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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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Form 10-K



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Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934 for the Fiscal Year Ended
December 30, 2001


Commission File No. 000-27221



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Vixel Corporation

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                     
|--------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                        |  | 84-1176506                          
|(State or other jurisdiction of incorporation
	or organization) |  | (I.R.S. Employer Identification No.)

11911 North Creek Parkway South

Bothell, Washington 98011


(425) 806-5509


(Address, including zip code, of
Registrants principal executive offices and telephone
number, including area code)




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Securities registered pursuant to
Section 12(b) of the Act: None

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

Common Stock, $0.0015 par value




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

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

The aggregate market value of voting common stock
held by non-affiliates of the Registrant based on the average of
the bid and ask price of the Registrants Common Stock on
March 1, 2002, as reported on the Nasdaq National Market,
was approximately $68,747,994. The aggregate market value
calculation excludes 3,940,516 shares of common stock held by
directors and officers and stockholders whose beneficial
ownership exceeds five percent of the shares outstanding at
March 1, 2002. Exclusion of shares held by any person
should not be construed to indicate that such person possesses
the power, direct or indirect, to cause the direction of the
management or policies of the Registrant, or that such person is
controlled by or under common control with the Registrant.

As of March 1, 2002, the Registrant had
outstanding 23,983,663 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant has incorporated by reference into
Part III of this Form 10-K portions of the Proxy
Statement for its 2002 Annual Meeting of Stockholders to be held
on May 22, 2002, which definitive proxy statement shall be
filed with the Securities and Exchange Commission on or before
April 29, 2002.



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TABLE OF CONTENTS



|                  |                                                                                                         |  |  |  |  |  |  | 
|----------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|INDEX            
|PART I           
|                  | Item 1. Business                                                                                       
|                  | Item 2. Properties                                                                                     
|                  | Item 3. Legal Proceedings                                                                              
|                  | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II          
|                  | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                  | Item 6. Selected Financial Data                                                                        
|                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                  | Item 8. Financial Statements and Supplementary Data                                                    
|                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III         
|                  | Item 10. Directors and Executive Officers of the Registrant                                            
|                  | Item 11. Executive Compensation                                                                        
|                  | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                  | Item 13. Certain Relationships and Related Transactions                                                
|PART IV          
|                  | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES       
|INDEX TO EXHIBITS
|Exhibit 10.13    
|Exhibit 23.1     



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VIXEL CORPORATION

FORM 10-K







INDEX


PART I

|           |           |  |    |                                                                                        |  |  |    | 
|---------- | --------- |  | -- | -------------------------------------------------------------------------------------- |  |  | -- | 
|           |           |  |    | Page                                                                                  
|           |           |  |    |                                                                                       
|           | Item  1.  |  |    | Business                                                                               |  |  | 2  | 
|           | Item  2.  |  |    | Properties                                                                             |  |  | 12 | 
|           | Item  3.  |  |    | Legal Proceedings                                                                      |  |  | 12 | 
|           | Item  4.  |  |    | Submission of Matters to a Vote of Security
	Holders                                   |  |  | 13 | 
|PART II   
|           | Item  5.  |  |    | Market For Registrants Common Equity and
	Related Stockholder Matters                 |  |  | 13 | 
|           | Item  6.  |  |    | Selected Financial Data                                                                |  |  | 14 | 
|           | Item  7.  |  |    | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |  | 15 | 
|           | Item  7A. |  |    | Quantitative and Qualitative Disclosure About
	Market Risk                             |  |  | 29 | 
|           | Item  8.  |  |    | Financial Statements and Supplementary Data                                            |  |  | 29 | 
|           | Item  9.  |  |    | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |  |  | 29 | 
|PART III  
|           | Item  10. |  |    | Directors and Executive Officers of the Registrant                                     |  |  | 30 | 
|           | Item  11. |  |    | Executive Compensation                                                                 |  |  | 30 | 
|           | Item  12. |  |    | Security Ownership of Certain Beneficial Owners
	and Management                        |  |  | 30 | 
|           | Item  13. |  |    | Certain Relationships and Related Transactions                                         |  |  | 30 | 
|PART IV   
|           | Item  14. |  |    | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |  |  | 30 | 
|SIGNATURES |           |  | 33 |                                                                                       

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SPECIAL NOTE ON FORWARD LOOKING
STATEMENTS

This report contains forward-looking statements
that involve risk and uncertainties. The statements contained in
this report that are not purely historical are forward-looking
statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended and Section 27A
of the Securities Act of 1933, as amended. In some cases, you
can identify forward-looking statements by terminology such as
may, will, should,
expect, plan, anticipate,
believe, estimate, predict,
potential, future, intends
or continue, the negative of such terms or other
comparable terminology. These statements are only predictions.
Actual events or results may differ materially.

Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance
or achievements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of
this report. Our actual results could differ materially from
those anticipated in these forward-looking statements for many
reasons, including the risks outlined on pages 21
through 29 and elsewhere in this report. We assume no
obligation to update any of the forward-looking statements after
the date hereof to conform such statements to actual results or
to changes in our expectations.

We believe it is important to communicate our
expectations to our investors. However, there may be events in
the future that we are not able to predict accurately or over
which we have no control. The risk factors and cautionary
language in this report provide examples of risks, uncertainties
and events that may cause our actual results to differ
materially from the expectations we describe in our
forward-looking statements. Before you make investment decisions
regarding our common stock, you should be aware that the
occurrence of the events described in these risk factors and
elsewhere in this report could have a material adverse effect on
our business, operating results, financial condition and stock
price.




PART I




Item 1.     Business

Overview

We provide comprehensive Fibre Channel-based
technologies and products for data storage solutions and storage
networking applications. Our products utilize the Fibre Channel
protocol, which is an American National Standards Institute, or
ANSI, defined standard for the transfer of information between
computers and storage devices. Our offering consists of a
variety of switch and hub products that connect computers to
data storage devices in a network configuration and a
switch-on-a-chip Application Specific Integrated
Circuit, or ASIC, which can be embedded in a variety of data
storage devices to enhance performance, improve availability,
and increase the reliability of these devices. This new
switching technology can be sold in chip, blade or box form to
original equipment manufacturers, or OEMs, for inclusion in
their solutions. Our storage networking interconnect products
are sold primarily as fully integrated switches and hubs through
OEMs, integrators and value-added resellers, or VARs.

Industry Background

In recent years there has been a significant
increase in the volume of data created, processed and accessed
throughout the enterprise. This growth has also been fueled by
the rapid expansion of the Internet, measured both by the number
of users as well as the number of web-based corporate
initiatives which require continuous access to critical business
information 24 hours a day, seven days a week. Also, rapid
growth of data-intensive applications, such as video and media
streaming, online transaction processing, e-commerce, Web
hosting, data warehousing, data mining, enterprise resource
management and the sharing of multimedia-based information, has
dramatically increased the need for high-capacity,
high-performance storage devices and systems. This demand is
compounded when organizations create redundant sources of data
to enable continuous error-free access. The growth in stored
data has been facilitated by the continued decline in the cost
per unit of storage capacity. International Data Corporation, or
IDC, an independent research firm, in a

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report published in November 2001, estimated that
the worldwide volume of stored data should grow from
approximately 380,000 terabytes in 2001 to approximately
1.4 million terabytes in 2005, representing a compound
annual growth rate of 39%.


The need to support ever-increasing storage
requirements presents enterprises with a number of significant
challenges. Traditional server-to-storage connections have
several limitations in meeting these challenges. To address the
limitations, a family of Fibre Channel standards was developed
to enable data to be transferred from one network device to
another, allowing any server to access any storage device on the
network. The family of Fibre Channel standards has acquired
broad industry support and has been implemented in network
configurations known as storage area networks, or SANs.

Typical Fibre Channel SAN configurations include
point-to-point connections between two devices, an arbitrated
loop for up to 126 devices and a switched network, or
fabric, which can enable the connection of millions of devices.
These configurations allow SANs to meet a wide variety of
storage and network requirements, from the smallest
server-to-storage configuration to complex enterprise networks.
IDC, in a report published in May 2001, estimated that worldwide
revenue from Fibre Channel hub and switch products should grow
from approximately $1.3 billion in 2000 to
$5.6 billion in 2004, representing a compound annual growth
rate of over 44%.

In addition, the ever-increasing requirements by
end users for data storage capacity and scaling, faster data
access speeds and constant availability and reliability present
storage manufacturers with significant challenges. These
manufacturers must continually look for ways to improve
performance, reliability and availability of their solutions,
while remaining cost competitive in a highly price-sensitive
market.

Our Fibre Channel Solutions

We provide comprehensive Fibre Channel solutions
that are focused on two distinct markets with differentiated
technologies and products: the embedded storage switch market
and the SAN interconnect market.



| |                                   
| | ----------------------------------
| | Embedded Storage Switch
	Solutions

We have leveraged our core competency and
expertise in Fibre Channel switching technologies to develop a
highly integrated switch-on-a-chip ASIC. This ASIC
incorporates our InSpeedTM technology, which is an
advanced switching architecture that results in a single chip
capable of handling multiple Fibre Channel devices operating at
either 1 gigabit per second, or Gbps, or 2 Gbps speed.
This ASIC has been designed to be embedded into storage
enclosure devices such as redundant array of independent disks,
or RAID, enclosures, tape libraries, network attached storage,
or NAS, environments and next generation storage systems, to
enhance the performance and scaling of these solutions as well
as improve device availability and reliability. It can be sold
in chip form or integrated into full Fibre Channel switches and
modules, or blades, for embedding by OEMs in their storage
solutions.

Our embedded storage switch products offer
customers the following key benefits:

Switching technology embedded in storage
enclosure architectures.The
integration of full crossbar switching and serializer/
deserializer capabilities into a single ASIC now permits
switching capabilities to be embedded into storage enclosures
that have limited space requirements and low power budgets.

Increased performance over current storage
device architectures.The storage RAID
enclosure architecture enabled with our switch ASIC provides for
faster data access from the controller to the storage drives.
The typical architecture in a storage JBOD, or just a bunch of
disks, is a loop topology that requires data to pass through
several hops before being delivered to the user. Implementing
our switched architecture creates a switched bunch of
disks, or SBODTM, which reduces the latency and
provides faster access to and from the disk or tape drives.

Increased scalability and lower costs of
storage devices.By reducing the
latency caused by typical storage device architectures, OEMs can
scale their solutions to provide greater storage capacity in one

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enclosure. In doing this, OEMs can reduce their
cost per unit of storage, and thereby achieve better margins or
lower price points for their products.


Higher availability and reliability in a
storage solution.In the typical loop
architecture of storage devices, if one disk in a JBOD fails,
there is a risk that the network loses access to the entire
JBOD. In an SBOD, only the faulty disk is lost and the remaining
disks stay on line and accessible. In the mission critical data
environments of todays enterprise, such reliability is a
key attribute to information technology professionals.



| |                           
| | --------------------------
| | SAN Interconnect Solutions

The SAN interconnect solutions we offer are:



| |   |                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fibre Channel entry-level SAN storage switches,
	devices that provide high-speed connections between multiple
	computers and storage devices, and that are simple to use for
	SAN islands and small to mid-size SAN implementations;
|
| |  | Fabric switches, devices that provide high-speed
	connections between multiple computers and storage devices, for
	sophisticated SAN environments;                                                                                  
|
| |  | Hubs, devices that connect multiple computers and
	devices in a shared environment and can be controlled remotely;
	and                                                                                                             
|
| |  | Heterogeneous SAN management software for
	interconnect devices.                                                                                                                                                                    

Our SAN interconnect products provide customers
with the following key benefits:

Our broad product portfolio addresses a wide
spectrum of storage requirements.We
offer a wide range of easily-managed, easily-integrated,
high-performance Fibre Channel interconnect products, including
entry-level SAN switches, fabric switches that support scalable
Fibre Channel device connections and managed and entry-level
hubs that support arbitrated loop SAN configurations.

Interoperability of our products optimizes SAN
deployment and functionality.We
design standards-based interoperability into our products from
the beginning of the design cycle. Our switches, hubs and
embedded storage switch products are engineered to perform in
concert to handle the rigorous requirements of enterprise
networks and enable highly available, scalable and manageable
SANs. Furthermore, because our products adhere to Fibre Channel
ANSI standards, they are compatible with other Fibre Channel
standards-based products. We believe that this enhanced
interoperability allows our OEMs and resellers to streamline the
testing and qualification process and minimize their time to
market. We also believe the interoperability of our products
reduces end users deployment time and enhances the
functionality and performance of their SANs.

Our range of solutions supports cost-effective
scaling.Because we offer the
essential building blocks for SAN interconnects, our solutions
can be efficiently scaled as users data and storage
requirements expand. Our solutions enable seamless additions of
devices and ports to the SAN, regardless of the installed Fibre
Channel configuration. Our advanced fabric switch design allows
our switches to be easily installed and to immediately interact
with existing equipment, enabling legacy arbitrated loop
configurations to scale to full fabric-switched SANs. We believe
that our interoperable products reduce personnel and financial
resource requirements by providing our end users with a more
cost-effective storage solution.

Our Strategy

Our mission is to create unique and breakthrough
technology and products to increase the performance, scalability
and adoption of storage solutions while reducing cost and
complexity. In doing this it is our objective to expand our
position as a developer and supplier of Fibre Channel solutions.
Key elements of our strategy include the following:

Focus our development efforts on InSpeed-based
solutions and fabric switches.We
intend to devote a higher percentage of our development
resources to expanding our InSpeed-based product offerings and

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developing new, higher port count ASICs with
additional functionality. We also plan to continue to develop
expanded features for our fabric switches.


Leverage our proven technology platforms and
expertise to address rapidly evolving market demands.We seek to leverage our proven switch
and high integration expertise to continually develop an
expanding range of products in key areas of the data storage
market for embedded applications as well as SAN interconnect
solutions. We believe our extensive Fibre Channel expertise, our
proprietary ASICs, and our experienced engineering and
operations teams enable us to rapidly develop and bring to
market products that address new and evolving market demands.

