 million of~~ principal ~~portion~~amount ~~of long-term debt, net of~~plus ~~$1.2 million~~accrued ~~in unamortized discount~~ and ~~$0.2 million~~unpaid ininterest, ~~unamortized~~if ~~issuance cost~~any, ~~was~~to, ~~extinguished.~~but ~~As of July 3~~excluding, ~~2004,~~ the ~~Company~~applicable ~~had~~repurchase ~~no long-term debt~~date.

~~Liquidity~~ Upon ~~and~~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 Capital ~~Resources~~Market Exchange, 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.

~~Management~~The ~~believes~~2006 ~~that~~Notes ~~our~~contain ~~existing~~certain ~~cash~~covenants ~~and~~applicable ~~cash~~to ~~equivalents~~Sipex, ~~are adequate~~including toa ~~fund~~covenant restricting ~~operations,~~the ~~capital~~amount ~~expenditures~~of ~~and~~indebtedness ~~research~~that ~~and~~Sipex ~~development efforts~~can ~~for~~incur ~~the~~that ~~next~~is ~~twelve~~senior ~~months.~~or ~~However~~pari inpassu with the 2006 ~~event~~Notes ~~that~~to wean ~~need~~aggregate ~~to secure~~principal ~~additional~~amount ~~funds~~of ~~for operations~~$7.5 million, ~~there~~unless issuch norestriction ~~guarantee~~is ~~that~~waived ~~financing~~by ~~will~~holders beof ~~available~~over or66 ~~that~~2/3% itof ~~will~~the beprincipal onamount ~~terms~~of ~~that~~the we2006 ~~will~~Notes ~~accept~~then outstanding. In ~~the long-term~~addition, ~~management~~an event ~~believes~~of ~~that~~default would occur under the ~~results~~2006 Notes for a number of ~~its~~reasons, ~~recent~~including ~~years~~the Company’s ~~restructuring~~failure ~~activities~~to pay when due any principal, ~~cost~~interest ~~control~~or ~~actions~~late ~~and~~charges ~~revised~~on ~~product~~the ~~line~~2006 ~~focus~~Notes, the default and ~~will~~acceleration ~~eventually~~of ~~result~~indebtedness inwith athe ~~return~~Company’s tobank ~~positive~~and ~~cash~~other ~~flow~~lenders ~~from~~in ~~operations~~amounts atgreater than $2.5 ~~which~~million, ~~time~~certain itevents ~~anticipates~~of ~~that~~bankruptcy ~~additional~~and ~~equity~~its breach or ~~debt~~failure ~~financing~~to ~~would~~perform ~~become~~certain representations ~~available~~and ~~for~~obligations ~~financing~~under ~~working~~the ~~capital~~2006 ~~requirements~~Notes. ~~and~~Upon ~~capital~~the ~~expenditure plans.~~occurrence ~~However,~~of ~~there~~an isevent noof ~~guarantee~~default, ~~that~~ the Company’s obligations ~~will~~under ~~return~~the to2006 ~~positive cash~~Notes ~~flow~~may ~~from~~become ~~operations~~due orand ~~that~~payable ~~financing,~~in ifaccordance ~~required,~~with ~~will~~the beterms ~~available or~~thereof. ~~that~~Further, itthe ~~will~~holders beof onthe ~~terms~~2006 ~~that~~Notes wehave ~~will~~imposed ~~accept~~dividend restriction on Sipex.

~~Contractual~~ In ~~Obligations~~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, 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 shares of Sipex common stock at $6.432 per share. As of June 30, 2007, the affiliates of Future held 8.6 million shares, or 45% of the Company’s outstanding capital stock.

~~As of~~At ~~July~~any time after May 318, ~~2004~~2009, Sipex’s ~~contractual~~may ~~obligations~~terminate ~~were~~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 ~~follows~~of (the date of termination will automatically be deemed exercised in full pursuant to a ~~thousands)~~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.

			Less Than		1 - 3		3 - 5		More Than
Contractual Obligations	Total		1 Year		Years		Years		5 Years
Restructuring liability (1)	$	842	$	448	$	334	$	60		—
Operating leases (2)		1,732		466		732		485		49
Purchase commitment (3)		4,079		4,079		—		—		—
Purchase commitment (4)		2,450		700		1,400		350		—
Total contractual obligations	$	9,103	$	5,693	$	2,466	$	895	$	49

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 Capital Market Exchange, 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. The Company’s common stock was traded on Nasdaq Capital Market Exchange on April 11, 2007. The registration statement was declared effective on July 6, 2007. On July 16, 2007, the Company’s stock started trading on Nasdaq Global Market Exchange.

(1)		Represents the estimated future lease payments less sublease income for our unused portion of Billerica, Massachusetts facility.
(2)		Excludes the lease payments related to Billerica, Massachusetts that are included in (1) above.
(3)		Minimum purchase commitments to PolarFab based on quarterly rolling forecasts extending out for one year.
(4)		Fixed payment obligation for license to use software tools for circuit design.

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

~~Factors~~ The ~~Affecting~~2006 ~~Results~~Notes were initially recorded during the second quarter of 2006 at $25.4 million representing their face values of ~~Operations~~$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 ~~Financial~~registration ~~Position~~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.

~~Our~~ The ~~quarterly~~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 EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and ~~annual~~EITF ~~operating~~Issue ~~results~~No. 00-27, ~~are~~“Application ~~volatile~~of Issue No. 98-5 to Certain Convertible Instruments” in accounting for the 2006 Notes, the accompanying warrants and ~~difficult~~the value of the beneficial conversion feature. Pursuant to EITF Issue No. 05-04 “The Effect of a Liquidated Damages ~~predict~~Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative Financial Instruments Indexed to, and ~~may~~Potentially ~~cause~~Settled ~~our~~in, a Company’s Own Stock,’” the Company combined the obligation to make registration delay payments and other interest penalty payments related to listing of the Company’s stock ~~price~~with the convertible senior notes for accounting purposes. 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 estimated fair value of such obligation as of the date of issuance of the 2006 Notes relating to ~~fluctuate~~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.

~~Our~~The ~~quarterly~~issuance costs totaled $1.3 million of which $1.2 million related to debt issuance costs and ~~annual~~$71,000 ~~operating~~related ~~results~~to ~~are~~warrant ~~affected~~issuance bycosts. aThe ~~wide~~$1.2 million, ~~variety~~which includes placement agent fees of ~~factors~~$900,000 ~~that~~on ~~could~~the ~~materially~~$15.0 million ~~and~~of ~~adversely~~the ~~affect~~2006 ~~net~~Notes ~~sales~~not ~~and~~sold to Future, is being amortized as ~~profitability~~part ~~from~~of interest expense over a five-year period. The Company reduced additional paid-toin-~~period~~capital by $71,000 ~~including:~~related to warrant issuance costs.

• For the ~~cyclical~~three ~~nature~~months ofended ~~the~~June 30, ~~semiconductor~~2007, ~~industry;~~Sipex •made ~~competitive~~interest ~~pressures~~penalty onpayments ~~selling~~of $104,000 ~~prices;~~and •also ~~the~~recorded ~~timing~~a ~~and~~net ~~cancellation~~reversal of ~~customer~~$47,000 ~~orders;~~in •interest ~~our~~expense ~~ability~~for tothe ~~design~~estimated ~~and~~penalty obligation, ~~manufacture~~primarily ~~products~~due to ~~meet~~the ~~customers’~~earlier ~~specifications~~than ~~and~~expected ~~expectations;~~listing ~~• our ability to introduce new products and technologies on a timely basis; • market acceptance~~ of ~~our products and our customers~~Sipex’s ~~products;~~common •stock ~~the~~on ~~introduction of products and technologies by our competitors; •~~ the ~~level~~Nasdaq Capital ofMarket ~~orders~~Exchange ~~received~~resulting ~~that can be shipped~~ in a ~~quarter;~~downward •revaluation ~~delays~~of inthe ~~shipments~~estimated ~~from~~future ~~our~~payments ~~fabrication~~of ~~plant~~the derivative toliability. ~~assembly~~For ~~houses; •~~ the ~~availability~~six ofmonths ~~foundry~~ended ~~capacity~~June 30, ~~raw~~2007, ~~materials~~Sipex ~~and~~made ~~assembly~~interest ~~and~~penalty ~~test~~payments of ~~capacity;~~$287,000 ~~• our ability to manufacture in the correct mix to respond to orders on hand~~ and ~~new~~also ~~orders~~recorded ~~received~~a innet ~~the~~reversal ~~future;~~of •$162,000 ~~fluctuations~~ in ~~yields;~~interest •expense ~~changes~~for inthe ~~product~~estimated penalty ~~mix;~~obligation. •The ~~the~~estimated ~~level~~total of future ~~product~~payment ~~returns;~~of • the ~~timing~~derivative ofliability ~~investments~~as inof ~~research~~June 30, 2007 ~~and~~was ~~development~~$30,000, ~~including~~in ~~tooling~~accordance ~~expenses associated~~ with ~~product development, process improvements and production; and •~~ the ~~overall~~FSP ~~economic~~EITF ~~conditions~~Issue inNo. 00-19-2, ~~the~~“Accounting ~~United~~for ~~States~~Registration Payment ~~and abroad~~Arrangements.”

~~Due~~For tothe three months ended June 30, 2007, the ~~absence~~Company recorded interest expense of ~~substantial~~$612,000 under ~~non-cancelable~~the ~~backlog~~effective interest method which included $413,000 wefor ~~typically~~interest at 5.5% and $199,000 for ~~plan~~amortization ~~our~~of ~~production~~discounts and ~~inventory~~debt ~~levels~~issuance ~~based~~costs. onFor ~~internal~~the ~~forecasts~~six months ended June 30, 2007, the Company recorded interest expense of $1.2 million under the effective interest method which ~~customer~~included ~~demand~~$825,000 ~~which~~for ~~are~~interest ~~highly~~at ~~unpredictable~~5.5% and ~~can~~$398,000 ~~fluctuate~~for amortization of discounts and debt issuance ~~substantially~~costs.

~~Our~~Note ~~expense levels are based, in part, on expectations of future revenues and are, to a large extent, fixed in the short term~~14. ~~For~~Segment ~~example,~~Information ~~we have a minimum purchase arrangement with one of our suppliers based on requirements forecasted one year in advance. Our future revenues are difficult to predict~~ and atMajor ~~times in the past we have failed to achieve revenue expectations. We may~~Customers be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. If revenue levels are below expectations for any reason, operating results are likely to be unfavorably affected. We may also take steps to adjust our strategic product families and change our cost structure, which may result in our incurring additional restructuring, reorganization and other charges. Based on forecasts, we may increase our operating expenses for personnel and new product development and for inventory in anticipation of increasing sales levels; therefore, operating results would be worsened if increased sales are not achieved. In addition, we are limited in our ability to reduce costs quickly in response to any revenue shortfalls.

~~From~~The ~~2001~~Company’s ~~through~~Chief ~~2003,~~Executive Officer (“CEO”) is considered to be the ~~semiconductor~~Company’s ~~industry~~chief operating ~~experienced~~decision maker. The Company has organized its operations based on a ~~prolonged~~single operating segment: the development and ~~severe~~delivery ~~downturn~~of high performance analog integrated circuits that ~~adversely~~are ~~affected~~used primarily ~~our~~by ~~results~~original ofequipment ~~operations.~~manufacturers ~~Our~~operating in the computing, communications and ~~business~~networking ~~depends~~infrastructure markets. The CEO reviews financial information presented on ~~market~~a consolidated ~~demand~~basis accompanied by disaggregated information about revenues by product family and geographic region for ~~products~~purposes ~~using~~of ~~analog~~making ~~semiconductors~~operating decisions and assessing financial performance. ~~Prolonged~~The ~~downturns~~disaggregated inrevenue ~~the~~information ~~semiconductor~~reviewed ~~industry~~on ~~lead~~a toproduct ~~decreases~~family inbasis ~~net~~by the CEO includes the ~~sales~~interface, ~~levels~~power management and ~~may~~optical ~~cause~~storage ~~continued~~families ~~losses~~along ~~and~~with ~~cash~~other ~~flow~~legacy ~~shortages~~product families.

~~As a result of the foregoing and other factors, we may experience material~~21 ~~fluctuations in future operating results on a quarterly or annual basis, which could substantially negatively affect our business, financial condition and operating results.~~

~~Table~~ The ofdisaggregated ~~Contents~~sales information reviewed on a product family basis by the CEO is as follows (in thousands):

Our auditors have identified certain “reportable conditions” and “material weaknesses” in the design and operation of our internal controls, which, if not adequately addressed, could result in accounting errors, call into question the accuracy of our financial results and prevent us from achieving Section 404 certification as mandated by the Sarbanes-Oxley Act.


	For the Three Months Ended				For the Six Months Ended
	June 30, 2007		July 1, 2006		June 30, 2007		July 1, 2006
Interface	$	10,623	$	11,768	$	20,524	$	22,419
Power Management		6,882		5,990		12,268		10,576
Optical Storage		914		3,185		2,465		5,796
Other*		—		70		21		76

Total net sales	$	18,419	$	21,013	$	35,278	$	38,867

In* ~~communications~~Includes byLegacy our independent auditors, Deloitte & Touche LLP, or D&T, to our Audit Committee with respect to D&T’s audit for the year ended December 31, 2003, D&T informed the Audit Committee that they identified the following “reportable conditions” in the design and ~~operation~~other ofdiscontinued ~~our internal controls:~~ products.

• Although ~~Deficiencies~~Sipex inhas ~~our~~operations ~~process~~in ~~for~~Malaysia, ~~determining~~China, ~~costs~~Taiwan, ~~related~~Japan, toSouth ~~deferred~~Korea, ~~profit on shipments to our largest distributor~~Germany, ~~Future;~~ Canada and •Belgium, ~~Deficiencies~~substantially inall the ~~staffing~~Company’s ofoperations ~~our accounting department~~ and ~~related~~long-lived ~~reliance~~assets onreside ~~manual~~in ~~reconciliations~~the ~~and analysis~~United States.