Develop products for new markets that can
benefit from Fibre Channel technology.We have identified new opportunities
to apply our Fibre Channel switching expertise and have
developed, and will continue to develop, products for use
outside of our traditional SAN interconnect market and product
line. As an example, we worked with Network Appliance, Inc., a
data storage manufacturer, to develop our first generation
embedded switch ASIC which they will use within their storage
file systems to provide higher levels of availability and
reliability. We will continue to develop embedded switch ASICs,
modules and boxes to meet the demands of embedded switch markets.

Offer customers a Fibre Channel product
portfolio to meet their cost/performance requirements.We intend to continue to provide
products that meet customer needs without requiring them to use
complex, difficult to manage, expensive features that do not
benefit them. For example, by broadening our Fibre Channel
product portfolio to include easy to manage InSpeed-based
switches, sophisticated fabric switches, and hubs, we can
provide solutions that meet customers application
requirements at price levels that are appropriate for each
application. In the entry level SAN market in particular, we
believe this will allow small to mid-size SANs to benefit from
Fibre Channel technology without having to incur the costs of
features they do not require, or having to hire Fibre Channel
experts to manage the SANs.

Partner with major storage solutions
providers.We intend to continue to
expand our relationships with key storage system and server
OEMs, integrators, and other leading Fibre Channel component and
device vendors. We have established strategic relationships with
several industry leaders to provide certified solutions that are
turnkey in nature and provide ease of implementation. These
solutions have primarily focused on server clustering, data
protection for NAS, data back up and mirroring applications and
video content delivery and editing. Examples of recently
established solution relationships include certifications of our
9000 series 2 Gbps fabric switches with Chaparral Network
Storage, Inc. and LSI Logic to provide solutions targeted at
companies transitioning from 1 Gbps to 2 Gbps SANs and with
NECs iStorage solutions for server clustering, data
back-up and disaster recovery solutions. Recent OEM
announcements include Avid Technology, Inc., the market leader
in real time video editing solutions, who is adopting our 2 Gbps
switch into their new rich media applications.

Expand our distribution channels.We plan to expand our OEM base,
introduce new products, develop new markets and leverage the
systems and service capabilities of industry-leading OEMs. We
have relationships with several OEMs, including Avid Technology,
Inc., BlueArc Corporation, Compaq Computer Corporation, Fujitsu
Software Technology Corporation, LSI Logic Corporation, NEC,
Raidtec Corporation Ltd., Sun Microsystems, Inc. and Unisys
Corporation. Our current domestic distributors are Bell
Microproducts and Ingram Micro. In addition, we have established
relationships with Eurologic Systems Ltd., ModernTech Computer
& Peripheral Ltd., Raidtec Corporation Ltd. and Solkenix
International for distribution of our products in Europe and
Asia Pacific.

Leverage our ASIC distribution relationship.We intend to leverage our relationship
with Vitesse Semiconductor Corporation, a leading designer and
supplier of semiconductors for the data communications industry,
to expand our market presence and growth in the embedded storage
ASIC marketplace. We have entered into a marketing and
development relationship with Vitesse for our InSpeed-based ASIC
products. Under these agreements, Vitesse markets and sells both
our current generation and next generation switch ASICs. We
receive royalties from Vitesse for their sales of the ASICs,
which provides us high margin revenue without incurring
significant sales, marketing and administrative costs.

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Our Products

We offer a comprehensive portfolio of Fibre
Channel products, including InSpeed-based ASICs, embedded
switches, entry-level storage switches, high-performance fabric
switches, managed and entry-level hubs and SAN management
software. Our broad family of interoperable products enables
customers to easily deploy a wide variety of SAN configurations,
from simple point-to-point connections to more complex
high-performance networks built with a combination of
InSpeed-based switch products and fabric switches. Our embedded
products enable storage OEMs to increase the reliability,
availability, performance and scalability of their data storage
solutions.



| |                                   
| | ----------------------------------
| | Embedded Storage Switch
	Products:

Our InSpeed-based ASIC is being marketed and sold
by Vitessse Semiconductor Corporation as the VSC7192. The
VSC7192 is a 12 Channel Fibre Channel Arbitrated Loop
(FC-AL) switch ASIC, which delivers diagnostics and low latency
for embedded applications, such as disk arrays and RAID
subsystems. The VSC7192 was made commercially available in
November 2001. The next generation switch ASIC is currently
under development.

We have used the VSC7192 to develop 12 port
switches, both with and without management capabilities. These
switches are currently in evaluation and qualification cycles at
various OEMs and we expect them to be commercially available in
the second quarter of 2002.



| |                           
| | --------------------------
| | SAN Interconnect Products:



| |                                                          
| | ---------------------------------------------------------
| | Vixel 7000 and 9000 Series Fibre Channel
	Fabric Switches

Fibre Channel switches connect a wide range of
server and storage devices and provide a high level of
performance and flexibility in building large configurations in
a SAN. The Vixel 7000 series of Fibre Channel fabric
switches is our third-generation of Fibre Channel switches. The
eight port Vixel 7100 and sixteen port Vixel 7200 were made
commercially available in March 2000. Subsequent enhancements to
our Vixel 7000 switches, with their patented architecture,
have been engineered into our latest series of Fibre Channel
fabric switches, the Vixel 9000 series, which were made
commercially available in June 2001. The Vixel 9000 series
operates at 1 Gbps or 2 Gbps speeds and consists of three
models: the eight port Vixel 9100, the sixteen port Vixel 9200
and the sixteen port, high-availability Vixel 9300HA. We believe
our Vixel 7000 series switches and Vixel 9000 series switches
are some of the highest performing, most cost-effective fabric
switch offerings in the industry. In addition to supporting
fabric switch functionality, our Vixel 7000 series and
Vixel 9000 series switches have the following significant
features:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | High speed and high bandwidth.Our Vixel 7000 series switches support
	1.0625 Gbps in transmit and receive directions per port. Our
	Vixel 9000 series switches support the highest Fibre Channel
	data-throughput rates, which is 2.125 Gbps, in transmit and
	receive directions per port. In addition, the architecture of
	the Vixel 7000 and the Vixel 9000 series switches supports 100
	MBps and 200 MBps wire-speed full bandwidth, respectively, per
	port in both directions.                                                         
|
| |  | Support for non-fabric arbitrated loop devices
	in a fabric switch.A large number of
	devices currently deployed in SANs cannot communicate with
	fabric configurations. We have patented the capability of our
	Vixel 7000 and Vixel 9000 series switches to enable these
	non-fabric arbitrated loop devices to perform in switched SAN
	environments.                                                                                                                                                                                       
|
| |  | Support for arbitrated loop or fabric-attached
	topologies by the same fabric port hardware.The flexible port architecture of the
	Vixel 7000 series and Vixel 9000 series supports both arbitrated
	loop and fabric configurations and offers significant
	flexibility and interoperability when building SANs. The Vixel
	7000 and Vixel 9000 series both ship in either full fabric or
	arbitrated loop mode. When shipped in arbitrated loop mode, the
	Vixel 7000 and Vixel 9000 series switches can be software
	upgraded to full fabric.

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| |   |                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hardware-based zoning.With hardware-based zoning
	capabilities, our Vixel 7000 and Vixel 9000 series switches
	allow potentially conflicting operating systems, such as Unix
	and Windows NT, to co-exist in a single SAN environment.                                                                                         
|
| |  | Full fabric software support services.Our Vixel 7000 and Vixel 9000 series
	switches support ANSI-defined fabric services such as simple
	name server, state change notification and worldwide name
	zoning. Devices attached to a fabric configuration use these
	services in order to create a full-functioning switched SAN.
|
| |  | Scalable architecture.Multiple Vixel 7000 and Vixel
	9000 series switches can be interconnected without
	sacrificing performance, enabling the creation of large, complex
	SANs referred to as meshed networks.                                                                                                                
|
| |  | Extensive port buffering.Because of the extensive port
	buffering capabilities designed into our Vixel 7000 and Vixel
	9000 series switches, data can be efficiently transported
	through our switches.                                                                                                                        



| |                              
| | -----------------------------
| | Vixel 2100 Zoning Managed Hub

Our Vixel 2100 Zoning Managed Hub has a
Hub-on-a-chip ASIC architecture and can be
zoned into four separate segments. Our ASIC
incorporated into the Vixel 2100 provides eight fully managed
ports on a single chip. This innovative design strategy enables
us to embed more functionality at a reduced cost and provide the
customer with a highly efficient solution. The eight port
configuration utilizes removable gigabit interface converters,
or GBICs, and provides customers the flexibility to deploy small
or large arbitrated loop installations. The zoning feature of
the Vixel 2100 allows it to be segmented into four separate
arbitrated loops, each segment providing full 100 MBps
bandwidth, for a variety of departmental and application uses.
Zones can be created dynamically through SAN InSite software or
under program control for variable applications such as tape
backup. Our Vixel 2100 connects devices in a SAN arbitrated loop
configuration and monitors the status of loop and port activity
through auto-recovery functionality and advanced diagnostic
capabilities.



| |                           
| | --------------------------
| | Vixel 1000 Entry-Level Hub

Our Vixel 1000 entry-level hub provides a
cost-effective solution that addresses SAN interconnect
requirements, linking low-and mid-range servers with storage
devices. Our Vixel 1000 hub supports full gigabit data transfer
speeds and automatically bypasses failed or unused ports in a
SAN. Its GBIC-based design allows customers to add, move or
delete storage capacity and Fibre Channel devices on the SAN, as
needed. The flexible design of our entry-level hub also enables
different combinations of copper, short wave optical and
long-wave optical transceiver types in a single SAN solution.



| |                                   
| | ----------------------------------
| | SAN InSite SAN Management Software

Our SAN InSite SAN management software has
evolved through eleven releases spanning more than four years of
development to become a comprehensive product that allows
isolation and resolution of problems in a SAN. SAN InSite was
created and designed from a SAN administrators perspective
leveraging our in-depth SAN and Fibre Channel experience. Our
newest version of SAN InSite provides comprehensive management
functionality across heterogeneous SAN devices including HBAs,
hubs, switches, routers, bridges, disks and virtualization
appliances. SAN InSite provides discovery, monitoring, and
management of these devices to allow proactive fault and error
analysis of the configuration information and data moving
through the SAN.

Our Technology

Our Fibre Channel expertise has enabled us to
develop high-performance SAN interconnect and embedded storage
switch products across a wide range of storage and SAN
configurations. Key components of our technology platform
include the following:

Switch architecture.We have developed a full-featured and
high-performance architecture for our switches. Our switches
incorporate advanced features, such as extensive port buffering,
to offer high

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performance in a low-cost architecture. In
addition, our switch architecture is scalable, facilitating
development of new generations of switches that support faster
transmission speeds, including our 2 Gbps Vixel 9000 series
switches. We have been issued two patents covering our switch
architecture and our unique private loop switching
functionality. Private loop switching is used in the majority of
the installed SAN environments today.


ASIC design expertise.We employ state-of-the-art ASIC design
methodologies and have demonstrated a successful track record of
achieving short design cycles for high-performance, complex
ASICs. We use our own internally-developed ASICs in our
products, which enables us to maximize our products
reliability, functionality and interoperability, while
minimizing cost and time to market.

Embedded software.Our embedded software expertise covers
a wide range of Fibre Channel products, including our switches,
switch ASICs and managed hubs. We believe we are uniquely
positioned to further develop embedded software that maximizes
interoperability and functionality of all of these Fibre Channel
components while supporting ANSI and Internet standards.

InSpeedTMtechnology.Leveraging our
state-of-the-art ASIC design methodologies, our Fibre Channel
switch architecture and our embedded software capabilities, we
have developed an advanced switching architecture that couples a
non-blocking crossbar switch with loop port logic resulting in a
single chip capable of handling multiple Fibre Channel devices.
InSpeed was designed to meet the demanding requirements of
embedded storage systems and provide high-performance and with
minimum complexity at low cost when compared to other Fibre
Channel components available in the market.

Designed-in interoperability.We design standards-based
interoperability into our products from the beginning of the
design cycle and thoroughly validate interoperability throughout
the product release process. We facilitate robust
interoperability testing and analysis of our products within a
multi-vendor system environment in our Vixel Verification, or
V2, Lab. Also, our Solutions and Interoperability Lab
is used to facilitate robust interoperability testing and
analysis of our products within a multi-vendor system
environment and to validate multi-vendor SAN and storage
applications. We believe that our investment of personnel and
capital equipment in these facilities have enhanced
interoperability and reduced time to market for our OEMs and
resellers. Our products also are tested extensively with other
vendors products to ensure cross-vendor interoperability.
In addition, we use the Solutions and Interoperability Lab and
the V2 Lab to certify specific SAN application
solutions, thereby reducing the need for our distribution
partners to undergo costly and timely testing processes.

Customers

Our primary customers are OEMs and integrators
who sell to end users, and value added resellers, or VARs.
During fiscal 2001, our top three OEMs were Sun Microsystems,
Compaq and Avid Technology, which represented 33.7%, 18.5% and
14.4% of revenue, respectively. Other current OEMs include
BlueArc, LSI Logic, Network Appliance, Raidtec and Unisys.
However, none of these customers represented more than 10.0% of
our total revenue during the year. Our primary resellers are
ACAL Electronics, Bell Microproducts Inc., ModernTech Computer
& Peripheral Ltd. and Ingram Micro. In fiscal 2001, total
revenue derived from distribution channel customers represented
12.2% of total revenue.

While we are seeking to diversify our customer
base and expand the portion of our revenue that is derived
through all of our sales channels, we anticipate that our
operating results will continue to depend on volume sales to a
relatively small number of OEMs. We may not be successful in our
efforts to diversify our customer base, and the loss of one of
our key customers, or a decrease in the level of sales to any
one of these customers, could significantly reduce our total
revenue.

Customer Service and Support

We emphasize customer service and support in
order to provide our customers and their end users with the
knowledge and resources necessary to successfully implement and
integrate comprehensive, high-performance Fibre Channel
solutions. We offer a variety of support options for our
products, including

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extended-hour support coverage and immediate
product replacement options. Our customer service and systems
engineering teams provide extensive pre- and post-sale customer
support, including consultation, network design and in-depth
training on SAN technology and product implementation.


Our Solutions and Interoperability Lab at our
Bothell, Washington headquarters enhances our ability to provide
service to our customers and to certify interoperability with a
broad array of storage products. In addition to a staff of
systems engineers and a wide variety of networking and storage
equipment, we are using cooperative exchange agreements with
industry leading storage providers to evaluate and certify a
wide range of storage products in this facility. Solutions
partners and customers have made use of this facility, which has
resulted in significant growth in the number of storage products
that interoperate with our products.

Sales and Marketing

We sell our storage networking solutions,
including InSpeed-based storage switches, fabric switches, hubs
and SAN interconnect management software to OEMs and select
resellers. We mainly sell to OEMs of specific operating
systems-based servers, including Unix and Windows NT, as well as
to OEMs of high-end disk and tape storage subsystems. Our OEMs
utilize our products to deliver to end-users complete
factory-configured solutions, which are installed and
field-serviced by those OEMs technical support
organizations.

As the storage and SAN markets continue to
develop, we are establishing additional relationships with
select integrators and resellers to reach additional markets and
increase our geographic coverage. By serving the needs of both
OEMs and resellers, we can leverage the strengths of our range
of customers to further develop the Fibre Channel market and
enhance our ability to address a large end-user base.

We are expanding internationally by partnering
with OEMs in Asia and Europe who have a strong international
presence and are capable of selling and installing complex SAN
solutions. In Europe, we have a number of distribution channel
partners, including ACAL Electronics, EDL, Hammer plc, Bell
Microsystems  Europe and Technology Distribution
Group. We currently distribute our products in Japan through our
relationship with Inno Micro Corporation, and Network Dynamics
Corporation. We distribute our products in Asia, Australia and
New Zealand through our relationships with ACA Pacific Ltd.,
Apara Design Automation, Datastor, Modern Tech
Computer & Peripheral Ltd., Netcom Storage, Solkenix
International Corporation and Shanghai East China Computer.

Our marketing efforts include extending our
strategic alliances, promoting the Vixel brand name, continuing
our active participation in industry associations and standards
committees, and speaking at storage conferences and events.

We have entered into a marketing and distribution
relationship with Vitesse for our InSpeed-based switch ASICs.
Vitesse is a leading designer and supplier of semiconductors for
the data communications industry. Under these agreements,
Vitesse markets and sells both our current generation and next
generation switch ASICs. We receive royalties from Vitesse for
their sales of the ASICs, which provide us high margin revenue
without incurring significant sales and marketing costs.

Manufacturing

We outsource our manufacturing to Suntron
Corporation, formally K*Tec Electronics Corporation. Suntron is
responsible for nearly all-material procurement, assembly and
testing, packaging and shipment of our products. We currently do
not have a long-term supply contract with Suntron. Therefore,
they are not obligated to manufacture products for us, except as
may be provided in particular purchase orders that they have
accepted. We place purchase orders with them based on periodic
forecasts. In the future, we may need to add new manufacturing
partners to achieve higher production volumes and/or lower costs.

While Suntron is responsible for all facets of
the manufacturing process, we are directly involved in
qualifying and designating suppliers and the key components that
are used in our products. Most of our product components can be
obtained from multiple qualified manufacturers. While most of
the materials used in our products are standard, some are
proprietary or sole sourced and require extended lead times.
Although we design our own ASICs, they are manufactured by LSI
Logic and Philips Semiconductors (formerly VLSI

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and now a subsidiary of Koninklijke Philips
Electronics, N.V). Motorola, Inc. and Intel Corporation are
currently our sole suppliers for microprocessors. In addition,
we license software for our hubs and switches from Wind River
Systems, Inc. Our supply management team works closely with
strategically important suppliers who offer proprietary or
sole-sourced products. In addition, our operations team is
focused on production test equipment development,
manufacturability, effective transfer of products from
development to production, monitoring of supplier performance
and quality demand and build forecasting and scheduling.


Research and Development

Our research and development efforts are focused
on developing ASIC and hardware products that enable our
customers to design and deploy high performance embedded storage
switches and SANs.

Our ASIC development is focused on incorporating
our InSpeed technology into higher port count ASICs with
expanded integration of features and functionality. We are
working with storage enclosure OEMs to help specify the
additional features and functionality required to make their
products more robust and scaleable.

We are also using our InSpeed-based ASICs to
develop Fibre Channel switches for the storage and entry-level
SAN markets. The high degree of integration in our ASICs will
help us develop lower cost switch solutions for these cost
sensitive markets.

Our fabric switch developments are focused on
enhancing real-life data throughput and lowering the total cost
of ownership of complex SANs. These development efforts have
allowed us to increase port density and double the transmission
speed of our switch products from one Gbps speeds to
two Gbps.

In addition to the development of high
performance ASICs and hardware products, our research and
development team is a key driver in the industrys focus on
interoperability between devices manufactured by different
vendors. This effort will enable devices of different
manufacturers to be deployed within the same SAN in many
applications. In continuing development of our core
technologies, we plan to partner with other leading providers of
SAN technologies, products and services to jointly develop high
performance SAN products and to play an active role in
supporting industry standards.

Our research and development expenses were
$14.6 million in fiscal 2001. We believe that our
research and development efforts are key to our ability to
maintain technical competitiveness and to deliver innovative
products that address the needs of our markets. However, our
product development efforts may not result in commercially
viable products, and our products may be made obsolete by
changing technology or new product announcements by us, or our
competitors.

Competition

The SAN interconnect market has become
increasingly competitive. New SAN-enabled products are being
offered by a growing number of server, storage, tape and storage
management vendors. Because we offer a broad product portfolio,
each of our products competes with a different set of
competitors. For SAN fabric switch sales, we compete primarily
with Brocade Communications Systems, Inc., McDATA Corp., Qlogic
Corp., and Gadzoox Networks, Inc. For hub sales, we compete
primarily with Emulex Corporation and Gadzoox Networks. As the
market for SAN interconnect products grows, we may face
competition from traditional networking companies and other
manufacturers of networking equipment. These networking
companies may enter the SAN interconnect market by introducing
their own products or by acquiring or entering into one or more
alliances with existing SAN interconnect providers. It also is
possible that our OEMs could develop and introduce products
competitive with our product offerings.

We believe the primary competitive factors in the
SAN interconnect market include: product performance and
features; product quality, reliability and interoperability;
ability to meet delivery schedules; the size of installed
customer base; price; strength of distribution channel; and
customer service and technical support. We believe we compete
favorably with our competitors on several of these factors.
However, because many of our existing and potential competitors
have longer operating histories, greater name recognition and
substantially greater financial, technical, sales and marketing
resources, they may have larger distribution

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channels, access to more customers and a larger
installed customer base than we do. These competitors may be
able to undertake more extensive marketing campaigns and adopt
more aggressive pricing policies than we can. To remain
competitive, we believe we must, among other things, invest
significant resources in expanding our distribution channels,
developing new products and enhancing our current products. If
we fail to do so, our products will not compete favorably with
those of our competitors, which will significantly harm our
business.


Our embedded storage switches are targeted at a
new and evolving market for this technology. As yet no Fibre
Channel switch providers have introduced similar technology to
our InSpeed-based range of products. As this market grows we may
face competition from legacy switch providers, or OEMs may
choose to develop the technology themselves. We believe the
primary competitive factors in the embedded storage ASIC switch
market include: integration of features and functionality; the
number of ports per ASIC; the power consumption of the ASICs;
product performance; ability to meet delivery schedules; price;
and strength of distribution channel.

Intellectual Property

We attempt to protect our technology through a
combination of patents, copyrights, trade secret laws and
trademarks, as well as confidentiality agreements and other
contractual restrictions. There can be no assurance that our
intellectual property protection measures will be sufficient to
prevent misappropriation of our technology or that our
competitors will not independently develop technologies that are
substantially equivalent or superior to our technology. In
addition, the laws of many foreign countries do not protect our
intellectual property rights to the same extent as the laws of
the United States. Our failure to protect our intellectual
property and other proprietary information could have a material
adverse effect on our business, financial condition and results
of operations.

In September 2000 we were awarded a patent on
private loop switching technology. The patent defines ways to
interconnect devices through a switch without the complexities
of full fabric services support. In February 2001 we were
awarded a patent on our Fibre Channel switching technology that
covers unique areas of our architecture that have allowed us to
adapt our products as the industry evolves to higher speeds and
different interfaces.

As of December 30, 2001, we had four pending
United States patent applications, as well as, pending patent
applications in selected countries abroad, with respect to the
broad scope of SAN technology, including our SAN management
capabilities and switch and hub architecture. However, it is
possible that patents may not be issued for the pending
applications and that our issued patent may not adequately
protect our technology from infringement or prevent others from
claiming our technology infringes that of third parties. All of
our software products have copyright notices. We own several
trademarks, including Vixel, InSpeed and SAN InSite. We also
rely on trade secret law and contractual provisions to protect
our intellectual property, including technology development,
which we have determined not to patent or copyright, or which is
not capable of more formal protection.

We may need to initiate litigation in the future
to enforce our intellectual property rights, to protect our
trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation could result in
substantial costs and diversion of our resources and could
materially harm our business. From time to time we have
received, and may receive in the future, notice of infringement
claims of other parties proprietary rights. Infringement
or other claims could be asserted or prosecuted against us in
the future, and it is possible that past or future assertions or
prosecutions could harm our business. Any such claims, with or
without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel,
cause delays in the development and release of our products, or
require us to develop non-infringing technology or enter into
royalty or licensing arrangements. Such royalty or licensing
arrangements, if required, may not be available on terms
acceptable to us, or at all. For these reasons, infringement
claims could materially harm our business.

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Employees

As of December 30, 2001 we had 152
employees, of which 83 were engaged in research and development,
35 in sales, marketing and customer service and support,
16 in operations and 18 in finance, administration and
information services. None of our employees are represented by a
labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.

Executive Officers

Our executive officers and their ages as of
December 30, 2001 were as follows:

|                  |  |     |    |          |  |                                                                             
|----------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|James M. McCluney |  |     | 50 |          |  | President, Chief Executive Officer and Chairman
	of the Board of Directors  
|Kurtis L. Adams   |  |     | 47 |          |  | Chief Financial Officer, Vice President of
	Finance, Secretary and Treasurer
|Stuart B. Berman  |  |     | 45 |          |  | Chief Technology Officer                                                    
|Thomas Hughes     |  |     | 42 |          |  | Vice President of Product Development                                       

James M. McCluneyhas served as our president, chief
executive officer and director since April 1999 and the
chairman of the board of directors since January 2000. From
October 1997 to January 1999, he served as president
and chief executive officer of Crag Technologies, formerly Ridge
Technologies, a storage system manufacturer. From
October 1994 to September 1997, Mr. McCluney
served in various positions at Apple Computer, including senior
vice president of worldwide operations and vice president of
European operations.

Kurtis L. Adamshas
served as our chief financial officer and vice president of
finance since September 1998. From December 1995 to
September 1998, he was chief financial officer and vice
president of finance of Health Systems Technologies, Inc., a
software company. Mr. Adams was the corporate controller
and chief accounting officer from March 1991 to
October 1995 for Chipcom Corporation, a networking company.

Stuart B. Bermanhas
served as our chief technology officer since February 1998.
In July 1996, he co-founded Arcxel Technologies, Inc., a
networking company, and through February 1998 served as its
chairman and chief technology officer. From February 1993
to June 1996, Mr. Berman was a Fibre Channel Architect
for Emulex Corporation, a networking company.

Thomas Hugheshas
served as our vice president of product development since
March 2000. Mr. Hughes was president from
August 1997 to January 2000 and chief operating
officer from June 1995 to August 1997 of V Band
Corporation, a provider of hardware and software-based mission
critical digital telecommunications systems for the financial
services industry.




Item 2.     Properties

Our corporate headquarters are located in
Bothell, Washington and occupy approximately 43,000 square feet.
Our lease for this facility expires in January 2005. In
addition, we have a research and development and sales facility
located in Irvine, California that occupies approximately 13,000
square feet. Our lease for this facility expires in November
2002, and we are currently evaluating our alternatives, which
may include an extension of this lease or moving these
operations to a new location. We also lease three domestic sales
offices in West Covina, California; Gloucester, Massachusetts;
and Nashua, New Hampshire and one international sales office in
Beijing, China.




Item 3.     Legal
Proceedings

Pending or Threatened Litigation

On November 15, 2001, a securities class
action was filed in the United States District Court in the
Southern District of New York against two of our officers
and directors and certain underwriters who participated in our
initial public offering in late 1999. The complaint alleges
violations under Section 10(b) of

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the Securities Exchange Act of 1934 and
Section 11 of the Securities Act of 1933 and seeks
unspecified damages on behalf of persons who purchased our stock
during the period October 1, 1999 through December 6,
2000. We intend to defend ourselves vigorously in this matter.





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

None.




PART II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

Our common stock is quoted on the Nasdaq National
Market under the symbol VIXL. Public trading of our
common stock commenced on October 1, 1999. Prior to this
time, there was no public market for our stock. The following
table summarizes the high and low bid price for our common stock
for the indicated periods as reported by the Nasdaq National
Market.

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|2000           |  |      |       |     |  |   |       | 
|              
|First Quarter  |  | $    | 33.50 |     |  | $ | 15.00 | 
|Second Quarter |  | $    | 17.13 |     |  | $ | 6.50  | 
|Third Quarter  |  | $    | 9.38  |     |  | $ | 4.31  | 
|Fourth Quarter |  | $    | 7.00  |     |  | $ | 1.03  | 
|              
|2001           |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 4.25  |     |  | $ | 1.00  | 
|Second Quarter |  | $    | 5.49  |     |  | $ | 0.75  | 
|Third Quarter  |  | $    | 4.71  |     |  | $ | 1.14  | 
|Fourth Quarter |  | $    | 2.20  |     |  | $ | 1.40  | 

As of March 1, 2002 we had 330 stockholders
of record. There are a substantially greater number of persons
who are beneficial owners of our stock. We have never declared
or paid cash dividends on our capital stock. We currently intend
to retain any future earnings to fund the development and growth
of our business and we do not currently anticipate paying any
cash dividends in the foreseeable future. Future dividends, if
any, will be determined by our board of directors.

Recent Sales of Unregistered
Securities

We did not sell any unregistered securities
during 2001.