InThe ~~addition,~~Company inmarkets ~~connection~~its ~~with~~products the audit for the year ended December 31, 2002, our former auditors identified certain “material weaknesses” in our internal controls, under standards established by the American Institute of Certified Public Accountants, primarily ~~resulting~~ from ~~deficiencies~~its inoperations ~~the systems and processes used~~ in the ~~preparation~~United ~~of our financial statements and~~States. ~~the~~International ~~lack~~sales ofare ~~proper~~made ~~management~~primarily ~~review~~to ~~and~~customers ~~account analysis~~ in ~~certain~~Asia ~~areas~~and Europe. ~~Although~~ ~~other~~Information ~~areas~~regarding ~~were impacted by~~ the ~~material weaknesses, the most~~ ~~significant~~Company’s ~~issues~~net ~~arising~~sales derived from ~~the~~products ~~material~~shipped ~~weaknesses~~to ~~included~~different ~~inappropriate process~~geographic ~~and~~regions ~~systems~~is ~~tracking of inventory, including significant manual reconciliations,~~ as ~~well~~follows ~~as inappropriate and insufficient analysis performed~~ (in ~~evaluating inventory costs capitalized and inventory excess and obsolete~~ ~~reserves established.~~thousands):

The reportable conditions and material weaknesses noted above, if not adequately addressed, could result in accounting errors such as those underlying the restatements of our consolidated financial statements more fully discussed in Note 14 to our consolidated financial statements for the year ended December 31, 2003. Our failure to fully address these reportable conditions and material weaknesses in the design and operation of our internal controls could have a material adverse effect on our business, results of operations and financial condition.


	For the Three Months Ended				For the Six Months Ended
	June 30, 2007		July 1, 2006		June 30, 2007		July 1, 2006
United States	$	4,353	$	4,253	$	7,820	$	8,094
China		2,929		4,022		5,580		6,889
United Kingdom		2,886		3,160		5,742		6,424
Singapore		2,736		3,830		5,563		6,439
Taiwan		1,706		953		2,623		2,064
Japan		1,586		2,527		3,457		5,408
South Korea		1,077		487		2,515		708
Rest of the world		1,146		1,781		1,978		2,841

Total net sales	$	18,419	$	21,013	$	35,278	$	38,867

~~Our~~Major ~~ability~~customers towho ~~implement~~accounted ~~our~~for ~~business~~10% ~~plan~~or ~~successfully~~more inas a ~~volatile market~~percentage ~~requires effective management systems and a system~~ of ~~financial processes~~total ~~and~~gross ~~controls. We have identified a need to further evaluate and~~accounts ~~improve~~receivable our inventory costing system and procedures. In addition, we have begun the process to implement a new enterprise requirements planning system, which is expected to be completed in 2005. During the process of preparing our financial statements for the second quarter of 2004, we continue to experience some delays and difficulties due to reliance on manual reconciliations and analyses. If we are ~~unable~~ toas ~~maintain an adequate level of processes and controls and improve our~~follows: ~~systems and procedures, we may not be able to accurately report our financial performance on a timely basis and our business and stock price would be adversely affected.~~

In addition, we are spending an increased amount of management time and external resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annual review and evaluation of our internal control systems, and attestations of the effectiveness of these systems by our independent auditors. We are currently documenting and testing our internal control systems and procedures and considering improvements that may be necessary in order for us to comply with the requirements of Section 404 by the end of 2004. This process has required us to hire additional personnel and outside advisory services and has resulted in additional accounting and legal expenses. In addition, the evaluation and attestation processes required by Section 404 are new and neither companies nor auditing firms have significant experience in testing or complying with these requirements. Accordingly, we may encounter problems or delays in completing the review and evaluation, the implementation of improvements and the receipt of a positive attestation by our independent auditors. In the event that our chief executive officer, chief financial officers or independent auditors determine that our controls over financial reporting are not effective as defined under Section 404, investor perceptions of our company may be adversely affected and could cause a decline in the market price of our stock. Please see Item 4 “Controls and Procedures” below.

~~We may~~* ~~experience~~Less ~~some~~than ~~delays and difficulties in developing and introducing new or enhanced products necessitated by technological advances.~~ 10%

~~Our~~Major future success will depend, in part, upon our ability to anticipate changes in market demand and evolving technologies. To remain competitive, we must enhance our current products and develop and introduce new products that keep pace with technological advancements and address the increasingly sophisticated needs of our customers. ~~Our~~who ~~products~~accounted ~~may~~for be10% ~~rendered obsolete if we fail to anticipate~~ or ~~react~~more ~~to change, and,~~ as a ~~result,~~percentage our revenues and cash flow may be negatively impacted. Our success depends on our ability to develop new semiconductor devices for existing and new markets, to introduce these products in a timely manner and to have these products selected for design into new products of ~~our~~total ~~customers.~~net ~~The~~sales ~~development~~are ~~of these new devices~~as is highly complex and from time to time we have experienced delays in completing the development of new products. Successful product development and introduction depends on a number of factors, includingfollows:

• accurate new product definition; • timely completion and introduction of new product designs; • availability of foundry capacity; • achievement of manufacturing yields; and • market acceptance of our products and our customers’ products.


	For the Three Months Ended						For the Six Months Ended
	June 30, 2007			July 1, 2006			June 30, 2007			July 1, 2006
Future Electronics Inc., a related party		46	%		45	%		47	%		46	%
Komatsu		*			*			*			10	%

22 * Less than 10%

~~Table of Contents~~22

WeNote ~~depend~~15. onCommitments ~~distributors~~and ~~who sell directly to OEMs.~~Contingencies

~~Approximately 84% of our net sales for both the three and six months ended~~Commitments July 3, 2004 are from shipments of our product to distributors who sell directly to OEMs. Our agreements with distributors contain limited provisions for return of our product, including stock rotations whereby distributors may return a percentage of their product based upon a percentage of their most recent three months of shipments effective in the first quarter of 2004. In addition, in certain circumstances upon termination of the distributor relationship, distributors may return a percentage of purchases. The loss of business from any of our significant distributors or the delay of significant orders from any of them, even if only temporary, could significantly reduce our income, delay recognition of revenue and impact our ability to accurately predict cash flow. We estimate the amount of future returns and have established reserves for estimated returns based upon available information, including sales during the period into the distribution channel, reported sell-through by distributors to OEMs, distributor inventory levels and the specific terms of the distributor agreements, as well as historical returns. We defer revenue on shipments to Future until the product is resold by the distributor to the end user. These provisions, as well as the significant share ownership by Future, cause management to conclude that reasonable estimates of price concessions and returns cannot be made at the time of shipment to Future.

We On ~~derive~~August 21, a2003, ~~substantial~~Sipex ~~portion~~announced ofan ~~our~~exclusive ~~revenues~~sourcing ~~and~~agreement ~~gross~~with ~~profits~~PolarFab, ~~from~~a ~~Future,~~US-based asemiconductor ~~related~~foundry. ~~party,~~The ~~and~~Company ~~our~~is ~~revenues~~under ~~and~~obligation ~~gross~~to ~~profits~~make ~~would~~minimum ~~likely~~purchase ~~decline~~commitments based ~~significantly~~on ifquarterly ~~Future~~rolling ~~elects~~forecasts ~~not~~extending out to ~~make,~~one ~~cancels,~~year. ~~reduces~~The orCompany ~~defers~~has also agreed to purchase ~~purchases~~no less than 50% of ~~our~~the ~~products~~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 June 30, 2007, the minimum purchase commitment with PolarFab was approximately $1.0 million for the following twelve months.

~~Future~~On has historically accounted for a significant portion of our revenues and gross profits. It is our largest distributor worldwide and accounted for 50% and 46% of total net sales for the three and six months ended July 3 2, 2004, ~~respectively;~~the ~~and~~Company ~~16%,~~entered ~~24%~~into ~~and~~an ~~21%~~agreement ofto ~~total~~use ~~net~~certain ~~sales~~licensed ~~for~~tools ~~the~~for ~~years~~circuit ~~ended~~design ~~December 31, 2003, 2002~~ and ~~2001,~~development ~~respectively.~~as ~~Before~~well ~~taking~~as ~~into account~~maintenance ~~the~~support ~~non-cash~~for ~~charges~~a ~~related~~total tofuture ~~the~~payment ~~fair value of debt conversion~~commitment ~~rights, Future represented 34%~~ of ~~total~~$2.5 million ~~net~~over ~~sales for~~ the ~~twelve~~next ~~months~~three ~~ended December~~and ~~31,~~one-half ~~2003~~years. ~~Future~~The ~~also~~contract ~~accounted~~requires ~~for 66% of our gross profits for both~~ the ~~three~~Company ~~months and six months ended July 3, 2004, as compared~~ to deposit 2175% ~~and~~of ~~38% for~~ the ~~corresponding~~total ~~periods~~commitment ofin ~~2003. We anticipate that sales of our products to Future will continue to account for~~ a ~~significant~~certificate ~~portion~~ of ~~our revenues~~deposit ~~and gross profits~~account. ~~The~~As ~~loss~~ of ~~Future as a distributor~~June 30, ~~a significant reduction in orders from Future~~2007, ~~or a reduction in average selling prices to~~no ~~Future~~restricted ~~would~~cash ~~materially~~is ~~and~~required ~~adversely~~from ~~affect~~the ~~our operating results, our business, our financial condition and our stock price~~vendor.

WeOn ~~have~~December 20, a2005, ~~distributor~~Sipex ~~agreement~~entered ~~with~~into ~~Future~~an ~~that~~agreement ~~provides for Future~~ to ~~act~~ asuse ~~our~~a ~~sole~~fast ~~distributor~~simulator ~~within~~software ~~North America and Europe. Sales to Future~~tool ~~are made under an agreement that provides protection against price reduction~~ for ~~their~~improvement ~~inventory~~ of ~~Sipex~~its ~~products~~product development. ~~Sipex~~A ~~maintains~~commitment aof ~~separate~~future ~~price~~payments ~~list~~including maintenance ~~for~~support ~~products~~fees ~~sold~~totaled ~~to Future~~$467,000 ~~which~~to ~~may~~ be ~~different~~paid ~~from~~over the ~~prices~~next ~~charged~~three ~~to customers in direct sales transactions~~years. ~~Our~~The ~~distributor~~ agreement ~~with~~expires ~~Future~~on ~~does not contain minimum purchase commitments. As a result~~December 19, ~~Future could cease purchasing our products with short notice to us~~2008. ~~In addition, Future may defer~~ ~~or cancel orders without penalty, which would likely cause our revenues, our business, our financial condition and our stock price to decline.~~

We On ~~may~~February 27, ~~not~~2006, ~~successfully~~Sipex ~~expand~~entered ~~our~~into ~~sales~~a definitive Master Agreement with Silan. This transaction was related to closing the Company’s wafer fabrication operations located in Milpitas, California and ~~distribution~~that ~~channels~~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 June 30, 2007, Silan had not conformed to the Company’s specifications relating to the process qualification wafers and product qualification wafers.

AnIn ~~integral~~May 2006, ~~part~~Sipex ofentered ~~our~~into ~~strategy~~a isprivate tolabel ~~expand~~agreement ~~our~~with ~~sales~~BCD ~~and~~Semiconductor ~~distribution~~Manufacturing ~~channels~~Limited (“BCD”). WeThe ~~are~~Company ~~increasing~~is ~~resources~~obligated ~~dedicated~~ to ~~developing~~purchase ~~and~~parts ~~expanding these~~no channels but we may not be successful doing so. If we are successful in increasing our sales through indirect sales channels, we expect that those sales will be at lower per unit prices than sales through direct channels, and revenues we receive for each sale will be less than ifone-third weof ~~had sold~~ the ~~same product~~amount to of the ~~customer~~rolling ~~directly.~~six-month ~~Selling through indirect channels may also limit our contact with our customers~~forecast. As aof ~~result~~June 30, ~~our ability to accurately forecast sales~~2007, ~~evaluate~~the ~~customer~~minimum ~~satisfaction~~purchase ~~and~~commitment ~~recognize~~with ~~emerging~~BCD ~~customer~~was ~~requirements may be hindered~~immaterial. ~~Even if we successfully expand our distribution channels,~~ any new distributors may not have the technical expertise required to market and support our products successfully. If parties do not provide adequate levels of services and technical support, our customers could become dissatisfied, we could be required to devote additional resources for customer support and our brand name, reputation and business could be negatively

23 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.

~~Table~~ As of ~~Contents~~June 30, 2007, Sipex had future wafer purchase commitments totaling approximately $2.0 million with Episil for non-cancelable purchase orders issued. Currently, the Company does not have a minimum purchase agreement with Episil.

~~impacted.~~Legal ~~Our strategy of marketing products directly to our customers and~~Proceedings ~~indirectly through distributors may result in distribution channel conflicts.~~

~~Affiliates~~ The ofCompany ~~Future,~~is ~~our~~subject ~~largest~~to ~~distributor~~legal proceedings, ~~beneficially~~claims, ~~own~~and alitigation ~~significant~~arising in the ~~percentage~~ordinary course of ~~our~~business ~~common~~including ~~stock,~~those ~~which~~described ~~will~~below. ~~allow~~The ~~them~~Company todefends ~~significantly~~itself vigorously ~~control~~against any such claims. The outcome of certain of these matters ~~requiring~~below ~~stockholder~~is ~~approval~~currently not determinable, and an unfavorable outcome could ~~discourage~~have ~~potential~~a material adverse effect on the Company’s ~~acquisitions~~consolidated financial position, results of ~~our~~operations, ~~Company~~or cash flows.

~~As of December 31, 2003, affiliates of Future, our largest distributor,~~23 held approximately 8.5 million shares of our common stock, or approximately 30%, of our outstanding common stock. During February 2004, the affiliates of Future exercised the conversion rights to convert their notes into our common stock for an additional 4.6 million shares, bringing their ownership up to 13.1 million shares, or approximately 40% of our outstanding common stock. On August 5, 2004, the affiliates of Future exercised a warrant to purchase 900,000 shares of our common stock. The warrant was issued to the affiliates of Future in conjunction with the $12 million convertible note issued in 2002, which was converted into our common stock in February 2004. In connection with this exercise of the warrant, we agreed to modify the standstill restrictions on the affiliates of Future to enable them to hold up to 49% of our outstanding common stock or 42.5% on a fully diluted basis, whichever is less. Based on currently outstanding shares, the affiliates of Future can purchase approximately 2.7 million shares on the open market. On August 9, 2004, they purchased 2.5 million shares of the Company’s common stock on the open market.