Use of Proceeds From Sales of Registered
Securities

Our Registration Statement on Form S-1
(No. 333-81347) for our initial public offering of common
stock became effective September 30, 1999. A total of
4,945,000 shares of our common stock was sold at a price of
$18.00 per share, including the underwriters over-allotment. The
initial public offering resulted in gross proceeds of
approximately $89.0 million, of which approximately
$6.2 million was applied toward the underwriting discount.
Net proceeds to us were $82.8 million. Expenses related to
the offering totaled approximately $1.4 million. Through
December 30, 2001, the proceeds were applied to repay a
$2.0 million promissory note due to Western Digital, a line
of credit borrowing totaling $2.8 million and a note
payable to a bank of $7.5 million. In addition,
$5.3 million was used to repay capital lease obligations,
$4.3 million was used to purchase property and equipment
and $39.8 million was used for working capital and general
corporate purposes. We have invested the remaining net proceeds
in short-term, investment grade, interest-bearing securities.

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Item 6.     Selected
Financial Data

The following selected financial data should be
read in conjunction with our financial statements and related
notes, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and other
financial information appearing elsewhere in this Annual Report
on Form 10-K. We derived the statement of operations data
for the fiscal years ended January 2, 2000,
December 31, 2000 and December 30, 2001 and the
balance sheet data as of December 31, 2000 and
December 30, 2001 from the audited financial statements in
this Annual Report on Form 10-K. The statement of
operations data for the fiscal years ended December 28,
1997 and January 3, 1999 and the selected balance sheet
data set forth below for us as of December 28, 1997,
January 3, 1999 and January 2, 2000 is derived from
our audited financial statements not included in this Annual
Report on Form 10-K. Net loss available to common
stockholders shown below includes our net loss, as well as the
accretion related to our redeemable preferred stock.

|                                          |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |        |        | 
|----------------------------------------- | ---------------------------------------------- | ---------------------------------------- | ------- | ---------- | ------ | ---------- | ------- | ------------ | ------ | ------------ | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                          |                                                |                                         
|                                          |                                                | For the Fiscal Year Ended               
|                                          |                                                |                                         
|                                          |                                                | December 28,                             |         | January 3, |        | January 2, |         | December 31, |        | December 30,
|                                          |                                                | 1997                                     |         | 1999       |        | 2000       |         | 2000         |        | 2001        
|                                          |                                                |                                          |         |            |        |            |         |              |        |             
|                                          |                                                |                                         
|                                          |                                                | (In thousands, except per share amounts)
|Statement of Operations Data:             |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Revenue                                   |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|                                          | SAN systems                                    |                                          | $       | 3,282      |        |            | $       | 15,222       |        |              | $       | 25,159 |        |   | $       | 29,610 |        |   | $       | 16,769 |       
|                                          | Components                                     |                                          |         | 19,501     |        |            |         | 24,223       |        |              |         | 13,668 |        |   |         | 3,599  |        |   |         | 5,034  |       
|                                          |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|                                          |                                                | Total revenue                            |         |            | 22,783 |            |         |              | 39,445 |              |         |        | 38,827 |   |         |        | 33,209 |   |         |        | 21,803 | 
|Cost of revenue                           |                                                |                                          | 19,047  |            |        |            | 36,199  |              |        |              | 28,293  |        |        |   | 21,799  |        |        |   | 14,069  |       
|                                          |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Gross profit                              |                                                |                                          | 3,736   |            |        |            | 3,246   |              |        |              | 10,534  |        |        |   | 11,410  |        |        |   | 7,734   |       
|                                          |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Operating expenses                        |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|                                          | Research and development                       |                                          |         | 9,360      |        |            |         | 11,110       |        |              |         | 12,788 |        |   |         | 15,570 |        |   |         | 14,657 |       
|                                          | Acquired in-process technology                 |                                          |         |           |        |            |         | 5,118        |        |              |         |       |        |   |         |       |        |   |         |       |       
|                                          | Selling, general and administrative            |                                          |         | 7,629      |        |            |         | 14,521       |        |              |         | 13,643 |        |   |         | 17,437 |        |   |         | 14,423 |       
|                                          | Amortization of goodwill and other intangibles |                                          |         | 222        |        |            |         | 2,057        |        |              |         | 1,362  |        |   |         | 2,159  |        |   |         | 820    |       
|                                          | Amortization of stock-based compensation       |                                          |         | 50         |        |            |         |             |        |              |         | 4,286  |        |   |         | 2,825  |        |   |         | 1,353  |       
|                                          |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|                                          |                                                | Total operating expenses                 |         |            | 17,261 |            |         |              | 32,806 |              |         |        | 32,079 |   |         |        | 37,991 |   |         |        | 31,253 | 
|                                          |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Loss from operations                      |                                                |                                          | (13,525 | )          |        |            | (29,560 | )            |        |              | (21,545 | )      |        |   | (26,581 | )      |        |   | (23,519 | )     
|Other (expense) income, net               |                                                |                                          | (234    | )          |        |            | 8,327   |              |        |              | (802    | )      |        |   | 3,024   |        |        |   | 1,591   |       
|                                          |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Net loss                                  |                                                | $                                        | (13,759 | )          |        | $          | (21,233 | )            |        | $            | (22,347 | )      |        | $ | (23,557 | )      |        | $ | (21,928 | )     
|                                          |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Net loss available to common stockholders |                                                | $                                        | (13,955 | )          |        | $          | (21,424 | )            |        | $            | (22,495 | )      |        | $ | (23,557 | )      |        | $ | (21,928 | )     
|                                          |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Basic and diluted net loss per share      |                                                | $                                        | (18.90  | )          |        | $          | (8.77   | )            |        | $            | (2.97   | )      |        | $ | (1.04   | )      |        | $ | (0.93   | )     
|                                          |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Weighted-average shares outstanding       |                                                |                                          | 738     |            |        |            | 2,444   |              |        |              | 7,572   |        |        |   | 22,710  |        |        |   | 23,504  |       
|                                          |                                                |                                          |         |            |        |            |         |              |        |              |         |        |        |   |         |        |        |   |         |       

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|                                                                |  |                |         |            |  |            |         |              |  |              |        |  |  |   |        |  |  |   |        | 
|--------------------------------------------------------------- |  | -------------- | ------- | ---------- |  | ---------- | ------- | ------------ |  | ------------ | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                                |  | December 28,   |         | January 3, |  | January 2, |         | December 31, |  | December 30,
|                                                                |  | 1997           |         | 1999       |  | 2000       |         | 2000         |  | 2001        
|                                                                |  |                |         |            |  |            |         |              |  |             
|                                                                |  |               
|                                                                |  | (In thousands)
|Balance Sheet Data:                                             |  |                |         |            |  |            |         |              |  |              |        |  |  |   |        |  |  |   |        | 
|Cash and cash equivalents                                       |  | $              | 3,776   |            |  | $          | 3,841   |              |  | $            | 16,706 |  |  | $ | 17,066 |  |  | $ | 5,036  | 
|Short-term investments                                          |  |                |        |            |  |            | 2,490   |              |  |              | 44,650 |  |  |   | 25,636 |  |  |   | 20,942 | 
|Working capital                                                 |  |                | 2,352   |            |  |            | 285     |              |  |              | 58,820 |  |  |   | 39,114 |  |  |   | 22,640 | 
|Total assets                                                    |  |                | 19,934  |            |  |            | 28,165  |              |  |              | 84,081 |  |  |   | 62,931 |  |  |   | 38,765 | 
|Long-term obligations and noncurrent portion of
	capital leases |  |                | 6,057   |            |  |            | 13,856  |              |  |              | 4,406  |  |  |   | 1,510  |  |  |   | 184    | 
|Mandatorily redeemable preferred stock                          |  |                | 19,523  |            |  |            | 19,993  |              |  |              |       |  |  |   |       |  |  |   |       | 
|Total stockholders equity (deficit)                            |  |                | (14,030 | )          |  |            | (19,924 | )            |  |              | 65,695 |  |  |   | 46,945 |  |  |   | 28,026 | 




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

The following discussion should be read in
conjunction with the Selected Financial Data in Item 6 and
the financial statements and the related notes referenced
elsewhere in this report.

Overview

We provide comprehensive Fibre Channel based
interconnect products and embedded switch products for data
storage solutions and storage networking applications. Our
offering consists of a variety of switch and hub products that
connect computers to data storage devices in a network
configuration and a switch-on-a-chip Application
Specific Integrated Circuit, or ASIC. This ASIC can be embedded
in a variety of data storage devices to enhance performance,
improve availability, and increase the reliability of these
devices. This new switching technology can be sold in chip,
blade or box form to original equipment manufacturers, or OEMs,
for inclusion in their solutions.

We incorporated in Colorado in June 1991 under
the name Photonics Research Incorporated and initially developed
fiber optic components for data communications and related
applications. In February 1995, we reincorporated in Delaware
and changed our name to Vixel Corporation. In the first quarter
of 1996, we acquired the Fibre Channel hub and transceiver
product lines from Western Digital Corporation. In 1997 we began
developing our SAN InSite software to manage our SAN
interconnect solutions. In the first quarter of 1998, we
acquired Arcxel Technologies, Inc., a developer of Fibre Channel
switches. In early 1998, we sold our laser diode fabrication
facility and gigabit Ethernet transceiver product line to Cielo
Communications, Inc, and since that time we have been focused
exclusively on designing, developing and marketing our Fibre
Channel solutions.

During 2001, we used our expertise in Fibre
Channel switching technologies to develop a
switch-on-a-chip ASIC. This ASIC incorporates our
InSpeed technology, which is an advanced switching architecture
that results in a single chip capable of handling multiple Fibre
Channel devices. This ASIC can be embedded into storage
enclosure devices such as redundant array of independent disks,
or RAID, enclosures, tape libraries, NAS environments and next
generation storage systems to enhance the performance and
scaling of these solutions as well as improve device
availability and reliability. We are also using this ASIC in
Fibre Channel switches and blades that can be embedded by OEMs
in their storage solutions. As part of our embedded storage
switch strategy, we have licensed the manufacturing and selling
of our Fibre Channel switch ASICs. This technology can also be
used to offer high performance, low cost switches for entry
level SANs. During the fourth quarter of 2001, we recognized our
first royalty revenue with regards to the licensing of these
products. Revenue from InSpeed-based products represented
approximately 26% of our total revenue in the fourth quarter of
fiscal 2001.

We derive substantially all of our revenue from
the sale of Fibre Channel products, including switches, hubs,
and embedded storage switch products. We have developed a
version of our SAN InSite software, SAN InSite Professional that
we license for a fee. SAN systems revenue consists of revenue
generated from sales of our SAN switches, hubs, transceiver
products sold as a result of selling our switches and hubs and
the sales

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and licensing of our embedded switching
technology. Component revenue consists primarily of revenue
generated from the sale of our transceiver products to original
equipment manufacturers, or OEMs, for use in their products.
During the second quarter of 2001, we discontinued the
manufacture and sale of our transceiver products. Also, we are
currently evaluating strategic alternatives for our SAN InSite
software and the related assets and resources.


We sell our products primarily to a limited
number of OEMs. Sun Microsystems, Compaq Computer and Avid
Technology represented 33.7%, 18.5% and 14.4% of revenue,
respectively, for fiscal 2001. Compaq Computer and Sun
Microsystems represented 25.6% and 21.3% of revenue,
respectively, for fiscal 2000. No other individual customer
represented more than 10.0% of our total revenue in those
periods. While we are seeking to diversify our customer base and
expand the portion of our revenue that is derived from sales
through various distribution channels, we anticipate that our
operating results will continue to depend on volume sales to a
relatively small number of OEMs. We may not be successful in our
efforts to diversify our customer base and the loss of one of
our key customers could significantly reduce our total revenue.
During fiscal 2001 and 2000, 12.2% and 19.6%, respectively, of
our total revenue was derived from sales to distribution channel
customers.

Our gross profit as a percentage of total revenue
is affected by the mix of products sold, sales channels and
customers to which our products are sold. Our gross profit as a
percentage of total revenue also is affected by fluctuations in
manufacturing volumes and component costs, manufacturing costs
charged by our contract manufacturers, new product
introductions, changes in our product pricing and estimated
warranty costs. We expect that average unit selling prices for
our products will decline over time in response to competitive
pricing pressures, increased sales discounts, new product
introductions by us or our competitors, and other factors. We
seek to maintain gross profit as a percentage of total revenue
by selling a higher percentage of higher margin products,
reducing the cost of our products through manufacturing
efficiencies, design improvements and cost reductions for
components and leveraging our internal operations infrastructure.

Since September 1999, we have outsourced our
product manufacturing to one contract manufacturer, Suntron
Corporation, formally K*Tec Electronics Corporation. Suntron
also provides distribution and repair operations and most of our
materials management. We purchase certain components directly
from suppliers and resell them to Suntron at our cost and
recognize no revenue from these transactions. We also outsource
the manufacturing of our ASICs to third-party manufacturers that
ship these components to Suntron for assembly. In addition, we
have recently developed a Fibre Channel embedded switch ASIC for
use in various storage devices. We have licensed the
manufacturing and selling of this ASIC to a third party and will
derive royalty revenue from such sales.

In connection with the grant of stock options to
employees and consultants during 1999, we recorded stock-based
compensation of $9.8 million. Stock-based compensation is
presented as a reduction of stockholders equity. The
balance is expensed on a graded vesting method over the vesting
period of the options. During fiscal 2000 and 2001, we
recognized $2.9 million and $1.4 million,
respectively, of the stock-based compensation as compensation
expense.

Since our inception, we have incurred significant
losses. As of December 30, 2001, we had operating loss
carryforwards of $85.4 million for federal income tax
purposes. These operating loss carryforwards expire on various
dates through 2021. We have recorded a valuation allowance equal
to the gross deferred tax asset balance because our accumulated
deficit, history of recurring net losses and possible
limitations on the use of carryforwards give rise to uncertainty
as to whether the deferred tax assets are realizable. Further,
these operating loss carryforwards could be subject to usage
limitations due to changes in our ownership resulting from
equity financings.

As of December 30, 2001, we had an
accumulated deficit of $124.1 million and have never been
profitable. We reduced our work force in 2001 and took other
steps to better align our operating expenses with our revenue
levels. We plan to grow our revenue base and to continue to
control our expenses in order to achieve profitability. However,
we cannot be certain that we will ever realize sufficient
revenue to achieve profitability. Even if we do achieve
profitability, we may not be able to sustain or increase
profitability.

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Critical Accounting Policies

We generally recognize revenue at the time of
product shipment, unless we have future obligations for
installation or when we ship product demonstration units.
Revenue from products shipped with future installation
obligations is recognized when we meet our future obligation.
Revenue is not recognized on demonstration units unless the
customer ultimately purchases the unit, and the related revenue
is recognized at that time. Our agreement with our North
American distributors provides for price protection and for
stock rotation based on a percentage of shipments for the
quarter preceding when an offsetting order is requested. Revenue
for the percentage of shipments subject to these stock rotation
rights is deferred until the stock rotation period has passed.
We provide an allowance for price protection rights. We also
maintain a reserve for product warranty costs based on a
combination of historical experience and specifically identified
potential warranty liabilities.

We receive royalty revenue under license
agreements with a number of third parties that sell products
based on technology developed by us. The license agreements
provide for the payment of royalties to us based on sales of the
licensed product. We record royalty revenue based on sales
reported to us by the licensee that occurred during the relevant
period. There are no future performance obligations under these
license agreements.

We offer product warranties of one to five years.
Estimated future warranty obligations related to certain
products are provided by charges to operations in the period in
which the related revenue is recognized. These estimates are
based on historical warranty experience and other relevant
information of which we are aware.

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could
differ from those estimates. Amounts in the financial
statements, which are particularly susceptible to changes in
estimates in the near term, include the recoverability of
goodwill and other intangibles and the adequacy of the
allowances for doubtful accounts receivable, sales returns,
inventory obsolescence and product warranty costs.

Results of Operations

The following table sets forth, as a percentage
of revenue, statement of operations data for the periods
indicated:

|                            |                                                |                           |       |              |       |              |       |      |       |  |        |      |       | 
|--------------------------- | ---------------------------------------------- | ------------------------- | ----- | ------------ | ----- | ------------ | ----- | ---- | ----- |  | ------ | ---- | ----- | 
|                            |                                                |                          
|                            |                                                | For the Fiscal Year Ended
|                            |                                                |                          
|                            |                                                | January 2,                |       | December 31, |       | December 30,
|                            |                                                | 2000                      |       | 2000         |       | 2001        
|                            |                                                |                           |       |              |       |             
|Revenue                     |                                                |                           |       |              |       |              |       |      |       |  |        |     
|                            | SAN systems                                    |                           |       | 64.8         | %     |              |       | 89.2 | %     |  |        | 76.9 | %    
|                            | Components                                     |                           |       | 35.2         |       |              |       | 10.8 |       |  |        | 23.1 |      
|                            |                                                |                           |       |              |       |              |       |      |       |  |        |     
|                            |                                                | Total revenue             |       |              | 100.0 |              |       |      | 100.0 |  |        |      | 100.0 | 
|Cost of revenue             |                                                |                           | 72.7  |              |       |              | 65.4  |      |       |  | 64.5   |     
|                            |                                                |                           |       |              |       |              |       |      |       |  |        |     
|Gross profit                |                                                |                           | 27.3  |              |       |              | 34.6  |      |       |  | 35.5   |     
|                            |                                                |                           |       |              |       |              |       |      |       |  |        |     
|Operating expenses          |                                                |                           |       |              |       |              |       |      |       |  |        |     
|                            | Research and development                       |                           |       | 32.9         |       |              |       | 46.9 |       |  |        | 67.2 |      
|                            | Selling, general and administrative            |                           |       | 35.1         |       |              |       | 52.5 |       |  |        | 66.2 |      
|                            | Amortization of goodwill and other intangibles |                           |       | 3.5          |       |              |       | 6.5  |       |  |        | 3.8  |      
|                            | Amortization of stock-based compensation       |                           |       | 11.3         |       |              |       | 8.7  |       |  |        | 6.2  |      
|                            |                                                |                           |       |              |       |              |       |      |       |  |        |     
|                            |                                                | Total operating expenses  |       |              | 82.8  |              |       |      | 114.6 |  |        |      | 143.4 | 
|                            |                                                |                           |       |              |       |              |       |      |       |  |        |     
|Loss from operations        |                                                |                           | (55.5 | )            |       |              | (80.0 | )    |       |  | (107.9 | )   
|Other income (expense), net |                                                |                           | (2.1  | )            |       |              | 9.1   |      |       |  | 7.3    |     
|                            |                                                |                           |       |              |       |              |       |      |       |  |        |     
|Net loss                    |                                                |                           | (57.6 | )%           |       |              | (70.9 | )%   |       |  | (100.6 | )%  
|                            |                                                |                           |       |              |       |              |       |      |       |  |        |     

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| |                                                                             
| | ----------------------------------------------------------------------------
| | Fiscal Years Ended January 2, 2000,
	December 31, 2000 and December 30, 2001

Revenue.Total
revenue was $38.8 million, $33.2 million and
$21.8 million in fiscal 1999, 2000 and 2001, respectively.
Our SAN systems revenue was $25.2 million,
$29.6 million and $16.8 million in fiscal 1999, 2000
and 2001, respectively. The 17.7% increase in SAN systems
revenue in fiscal 2000 compared with fiscal 1999 was the result
of increased sales of our switch products. The 43.2% decrease in
SAN systems revenue in fiscal 2001 compared with fiscal 2000 was
primarily a result of a decrease in entry-level hub product
sales and a decrease in the sales of our transceiver products
with our switch and hub products as a result of us discontinuing
the manufacturing and selling of transceiver products in the
second quarter of 2001.

Component and other revenue was
$13.7 million, $3.6 million and $5.0 million in
fiscal 1999, 2000 and 2001, respectively. Performance issues
with our CD-based transceiver products sold primarily in 1997
were identified in late 1998 and early 1999 and, combined with
certain other warranty issues with our gigabaud link modules, or
GLM, transceiver products resulted in a decrease in the
purchases of our component products in fiscal 2000 as compared
with fiscal 1999. The 38.9% increase in component revenue in
fiscal 2001 compared with fiscal 2000 is a result of a one-time
order of a transceiver product from one of our OEM customers.
During the second quarter of 2001, we discontinued the
manufacture and sale of our transceiver products.

Gross profit.Cost
of revenue includes the cost to acquire finished products from
third party manufacturers of our products, expenses we incur
related to inventory management, product quality testing and
customer order fulfillment, and provisions for warranty expenses
and inventory obsolescence. Gross profit was $10.6 million,
$11.5 million and $7.7 million in fiscal 1999, 2000
and 2001 respectively, representing 27.3%, 34.6% and 35.5% of
total revenue, respectively. The increases in both absolute
dollars and percentage of total revenue in 2000, as compared
with 1999, reflect a change in our product mix as sales of
switch and hub products increased while sales of transceivers
declined. Our switch and hub products generally have higher
gross margins than our transceiver products. The decrease in the
amount of gross profit in 2001 compared with 2000 is directly
related to the decreased revenue in 2001 compared with 2000.

Cost of revenue during fiscal 2001 was reduced by
$2.2 million as a result of the settlement of warranty
related claims against a third party vendor. Also, included in
cost of revenue during fiscal 2001 were provisions for excess
and obsolete inventory and purchase commitments totaling
approximately $4.1 million, reduced by $800,000 resulting
from the settlement of a patent infringement claim related to
our GBIC transceivers for less than previously estimated. These
provisions resulted primarily from transitioning out of the GBIC
and GLM transceiver products and less than originally forecasted
sales of certain of our products. Inventory purchases and
commitments are based upon future sales forecasts. To mitigate
the component supply constraints that have existed in the past,
our contract manufacturer builds inventory levels for certain
components with long lead times and enters into certain
longer-term commitments for certain components. Due to the
transition out of our transceiver products and a faster than
anticipated shift in demand from older to newer generation SAN
system products, inventory levels for these products exceeded
our requirements. The excess and obsolete inventory charge was
calculated based on the inventory levels in excess of demand for
each specific product. We do not anticipate that the excess
inventory subject to this charge will be used at a later date.

We have entered into agreements with third
parties to market and/or sell our switch ASIC products. As a
result of these agreements, future revenue from our ASIC
products will primarily be in the form of royalties received
from these third parties. We expect gross profit as a percentage
of revenue to increase in 2002 as a result of anticipated
royalty revenue.

Research and development expenses.Research and development expenses
consist primarily of salaries and related expenses for personnel
engaged in the design, development and sustaining engineering of
our products, consulting and outside service fees, costs for
prototype and test units and other expenses related to the
design, development, testing and enhancement of our products.
Research and development expenses were $12.8 million,
$15.6 million and $14.7 million in fiscal 1999, 2000
and 2001, respectively. The 21.9% increase in research and
development expenses in fiscal 2000 compared with fiscal 1999
was due to increased development costs relating to our
management software and switch products and two development
agreements with third parties to embed our switch or ASIC
technology into their products. The 5.8% decrease in research

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and development expenses in fiscal 2001 compared
with fiscal 2000 was the result of a decrease in consulting and
temporary services with regard to the 9000 series switch design
and development, as well as a decrease in software development
consulting for our SAN InSite Professional product, both of
which were completed during 2001. We expect the absolute dollar
amounts of research and development expense will decrease in
fiscal 2002 compared with fiscal 2001. However, we believe that
continued investment in research and development is an essential
element of our strategic objectives to design quality products
while reducing costs and to leverage our technologies into new
market opportunities. As a result, we expect these expenses to
continue to represent a significant percentage of our future
revenue.


Selling, general and administrative expenses.Selling, general and administrative
expenses consist primarily of salaries, commissions and related
expenses for personnel engaged in marketing, sales, finance and
information technology support functions, as well as
professional fees, allowance for doubtful accounts receivable,
trade shows and other marketing activities. Selling, general and
administrative expenses for fiscal years 1999, 2000 and 2001
were $13.6 million, $17.4 million and
$14.4 million, respectively. The 27.8% increase in the
selling, general and administrative expenses in fiscal 2000
compared with fiscal 1999 is primarily due to increases in sales
and customer service and support personnel in 2000. The 17.2%
decrease in selling, general and administrative expenses in
fiscal 2001 compared with fiscal 2000 was mainly due to a
reduction in bad debt expense, a reduction in travel,
recruitment and relocation expenses due to a reduction-in-force
during 2001 and a reduction of marketing expenses such as trade
show expense, cooperative marketing expense and advertising
development and placement expenses. We currently anticipate that
selling, general and administrative expenses will continue to
decrease in absolute dollars and as a percentage of revenue as
we continue to manage costs, maximize operating efficiencies and
leverage our current infrastructure.

Amortization of goodwill and other
intangibles.Amortization and
writedown of goodwill and other intangibles in fiscal 1999, 2000
and 2001 was $1.4 million, $2.1 million and $820,000,
respectively, representing 3.5%, 6.5% and 3.8%, respectively, of
total revenue. The increase in fiscal 2000 compared with fiscal
1999 is the result of an increase in the amortization of the
intangible assets capitalized in conjunction with our purchase
of Arcxel Technologies in February 1998. The decrease in fiscal
2001 compared with fiscal 2000, resulted from the intangible
assets being fully amortized during fiscal 2000.

Amortization of stock-based compensation.Amortization of stock-based
compensation in fiscal 1999, 2000 and 2001 was
$4.4 million, $2.9 million and $1.3 million,
respectively, as a result of stock options granted to employees
and consultants during fiscal 1999 for which we recorded
stock-based compensation of $9.8 million. The remaining
balance of deferred stock-based compensation will be amortized
during fiscal 2002 and 2003 in the amounts of $654,000 and
$111,000, respectively.

Other income (expense), net.Other income (expense), net, consists
of interest income, interest expense and other miscellaneous
income or expense. Other expense, net, was $802,000 in fiscal
1999, and other income, net was $3.0 million in fiscal 2000
and $1.6 million in fiscal 2001. Other expense, net in
fiscal 1999 was primarily interest expense. Other income, net in
fiscal 2000 and fiscal 2001 was primarily interest income
relating to our short-term investments.

Liquidity and Capital Resources

Since inception, we have financed our operations
primarily through the sale of common stock and preferred stock
with aggregate proceeds of approximately $114.8 million.
Additionally, we have financed our operations through capital
equipment lease lines, working capital credit facilities, notes
payable and $6.9 million in net cash received from the sale
of our laser diode fabrication facility and gigabit Ethernet
product line. Our principal sources of liquidity at
December 30, 2001 consisted of $5.1 million in cash
and cash equivalents and $20.9 million in short-term
investments. We are evaluating strategic alternatives for our
SAN InSite software and related assets and resources. Depending
on the outcome of this strategic evaluation, we may be able to
increase our cash resources to use in financing our future
operations. However, we cannot be certain that such a strategic
alternative will be available to us.

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Cash utilized by operating activities was
$14.8 million in fiscal 2001, due to net losses, as well as
working capital required to fund our operations. Cash provided
by investing activities was $3.6 million, primarily related
to maturities of short-term investments, net of purchases of
short-term investments and capital expenditures of
$1.1 million. Cash used in financing activities was
$856,000, primarily due to payments on our capital leases and
purchases of treasury stock, net of payments received on our
stockholder notes receivable and common stock issued under our
Employee Stock Purchase Plan and stock option plans.

As of December 30, 2001, we had an
accumulated deficit of $124.1 million and have never been
profitable. We reduced our work force in 2001 and may do so
again in 2002 depending on the results of our evaluation of
strategic alternatives for SAN InSite or by further aligning our
resources to execute our strategies. We plan to grow our revenue
base and to continue to control our expenses in order to achieve
profitability. However we cannot be certain that we will ever
realize sufficient revenue to achieve profitability. Even if we
do achieve profitability, we may not be able to sustain or
increase profitability.