We DiPietro ~~face significant risks related to our international operations~~v. Sipex

WeIn ~~derive~~April 2003, aPlaintiff ~~significant~~Frank ~~portion~~DiPietro (former CFO of ~~our~~Sipex) ~~net~~brought ~~sales~~an ~~from~~action ~~international~~against Sipex ~~sales~~for his severance benefits. Sipex counterclaimed for approximately $150,000 which was owed ~~including~~under ~~Asia~~a promissory note signed by Mr. DiPietro. In August 2004, ~~which~~Sipex ~~are~~filed ~~subject~~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 ~~certain~~pay ~~risks~~Sipex $149,486 plus ~~including:~~costs and interest was approximately $227,000 as of June 30, 2007. 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. On May 14, 2007, the Appeals Court reversed and remanded the lower court’s decision. The Company has filed a petition for a hearing with the Appeals Court.

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

~~Our~~On ~~international~~or ~~sales~~about ~~for the six months ended July~~October 326, ~~2004 were $25.9 million or 77% of total net sales~~2006, ~~and~~Sipex ~~$51.6 million,~~initiated oran ~~81%~~arbitration ofproceeding ~~total~~before ~~net sales~~the ~~before~~American ~~fair~~Arbitration ~~value~~Association ofagainst ~~debt~~one ~~conversion~~of ~~rights~~its ~~for the year ended December 31~~distributors, ~~2003~~ ~~and~~Lestina ~~$51~~International.~~2 million~~ ~~and~~Sipex’s Demand ~~$42.0 million~~For ~~for~~Arbitration ~~the~~alleges ~~years~~that ~~ended~~Lestina ~~2002~~breached ~~and~~the ~~2001, respectively,~~Distributor orAgreement ~~77%~~between ~~and~~Sipex ~~58% of total net~~and ~~sales~~itself ~~for~~by, ~~those~~inter ~~years~~alia, ~~respectively.~~failing ~~There~~to ~~can~~make betimely nopayments ~~assurance~~on ~~that economic~~invoices ~~and~~resulting ~~geopolitical troubles~~ in ~~any~~a ~~area~~$281,667 ofunpaid balance, ~~the~~plus ~~world~~interest, ~~will~~owing ~~not~~to ~~have~~Sipex. ~~a material~~The ~~adverse~~Demand ~~effect~~also onseeks ~~our~~attorneys’ ~~business,~~fees ~~results~~and costs of ~~operations and financial condition~~suit.

24 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.

~~Table~~ On August 8, 2007, the arbitrator issued an Interim Award. The financial impact to the Company as a result of ~~Contents~~the reward is immaterial. Both parties have until August 14, 2007 to submit further briefing on the issues of interest, costs and attorney’s fees. Such costs will be determined by the arbitrator upon issuance of the final award.

~~Our~~Note ~~inability~~16. toSubsequent ~~meet any increase in demand could reduce our market share.~~Events

~~Demand~~On ~~shifts~~July 17, in2007, the ~~semiconductor~~Company ~~industry~~borrowed ~~are~~the ~~rapid~~remaining ~~and difficult to predict~~$3,735,000 ~~and~~under weits ~~may~~$5,000,000 ~~not~~line beof credit ~~able~~with toSilicon ~~respond~~Valley ~~quickly~~Bank ~~enough~~(See toNote an10). ~~increase~~Interest ~~in demand,~~accrues ifat itan ~~occurs.~~annual ~~Our~~rate ~~ability~~equal to ~~increase~~the bank’s ~~sales~~prime ofrate ~~our~~plus ~~products~~three ~~depends,~~percent ~~in part,~~(3.00%) ~~upon~~and ~~our~~is ~~ability~~payable toon ~~optimize~~ the ~~use~~first day of ~~our~~each ~~manufacturing~~month. ~~capacity in a~~The ~~timely~~borrowing ~~manner~~is ~~and,~~due ifon ~~necessary,~~the ~~expand~~earlier ~~our~~of ~~manufacturing~~September 29, ~~capacity.~~2007 Ifor wea ~~are unable~~liquidity toevent ~~respond~~which toincludes ~~rapid increases~~ changes in ~~demand~~ownership, ifa ~~it occurs~~merger, ~~for~~an ~~our~~acquisition ~~products on~~or aSipex’s ~~timely~~receipt ~~basis~~of ornet toproceeds ~~manage~~from ~~any~~the ~~corresponding~~consummation ~~expansion~~ of ~~our manufacturing~~ ~~capacity~~an ~~effectively,~~equity ~~our~~financing ~~customers~~of ~~could~~no ~~increase~~less ~~their~~than ~~purchases from our competitors~~$10, ~~which would reduce our market share~~000,000.

~~Our~~ In July 2007, ~~financial~~the ~~results~~Company’s ~~may~~board beof ~~adversely~~directors ~~affected~~approved, ~~due~~subject to the ~~highly~~Company ~~volatile~~stockholders’ approval ~~optical~~and ~~storage~~completion ~~market~~of the proposed merger with Exar, the acceleration of the vesting of approximately 30,000 shares of stock options held by four directors of the Company’s board.

AIn ~~significant~~July 2007, ~~component~~in addition to Rodfre’s agreement of ~~our~~the ~~growth~~note ~~strategy~~conversion, ~~depends~~the onremaining ~~increasing~~50% of ~~shipments~~the in2006 ~~the~~Notes ~~optical~~holders ~~storage~~have ~~market.~~also ~~During~~agreed ~~2003,~~to weconvert ~~derived~~their ~~all~~2006 ofNotes ~~our optical~~into ~~storage~~Sipex ~~sales~~common ~~from~~stock immediately aprior ~~limited~~to ~~number~~the effective time of ~~customers~~the inmerger, ~~Japan.~~subject ~~Local~~to the conditions that (a) the ~~suppliers~~average inprice ~~Japan~~of ~~may~~Sipex ~~have~~common astock ~~competitive~~has ~~advantage~~exceeded ~~over~~one ~~Sipex,~~hundred ~~which~~fifty ~~could~~percent (150%) of the conversion ~~adversely~~price ~~affect~~then ~~our~~in ~~ability~~effect tofor ~~grow~~at ~~sales~~least ortwenty ~~continue~~trading todays ~~compete~~during inthe ~~Japan~~thirty ortrading day period ending ~~other~~one ~~regions~~day prior to closing of the ~~world.~~merger ~~Any~~and ~~failure~~(b) the toAverage ~~increase~~Daily ~~our~~Volume ~~shipments~~(as defined in the ~~optical~~Indenture ~~storage~~entered ~~market~~into ~~could~~in ~~limit~~connection ~~our~~with ~~ability~~the to2006 ~~grow~~Notes) ~~our~~for ~~business~~Sipex ~~and~~common ~~could~~stock shall not be less ~~adversely~~than ~~affect~~three ~~our~~hundred ~~operating~~seventy-five ~~results~~thousand dollars ($375,000) during such period.

IfItem 2. weManagement’s ~~are~~Discussion ~~unable~~and toAnalysis ~~compete~~of ~~effectively~~Financial ~~with~~Condition ~~existing or new competitors, we will experience fewer customer orders, reduced revenues, reduced gross margins~~ and ~~lost~~Results ~~market~~of ~~share.~~Operations

WeThis ~~compete~~section inand ~~markets~~other ~~that~~parts ~~are~~of ~~intensely~~this ~~competitive,~~Form ~~and~~10-Q ~~which~~contain ~~are subject~~forward-looking tostatements ~~both~~that ~~rapid~~involve risks ~~technological change~~ and ~~continued price erosion~~uncertainties. ~~Our competitors~~The ~~include~~statements ~~many~~that ~~large~~are ~~domestic~~not ~~and~~purely ~~foreign~~historical ~~companies~~are ~~that have~~forward-looking ~~substantially~~statements ~~greater~~within ~~financial,~~the ~~technical~~meaning ~~and~~of ~~management~~Section 27A ~~resources~~of ~~than~~the ~~we have.~~Securities ~~Loss~~Act of ~~competitive~~1933, ~~position~~as ~~could result in price reductions~~amended, ~~fewer~~or the ~~customer~~Securities ~~orders~~Act, ~~reduced~~and ~~revenues,~~Section 21E ~~reduced~~of ~~gross~~the ~~margins~~Securities ~~and~~Exchange ~~loss~~Act of ~~market share~~1934, ~~any~~as ofamended, ~~which~~or ~~would~~the ~~affect our operating results and financial condition.~~Exchange ToAct, ~~remain competitive~~including, wewithout ~~continue~~limitation, tostatements ~~evaluate~~regarding our ~~manufacturing~~expectations, ~~operations~~beliefs, ~~looking~~ ~~for~~intentions ~~additional~~or strategies ~~cost~~regarding ~~savings~~the ~~and technological improvements~~future. IfAll weforward-looking ~~are not~~statements ~~able~~included toin ~~successfully~~this ~~implement~~Form ~~new~~10-Q ~~process~~are based ~~technologies~~on ~~and~~information available to ~~achieve volume~~us ~~production~~on ofthe ~~new~~date ~~products at acceptable yields~~hereof, ~~our operating results~~ and ~~financial~~we ~~condition~~assume ~~may~~no beobligation ~~affected. In addition, if competitors in Asia reduce prices on commodity products, it would adversely affect our ability~~ to ~~compete~~ ~~effectively~~update ~~in that region. Our future competitive performance depends~~any onsuch ~~a number of factors, including our ability to:~~forward-looking

• accurately identify emerging technological trends and demand for product features and performance characteristics; • develop and maintain competitive products; • enhance our products by adding innovative features that differentiate our products from those of our competitors; • bring products to market on a timely basis at competitive prices; • respond effectively to new technological changes or new product announcements by others; • increase device performance and improve manufacturing yields; • adapt products and processes to technological changes; and • adopt and/or set emerging industry standards.24

~~The~~statements. ~~implementation~~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 athese ~~new~~terms ~~management~~or other ~~information~~comparable ~~system~~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 ~~disrupt~~actual results to differ from expectations include those discussed in “Risk Factors” beginning with Item 1A of Part II in this document, and in our ~~business~~Annual Report on Form 10-K for the year ended December 30, 2006. The terms “Sipex,” “the Company,” “we,” “us,” “its” and “our” as used in this Form 10-Q refer to Sipex Corporation and its subsidiaries and its predecessors as a combined entity, except where the context requires otherwise.

WeAvailable ~~have begun the process to implement a new enterprise resource planning~~Information and financial accounting and planning system, and integrate this new system with our customer relationship management system and our product management system. Implementation of the new management information system, including the integration with other systems, is a very complex process that requires significant financial resources and personnel time, as well as unifying operating policies and procedures to ensure that the total system operates efficiently and effectively. Delays and/or errors in the implementation could result in additional costs and cause disruptions to our business, which

25 Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act, are also available on our website at www.sipex.com/investor when such reports are available on the website of the Securities and Exchange Commission, or the SEC. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, our references to the Uniform Resource Locators (URLs) for these websites are intended to be inactive textual references only.

~~Table~~ The offollowing ~~Contents~~discussion should be read together with our consolidated financial statements and the related notes contained elsewhere in this quarterly report on Form 10-Q.

~~could adversely~~Significant ~~affect our ability to accurately report our financial results on a~~Developments ~~timely basis and could have a material adverse effect on our business, financial condition and operating results.~~

We In ~~have~~May 2007, ~~only~~we ~~limited~~announced ~~protection~~that we entered into a definitive merger agreement with Exar Corporation (“Exar”) to combine the two companies. Under the terms of the agreement, which was approved by the boards of directors of both companies, Sipex stockholders will receive 0.6679 of a share of Exar common stock for ~~our~~each ~~proprietary~~share ~~technology~~of Sipex common stock. Exar stockholders will own approximately 67.6% and Sipex stockholders will own approximately 32.4% of Exar common stock after completion of the transaction, which assumes conversion to common stock of Sipex’s outstanding convertible senior notes and the exercise of the related warrants. Ralph Schmitt, Sipex chief executive officer, will become the chief executive officer of Exar. Interim chief executive officer and chairman of Exar, Richard L. Leza, will continue as chairman of the board of directors.

~~The~~Under ~~semiconductor~~the ~~industry~~terms ~~is characterized by frequent litigation regarding patent and other intellectual property rights. Although we are not aware~~ of ~~any~~the ~~pending~~agreement, orthe ~~threatened~~transaction ~~patent litigation that we consider material, there~~ is noexpected ~~assurance that third parties will not assert claims against us with respect~~ to ~~existing~~be ortax-free ~~future products or technologies and we have been subject~~ to ~~such claims in~~ the ~~past. In litigation to determine the validity of any~~ ~~third~~stockholders ~~party claims, such litigation, whether or not determined in our favor, could result in significant expense to us and divert the efforts~~ of ~~our management~~both ~~personnel~~companies ~~from~~for ~~productive tasks~~U.S. Infederal ~~the~~income ~~event~~tax ofpurposes. anThe ~~adverse~~transaction ~~ruling~~has been instructured ~~such~~as ~~litigation,~~a westock-for-stock ~~may~~reverse betriangular ~~required~~merger towhereby ~~discontinue~~a ~~the~~wholly-owned ~~use~~subsidiary of ~~certain~~Exar ~~processes,~~will ~~cease~~merge ~~the~~with ~~manufacture, use~~ and ~~sale~~into ofSipex, ~~infringing~~with ~~products,~~Sipex ~~and expend~~surviving ~~significant~~the ~~resources~~merger toas ~~develop~~a ~~non~~wholly-~~infringing~~owned ~~technology~~subsidiary ~~or obtain~~of ~~licenses to the infringing technology~~Exar. ~~There~~The transaction is nosubject ~~assurance that licenses will be available on acceptable terms, or at all, with respect~~ to ~~disputed third party technology. In~~ the ~~event~~approval of astockholders ~~successful~~from ~~claim~~both ~~against~~companies usas ~~and~~well ~~our failure~~as tocustomary ~~develop~~closing orconditions ~~license~~and aregulatory ~~substitute~~approvals. ~~technology~~The atcompanies aexpect ~~reasonable~~the ~~cost,~~transaction ~~our~~to ~~business,~~close ~~financial~~by ~~condition~~the ~~and~~third ~~results~~calendar quarter of ~~operations~~fiscal ~~would~~year ~~be materially and adversely affected~~2007.