We believe that our existing cash, cash
equivalent and short-term investment balances will be sufficient
to meet our cash requirements at least through the next twelve
to eighteen months. However, we may be required, or could elect,
to seek additional funding prior to that time. Our future
capital requirements will depend on many factors, including our
future revenue, our strategic decisions concerning SAN InSite
business, the timing and extent of spending to support product
development efforts and sales, general and administrative
activities, the timing of introductions of new products, and
market acceptance of our products. We cannot assure you that
additional equity or debt financing, if required, will be
available on acceptable terms or at all.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board, or FASB, issued FAS No. 141, Business
Combinations, and FAS No. 142, Goodwill and
Other Intangible Assets. FAS 141 supersedes
Accounting Principles Bulletin No. 16, Business
Combinations and FAS No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises and
FAS 142 supersedes Accounting Principles Bulletin
No. 17, Intangible Assets. These statements
require use of the purchase method of accounting for all
business combinations initiated after July 30, 2001,
thereby eliminating use of the pooling-of-interests method.
Goodwill and other intangible assets with indefinite lives will
no longer be amortized but will be tested for impairment at
least annually. Additionally, new criteria have been established
that determine whether an acquired intangible asset should be
recognized separately from goodwill. We will adopt these
pronouncements on a prospective basis in fiscal 2002, as
required. We do not expect this accounting pronouncement to have
a significant impact on our financial position or results of
operations.

In June 2001, the FASB issued FAS No. 143
Accounting for Obligations Associated with the Retirement
of Long-Lived Assets. The provisions of FAS 143 apply
to all entities that incur obligations associated with the
retirement of tangible long-lived assets. FAS 143 is
effective for financial statements issued for fiscal years
beginning after June 15, 2002 and will become effective for
us commencing with fiscal year 2003. We do not expect this
accounting pronouncement to have a significant impact on our
financial position or results of operations.

In August 2001, the FASB issued FAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. The objectives of FAS 144 are to address
issues relating to the implementation of FAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and to develop a
model for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. FAS 144 is
effective for financial statements issued for fiscal years
beginning after December 15, 2001 and will become effective
for us commencing with fiscal year 2002. We do not expect this
accounting pronouncement to have a significant impact on our
financial position or results of operations.

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Factors That May Affect Results of Operations
and Financial Condition



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | We have incurred significant losses since
	our inception, we expect future losses, and we may not become
	profitable.

We have incurred significant losses since
inception, most recently a net loss of $21.9 million for
fiscal year 2001, and expect to incur losses in the future. As
of December 30, 2001, we had an accumulated deficit of
$124.1 million. We expect to incur significant product
development, sales and marketing and administrative expenses,
and we will need to generate significant revenue to achieve and
maintain profitability. We cannot be certain that we ever will
realize sufficient revenue to achieve profitability and even if
we do achieve profitability, we may not be able to sustain or
increase profitability.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results are difficult to
	forecast, may fluctuate on a quarterly basis and may be
	adversely affected by many factors, which may result in
	volatility in our stock price.

Our revenue and results of operations have varied
on a quarterly basis in the past and may vary significantly in
the future due to a number of factors, many of which may cause
our stock price to fluctuate. Some of the factors that could
affect our operating results include:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the size, terms and fluctuations of customer
	orders, particularly orders from a limited number of OEMs;                                                                                               
|
| |  | changes in general economic conditions and
	specific economic conditions in the computer storage and
	networking industries, including changes in spending levels for
	information technology products;
|
| |  | the timing of customer orders, a large percentage
	of which are generated in the last month of each quarter;                                                                                           
|
| |  | our ability to attain and maintain sufficient
	reliability levels for our products;                                                                                                                    
|
| |  | our ability to develop and market new products;                                                                                                                                                        
|
| |  | the results of our evaluation of strategic
	alternatives for our SAN InSite software and related assets and
	resources;                                                                                
|
| |  | the timing of the introduction or enhancement of
	products by us, our OEMs and our competitors;                                                                                                        
|
| |  | decreases in the prices at which we can sell our
	products;                                                                                                                                            
|
| |  | the mix of products sold and the mix of
	distribution channels through which our products are sold; and                                                                                                
|
| |  | the ability of our contract manufacturer to
	produce and distribute our products in a timely fashion.                                                                                                  

As a result of these and other factors, we
believe that period to period comparisons of our operating
results should not be relied upon as an indicator of our future
performance. It is likely that in some future period our
operating results will be below our guidance, your expectations
or the expectations of public market analysts.



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Our OEMs have unpredictable order patterns,
	which may cause our revenue to vary significantly from period to
	period.

Our OEMs tend to order sporadically, and their
purchases can vary significantly from quarter to quarter. Our
OEMs generally forecast expected purchases in advance, but
frequently do not order as expected and tend to place purchase
orders only shortly before the scheduled delivery date. We plan
our operating expenses based in part on revenue projections
derived from our OEMs forecasts. Because most of our
expenses are fixed in the short term or incurred in advance of
anticipated revenue, we may not be able to decrease our expenses
in a timely manner to offset any unexpected shortfall in
revenue. These typical ordering practices cause our backlog to
fluctuate significantly. Moreover, our backlog is not
necessarily indicative of actual sales for any succeeding
period, as orders are subject to cancellation or delay by our
OEMs with limited or no penalty.

21



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| |                                                                               
| | ------------------------------------------------------------------------------
| | The loss of one or more key customers could
	significantly reduce our revenue.

Our success will depend on our continued ability
to develop and manage relationships with significant OEMs,
resellers and integrators, as well as on the sales efforts and
success of these customers. Revenue from Sun Microsystems,
Compaq Computer and Avid Technology, represented 33.7%, 18.5%
and 14.4% of our total revenue, respectively, for the twelve
months ended December 30, 2001. Although we are attempting
to expand our base of OEMs and resellers, most of our future
revenue may come from a small number of customers.

Our agreements with our customers do not provide
any assurance of future sales to those customers. For example:



| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | our OEM and reseller agreements are not exclusive
	and contain no renewal obligation;  
|
| |  | our OEMs and resellers can stop purchasing and
	marketing our products at any time; and
|
| |  | our OEM and reseller agreements do not require
	minimum purchases.                     

We cannot be certain that we will retain our
current OEMs and resellers or that we will be able to recruit
additional or replacement customers. Many of our OEMs and
resellers carry or utilize competing product lines. If we were
to lose one or more OEMs or resellers to a competitor, our
business, results of operations and financial condition could be
harmed significantly.



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Our success is dependent upon acceptance of
	our Fibre Channel technology and the growth of the storage
	market.

Our products are used exclusively in storage
devices and SANs. Accordingly, widespread adoption of remote
storage and SANs is critical to our future success. These
markets are evolving rapidly, and it is difficult to predict
their potential size or future growth rate. Our success in
generating revenue in the markets will depend on, among other
things, our ability to:



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | demonstrate the benefits of SANs and our SAN
	switch and hub products and embedded switch products to OEMs,
	resellers and end-users;                
|
| |  | enhance our existing products and introduce new
	products on a timely basis to meet changes in customer
	preferences and evolving industry standards;
|
| |  | develop, maintain and build relationships with
	leading OEMs and resellers; and                                                                      
|
| |  | accurately predict the direction of industry
	standards and base our products on those industry standards.                                           

Our failure to do any of these activities would
adversely affect our ability to successfully compete in these
markets.



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Competing technologies may emerge and we
	may fail to adopt new technologies on a timely basis. Failure to
	utilize new technologies may decrease the demand for our
	products.

Emerging technologies, such as Ethernet IP, SCSI
(Small Computer System Interface) over IP and Infiniband are
potential competing alternatives to Fibre Channel. If we are
unable to identify new technologies in a timely manner and
efficiently utilize such new technologies in our product
development efforts, the demand for our current products may
decrease significantly and rapidly, which would harm our
business.



| |                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We expect that a growing percentage of our
	future revenue will be derived from our SAN interconnect
	switch products, our InSpeed technology-based products, and
	royalties from technology development agreements with customers,
	and our success will depend on widespread acceptance of these
	products and technologies and our ability to manage transition
	from older product inventories.

Our future revenue growth will depend on the
success of our new products and product launches by customers
for which we have developed, or are developing, products under
technology development

22



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##### Table of Contents



agreements. In addition, as we introduce new or
enhanced products, such as our Inspeed-based products, we will
have to manage successfully the transition from older products
in order to minimize disruption in our customers ordering
patterns, avoid excessive levels of older product inventories
and ensure that enough supplies of new products can be delivered
to meet our customers demands. To the extent customers
defer or cancel orders in expectation of new product releases,
any delay in development or introduction of new products could
cause our operating results to suffer.




| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because a significant portion of our
	revenue is derived from sales of entry-level hubs, we are
	dependent on continued widespread market acceptance of these
	products.

We currently derive a significant portion of our
revenue from sales of our entry-level hubs. Although we
anticipate our revenue from sales of entry-level hubs to decline
as management of SAN products becomes more important in larger,
more complex SAN implementations, we expect that revenue from
our entry-level hubs will continue to account for a substantial
portion of our total revenue for the foreseeable future. If the
market does not continue to accept our entry-level hubs, or if
our revenue from entry-level hubs decreases more rapidly than we
anticipate, our total revenue may not grow or may decline
significantly.



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Competition in our markets may lead to
	reduced prices and sales of our products, increased losses and
	reduced market share.

We may not be able to compete successfully in the
SAN market. The markets for SAN interconnect products are highly
competitive. Our current competitors include a number of
domestic and international companies, many of which have
substantially greater financial, technical, marketing and
distribution resources than we have. We expect that more
companies, including our customers, may enter the market for SAN
interconnect products. We may not be able to compete
successfully against either current or future competitors.
Increased competition could result in significant price erosion,
reduced revenue, lower margins or loss of market share, any of
which would have a material adverse effect on our business,
results of operations and financial condition.

For SAN interconnect switch sales, we compete
primarily with Brocade Communications, McDATA, Qlogic
Corporation and Gadzoox Networks. For hub sales, we compete
primarily with Emulex Corporation and Gadzoox Networks. Our
competitors continue to introduce improved products with lower
prices, and we will have to do the same to remain competitive.
Furthermore, our customers or larger companies in other related
industries may develop or acquire technologies and apply their
significant resources, including their distribution channels and
brand recognition, to capture significant SAN market share.

Our embedded switches are targeted at a new and
evolving market for this technology. As yet, no Fibre Channel
switch providers have introduced similar technology to our
InSpeed range of products. As this market grows we may face
competition from legacy switch providers, or OEMs may choose to
develop competing technology themselves.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | Our failure to enhance our existing
	products and introduce new products on a timely basis could
	cause our revenue to fall.

Given the product life cycles in the markets for
our products, any delay or unanticipated difficulty associated
with new product introductions or product enhancements could
significantly harm our business, results of operations and
financial condition. We may not be able to develop, manufacture
and market these new products or other product enhancements in a
timely manner or in a manner that will achieve market
acceptance. We also may not be able to develop the underlying
core technologies necessary to create new products and
enhancements, or to license these new technologies from third
parties. Product development delays may result from numerous
factors, including:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | changing OEM product specifications;                                                    
|
| |  | difficulties in hiring and retaining necessary
	personnel;                              
|
| |  | difficulties in reallocating engineering
	resources and overcoming resource limitations;

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| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | difficulties with independent contractors or
	development partners;
|
| |  | changing market or competitive product
	requirements; and          
|
| |  | unanticipated engineering complexities.                            



| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The sales cycle for our products are long
	and we may incur substantial non-recoverable expenses and devote
	significant resources to sales that do not occur when
	anticipated or at all.

OEMs and resellers typically conduct significant
evaluation, testing, implementation and acceptance procedures
before they begin to market and sell new solutions that include
our products. This evaluation process is lengthy and may range
from six months to one year or more. This process is complex and
may require significant sales, marketing and management efforts
on our part. This process becomes more complex as we
simultaneously qualify our products with multiple customers. As
a result, we may expend significant resources to develop
customer relationships before we recognize any revenue from
these relationships, or we may never realize any revenue from
these efforts, or recognize revenue when anticipated.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | Failure to manage our OEM and reseller
	relationships and expand our distribution channels could
	significantly reduce our revenue.

We rely on OEMs and resellers, and Vitesse
Semiconductor in the case of our InSpeed-based ASICs, to
distribute and sell our products. Our success depends
substantially on our ability to initiate, manage and expand our
relationships with OEMs, our ability to attract additional
resellers and the sales efforts of these OEMs and resellers. Our
failure to manage and expand our relationships with OEMs and
resellers, or their failure to market our products effectively,
could substantially reduce our revenue and seriously harm our
business.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Any failure by us to successfully execute
	our distribution strategy will negatively impact our
	revenue.

Our distribution strategy focuses primarily on
developing and expanding indirect distribution channels through
OEMs and resellers. Our failure to execute this strategy
successfully could limit our ability to grow or sustain revenue.
If we fail to develop and cultivate relationships with
significant resellers, or if these resellers are not successful
in their sales efforts, sales of our products may decrease, and
our operating results would suffer. Many of our resellers also
sell products that compete with our products. We cannot assure
you that our resellers will market our products effectively or
continue to devote the resources necessary to provide us with
effective sales, marketing and technical support. Our failure to
successfully develop or manage our reseller relationships or
their failure to sell our products could reduce our revenue.



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The loss of Suntron, the failure to
	forecast accurately demand for our products or to manage
	successfully our relationship with Suntron would negatively
	affect our business.

We rely on Suntron Corporation, formally K*Tec
Electronics Corporation, an outside contract-manufacturing firm,
to manufacture, store and ship our products. We share
Suntrons manufacturing and assembly capacity with numerous
companies whose needs may conflict with ours. If Suntron is
unable or unwilling to complete production runs for us in the
future, or experiences any significant delays in completing
production runs or shipping our products, the manufacturing,
assembly and sale of our products could be temporarily
suspended. We have in the past experienced delivery problems
based on capacity constraints for production, test and material
supply. If our product volume requirements increase, we may find
it necessary to augment our manufacturing and assembly capacity
by engaging new subcontract manufacturers. We may not be
successful in finding qualified manufacturers that meet our
needs. An interruption in supply of our products, or additional
costs incurred to qualify and shift production to an alternative
manufacturing and assembly facility, would significantly harm
our business, results of operations and financial condition.

Suntron is not obligated to supply products for
us, except as may be provided in a particular purchase order
that Suntron has accepted. We place purchase orders with Suntron
based on periodic forecasts. While most of the materials used in
our products are standard products, some are proprietary and/ or
sole-source and

24



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require extended lead times. Our business will be
adversely affected if we are unable to accurately forecast
demand for our products and manufacturing capacity or if
materials are not available at Suntron to meet the demand. Lead
times for materials and components vary significantly and depend
on the specific supplier, contract terms and demand for a
component at a given time. We also may experience shortages of
components from time to time, which could delay the manufacture
of our products.


We plan to regularly introduce new products and
product enhancements, which will require that we coordinate our
efforts with Suntron to rapidly achieve volume production. If we
do not effectively manage our relationship with Suntron, or if
Suntron experiences delays, disruptions, capacity constraints or
quality control problems in its manufacturing operations, our
ability to ship products to our customers could be delayed and
our competitive position and reputation could be harmed.
Qualifying a new contract manufacturer and commencing volume
production is expensive and time consuming. If we are required
to or if we choose to change contract manufacturers, we may lose
revenue and damage our customer relationships.



| |                                                                        
| | -----------------------------------------------------------------------
| | We may lose sales if our sole source
	suppliers fail to meet our needs.

We currently purchase several key components from
single sources. We depend on single sources for our card guides,
ASICs and our microprocessors. ASICs are custom designed
computer chips that perform specific functions very efficiently.
In addition, we license software from a third party that is
incorporated into our switches and hubs. If we cannot supply
products due to a lack of components, or are unable to redesign
products with other components in a timely manner, our business,
results of operations and financial condition would be
materially adversely affected.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | If we fail to forecast accurately the
	demand for our products, it will negatively affect our
	business.

We use rolling forecasts based on anticipated
product orders to determine our component requirements. Lead
times for materials and components that we order vary
significantly and depend on factors such as specific supplier
requirements, contract terms and current market demand for
particular components. As a result, our component requirement
forecasts may not be accurate. If we overestimate our component
requirements, we may have excess inventory, which would increase
our costs. If we underestimate our component requirements, we
may have inadequate inventory, which could interrupt our
manufacturing and delay delivery of our products to our
customers. Either of these occurrences would negatively impact
our business and operating results.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Undetected software or hardware defects
	could increase our costs and reduce our revenue.

Fibre Channel products and management software
frequently contain undetected software or hardware defects when
first introduced or as new versions are released. Our products
are complex and problems may be found from time to time in our
existing, new or enhanced products. Our products incorporate
components manufactured by third parties. We have in the past
experienced difficulties with quality and reliability of
components obtained from third parties, and we could experience
similar problems in the future. In addition, our products are
integrated with products from other vendors. As a result, when
problems occur, it may be difficult to identify the source of
the problem. These problems may cause us to incur significant
warranty and repair costs, divert the attention of our
engineering personnel from our product development efforts and
cause significant customer relations problems.



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A component in a discontinued product line
	experienced an abnormally high failure rate, which adversely
	affected our sales and could in the future affect our operating
	results.

We observed, and some customers confirmed, that
in certain applications our GBIC and GLM transceivers
manufactured prior to March 1998 that incorporated a third party
CD laser experienced an abnormally high failure rate. As a
result of this problem, we recorded a warranty reserve of
$3.6 million in the fourth quarter of fiscal 1998. Although
we have settled claims by customers that purchased the majority
of these products, there is a risk that additional claims could
occur and that the total amount reserved may be inadequate to
cover all potential claims. Claims against us in excess of the
amount of our reserves could have a

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material adverse effect on our business and
financial condition. We discontinued the manufacturing and
selling of our transceiver products during the second quarter
of 2001.




| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | If we fail to successfully develop and
	maintain the Vixel brand, our revenue may not grow and our stock
	price may fall.

We believe that establishing and maintaining the
Vixel brand is a critical aspect of our efforts to maintain and
develop strategic OEM and reseller relationships, and that the
importance of brand recognition will increase due to the growing
number of vendors of SAN interconnect products. If we fail to
promote our brand successfully, or if we incur excessive
expenses in an attempt to promote and maintain the Vixel brand,
our business, results of operations and financial condition may
be materially adversely affected. In addition, if our OEMs,
resellers and end users of our products do not perceive our
products to be of high quality, or if we introduce new products
or technologies that are not accepted by the market, the value
of the Vixel brand will decline and our business will suffer.



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | If we lose key personnel or are unable to
	hire and integrate qualified personnel, we may not be
	successful.

Our success depends to a significant degree upon
the continued joint contributions of our senior management,
including James M. McCluney, President and Chief Executive
Officer, Kurtis L. Adams, Chief Financial Officer, Stuart B.
Berman, Chief Technology Officer, and Thomas Hughes, Vice
President, Product Development. The loss of one or more of our
senior management personnel could harm our sales or delay our
product development efforts.

We believe our future success will depend in
large part upon our ability to attract and retain highly skilled
managerial, technical, sales and marketing, finance and
operations personnel. The loss of services of any of our key
personnel could have a negative impact on our business. Many of
our employees have only recently joined us. If we are unable to
integrate new employees in a timely and cost-effective manner,
our operating results may suffer. We also need to increase the
number of technical staff members with experience in high-speed
networking applications and ASIC design as we further develop
our product line. Competition for these highly skilled employees
in our industry is intense. Our failure to attract and retain
these key employees could have a material adverse effect on our
business, results of operations and financial condition.

In addition, employees may leave our company and
subsequently compete against us. Moreover, companies in our
industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair
hiring practices. We may be subject to claims of this type in
the future as we seek to hire qualified personnel and some of
these claims may result in material litigation. We could incur
substantial costs in defending ourselves against these claims,
regardless of their merits. The loss of the services of any of
our key employees, the inability to attract or retain qualified
personnel in the future or delays in or disputes related to
hiring required personnel could hinder the development and
introduction of and negatively impact our ability to sell our
products.



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | We plan to increase our international
	sales, which will subject us to additional business
	risks.

Our revenue from international sales represented
32.2% of our total revenue for the twelve months ended
December 30, 2001. We plan to expand our international
sales, especially in Europe and Asia. Our international sales
growth will be limited if we are unable to establish
relationships with international distributors, establish foreign
operations, effectively manage international sales channels and
develop relationships with service organizations. We cannot be
certain that we will be able to establish, generate and build
market demand for our products internationally. Our
international operations will be subject to a number of risks,
including:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | increased complexity and costs of managing
	international operations;               
|
| |  | multiple protectionist, conflicting and changing
	governmental laws and regulations;
|
| |  | longer sales cycles;                                                                

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| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | difficulties in collecting accounts receivables;                    
|
| |  | reduced or limited protections of intellectual
	property rights; and
|
| |  | political and economic instability.                                 

These factors and others could harm future sales
of our products to international customers, which would
negatively impact our business and operating results. To date,
none of our international revenue has been denominated in
foreign currencies. As a result, an increase in the value of the
U.S. dollar relative to foreign currencies could make our
products more expensive and thus less competitive in foreign
markets. In the future, a portion of our international revenue
may be denominated in foreign currencies, including the Euro,
which would subject us to risks associated with foreign currency
fluctuations.

Our SAN interconnect products are subject to U.S.
Department of Commerce export control restrictions. Neither our
customers nor we may export those products without obtaining an
export license. These U.S. export laws also prohibit the
export of our SAN interconnect products to a number of countries
deemed by the United States to be hostile. These restrictions
may make foreign competitors facing less stringent controls on
their products more competitive in the global market than are
our customers or we. The U.S. government may not approve
any pending or future export license requests. In addition, the
list of products and countries for which export approval is
required, and the regulatory policies with respect thereto,
could be revised. The sale of our SAN interconnect products
could be harmed by our failure or the failure of our customers
to obtain the required government licenses or by the costs of
compliance.



| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products must comply with evolving
	industry standards and government regulations, and if we cannot
	develop products that are compatible with these evolving
	standards, our business will suffer.

The market for Fibre Channel products is
characterized by the need to support industry standards as they
emerge, evolve and achieve acceptance. To remain competitive, we
must continue to introduce new products and product enhancements
that meet these industry standards. All components of a SAN must
utilize the same standards in order to operate together. Our
products comprise only a part of an entire SAN and we depend on
the companies that provide other components, many of which are
significantly larger than we are, to support industry standards
as they evolve. We also depend on our competitors to support
these same industry standards. The failure of these providers or
our competitors to support these industry standards could
negatively impact market acceptance of our products.

In addition, in the United States, our products
must comply with various regulations and standards defined by
the Federal Communications Commission and Underwriters
Laboratories. Internationally, products that we develop also
will be required to comply with standards established by
authorities in various countries. Failure to comply with
existing or evolving industry standards or to obtain timely
domestic or foreign regulatory approvals or certificates could
materially harm our business.



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | Our intellectual property protection may
	prove to be inadequate which could negatively affect our ability
	to compete.

We believe that our continued success depends on
protecting our proprietary technology. We currently rely on a
combination of patents, copyrights, trademarks, trade secrets
and contractual provisions to establish and protect our
intellectual property rights. In addition, we also enter into
confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and
distribution of our software, documentation and other
proprietary information. Our failure to protect our intellectual
property rights could have a material adverse effect on our
business, results of operations and financial condition. Efforts
to protect our intellectual property could be time consuming and
expensive and could have a material adverse effect on results of
operations and financial condition. We cannot be certain that
the steps we take to protect our intellectual property will
adequately protect our proprietary rights, that others will not
independently develop or otherwise acquire equivalent or
superior technology or that we can maintain any of our
technology as trade secrets. In addition, the laws of some of
the countries in which our products are or may be sold may not
protect our products and intellectual property rights to the
same extent as the laws of the United States, or at all.

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| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Third-party claims of infringement of their
	intellectual property rights could adversely affect our
	business.

In recent years, there has been significant
litigation in the United States involving patents and other
intellectual property rights. We occasionally receive
communications from third parties alleging patent infringement,
and there always is the chance that third parties may assert
infringement claims against us. Future patent infringement
disputes, with or without merit, could result in costly
litigation, cause product shipment delays or require us to enter
into royalty or licensing agreements. We cannot be certain that
the necessary licenses would be available or that they could be
obtained on commercially reasonable terms. If we fail to obtain
these royalty or licensing agreements in a timely manner and on
reasonable terms, our business, results of operations and
financial condition would be materially adversely affected.



| |                                                           
| | ----------------------------------------------------------
| | Our stock price has been and may continue
	to be volatile.

The trading price of our common stock has been
and is likely to continue to be volatile. The market price of
our common stock may fluctuate significantly in response to
several factors, including but not limited to the following,
some of which are beyond our control:



| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated fluctuations in our
	operating results;                                                                                                            
|
| |  | losses of our key OEMs or reduction in their
	purchases of our products;                                                                                                 
|
| |  | changes in financial estimates by securities
	analysts;                                                                                                                  
|
| |  | changes in market valuations of other technology
	companies;                                                                                                             
|
| |  | announcements by us or by our competitors of
	significant technical innovations, contracts, acquisitions,
	strategic partnerships, joint ventures or capital commitments;
|
| |  | additions or departures of key personnel; and                                                                                                                            
|
| |  | future sales of capital stock.                                                                                                                                           

In addition, the stock market has recently
experienced extreme volatility that often has been unrelated to
the performance of particular companies. These market
fluctuations may cause our stock price to fall regardless of our
performance.



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | We may not be able to meet our future
	capital requirements, limiting our ability to
	grow.

We believe that our existing cash, cash
equivalents and short-term investment balances will be
sufficient to meet our capital requirements at least through the
next twelve to eighteen months. However, we may need, or could
elect, to seek additional funding prior to that time. If we need
to raise additional funds, we may not be able to do so on
favorable terms, or at all. If we cannot raise funds on
acceptable terms, we may not be able to develop or enhance our
products, take advantage of future opportunities or respond to
competitive pressures or unanticipated funding requirements.



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | We may engage in future acquisitions that
	may dilute our stockholders and cause us to incur debt or assume
	contingent liabilities.

We may review opportunities to buy other
businesses or technologies that would complement our current
products, expand the breadth of our markets or enhance our
technical capabilities, or that may otherwise offer growth
opportunities. While we have no current agreements or
negotiations underway, we may buy businesses, products or
technologies in the future. If we make any future purchases, we
could issue stock that would dilute existing stockholders
percentage ownership, incur substantial debt or assume
contingent liabilities.

These purchases also may involve numerous risks,
including:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | problems assimilating the purchased operations,
	technologies or products;
|
| |  | unanticipated costs associated with the
	acquisition;                     

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| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | diversion of managements attention from our
	core business;                                   
|
| |  | adverse effects on existing business
	relationships with suppliers and customers;              
|
| |  | incorrect estimates made in the accounting for
	acquisitions;                                  
|
| |  | risks associated with entering markets in which
	we have limited, if any, prior experience; and
|
| |  | potential loss of key employees of purchased
	organizations.                                   



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our corporate offices and principal product
	development facility are located in regions that are subject to
	earthquakes and other natural disasters.

Our corporate offices in Bothell, Washington and
research facility in Irvine, California are located near major
earthquake faults. We are not specifically insured for
earthquakes, or other such natural disasters. Any personal
injury or damage to the facilities as a result of such
occurrences could have a material adverse effect on our
business, results of operations and financial condition.



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | Our stockholder rights plan, certificate of
	incorporation and Delaware law could adversely affect the
	performance of our stock.

Our stockholder rights plan and provisions of our
certificate of incorporation and the Delaware General
Corporation Law could make it more difficult for a third party
to acquire us, even if doing so would be beneficial to our
stockholders. The stockholder rights plan and these provisions
of our certificate of incorporation and Delaware law are
intended to encourage potential acquirers to negotiate with us
and allow our board of directors the opportunity to consider
alternative proposals in the interest of maximizing stockholder
value. However, such provisions may also discourage acquisition
proposals or delay or prevent a change in control, which could
harm our stock price.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

We maintain investment portfolio holdings of
various issuers, types, and maturities, the majority of which
are commercial paper and government securities. These securities
are generally classified as available for sale and,
consequently, are recorded on the balance sheet at fair value.

Our investment portfolio, with a fair value of
$20.9 million as of December 30, 2001, is invested in
commercial paper, government securities and corporate
indebtedness that could experience an adverse decline in fair
value should an increase in interest rates occur. In addition,
declines in interest rates could have an adverse impact on
interest earnings for our investment portfolio. We do not
currently hedge against this interest rate exposure.

All of our revenue is realized in U.S. dollars
and is from customers primarily headquartered in the United
States. Therefore, we do not believe we currently have any
significant direct foreign currency exchange risk.