~~There~~In isApril 2007, nowe ~~assurance~~announced that ~~foreign~~we ~~intellectual~~had ~~property~~received ~~laws~~notification ~~will~~that ~~protect~~ our ~~intellectual~~common ~~property~~stock ~~rights.~~was approved ~~Furthermore,~~for ~~there~~listing ~~can~~on bethe noNasdaq ~~assurance~~Capital ~~that others~~Market ~~will~~Exchange. ~~not~~Sipex ~~independently~~common ~~develop~~stock ~~similar~~began ~~products,~~trading ~~duplicate~~under the ~~our~~symbol ~~products or~~“SIPX” ~~design~~upon ~~around~~the ~~any~~opening of ~~our~~the ~~patents.~~market Weon ~~may~~April 11, be2007. ~~subject~~On toJuly 16, ~~or may initiate~~2007, ~~interference~~ ~~proceedings in~~ the ~~U.S.~~Company’s stock ~~Patent~~started ~~and~~trading ~~Trademark~~on ~~Office,~~Nasdaq ~~which~~Global ~~can demand~~Market ~~significant financial and management resources~~Exchange.

~~Our~~ In ~~future~~February 2007, ~~success~~we ~~depends~~announced that we filed an amendment to our certificate of incorporation to affect a previously approved reverse stock split on ~~retaining~~a one for two (1:2) basis. The reverse stock split took effect on Friday, February 23, 2007. As a result of the reverse stock split, each two shares of our ~~key~~currently ~~personnel~~issued and ~~attracting~~outstanding common stock as of the close of business on February 23, 2007 were automatically converted into and reconstituted as one share of new common ~~retaining~~stock. ~~additional~~The ~~highly~~number ~~qualified~~of ~~employees~~shares of Sipex’s common stock issued and outstanding after this reverse split was therefore reduced from approximately 37,107,586 shares to approximately 18,553,793 shares post reverse stock split, as of the end of business on February 23, 2007. The number of shares of common stock issuable upon exercise of our outstanding options and warrants, or upon conversion of our outstanding senior secured convertible promissory notes was also reduced proportionately. No fractional shares were issued in connection with the reverse stock split. Any fractional shares that resulted from the reverse stock split of outstanding shares were exchanged for cash at a value of $4.613 per share, the average of the closing prices of our common stock, for the ten trading days ended February 15, 2007. We executed the reverse split to meet the Nasdaq Capital Market Exchange minimum $5 per share listing requirement.

~~Our success depends upon the continued service of our executive officers~~25 and other key management and technical personnel, and on our ability to continue to attract, retain and motivate qualified personnel, such as experienced analog circuit designers. The competition for these employees is intense. Our employees are employed at-will, which means that they can terminate their employment at any time. There is no assurance that we will be able to retain our design engineers, executive officers and other key personnel. The loss of the services of one or more of our design engineers, executive officers or other key personnel or our inability to recruit replacements for these personnel or to otherwise attract, retain and motivate qualified personnel could seriously impede our success.

~~Our~~In ~~Senior~~December 2006, ~~Vice~~we ~~President~~announced ofa ~~Finance~~workforce ~~and~~reduction ~~Chief~~plan ~~Financial~~that ~~Officer~~was implemented in response to our transitioning to a fabless semiconductor company, ~~Clyde~~de-emphasizing Roptical products, reducing dependency on commodity products and with the goal of improving our cost structure. As a result, we recorded ~~Wallin~~total restructuring costs of $1.1 million related to employee severance compensation, ~~joined~~including $0.1 million ~~Sipex~~for vesting acceleration of stock options in ~~April~~lieu of a severance payment for a senior executive officer. Of the $1.1 ~~2004~~million, $0.1 million was paid during December 2006 and approximately ~~Rick~~$0.7 million ~~Hawron~~was paid during the six months ended June 30, ~~our~~2007. ~~Senior~~The remaining ~~Vice~~balance ~~President~~was ofreversed ~~Sales~~during the three and six months ended June 30, ~~joined~~2007 ~~Sipex~~as ina ~~February~~result ~~2004.~~of ~~Changes~~change in management’s ~~may~~estimate. beOur ~~disruptive~~current tobusiness plans focus our product development and marketing programs toward a greater emphasis on our ~~business~~power management and ~~may~~interface ~~result~~products inas ~~the~~we ~~departure~~believe these ofproducts ~~existing~~align ~~employees~~greater development synergies and~~/or~~ provide greater opportunities for growth and ~~customers~~profitability in contrast to other areas such as our optical products.

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

~~Our~~We ~~manufacturing~~entered ~~processes~~into ~~are~~a ~~highly~~definitive ~~complex~~merger ~~and~~agreement ~~are~~with ~~continuously~~Exar ~~being~~Corporation on May 7, 2007 to combine ~~modified~~the intwo ancompanies. ~~effort~~Both companies have scheduled respective shareholder meetings on August 23, 2007 whereby the proposed merger will be subjected to ~~improve~~the ~~yields~~vote of the shareholders of both companies, and ~~product~~if ~~performance.~~the ~~Process~~stockholders of the companies approve the ~~changes~~merger, ~~can~~we ~~result~~expect the merger to close as soon as practicable after the stockholders meeting. As shown in ~~interruptions~~the consolidated financial statements, presented in ~~production~~Part orI, ~~significantly~~Item ~~reduced~~I of this Form 10-Q during the six months ~~yields~~ended ~~causing~~June 30, ~~product~~2007, ~~introduction~~we orused ~~delivery~~cash ~~delays~~in operating activities of $12.9 million. In addition, ~~yields~~we ~~can be~~used ~~adversely~~cash ~~affected~~of by$27.9 million ~~minute~~for ~~impurities~~operating inactivities for the ~~environment~~year orended ~~other~~December 30, 2006. ~~problems~~As of June 30, 2007, our cash, cash equivalents and short-term investments totaled $3.4 ~~that~~million ~~occur~~and inour ~~the~~accumulated ~~complex~~deficit ~~manufacturing~~was ~~process~~$257.4 million. ~~Many~~These offactors, ~~these~~among ~~problems~~others, ~~are~~may indicate ~~difficult~~that we will be unable to ~~diagnose~~continue ~~and~~as ~~are~~a going concern for a reasonable period of time~~-consuming~~. Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or ~~expensive~~the amounts and classification of liabilities that may be necessary should we be unable to ~~remedy~~continue as a going concern. ~~From~~The ~~time~~continuation as a going concern is dependent upon our ability to ~~time~~generate wesufficient ~~have~~cash flow to meet our obligations on a ~~experienced~~timely ~~unfavorable~~basis, ~~yield~~to ~~variances.~~comply Inwith ~~particular~~the terms and covenants of our financing agreements, ~~new~~to ~~process~~obtain ~~technologies~~additional financing or ~~new~~refinancing ~~products~~as ~~can~~may be ~~subject~~required, and ultimately to ~~especially~~attain ~~wide~~profitability. Should ~~variations~~the merger with Exar Corporation not be completed, management intends to actively engage in ~~manufacturing~~several ~~yields~~steps ~~and~~designed ~~efficiencies.~~to ~~There~~enable isus noto ~~assurance~~meet ~~that~~the capital requirements of our ~~foundries~~business, which include ~~will~~continuing ~~not~~our ~~experience~~efforts ~~unfavorable~~to ~~yield~~obtain ~~variances~~additional orshort- ~~other~~and ~~manufacturing~~long-term ~~problems that~~financing ~~result~~to infund ~~delayed~~operations ~~product~~and implementing ~~introduction~~efforts orto ~~delivery~~reduce ~~delays~~corporate expenditures.

26 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.

~~Table~~ 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 ~~Contents~~these key areas are interrelated and important in achieving improved gross margins.

Product ~~defects~~ ormix ~~compatibility~~between ~~problems~~our ~~with~~three ~~our~~product families and the sale of new products ~~could~~within ~~damage~~each of our ~~reputation,~~product ~~decrease~~families ~~market~~can ~~acceptance~~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 ~~technology~~advanced power management product offerings, ~~cause~~such usas towhite LED ~~replace~~(light ~~defective~~emitting ordiode) ~~incompatible~~drivers, and our Power Bloxtm family, are newer products, atand acontribute ~~substantial~~typically ~~cost~~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. ~~result~~Optical instorage ~~potentially~~product ~~costly~~margins ~~litigation~~are typically within range of our average product margin. The products in this family are typically proprietary, but alternative suppliers have introduced competitive solutions.

A26 number of factors, including design flaws, materials failures, manufacturing problems, and misapplication of our products may cause our products to contain undetected errors, defects or compatibility problems. Defects or compatibility problems with our products may:

~~If any~~Capacity utilization of our ~~products~~wafer ~~contain~~fabrication ~~defects~~facility in Milpitas, orCalifornia ~~have~~was historically ~~reliability~~an important factor in driving gross margin improvement. In the past, ~~quality~~a orlarge portion ~~compatibility~~of ~~problems~~our fabrication cost structure was fixed, ~~our~~such ~~reputation~~as ~~might~~depreciation beand ~~damaged~~payroll ~~significantly~~expense for process engineering and ~~customers~~manufacturing ~~might~~support, beand ~~reluctant~~this tostructure ~~buy~~provided ~~our~~for ~~products.~~lower ~~This~~per ~~could~~unit costs as the ~~result~~volume inof completed wafers increased. In the ~~loss~~third quarter of ~~existing~~2005, ~~customers~~we ~~and~~decided ~~impair~~to ~~our~~outsource ~~ability~~all toof ~~attract~~our ~~new~~wafer ~~customers~~fabrication inoperations ~~the~~and ~~future.~~in ~~In addition~~October 2006, we ~~may~~completed ~~discover~~the shut-down of our Milpitas, ~~defects~~California orwafer ~~failures~~fabrication infacility. ~~our~~We ~~products~~believe ~~after~~that ~~they~~this ~~are~~transition ~~installed~~to byan outsourced or ~~customers.~~“fabless” Inmanufacturing ~~such~~model ~~cases,~~will weimprove ~~may~~the ~~incur~~overall ~~significant~~margins ~~costs~~of our interface and ~~devote~~certain of our ~~substantial~~commodity ~~management~~market ~~resources~~power tomanagement ~~correcting~~products ~~these~~which ~~problems.~~we ~~Our customers~~historically ~~may~~manufactured ~~also~~at ~~sue~~the usMilpitas facility. ~~for~~However, orbecause ~~otherwise~~of ~~seek~~this totransition ~~recover~~away from a usfixed cost structure in a captive wafer fab, ~~any~~ ~~losses~~we ~~resulting~~may ~~from~~not ~~alleged~~recognize ~~defects~~the orsame ~~errors~~decrease in ~~our~~per ~~products~~unit manufacturing costs as production volumes increase.

We Cost ~~rely~~reductions onand ~~outside~~productivity ~~foundries~~improvements are required in order to ~~supply~~remain ~~certain~~competitive in our marketplace. Cost reductions are achieved in several ways, such as re-designing the products to “shrink” the size of ~~our~~the ~~wafers~~“die” ~~and~~providing ~~those~~more individual products per wafer produced. This ~~foundries~~generates ~~may~~increased ~~not~~output ~~produce~~without atadding ~~acceptable~~significant ~~levels~~incremental cost. Other cost reductions and productivity improvements come through product assembly and test yield improvements and test time reductions.

WeNew ~~rely~~product onintroductions ~~outside~~represent ~~foundries~~a tokey ~~supply~~driver ~~certain~~ of opportunities to improve our ~~fully-processed~~product ~~semiconductor wafers~~margins. ~~This~~New ~~reliance~~products onare ~~outside~~typically ~~foundries~~proprietary ~~presents~~in nature and therefore command a stronger market position and we typically have higher product margins. In the ~~following~~second quarter of 2007, we ~~potential~~introduced ~~risks:~~eight new products, seven 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.

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

~~Additionally,~~For the ~~manufacture~~periods ofindicated, ~~integrated~~the ~~circuits~~following istable asets ~~highly~~forth ~~complex and~~the ~~technologically~~percentages ~~demanding~~of ~~process.~~net ~~Our third-party foundries have, from~~sales ~~time~~represented toby ~~time,~~the ~~experienced~~respective ~~lower~~line ~~than~~items ~~anticipated manufacturing yields, particularly~~ in ~~connection~~our ~~with~~consolidated ~~the~~statements ~~introduction~~ of ~~new~~operations ~~products~~for ~~and~~ the ~~installation~~ three and ~~start-up~~six ofmonths ~~new~~ended ~~process~~June 30, ~~technologies.~~2007 ~~There~~and isthe nocomparable ~~assurance that~~periods ~~our~~of ~~outside foundries will not experience lower than expected manufacturing yields in~~ the ~~future~~prior year.

Additionally, we do not have a guaranteed level of production capacity at any of these foundries with the exception of one of our foundries for whom we provide minimum purchase commitments in accordance with our supply agreement announced on August 11, 2003 (see Note 10 for Commitments and Contingencies). The ability of each foundry to provide wafers to us is limited by the foundry’s available capacity, and the foundry’s allocation of its available capacity among multiple customers. There can be no assurance that our third party foundries will allocate sufficient capacity to satisfy our requirements. We have experienced decreased allocations of wafer supplies from our suppliers in the past, which reduced our capacity to ship products, and, thus, recognize revenues. Additionally, any sudden reduction or elimination of any primary source or sources of fully processed wafers could result in a material delay in the shipment of our products. If any other delays or shortages occur in the future, our business and operating results will be negatively impacted.


	For the Three Months Ended						For the Six Months Ended
	June 30, 2007			July 1, 2006			June 30, 2007			July 1, 2006
Net sales		100.0	%		100.00	%		100.0	%		100.00	%
Cost of sales		78.3			81.6			76.1			90.6

Gross profit		21.7			18.4			23.9			9.4
Operating expenses:
Research and development		18.6			18.5			20.2			24.1
Marketing and selling		16.9			17.9			18.2			19.1
General and administrative		25.2			13.0			21.6			17.4
Restructuring		(0.6	)		(0.1	)		(0.1	)		0.7
Impairment of fixed assets		—			—			—			—

Total operating expenses		60.1			49.3			59.9			61.3

Loss from operations		(38.4	)		(30.9	)		(36.0	)		(51.9	)
Other income (expense), net		(4.5	)		(1.4	)		(4.4	)		(1.0	)

Loss before income taxes		(42.9	)%		(32.3	)%		(40.4	)%		(52.9	)%

~~Our~~ Net ~~wafer~~Sales. ~~fabrication~~The ~~facility~~table ~~and~~in ~~the~~Note ~~facilities~~14 ofto ~~certain~~our condensed consolidated financial statements shows details of our ~~significant customers~~net ~~and~~sales ~~third-~~by ~~party~~product ~~wafer~~family ~~suppliers~~and ~~are~~geographic ~~located~~location infor ~~areas~~the ~~susceptible~~three toand six months ~~earthquakes~~ended June 30, 2007 and ~~other~~the ~~natural~~comparable ~~disasters~~periods of 2006.

~~Our~~Net ~~in-house~~sales ~~fabrication~~decreased ~~facility~~by ~~and~~12.3% to $18.4 million for the ~~facilities~~quarter ofended ~~certain~~June 30, of2007, ~~our~~as compared ~~significant~~to ~~customers~~$21.0 million ~~and~~for ~~third-party~~the ~~wafer~~quarter ~~suppliers~~ended ~~are~~July 1, ~~located~~2006. The decrease in ~~areas~~net ~~that are~~sales ~~susceptible~~was primarily due to a ~~earthquakes~~$2.3 million ~~and~~decrease ~~other~~in ~~natural~~net ~~disasters.~~sales ~~Damage~~for ~~caused~~the ~~by earthquakes~~optical ~~may~~storage ~~result~~product infamily ~~shortages~~and a $1.1 million decrease in ~~water~~net orsales ~~electricity~~for orthe ~~transportation~~interface product family, partially offset by a $0.9 million increase ~~which~~in ~~could~~net ~~limit~~sales for the ~~production~~power ~~capacity~~management ofproduct ~~our~~family. ~~wafer~~The ~~facility~~decline ~~and/or~~in ~~the ability~~net ofsales ~~certain~~ of our ~~subcontractors~~optical product tofamily ~~provide~~was ~~needed~~driven ~~products.~~by ~~Any reduction~~a continuing decline in ~~production~~unit ~~capacity~~volume orshipments ~~the~~as ~~ability~~certain toproduct programs ~~obtain~~approached ~~fully~~the ~~processed semiconductor~~end ~~wafers~~of ~~could~~their ~~cause~~product ~~delays~~life orcycles ~~shortages~~and inwe de-emphasize our ~~product~~marketing ~~supply,~~and ~~which~~sales ~~would~~efforts ~~negatively~~in ~~impact~~this ~~our~~product ~~business~~family. IfThe ~~our~~decrease ~~facilities~~in ornet ~~the~~sales ~~facilities of~~for ~~our~~the ~~customers~~interface orproduct ~~suppliers~~family was ~~are~~driven ~~damaged~~ by ~~future~~a ~~earthquakes~~decrease orin ~~other natural~~unit ~~disasters,~~volume itshipments ~~could~~as ~~have~~well as a ~~materially~~decline ~~adverse~~in ~~effect~~average onselling ~~our~~prices for ~~business~~this product family. The decline

Wein ~~rely~~average onselling ~~outside~~prices ~~suppliers~~was todriven ~~assemble,~~by ~~test~~price declines in both commodity and ~~ship~~proprietary interface products, towhile the unit volume decline was driven by declines in demand across the general analog market. The net sales increase in our ~~customers~~power management product family was driven by unit volume increases of our proprietary power products, somewhat offset by declines in average selling prices. For the six months ended June 30, 2007, net sales decreased by $3.6 million, or 9.2%, to $35.3 million from $38.9 million. The decrease in net sales for the first six months of fiscal year 2007 as compared to the first six months of fiscal year 2006 was primarily due to a $3.3 million decrease in net sales for the optical storage product family and a $1.9 million decrease in net sales for the interface product family, partially offset by a $1.7 million increase in net sales for the power management product family.

WeGeographically, ~~rely~~during onthe ~~outside~~second ~~assembly~~quarter ~~houses~~of fiscal year 2007, international net sales were $14.1 million, or 76% of total net sales, as compared to ~~assemble~~$16.8 million, ~~test~~or ~~and~~80%, ~~ship~~in ~~our~~the ~~products~~second toquarter ~~end~~of ~~customers~~fiscal year 2006. ~~There~~For ~~can~~the befirst nosix ~~assurance~~months ~~that~~of ~~our~~fiscal ~~third-party~~year ~~suppliers~~2007, ~~will~~international sales were ~~allocate~~$27.5 million, ~~sufficient~~or ~~capacity~~78% toof ustotal tonet ~~meet~~sales, ~~our~~as ~~requirements.~~compared ~~Any~~to ~~sudden reduction~~$30.8 million, or ~~elimination~~79% of atotal ~~primary~~net ~~source~~sales in ~~could~~2006. ~~result~~In the second quarter of fiscal year 2007, sales in ~~material~~Japan ~~delay~~declined by $0.9 million or 37%. This decline was principally driven by the decline in revenues for the optical storage product family. In Asia, in the ~~shipment~~second quarter of ~~our~~fiscal ~~products~~year ~~and~~2007, ~~could~~other ~~have~~than aJapan, ~~material~~net ~~adverse~~sales ~~affect~~decreased by on$1.6 million, ~~our business~~or 15%, related to the decline in the optical storage and ~~operating~~interface ~~results~~products. Net sales in Europe in the second quarter of fiscal year 2007 and the rest of the world decreased by $1.4 million, or approximately 26% from the comparable period in 2006. Domestic net sales in the second quarter of fiscal year increased by $0.1 million, or 2%, from the comparable period in 2006.

~~Because~~Gross weProfit. ~~rely~~Gross onprofit ~~outside~~increased ~~assembly~~to ~~house~~$4.0 million toin ~~assemble,~~the ~~test~~second ~~and~~quarter ~~ship~~of ~~our~~fiscal year ~~products~~2007, weor ~~have~~21.7% ~~limited~~of ~~control~~net ~~over~~sales, ~~quality~~as ~~assurance~~compared to a gross profit of $3.9 million, ~~manufacturing~~or ~~yields~~18.4%, in the second ~~and~~quarter ~~production~~of ~~costs~~fiscal year 2006. The increase was primarily attributable to a $0.9 million reduction in inventory write-downs, royalty costs and weshipment ~~have~~of inventory that was previously written-down to zero, partially offset by an approximately $0.8 million increase in unfavorable manufacturing yield and price variances. For the ~~past~~six ~~experienced~~months ~~yield~~ended ~~problems~~June 30, ~~and~~2007, gross profit increased to $8.4 ~~delays~~million, or 23.9% Weof ~~could~~net ~~experience~~sales, ~~delays~~as compared to a gross profit of $3.7 million, or ~~yield~~9.4% ~~issues~~of net sales in the ~~future~~comparable ~~due~~period of fiscal year 2006. The increase was primarily attributable to ~~the~~recording ~~transfer~~$4.5 million of ~~products~~increased ~~from~~depreciation ~~development~~during the first quarter of 2006, reducing gross profit, related to ~~production~~the Milpitas, ~~which~~California ~~could~~facility ~~negatively~~after management’s determination in November 2005 that ~~impact~~the ~~our~~facility ~~business~~had ~~and~~a ~~operating~~shorter ~~results~~economic useful life to Sipex. In addition, ifthe ~~defects~~increase in ~~our~~gross profit ~~products~~was ~~are~~attributable ~~undetected,~~to: we1) ~~may~~$0.4 million ~~experience~~increase ~~higher~~in ~~warranty~~our ~~expenses~~standard ~~than~~gross profit due to our shift to a ~~anticipated~~lower cost fabless manufacturing model, ~~which~~and ~~could~~2) ~~negatively~~$0.6 million ~~impact~~reduction ~~our~~in ~~reputation,~~inventory ~~business~~write-downs and ~~operating~~royalty ~~results~~costs. These increases in gross profit were partially offset by approximately $1.6 million of unfavorable manufacturing yield and price variances.

We Research ~~must~~and ~~comply~~Development. ~~with~~Research ~~significant~~and ~~environmental~~development ~~regulations~~expenses in the second quarter of fiscal year 2007 were $3.4 million compared to $3.9 million in the second quarter of fiscal year 2006. The $0.5 million decline was primarily driven by an approximately $0.4 million decrease in spending for prototype wafers, ~~which~~product isdevelopment ~~difficult~~costs and ~~expensive~~outside design services and an approximately $0.2 million reduction in stock-based compensation expenses, offset by an approximately $0.1 million increase in license fees for computer automated design tools. For the six months ended June 30, 2007, research and development expenses were $7.1 million compared to $9.4 million for the comparable period of 2006. The $2.3 million decline was primarily due to recording $1.1 million of depreciation expense in the first quarter of fiscal year 2006 related to the Milpitas, California facility after management’s determination in November 2005 that the facility had a shorter economic useful life to Sipex. In addition, approximately $1.0 million of the reduction was due to a decrease in spending for prototype wafers, product development costs and outside design services and an approximately $0.3 million reduction in stock-based compensation expenses, offset by an approximately $0.1 million increase in license fees for computer automated design tools. As a percentage of net sales, research and development expenses were 18.6% in the second quarter of fiscal year 2007 and 18.5% in the comparable period of the prior year. This percentage increase was principally due to the lower sales levels in the second quarter of fiscal year 2007. For the six months ended June 30, 2007, as a percentage of net sales, research and development expenses were 20.2% and 24.1% in the comparable period of the prior year. This percentage decrease was due to the reductions in spending noted above.

WeMarketing ~~are~~and ~~subject~~Selling. toMarketing aand ~~variety~~selling ofexpenses ~~federal,~~were ~~state~~$3.1 million ~~and~~in ~~local~~the ~~governmental~~second quarter ~~regulations~~of ~~related~~fiscal toyear ~~the~~2007 ~~use,~~compared ~~storage,~~to ~~discharge~~$3.8 million ~~and~~in ~~disposal~~the ofsecond ~~toxic, volatile~~quarter orof ~~otherwise~~fiscal ~~hazardous~~year ~~chemicals~~2006. ~~used~~The ~~in our manufacturing processes~~$0.7 ~~Although~~million wedecline ~~believe~~was ~~that~~primarily ~~our~~due ~~activities conform~~ to ~~presently~~an ~~applicable environmental~~approximately ~~regulations,~~$0.4 million ~~the~~decline ~~failure~~in tocompensation ~~comply~~and benefits ~~with~~related ~~present~~to ora ~~future regulations~~reduction ~~could~~in ~~result~~sales inand ~~fines~~marketing ~~being~~personnel, ~~imposed~~and onapproximately us$270,000 ~~suspension~~ of ~~production~~ orlower asales ~~cessation~~commissions, oftravel ~~operations.~~and ~~Any~~other ~~failure~~selling bycosts. usFor ~~to control~~ the ~~use~~six ~~of,~~months ~~or adequately~~ended ~~restrict the discharge of~~June 30, ~~hazardous substances~~2007, ~~or otherwise comply~~ ~~with~~marketing ~~environmental~~and ~~regulations,~~selling ~~could~~expenses ~~subject~~were us$6.4 million compared to ~~significant future liabilities~~$7.4 million Infor ~~addition,~~the ~~there~~comparable isperiod of no2006. ~~assurance~~The ~~that~~$1.0 million wedecline ~~have~~was ~~not~~primarily ~~violated~~due ~~laws or~~an ~~regulations~~approximately in$0.4 million ~~the~~decline ~~past, which violations could result~~ in ~~remediation or~~ ~~other~~compensation ~~significant~~and ~~liabilities,~~benefits orrelated ~~that~~to ~~past~~a ~~use~~reduction ~~or disposal of environmentally sensitive materials~~ in ~~conformity~~sales ~~with then existing environmental laws~~ and ~~regulations~~ ~~will~~marketing ~~not~~personnel, ~~result~~recording ~~in remediation or other significant liabilities~~$0.3 ~~under~~million ~~current or future environmental laws or regulations.~~of

~~It would be difficult for us to adjust our spending significantly if we experience any revenue shortfalls.~~28

Wedepreciation expense in the first quarter of 2006 related to the Milpitas, California ~~may~~facility ~~not~~after ~~have~~management’s ~~sufficient~~determination ~~capital~~in November 2005 that the facility had a shorter economic useful life to ~~maintain~~Sipex, and ~~grow~~approximately ~~our~~$0.3 million ~~business~~of lower sales commissions, travel and weother ~~may~~selling ~~not~~costs. beMarketing ~~able~~and selling expenses were 16.9% of net sales in the second quarter of fiscal year 2007 and 17.9% of net sales in the comparable period of the prior year. This percentage reduction was due to ~~secure~~the ~~adequate~~reductions ~~capital~~in onspending ~~acceptable~~noted ~~terms~~above. For the six months ended June 30, 2007, marketing and selling expenses were 18.2% and 19.1% in the comparable period of the prior year. This percentage decrease was due to the reductions in spending noted above.

InGeneral ~~order~~and toAdministrative. ~~remain~~General ~~competitive,~~and weadministrative ~~must~~expenses ~~continue~~were to$4.6 million ~~make investments~~ in the ~~our~~second ~~facilities~~quarter ~~and~~of ~~capital~~fiscal ~~equipment.~~year We2007 ~~obtained~~compared ~~additional~~to ~~funding~~$2.7 million ~~through~~ in the ~~private~~second ~~placement~~quarter of 3fiscal year 2006.0 The $1.9 million ~~shares~~increase ofwas ~~Sipex~~primarily ~~common~~due ~~stock~~to onrecording ~~April 16, 2002,~~approximately ~~which provided~~ $231.54 million, ~~net~~ of expenses ~~placement~~related ~~agent~~to ~~fees~~the ~~and~~contemplated ~~other~~merger ~~costs of~~with ~~issuance,~~Exar Corporation for a fairness opinion and ~~through~~merger related legal fees. In addition, the ~~private~~increase ~~placement~~was ofdriven aby ~~convertible~~approximately ~~secured~~$199,000 ~~note~~of higher ~~and~~non-merger related ~~warrant~~legal ~~on September 27~~expenses, ~~2002~~approximately $123,000 ~~which~~of ~~provided~~higher ~~approximately~~compensation ~~$12.0~~and benefits ~~million~~costs, ~~net~~and ofapproximately ~~costs~~$116,000 of ~~issuance.~~higher Westock ~~obtained~~compensation ~~funding~~expenses. ~~from~~For the ~~private~~six months ended ~~placement~~June 30, of2007, ageneral ~~convertible~~and ~~secured~~administrative ~~note~~expenses onwere ~~June~~$7.6 ~~20,~~million ~~2003~~compared ~~which~~to ~~provided approximately~~ $106.48 million, ~~net~~for the ofcomparable ~~costs~~period of ~~issuance~~2006. InThe ~~December~~$0.8 ~~2003,~~million weincrease was primarily due to recording ~~entered~~approximately ~~into~~$1.4 million anof ~~agreement~~expenses related to ~~amend~~the ~~both~~contemplated ~~outstanding~~merger ~~convertible~~with ~~notes~~Exar ~~and~~Corporation, ~~accelerated~~and ~~the~~by ~~associated~~approximately ~~conversion~~$135,000 ~~rights.~~of Inhigher ~~connection~~non-merger ~~with~~related ~~this agreement~~legal expenses, weoffset ~~received~~by a reduction in depreciation expense of approximately $3.0.7 million inof ~~cash.~~depreciation ~~During~~expense ~~February 2004,~~recorded in the ~~note~~first ~~holders~~quarter ~~converted~~of ~~their~~fiscal ~~notes~~year ~~into~~2006 ~~our~~related ~~common~~to ~~stock~~the Milpitas, ~~resulting~~California facility after management’s determination in ~~dilution~~November 2005 that the facility had a shorter economic useful life to Sipex. ~~our~~General ~~stockholders~~and administrative expenses were 25.2% Onof ~~August 5,~~net ~~2004,~~sales wein ~~received~~the second quarter of fiscal year $22007 and 13.~~7 million~~0% of net sales in ~~cash~~the ~~for~~comparable ~~our~~period ~~common~~of ~~stock~~the ~~issued~~prior year. This percentage increase was due to the ~~warrant holders~~increases in ~~conjunction~~spending noted above along with the ~~$12~~reduction in net sales.~~0 million~~ ~~convertible~~For ~~note~~the onsix ~~September~~months ended June 2730, ~~2002.~~2007, ~~This~~as ~~resulted~~a inpercentage ~~further~~of ~~dilution~~net tosales, ~~our~~general and administrative expenses ~~stockholders~~were 21.6% Ifand we17.4% ~~require~~in ~~additional~~the ~~financing,~~comparable itperiod ~~may~~of ~~not~~the beprior ~~available or~~year. ~~available~~This onpercentage ~~terms~~increase ~~acceptable~~was due to ~~us,~~the ~~and~~spending ~~could~~increases ~~result~~noted inabove ~~additional~~as ~~dilution to~~well ~~existing~~as ~~stockholders~~the decline in net sales.

28 Restructuring and other. During the quarter ended June 30, 2007, we recorded a reduction in restructuring expenses of approximately $103,000, representing principally a reduction in severance costs for the workforce reduction at our Belgium Design Center.

~~Table~~ Other Income/Expense, Net. Other income/expense, net was $0.8 million of ~~Contents~~net other expense in the second quarter of 2007 compared to $0.3 million of net other expense in the second quarter of 2006. The $0.5 million increase in net other expense was attributable to an approximately $0.3 million increase in interest expense related to the convertible senior notes issued in May 2006 and an approximately $0.2 million reduction in interest income attributable to our interest bearing cash equivalents and short-term investments.

Income Tax Expense. Our ~~stock~~income ~~price~~tax ~~has~~expense ~~been~~primarily ~~volatile~~relates ~~and~~to ~~could~~our foreign operations as we continue to ~~remain~~incur ~~volatile~~losses from domestic operations. In the second quarter of fiscal year 2007, we recorded an income tax provision of $51,000, compared to a provision of $53,000 in the second quarter of fiscal year 2006. 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.

~~The trading price of our common stock is subject to wide fluctuations in~~29 response to quarter-to-quarter variations in operating results, announcements of technological innovations or new products by us or our competitors, general conditions in the semiconductor manufacturing and electronics markets, changes in earnings estimates by analysts, or other events or factors. In addition, the public stock markets have experienced extreme price and trading volume volatility in recent months. In the second quarter of 2004, our stock closing price ranged from a high of $6.54 to a low of $4.75. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.

~~We have~~Financial ~~in the past~~Condition, ~~and~~Liquidity may in the future, become involved in litigation or have claims made against us by customers, distributors, former employees, shareholders or other third-parties related to a variety of matters concerning the operations of our business. The litigation process is uncertain and ~~unpredictable~~Capital ~~and there is no~~Resources guarantee that we will not become subject to lawsuits or claims in future. If we do become subject to lawsuits or claims, it could result in substantial costs, potential damages, and the diversion of management’s attention and resources, all of which could have a negative impact on our business and our financial results.

~~Changes~~ As inof ~~laws~~June 30, ~~regulations~~2007, we had cash, cash equivalents and ~~financial~~short-term ~~accounting~~investments, ~~standards~~of ~~may~~$3.4 million as ~~affect~~compared ~~our~~to ~~reported~~$15.4 million ~~results~~at December 30, 2006. The decrease of $12.0 million was principally due to our net cash outflows from operations of $12.9 million as well as our cash payments for capital expenditures of $1.3 million and $0.4 million of repayments of bank borrowings and lease financing obligations. These outflows were partially offset by cash inflows of $2.4 million of proceeds from issuance of common stock under our employee stock plans.

~~The~~As ~~recently~~of ~~enacted~~June ~~Sarbanes-Oxley~~30, ~~Act~~2007, ofwe ~~2002~~have ~~and~~a ~~related~~$1,667,000 ~~regulations may~~outstanding ~~result~~term loan with Silicon Valley Bank that was borrowed in ~~changes~~December 2006, of which $667,000 was due in ~~accounting~~the ~~standards~~next ortwelve ~~accepted~~months; ~~practices~~however, ~~within~~we ~~our~~currently do not expect to maintain compliance with the financial covenants as of the ~~industry.~~end ~~New~~of ~~pronouncements~~the fiscal quarter ending September 29, 2007 and ~~varying~~accordingly ~~interpretations~~the unpaid portion of ~~pronouncements~~the ~~have~~term ~~occurred~~loan inmay ~~the~~become ~~past~~payable ~~and~~at such date upon demand by Silicon Valley Bank if we are ~~likely~~unable to ~~occur~~obtain a inwaiver from Silicon Valley Bank. In July 2007, we borrowed the ~~future~~remaining $3,750,000 asunder athe $5,000,000 ~~result~~line of ~~recent~~ ~~Congressional~~credit ~~and~~with ~~regulatory~~Silicon ~~actions~~Valley Bank (See Note 10). ~~New~~The ~~laws,~~line ~~regulations~~of credit borrowings, ~~and accounting~~along ~~standards~~with the interest, asis ~~well~~due ason the ~~questioning~~earlier of September 29, 2007 or ~~changes~~a ~~to,~~liquidity ~~currently accepted~~event ~~accounting~~which ~~practices~~includes changes in ~~the~~ownership, ~~technology~~a ~~industry~~merger, ~~may~~an ~~adversely~~acquisition ~~affect~~or the ~~our~~receipt ~~reported~~of ~~financial~~net ~~results,~~proceeds ~~which~~from ~~could~~the ~~have~~consummation of an ~~adverse~~equity ~~effect~~financing onof ~~our~~no ~~stock price~~less than $10,000,000. ~~Proposals~~In ~~have~~addition ~~been~~to ~~made~~these ~~concerning~~short-term ~~the~~debt ~~expensing~~obligations, ofan ~~stock~~interest ~~options~~payment ~~which~~of ~~could~~$825,000 ~~result~~for inthe ~~rules~~$30 ormillion ~~laws~~convertible ~~that~~notes, ~~may~~issued ~~adversely~~in ~~affect~~May ~~our~~2006, ~~reported~~is ~~financial results~~due ~~and~~in ~~have~~November an2007 ~~adverse~~(See ~~effect~~Note ~~on our stock price~~13).

We ~~are~~entered ~~incurring~~into ~~additional~~a ~~costs~~definitive ~~and~~merger ~~devoting~~agreement ~~more~~with ~~management~~Exar ~~resources~~on May 7, 2007 to combine the two companies. Both companies have scheduled respective stockholders meetings on ~~comply~~August ~~with~~23, ~~increasing~~2007 ~~regulation~~whereby the proposed merger will be subjected to the vote of ~~corporate~~the ~~governance~~stockholders of both companies. During the six months ended June 30, 2007, we used cash in operating activities of $12.9 million. We used cash of $27.9 million for operating activities for the year ended December 30, 2006. As of June 30, 2007, our cash, cash equivalents and ~~disclosure~~short-term investments totaled $3.4 million and our accumulated deficit was $257.4 million. These factors, among others, may indicate that we will be unable to continue as a going concern for a reasonable period of time.

WeBased ~~are~~on ~~spending~~our ancurrent ~~increased~~plans ~~amount~~and ofbusiness ~~management~~conditions, ~~time~~we believe that our existing cash, cash equivalents and ~~external~~short-term investments together with available borrowings under ~~resources~~our bank line of credit and unsecured promissory note facility will be sufficient to ~~understand~~meet our liquidity and ~~comply~~capital spending requirements for at least the next three months. However, should the merger with ~~changing~~Exar ~~laws~~not be completed, ~~regulations~~the ~~and standards~~Company ~~relating~~will not have sufficient resources to ~~corporate~~fund ~~governance~~its ~~and~~operations ~~public~~for ~~disclosure~~the next twelve months without obtaining additional capital resources. As such, ~~including~~if the merger with Exar is not completed, ~~Sarbanes-Oxley~~management ~~Act~~intends to actively engage in steps designed to enable us to meet the capital requirements of ~~2002~~our business, ~~new~~which ~~SEC~~would ~~regulations~~include continuing the efforts to obtain additional short- and ~~Nasdaq~~long-term ~~Stock~~financing ~~Market~~to ~~rules~~ fund operations and ~~listing~~implementing ~~requirements~~efforts to reduce corporate expenditures. ~~Devoting~~In ~~the~~addition, ~~necessary~~we ~~resources~~may seek to ~~comply~~raise ~~with evolving~~additional ~~corporate~~capital ~~governance~~through ~~and~~the ~~public~~sale ~~disclosure~~of ~~standards~~debt ~~may~~or ~~result~~equity. ~~in increased~~We ~~general~~cannot ~~and~~assure, ~~administrative~~however, ~~expenses~~that future borrowings and acapital ~~diversion~~resources ofwill ~~management time~~be ~~and~~available ~~attention~~on tofavorable ~~these~~terms ~~compliance~~or ~~activities~~at all.

29Operating Activities

~~Table~~ Net cash used in operating activities was $12.9 million for the six months ended June 30, 2007, resulting primarily from a $14.3 million net loss and the unfavorable impact of ~~Contents~~a $2.2 million net change in assets and liabilities, offset by $3.5 million of non-cash adjustments to net loss. The changes in assets and liabilities included a $3.7 million reduction in accounts payable, accrued expenses and the restructuring accrual, along with a $1.2 million increase in accounts receivable and prepaid expenses and a $0.8 million reduction in deferred income. These cash outflows were partially offset by a $3.5 million reduction in inventory. The non-cash adjustments to net loss primarily comprised stock-based compensation expense of $1.8 million, $1.1 million of depreciation and amortization expense, a $0.6 million provision for sales returns and allowances and uncollectible receivables, and $0.4 million for amortization of the discount and issuance costs on the convertible notes.

~~Item 3. Quantitative and Qualitative Disclosures about Market Risk:~~30

WeAccounts ~~invest~~receivable, ~~excess~~net ~~cash~~of inallowances, ~~financial~~was ~~instruments~~$7.5 million ~~that~~and ~~are~~$7.2 million ~~sensitive to market risks~~ as ~~part~~ of ~~our~~June 30, ~~investment~~2007 and ~~strategy.~~December 30, ~~None~~2006, ofrespectively. ~~these~~The ~~market-sensitive instruments~~allowances ~~are held~~ for ~~trading~~accounts ~~purposes.~~receivable Weincreased doto ~~not~~$1.1 million ~~own~~at ~~derivative~~the ~~financial instruments~~end inof ~~our~~the ~~portfolio.~~second ~~The~~quarter ~~investment~~of ~~portfolio~~fiscal ~~contains~~year ~~instruments that~~2007, ~~are~~up ~~subject~~from to$0.9 million at the ~~risk~~end of fiscal ayear ~~decline in interest rates~~2006. AsThe ~~required~~increase byin ~~our investment~~allowances ~~policy,~~was ~~available~~primarily ~~funds~~due ~~are~~to ~~invested~~receivables inallowances ~~a manner that assures~~for ~~maximum~~pricing ~~safety~~adjustments and ~~liquidity~~product ~~and,~~return ~~secondarily,~~provisions ~~maximizes~~for ~~yield within such~~distributors. ~~constraints~~

~~Interest~~ In ~~Rate~~2005, ~~Risk~~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. During the six months ended June 30, 2007, we incurred approximately $552,000 of manufacturing process transfer and qualification costs, as reflected in cost of sales, as compared to approximately $642,000 in the comparable period of fiscal year 2006. We anticipate that we will continue to incur similar costs in the future until the processes are fully transferred and in full production volumes. We cannot guarantee 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.

~~Our~~In ~~financial~~addition, ~~instruments~~we ~~consist~~may ~~primarily~~be unable to achieve all or any of ~~high~~the ~~quality~~expected ~~commercial~~benefits of the ~~paper~~relationship ~~and~~within ~~money~~the ~~market~~anticipated ~~funds~~time-frames. WeThe doanticipated synergies between Sipex and Silan or Episil may not ~~believe~~be ~~that~~as itsignificant ~~has~~as aoriginally ~~material~~expected. ~~exposure~~We may be unable to qualify the manufacturing processes and wafer testing following the transfer from Sipex to ~~interest~~Silan ~~rate~~or ~~risk~~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.

~~Our~~Investing ~~exposure to market risk for changes in interest rates relates~~Activities primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio. The two debt instruments that we entered into had fixed interest rates. We do not use derivative financial instruments or engage in hedging activities in our investment portfolio. We ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in safe and high-credit quality securities.

AtNet ~~July 3,~~cash ~~2004,~~provided weby ~~had~~investing ~~short-term~~activities ~~investments~~during ofthe ~~$3.0 million.~~six ~~Our short-term~~months ~~investments~~ended ~~consist~~June 30, of2007 ~~highly~~was ~~liquid investments with original~~$0.8 ~~maturities~~million, atas ~~the~~compared ~~date~~to ofnet ~~purchase~~cash ~~between~~used 91in ~~days~~investing ~~and~~activities ~~180~~of ~~days~~$4.9 million ~~These~~during ~~investments~~the ~~are~~comparable ~~subject~~period toof ~~interest rate risk and will fall in value if market interest rates increase~~2006. The ~~Company~~net ~~believes~~cash aprovided ~~hypothetical~~during ~~increase~~the infirst ~~market~~six ~~interest~~months ~~rates by~~of ~~10%~~fiscal ~~from~~year ~~levels~~2007 atconsisted ~~July~~of $2.8 3,million ~~2004,~~of ~~would~~proceeds ~~cause~~from ~~the~~maturities ~~fair value~~ of ~~these~~ short-term ~~investments to fall by an immaterial amount~~securities. ~~Since~~These weinflows ~~are~~were ~~not~~partially ~~required~~offset toby ~~sell~~$1.3 million ~~these~~of ~~investments~~capital ~~before~~expenditures ~~maturity,~~and ~~we have the ability to avoid realizing losses on these investments due to a sudden change in market interest rates~~$1.0 million Onof ~~the~~purchases ~~other~~of ~~hand, declines in the interest rates over time~~short-term ~~will~~investment ~~reduce our interest income~~securities.

~~Foreign~~Financing ~~Currency Exchange Risk~~Activities

~~The~~Net ~~majority~~cash ofprovided ~~our~~by ~~sales,~~financing ~~expense, and capital purchasing~~ activities ~~are transacted~~during inthe ~~U.S.~~six ~~dollars.~~months ~~However~~ended June 30, ~~since~~2007 awas ~~portion of our operations consists of sales activities outside of the U~~$1.S.9 million, weresulting ~~enter~~primarily ~~into~~from ~~transactions in other currencies~~$2.4 million Weof ~~are~~proceeds ~~primarily~~from ~~exposed~~the toissuance ~~changes~~of incommon ~~exchange~~stock ~~rates for the Euro,~~under ~~Japanese~~employee ~~yen,~~stock ~~and British pound. Currently~~plans, weoffset ~~have~~by ~~no plan to enter into any foreign currency hedging program since the amounts involved have not been material~~$0.4 million ~~Foreign~~of ~~currency~~repayments ~~fluctuations did not have a material impact on our consolidated financial position, results~~ of ~~operations~~short-term orborrowings ~~cash~~and ~~flows for the~~lease ~~quarters~~financing ~~ended July 3, 2004 and June 28, 2003~~obligations.

~~Item~~ On 4July 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, September 28, 2006 and June 26, 2007. ~~Controls~~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 ~~Procedures~~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, equal to Silicon Valley Bank’s prime rate plus 3.0%. 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% per annum. 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 June 30, 2007, the unused portion of our line of credit was $3,735,000, and $1,667,000 was outstanding under the term loan.

~~Evaluation of disclosure controls and procedures~~31

~~Senior~~The ~~management~~agreement ~~and~~with ~~our~~Silicon ~~Audit~~Valley ~~Committee~~Bank ~~were~~has ~~informed~~been byextended ~~our~~to ~~previous independent auditors as part of the December~~September 3129, ~~2002~~2007. ~~audit~~Any borrowings ~~that~~under ~~they~~the ~~had identified~~line ~~“material~~of ~~weaknesses”~~credit ~~(as~~are ~~defined~~due ~~under~~and ~~standards~~all ~~established~~outstanding byadvances ~~the American~~must ~~Institute~~be ofrepaid, ~~Certified~~and ~~Public~~all ~~Accountants)~~outstanding ~~relating~~letters ~~to the~~of ~~deficiencies~~credit inmust ~~the~~be ~~systems~~cash ~~and~~collateralized ~~processes~~upon ~~used in~~ the ~~preparation~~earlier of ~~the consolidated~~September 29, ~~financial~~2007 ~~statements~~or ~~and~~a ~~the~~liquidity ~~lack~~event which ofincludes ~~proper~~changes ~~management~~in ~~review~~ownership, ~~and account~~a ~~analysis.~~merger, ~~Mr. Maghribi~~an ~~and~~acquisition ~~our~~or ~~former~~the ~~Chief~~receipt ~~Financial~~of ~~Officer,~~net ~~Phillip~~proceeds from A.the ~~Kagel,~~consummation ~~determined~~of ~~that~~an ~~these~~equity ~~material~~financing ~~weaknesses,~~of ~~together~~no ~~with~~less ~~certain other~~than ~~deficiencies~~$10, ~~if unaddressed~~000,000. ~~could~~The ~~result~~agreement inrequires ~~accounting~~us ~~errors and~~to ~~impair~~comply ~~our~~with ~~ability~~a tominimum ~~accurately~~liquidity ~~report~~ratio ~~our~~of ~~financial~~1.50:1.00 ~~results~~at ineach afiscal ~~timely manner~~month end. AtThe ~~the~~liquidity ~~end~~ratio is ofcalculated as the ~~third~~sum ~~quarter~~ of ~~2003,~~(i) Our ~~certain~~unrestricted ~~key~~cash ~~accounting personnel~~and ~~resigned.~~cash ~~While~~equivalents, weshort-term ~~hired~~marketable securities ~~temporary replacements~~ and ~~sought~~50% ~~permanent replacements,~~of ~~the~~consolidated ~~2003 year~~Accounts ~~end~~divided ~~closing~~by ~~process~~(ii) the ~~took~~Obligations ~~longer~~as ~~than~~defined ~~anticipated~~in the ~~and~~agreement. ~~continued~~We tomust ~~require~~maintain, aas ~~significant level~~ of ~~manual~~ ~~reconciliations~~the ~~and~~last ~~adjustments.~~day Inof ~~connection~~each ~~therewith~~fiscal quarter, ~~errors~~a ~~were identified~~tangible bynet ~~the~~worth ~~Company~~(deficit) ~~that~~(as ~~required~~defined ~~restatement~~in the Agreement) of ~~our~~at ~~second~~least ~~and~~the ~~third quarter~~amount ofset ~~2003~~forth ~~results of operations.~~below:


Fiscal Quarter Ending		Minimum Tangible Net Worth (Deficit)
September 30, 2006		$600,000
December 30, 2006		($5,500,000)
March 31, 2007		($10,000,000)
June 30, 2007		($20,000,000)
Each fiscal quarter thereafter		$2,500,000 plus 50% of any positive net income for each fiscal quarter thereafter

~~Table~~ For purposes of ~~Contents~~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 (deficit). 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 June 30, 2007, total borrowing under the term loan with Silicon Valley Bank was $1.7 million, of which $0.7 million was the short-term portion and $1.0 million was the long-term portion. We currently do not expect to maintain compliance with the financial covenants as of the end of the fiscal quarter ending September 29, 2007. If we are unable to obtain a waiver from Silicon Valley Bank, we may be required to repay the unpaid portion of the term loan at such date upon demand by Silicon Valley Bank.

On ~~March~~July 1217, ~~2004~~2007, ~~Deloitte~~we &borrowed ~~Touche LLP advised management and~~ the ~~Audit Committee~~remaining of$3,735,000 ~~two~~under ~~reportable~~its ~~conditions~~$5,000,000 inline ~~our internal controls. According to the American Institute~~ of ~~Certified Public Accountants, a “reportable~~credit ~~condition”~~with isSilicon aValley ~~matter~~Bank. ~~that~~Interest ~~comes~~accrues toat an ~~auditor’s~~annual ~~attention~~rate ~~that~~equal ~~represents~~to ~~a significant deficiency in~~ the ~~design or operation of internal control that could adversely affect an entity~~bank’s ~~ability~~prime torate ~~initiate,~~plus three ~~record,~~percent ~~process~~(3.0%) and ~~report~~ ~~financial~~is ~~data~~payable ~~consistent~~on ~~with~~ the ~~assertions~~first day of ~~management~~each ~~in financial statements~~month. The ~~first~~borrowings ~~reportable~~under ~~condition related to our process for determining~~ the ~~deferral~~line of ~~costs~~credit ~~associated~~is ~~with~~due ~~the~~on ~~deferred sales to our~~the ~~major~~earlier ~~distributor~~of September 29, ~~Future.~~2007 ~~Errors~~or ~~impacting~~a ~~cost~~liquidity ofevent ~~sales~~which ~~were~~includes ~~detected~~changes in ~~the~~ownership, a merger, ~~process~~an toacquisition ~~determine~~or the ~~deferral~~receipt of ~~such~~net ~~costs.~~proceeds ~~The~~from ~~second~~the ~~reportable condition~~consummation ~~related to staffing~~ of ~~the~~an ~~accounting~~equity ~~department~~financing ~~and~~of ~~our reliance on~~no ~~manual~~less ~~reconciliations~~than ~~and analysis~~$10,000,000.

~~Based~~On onMarch 29, ~~the~~2007, ~~above~~we entered into a Securities Purchase Agreement with Rodfre, an affiliate of Future, our largest distributor worldwide and ~~under~~an ~~the~~affiliate ~~direction~~of our largest stockholder (Alonim Investment Inc.), to provide an unsecured promissory note facility of ~~the~~up ~~Audit~~to ~~Committee~~$10.0 million. This facility expires, and the borrowings and accrued interest under any notes issued under this ~~Board~~facility ofare ~~Directors~~due and payable, ~~senior~~on ~~management~~June 30, is2008, ~~dedicating~~or ~~resources~~upon ~~and~~certain ~~taking~~other ~~steps~~events such as a change of control. Borrowings under this promissory note facility bear interest of 9% per annum subject to an ~~strengthen~~increased ~~control~~interest ~~processes~~rate of up to 20% in ~~order~~case of default or after maturity. This promissory note facility is subordinate to ~~both~~our ~~identify~~Loan and ~~rectify~~Security ~~the deficiencies~~Agreement with Silicon Valley Bank and ~~prevent~~to ~~the~~our ~~situations~~5.5% Redeemable ~~from~~Convertible ~~recurring~~Senior Notes due 2026. ToNo ~~this~~borrowing ~~end,~~was made under the promissory note ~~following~~facility ~~steps~~in ~~were~~the ~~and~~six ~~will~~months beended ~~taken:~~June 30, 2007.

• we established a Disclosure Committee with a mandate to assist our Chief Executive Officer and Chief Financial Officer in overseeing the accuracy and timeliness of our public disclosures and in regularly evaluating our disclosure controls and procedures; • we intend to implement improved processes and procedures related to revenue recognition; • we continue to implement improved inventory control systems and procedures throughout our manufacturing lines; • we intend to implement improved inventory costing systems and procedures; • we continue to implement procedures to ensure accurate and timely account analysis and reconciliations; and • updated written policies and procedures are being prepared to standardize and improve processes, including procedures relating to systems, finance policies and internal controls.32

AsCritical aAccounting ~~result~~Estimates ~~of the steps taken to improve controls~~ and ~~following the~~Policies conclusion of our recently completed review of our financial accounts, Mr. Maghribi and our new Chief Financial Officer, Mr. Wallin, concluded that the information required to be disclosed in this quarterly report has been recorded, processed, summarized and reported as required. Based upon their evaluation, and as of the end of the period covered by this quarterly report, the Chief Executive Officer and Chief Financial Officer further concluded that our disclosure controls and procedures, taking into account the steps listed above to improve the controls and procedures, are effective in all material respects.

~~Changes~~ Our condensed consolidated financial statements have been prepared in ~~Internal~~accordance ~~Control~~with accounting ~~Over~~principles ~~Financial~~generally ~~Reporting~~accepted in the United States of America. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates.

~~Other~~We ~~than~~believe asthat ~~described~~the ~~above,~~following ~~there~~accounting ~~have~~policies ~~been~~are no“critical” ~~significant~~as ~~changes~~defined by the SEC, in ~~our~~that ~~internal~~they ~~control~~are ~~over~~both ~~financial~~highly ~~reporting~~important ~~that~~to ~~occurred~~the ~~during~~portrayal of our ~~second~~financial condition and results, and ~~quarter~~require ofdifficult ~~fiscal~~management ~~year~~judgments ~~2004~~and assumptions about matters that are inherently uncertain. We also have ~~materially~~other ~~affected~~important policies, including those related to derivative instruments and concentration of credit risk. However, these policies do not meet the definition of critical accounting policies because they do not generally require us to make estimates or ~~are~~judgments ~~reasonably~~that ~~likely~~are difficult or subjective. These policies are discussed in the Notes to ~~materially~~the ~~affect~~consolidated financial statements, which are included in our ~~internal~~Annual ~~control~~Report ~~over~~on ~~financial~~Form ~~reporting~~10-K for the fiscal year ended December 30, 2006.

31 We believe the accounting policies described below are the ones that most frequently require us to make estimates and judgments, and therefore are critical to the understanding of our results of operations:

~~Table~~1. revenue recognition; 2. valuation of ~~Contents~~receivables and inventories; 3. restructuring and fixed asset impairment; and 4. income taxes.

~~Part~~ There ~~II:~~have ~~OTHER~~been ~~INFORMATION~~no significant changes to these policies from the disclosures noted in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006 except the adoption of FIN 48 “Accounting for Uncertainty in Income Taxes” (See Note 7).

~~Item~~Recent 1.Accounting ~~Legal Proceedings~~Pronouncements

~~None~~Please refer to Note 2 of Notes to our condensed consolidated financial statements included in Item 1 of Part I for a discussion of the expected impact of recently issued accounting standards.

~~Item 2. Changes in Securities and Use of Proceeds~~33

~~Item~~Contractual 3.Obligations ~~Defaults~~and ~~Upon Senior Securities~~Commitments

~~None~~Our contractual obligations and commitments at December 30, 2006 totaled $77.9 million. Our contractual obligations and commitments at June 30, 2007 are as follows (in thousands):

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


			Payment Due by Period
			Less Than		1 - 3		3 - 5		More Than
	Total		1 Year		Years		Years		5 Years
Convertible senior notes payable (1):
Principal	$	30,000	$	—	$	—	$	—	$	30,000
Interest		31,380		1,680		3,300		3,300		23,100
Long-term lease financing obligation (2)		5,135		1,348		2,816		971		—
Restructuring liability (3)		484		484		—		—		—
Operating leases (4)		1,381		625		507		249		—
Purchase commitment - PolarFab		958		958		—		—		—
Purchase commitment - Episil Technology		2,033		2,033		—		—		—
Purchase commitment - Cadence Design		584		506		78		—		—
Purchase commitment - Mentor Graphics		350		175		175		—		—
Other (5)		1,075		1,072		3		—		—

Total	$	73,380	$	8,881	$	6,879	$	4,520	$	53,100

The Annual Meeting of Stockholders was held on May 27, 2004. Holders of an aggregate of 33,070,987 shares of common stock at the close of business on April 16, 2004 were entitled to vote at the meeting and the Holders of 26,723,173 shares of common stock were present or represented by Proxy at the meeting. At such meeting, the Company’s stockholders voted as follows:


Note:		The table above excludes the liability for unrecognized income tax benefit of approximately $284,000 at June 30, 2007 since we cannot predict with reasonable reliability the timing of cash settlements with the respective taxing authorities.

(1)		$30.0 million Convertible Senior Notes issued on May 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 at the end of the lease term) due on our Hillview facility in Milpitas, California under a 5-year Standard Form Lease agreement signed with Mission West Properties L.P. on March 9, 2006.

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

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

(5)		Includes licensing, R&D contract and testing services with various vendors.

~~Proposal~~Off-Balance 1Sheet Arrangement

~~The~~ As ~~following~~of ~~Class~~June II30, ~~Directors~~2007, ~~were~~we ~~elected~~had atno ~~the~~off-balance ~~meeting~~sheet toarrangements ~~serve~~as ~~for~~defined in Item 303(a) ~~three~~(4) of the SEC’s Regulation S-~~year~~K ~~term:~~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.”

	For		Withheld
Lionel H. Olmer.		25,875,305		847,868
John D. Arnold		26,458,972		264,201

Item 3. Quantitative and Qualitative Disclosures about Market Risk

~~Proposal~~Market 2Risk

~~Ratification~~ We invest excess cash in financial investments that are sensitive to market risks as part of our ~~the~~investment ~~appointment~~strategy. None of ~~Deloitte~~these &market-sensitive ~~Touche~~instruments ~~LLP~~are asheld for trading purposes. We do not own derivative financial instruments in our portfolio. The investment portfolio contains instruments that are subject to the ~~Company’s~~risk of a decline in interest rates. As required by our ~~independent~~investment ~~auditors~~policy, ~~for~~available ~~fiscal~~funds ~~year~~are ~~ending~~invested ~~January 1~~in a manner that assures maximum safety and liquidity and, ~~2005:~~secondarily, maximizes yield within such constraints.

For		Against				Abstained				Broker Non-Vote
26,677,589			39,896				5,688				0

Interest Rate Risk

~~Proposal~~ Our 3financial investments consist primarily of high quality commercial paper and money market funds. We believe we have no material exposure to interest rate risk.

~~Approval~~ Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio and interest expense we are charged on borrowings. We do not use derivative financial instruments or engage in hedging activities in our investment portfolio. We ensure the ~~amendment~~safety and ~~restatement~~preservation of our ~~the~~invested ~~1996~~principal ~~Employee~~funds ~~Stock~~by ~~Purchase~~limiting default risks, market risk and reinvestment risk. We ~~Plan:~~mitigate default risk by investing in safe and high-credit quality securities.

For		Against				Abstained				Broker Non-Vote
22,368,158			319,058				39,785				3,996,172

We had short-term investment securities of $597,000 as of June 30, 2007. Our short-term investments consisted of highly liquid investments with original maturities at the date of purchase of 91-92 days. These investments are subject to interest rate risk and will fall in value if market interest rates increase. We believe a hypothetical increase in market interest rates by 10% from levels at June 30, 2007, would cause the fair value of these short-term investments to fall by an immaterial amount. Since we are not required to sell these investments before maturity, we have the ability to avoid realizing losses on these investments due to a sudden change in market interest rates. On the other hand, declines in the interest rates over time will reduce our interest income.

~~The proposals above are described in detail in the Company’s definitive proxy~~34 ~~statement dated May 5, 2004, for the Annual Meeting of Stockholders held on May 27, 2004.~~

~~None~~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 our Hillview facility to Mission West Properties, L.P. for a price of $13.4 million in cash (net proceeds of $12.6 million). Simultaneously, we entered into a Standard Form Lease agreement to lease back the Hillview facility from Mission West Properties, L.P. 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.; accordingly, we have accounted for this sale and leaseback transaction as a financing transaction shown on the consolidated balance sheet as “lease financing obligation.” An effective interest rate of 9.3%, which approximates our estimated borrowing rate, is used to record the interest expense over the lease term of 60 months with average lease payments of approximately $1.4 million per year. Since the interest rate of this transaction was fixed, a hypothetical 10% increase in interest rates will not have a material effect on our financials.

32 On May 16, 2006 we placed $30.0 million of 5.5% Redeemable Convertible Senior Notes due 2026. The notes provide for a fixed interest rate of 5.5%, which has been increased to, and currently fixed at 6.7% as a result of our failure to meet certain conditions. A hypothetical 10% increase in interest rates will not have a material effect on our financials. A more detailed description of the terms of the 2006 Notes is provided in Note 13 to our condensed financial statements included in this 10-Q filing, and in our Form 8-K filed with the SEC on May 22, 2006.

~~Table~~ We have a Loan and Security Agreement with Silicon Valley Bank which provides us with a line of ~~Contents~~credit up to $5.0 million and charges interest at the bank’s prime rate plus three percent (3%). However, we do not believe that a hypothetical increase in market interest rates by 10% from current levels would result in a material increase in our overall expenses. As part of the agreement, in addition to the $5.0 million secured revolving line of credit, we borrowed $2.0 million under a separate term loan during December 2006, of which $333,000 was paid in the first six months of fiscal year 2007. Interest accrues at a fixed rate of 9.25% per annum.

~~Item~~ We 6have a promissory note facility with Rodfre which provides us with the ability to issue up to $10.0 million ~~Exhibits~~of ~~and~~promissory ~~Reports~~notes that would charge interest at the rate of 9% per annum. Since the interest rate is fixed in the promissory notes to be issued under the facility with Rodfre, a hypothetical 10% increase in interest rates will not have a material effect in our expenses under this promissory note facility, nor will it have a material effect on ~~Form~~our ~~8-K~~financials.

~~(a) Exhibits~~Foreign Currency Exchange Risk

Exhibit Number		Title
31.1		Certification of CEO pursuant to Section 302 the Sarbanes-Oxley Act of 2002.
31.2		Certification of CFO pursuant to Section 302 the Sarbanes-Oxley Act of 2002.
32.1		Certification of CEO pursuant to Section 906 the Sarbanes-Oxley Act of 2002.
32.2		Certification of CFO pursuant to Section 906 the Sarbanes-Oxley Act of 2002.

The majority of our sales, expense, and capital purchasing activities are transacted in U.S. dollars. However, since a portion of our operations consists of sales activities outside of the U.S., we enter into transactions in other currencies. We are primarily exposed to changes in exchange rates for the euro, British pound, Japanese yen, Canadian dollar and South Korean won. Currently, we have no plans to enter into any foreign currency hedging program since the amounts involved have not been material. Foreign currency fluctuations did not have a material impact on our consolidated financial position, results of operations or cash flows for the quarters ended June 30, 2007 and July 1, 2006.

~~(b)~~Item ~~Reports~~4. onControls ~~Form 8-K~~and Procedures

OnEvaluation ~~May 13,~~of ~~2004,~~Disclosure ~~Sipex~~Controls ~~submitted~~and aProcedures ~~Current Report on Form 8-K (SEC file number 00027892) to report that it issued a press release announcing its results~~ for ~~the~~Quarter ~~first~~Ended ~~quarter ended April~~June 330, ~~2004.~~2007

33 We evaluated the design and operating effectiveness of our disclosure controls and procedures as of June 30, 2007, under the supervision and with the participation of our management, pursuant to Rule 13a-15(b) of the Exchange Act. Based on this evaluation, our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, concluded that our disclosure controls and procedures as defined in Rule 3a-15(e) were not effective in ensuring that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, due to certain material weaknesses in our internal controls over financial reporting described in Management’s Report On Internal Control Over Financial Reporting in Item 9A of our annual report on Form 10-K for the year ended December 30, 2006 that have not been remediated. To address the material weaknesses in our internal control over financial reporting described below, we performed additional manual procedures and analysis and other post-closing procedures in order to prepare the consolidated financial statements included in this Quarterly Report on Form 10-Q. Notwithstanding management’s assessment that our disclosure controls and procedures as of June 30, 2007 were ineffective due to the material weaknesses that existed as of January 1, 2005,

~~Table of Contents~~35

~~Pursuant~~as todescribed ~~the~~in ~~requirements~~our ofannual ~~the~~report ~~Securities~~on ~~Exchange~~Form ~~Act~~10-K offor ~~1934~~the year then ended, we believe that the ~~Registrant~~consolidated ~~has~~financial ~~duly~~statements ~~caused~~contained in this report topresent befairly ~~signed~~our onfinancial ~~its~~condition, results ~~behalf~~of byoperations and cash flows for the periods covered thereby in all material respects in ~~undersigned,~~accordance ~~thereunto~~with ~~duly~~generally ~~authorized~~accepted accounting principles.

		SIPEX CORPORATION
DATE: August 12, 2004	BY	/s/ Clyde R. Wallin
		Clyde R. Wallin
		Senior Vice President, Finance
		Chief Financial Officer & Treasurer
		(Duly Authorized Officer &
		Principal Financial Officer)

The material weaknesses in our internal control over financial reporting as of January 1, 2005 identified by our management related to the design and operation of controls in the following areas: (i) entity level controls, (ii) revenue accounting, and (iii) financial closing process — use of estimates.

34Internal Control over Financial Reporting

~~Table~~ For the year ended December 30, 2006, we were not an accelerated filer, and therefore we were not required to make the annual report on internal control over financial reporting required by Item 308(a) of ~~Contents~~Regulation S-K and our independent registered public accounting firm was not required to issue a separate attestation report on management’s assessment of our internal control over financial reporting under Item 308(b).

~~Exhibit Index~~Changes in Internal Control over Financial Reporting

Exhibit Number		Title
31.1		Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

During fiscal year 2006, our management continued efforts to improve our internal controls over financial reporting, in particular to remediate the material weaknesses reported as of January 1, 2005. Our management believes that these efforts have or are reasonably likely to have, a material improvement on the design and effectiveness of our internal controls over financial reporting and to remediate the material weaknesses. However, as we were not an accelerated filer, and therefore not required to make the annual report on internal control over financial reporting required by Item 308(a) of Regulation S-K and our independent registered public accounting firm was not required to issue a separate report on management’s assessment of our internal control over financial reporting under Item 308(b), there can be no assurance that we have fully remediated the material weaknesses reported as of January 1, 2005 or that our internal control over financial reporting is effective.

35 During the second quarter of fiscal year 2007, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. While there were no changes in our internal control over financial reporting during the second quarter of 2007, our management is dedicated to improving our internal controls over financial reporting and intends to continue to monitor and upgrade our internal controls as necessary or appropriate for our business.

Inherent Limitation on the Effectiveness of Internal Controls

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the risk of exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate the risk of misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but we cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

The information included in Note 15 of Notes to condensed consolidated financial statements under the caption “Legal Proceedings” in Item 1 of Part I is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth under “Item 1A. Risk Factors” included in our annual report on Form 10-K for the fiscal year ended December 30, 2006 except the following:

If the proposed merger with Exar does not occur, we could be materially adversely affected.

The completion of the proposed merger with Exar is subject to the satisfaction of closing conditions set forth in the merger agreement, including approval by the affirmative vote of a majority of the outstanding shares of our common stock and Exar’s common stock and the receipt of certain regulatory approvals. The proposed merger has resulted, and will continue to result, in significant costs and expenses for us, including costs for legal and financial advisory services, and our cash position may consequently continue to decline during the pendency of the merger. In addition, the proposed merger may have negative effects on our relationships with our employees or customers and on the operation of our business, and if the proposed merger does not close, we may not be able to reverse any such negative effects and may otherwise be materially adversely affected.

In addition, should the merger with Exar not be completed, we will not have sufficient resources to operate our business as a going concern for the next twelve months without obtaining additional capital resources. As such, we will seek to raise additional capital through the sale of debt or equity. However, there can be no assurance that future borrowings and capital resources will be available on favorable terms or at all. If adequate funds are not available, we may be required to curtail our operations significantly or to obtain funds through other arrangements. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit Number		Title

2.1		Agreement and Plan of Merger dated May 7, 2007 by and among Exar Corporation, Side Acquisition Corp. and Sipex Corporation (previously filed as Exhibit 2.1 to the Company’s Form 8-K filed on May 8, 2007 and incorporated herein by reference)

10.1		Letter Agreement between Sipex and Ray Wallin dated April 24, 2007 (previously filed as Exhibit 10.1 to the Company’s 8-K filed on April 27, 2007 and incorporated herein by reference)

10.2		Form Sipex Voting Agreement (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on May 8, 2007 and incorporated herein by reference)

10.3		Amendment No. 7 to Loan and Security Agreement between Sipex Corporation and Silicon Valley Bank dated June 26, 2007 (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on June 27, 2007 and incorporated herein by reference)

31.1		Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements 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.

Date: August 14, 2007


		SIPEX CORPORATION
		/s/ Clyde R. Wallin
		Clyde R. Wallin
		Chief Financial Officer and Senior Vice President of Finance (Duly Authorized Officer & Principal Financial Officer)

Exhibit Index


Exhibit Number		Title

2.1		Agreement and Plan of Merger dated May 7, 2007 by and among Exar Corporation, Side Acquisition Corp. and Sipex Corporation (previously filed as Exhibit 2.1 to the Company’s Form 8-K filed on May 8, 2007 and incorporated herein by reference)

10.1		Letter Agreement between Sipex and Ray Wallin dated April 24, 2007 (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on April 27, 2007 and incorporated herein by reference)

10.2		Form Sipex Voting Agreement (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on May 8, 2007 and incorporated herein by reference)

10.3		Amendment No. 7 to Loan and Security Agreement between Sipex Corporation and Silicon Valley Bank dated June 26, 2007 (previously filed as Exhibit 10.1 to the Company’s Form 8-K filed on June 27, 2007 and incorporated herein by reference)

31.1		Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

June 30, 2007

December 30, 2006

Future Electronics Inc., a related party

Jetronic Technology