Item 8.     Financial
Statements and Supplementary Data

Our financial statements, together with related
notes and the report of PricewaterhouseCoopers LLP, independent
accountants, are listed in Items 14(a) and included herein
beginning on page F-1.




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

None.

29



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##### Table of Contents






PART III




Item 10.     Directors
and Executive Officers of the Registrant

The information required by this item concerning
our directors and nominees is incorporated by reference to our
2002 Proxy Statement under the caption Election of
Directors and information concerning our executive
officers is included in Part I, Item 1, under the caption
Executive Officers of the Registrant.




Item 11.     Executive
Compensation

The information required by this item is
incorporated by reference to our 2002 Proxy Statement under the
section titled Executive Compensation.






|         |                                                                                                 
|-------- | ------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
	Owners and Management and Related Stockholder
	Matters

The information required by this item is
incorporated by reference to our 2002 Proxy Statement under the
section titled Security Ownership of Certain Beneficial
Owners and Management.




Item 13.     Certain
Relationships and Related Transactions

The information required by this item is
incorporated by reference to our 2002 Proxy Statement under the
section titled Certain Transactions.




PART IV




Item 14.     Exhibits,
Financial Statement Schedules, and Reports on Form
8-K

(a) The following documents are filed as
part of this report:

(1) Index to Financial Statements and
Report of Independent Accountants.

The following financial statements required by
this item are submitted in a separate section beginning on
page F-1 of this report.

|                                                                                                     |  |      |     | 
|---------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                     |  | Page
|                                                                                                     |  |     
|Report of Independent Accountants                                                                    |  |      | F-1 | 
|Balance Sheet                                                                                        |  |      | F-2 | 
|Statement of Operations                                                                              |  |      | F-3 | 
|Statement of Changes in Mandatorily Redeemable
	Convertible Preferred Stock and Stockholders Equity |  |      | F-4 | 
|Statement of Cash Flows                                                                              |  |      | F-5 | 
|Notes to Financial Statements                                                                        |  |      | F-6 | 

(2) Financial Statement Schedules.

The following financial statement schedule for
the years ended January 2, 2000, December 31, 2000,
and December 30, 2001, is filed as part of this Annual
Report and should be read in conjunction with the consolidated
financial statements.

|                                                                    |  |      |    | 
|------------------------------------------------------------------- |  | ---- | -- | 
|                                                                    |  | Page
|                                                                    |  |     
|Report of Independent Accountants on Financial
	Statement Schedules |  |      | 32 | 
|Schedule II  Valuation and Qualifying
	Accounts                    |  |      | 32 | 

30



---



##### Table of Contents



(3) Exhibits.

|        |          |             |  |                                                                                                                                                                     
|------- | -------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 3.1(1)   |             |  | Amended and Restated Certificate of Incorporation
	of Registrant (Exhibit 3.2)                                                                                      
|        | 3.2(2)   |             |  | Certificate of Designation of Series A
	Junior Participating Preferred Stock (Exhibit 3.1)                                                                          
|        | 3.3(1)   |             |  | Bylaws of the Registrant (Exhibit 3.4)                                                                                                                              
|        | 4.1(1)   |             |  | Specimen Stock Certificate                                                                                                                                          
|        | 4.2(1)   |             |  | Amended and Restated Investors Rights
	Agreement dated February 17, 1998                                                                                           
|        | 4.3(1)   |             |  | First Amendment to Amended and Restated
	Investors Rights Agreement dated February 17, 1998                                                                        
|        | 4.4(2)   |             |  | Rights Agreement dated November 15, 2000,
	between the Registrant and Computer Share Trust Company, Inc.
	(Exhibit 4.1)                                             
|        | 4.5(2)   |             |  | Form of Rights Certificate (Exhibit 4.2)                                                                                                                            
|        | 10.1(1)  |             |  | Form of Indemnity Agreement to be entered into by
	the Registrant and each of its directors and executive officers*                                                 
|        | 10.2(1)  |             |  | Amended and Restated 1995 Stock Option Plan and
	forms of agreements thereunder                                                                                     
|        | 10.3(1)  |             |  | Master Lease Agreement between Registrant and
	Transamerica Business Credit Corporation dated May 23, 1997
	(Exhibit 10.4)                                          
|        | 10.4(1)  |             |  | Master Lease Agreement between Registrant and
	Comdisco, Inc. dated January 18, 1996, together with
	addendum dated January 18, 1996 (Exhibit 10.5)                 
|        | 10.5(1)  |             |  | Turnkey Manufacturing Agreement with K*Tec
	Electronics, a division of Kent Electronics Company, dated
	May 5, 1997 (Exhibit 10.7)                                  
|        | 10.6(1)  |             |  | Employment Agreement between Registrant and
	Stuart B. Berman dated February 17, 1998
	(Exhibit 10.9)*                                                              
|        | 10.7(1)  |             |  | Employment Agreement between Registrant and James
	McCluney dated April 26, 1999 (Exhibit 10.12)*                                                                   
|        | 10.8(1)  |             |  | Restricted Stock Purchase Agreement between
	Registrant and Kurtis L. Adams dated May 20, 1999
	(Exhibit 10.15)                                                     
|        | 10.9(1)  |             |  | Full Recourse Promissory Note between Registrant
	and Stuart B. Berman dated April 16, 1999
	(Exhibit 10.16)                                                        
|        | 10.10(1) |             |  | Form of Full Recourse Promissory Note between
	Registrant and its executive officers (Exhibit 10.17)                                                                
|        | 10.11(1) |             |  | Form of Full Recourse Promissory Note between
	Registrant and its directors (Exhibit 10.18)                                                                         
|        | 10.12(1) |             |  | Lease Agreement between Registrant and Sun Life
	Assurance Company of Canada (U.S.) dated December 5, 1996,
	as amended January 22, 1997 (Exhibit 10.19)            
|        | 10.13    |             |  | Second Amendment to Lease Agreement between
	Registrant and Sun Life Assurance Company of Canada (U.S.) dated
	January 13, 1997                                     
|        | 10.14(1) |             |  | Lease Agreement between Arcxel Technologies, Inc.
	and Aetna Life Insurance Company, dated November 1, 1997,
	assigned to Registrant August 24, 1998 (Exhibit 10.20)
|        | 10.15(1) |             |  | Vixel Corporation 1999 Employee Stock Purchase
	Plan and forms of agreements thereunder (Exhibit 10.22)*                                                            
|        | 10.16(1) |             |  | Vixel Corporation 1999 Equity Incentive Plan, as
	amended*                                                                                                          
|        | 10.17(1) |             |  | Form of Stock Pledge Agreement between the
	Registrant and its directors (Exhibit 10.24)                                                                            
|        | 10.18(3) |             |  | Vixel Corporation 2000 Non-officer Equity
	Incentive Plan and forms of agreements thereunder
	(Exhibit 99.1)*                                                       
|        | 23.1     |             |  | Consent of PricewaterhouseCoopers LLP,
	Independent Accountants                                                                                                     
|        | 24.1     |             |  | Power of Attorney. Reference is made to the
	signature page                                                                                                         

31



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##### Table of Contents





---



|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to designated exhibits
	to the Companys Registration Statement on Form S-1
	(File No. 333-81347), declared effective on
	September 30, 1999.
|   
|(2) | Incorporated by reference to designated exhibits
	to Companys current report on Form 8-K filed with the
	Securities and Exchange Commission on November 17, 2000.     
|   
|(3) | Incorporated by reference to designated exhibits
	to Companys Registration Statement on Form S-8 (File
	No. 333-39000)                                                



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| | * | Management compensatory plans and arrangements
	required to be filed as exhibits to this report.



(b) Reports on Form 8-K.

We did not file any current report on
Form 8-K during the quarter ended December 30, 2001.

(c)  See Exhibits listed under
Item 14(a)(3).

(d) The financial statement schedules
required by this item are listed under Item 14(a)(2).

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULES

To the Board of Directors

of Vixel Corporation


Our audits of the financial statements referred
to in our report dated January 31, 2002 appearing in this
Report on Form 10-K also included an audit of the financial
statement schedules listed in item 14(a)(2) of this
Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the
related financial statements.



| |                           
| | --------------------------
| | PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

January 31, 2002


SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

For the Years Ended January 2, 2000,
December 31, 2000 and December 30, 2001 (in thousands):

|                                     |  |            |       |            |  |              |       |            |  |  |        |   |  |  |       | 
|------------------------------------ |  | ---------- | ----- | ---------- |  | ------------ | ----- | ---------- |  |  | ------ | - |  |  | ----- | 
|                                     |  | Balance at |       | Charged to |  |              |       | Balance at
|                                     |  | beginning  |       | costs and  |  |              |       | end of    
|Description                          |  | of period  |       | expenses   |  | (Deductions) |       | period    
|                                     |  |            |       |            |  |              |       |           
|Allowance for doubtful accounts      |  |            |       |            |  |              |       |            |  |  |        |   |  |  |       | 
|Year ended January 2, 2000           |  |            | 231   |            |  |              | 171   |            |  |  | (152   | ) |  |  | 250   | 
|Year ended December 31, 2000         |  |            | 250   |            |  |              | 701   |            |  |  | (101   | ) |  |  | 850   | 
|Year ended December 30, 2001         |  |            | 850   |            |  |              | 108   |            |  |  | (569   | ) |  |  | 389   | 
|Accrued warranty costs               |  |            |       |            |  |              |       |            |  |  |        |   |  |  |       | 
|Year ended January 2, 2000           |  |            | 4,390 |            |  |              | 3,252 |            |  |  | (4,693 | ) |  |  | 2,949 | 
|Year ended December 31, 2000         |  |            | 2,949 |            |  |              | 1,975 |            |  |  | (1,526 | ) |  |  | 3,398 | 
|Year ended December 30, 2001         |  |            | 3,398 |            |  |              | 604   |            |  |  | (1,639 | ) |  |  | 2,363 | 
|Allowance for inventory obsolescence |  |            |       |            |  |              |       |            |  |  |        |   |  |  |       | 
|Year ended January 2, 2000           |  |            | 483   |            |  |              | 139   |            |  |  | (57    | ) |  |  | 565   | 
|Year ended December 31, 2000         |  |            | 565   |            |  |              | 1,066 |            |  |  | (603   | ) |  |  | 1,028 | 
|Year ended December 30, 2001         |  |            | 1,028 |            |  |              | 4,413 |            |  |  | (1,361 | ) |  |  | 4,080 | 

Schedules not listed above have been omitted
because the information required to be set forth therein is not
applicable or is included in the financial statements or notes
thereto.

32



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has caused this report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
City of Bothell, King County, State of Washington, on this 1st
day of April, 2002.



| |                  
| | -----------------
| | VIXEL CORPORATION



| |     |                      
| | --- | ---------------------
| | By: | /s/ JAMES M. MCCLUNEY

| |                                        
| | ---------------------------------------
| |                                        
| | James M. McCluney                      
| | Chief Executive Officer, President
	and
| | Chairman of the Board of Directors     

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
individual whose signature appears below constitutes and
appoints James M. McCluney and Kurtis L. Adams, his true
and lawful attorneys-in-fact each acting alone, with full power
of substitution and resubstitution, for him and in his name,
place and stead in any and all capacities to sign any or all
amendments to this report on Form 10-K, and to file the
same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that
said attorneys-in-fact, or their substitutes, each acting alone,
may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report on Form 10-K has been
signed below by the following persons in the capacities and on
the dates indicated:

|                                             |  |                                                                                                                            |  |              
|-------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | -------------
|Signature                                    |  | Title                                                                                                                      |  | Date         
|                                             |  |                                                                                                                            |  |              
|                                            
|/s/ JAMES M. MCCLUNEYJames M. McCluney       |  | Chief Executive Officer, President
	and Chairman of the Board of
	Directors (Principal
	Executive Officer)                 |  | April 1, 2002
|                                            
|/s/ KURTIS L. ADAMSKurtis L. Adams           |  | Chief Financial Officer, Vice President of
	Finance, Secretary and Treasurer (Principal Financial and
	Accounting Officer) |  | April 1, 2002
|                                            
|/s/ ROBERT Q. CORDELL IIRobert Q. Cordell II |  | Director                                                                                                                   |  | April 1, 2002
|                                            
|/s/ CHARLES A. HAGGERTYCharles A. Haggerty   |  | Director                                                                                                                   |  | April 1, 2002
|                                            
|/s/ TIMOTHY M. SPICERTimothy M. Spicer       |  | Director                                                                                                                   |  | April 1, 2002
|                                            
|/s/ WERNER F. WOLFENWerner F. Wolfen         |  | Director                                                                                                                   |  | April 1, 2002

33



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors

and Stockholders of Vixel Corporation


In our opinion, the accompanying balance sheet
and the related statements of operations, of changes in
mandatorily redeemable convertible preferred stock and
stockholders equity and of cash flows present fairly, in
all material respects, the financial position of Vixel
Corporation at December 31, 2000 and December 30,
2001, and the results of its operations and its cash flows for
each of the three years in the period ended December 30,
2001 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are
the responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.



| |                           
| | --------------------------
| | PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

January 31, 2002


F-1



---



##### Table of Contents



VIXEL CORPORATION

BALANCE SHEET

|                                                           |                                                                                                                                                                                          |                                            |       |              |        |  |     |          |        | 
|---------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------------ | ------ |  | --- | -------- | ------ | 
|                                                           |                                                                                                                                                                                          | December 31,                               |       | December 30,
|                                                           |                                                                                                                                                                                          | 2000                                       |       | 2001        
|                                                           |                                                                                                                                                                                          |                                            |       |             
|                                                           |                                                                                                                                                                                          |                                           
|                                                           |                                                                                                                                                                                          | (In thousands, except share               
|                                                           |                                                                                                                                                                                          | amounts)                                  
|ASSETS                                                    
|Current assets                                             |                                                                                                                                                                                          |                                            |       |              |        |  |     |         
|                                                           | Cash and cash equivalents                                                                                                                                                                |                                            | $     | 17,066       |        |  | $   | 5,036    |       
|                                                           | Short-term investments                                                                                                                                                                   |                                            |       | 25,636       |        |  |     | 20,942   |       
|                                                           | Accounts receivable, net of allowance for
	doubtful accounts of $850 and $389, respectively                                                                                              |                                            |       | 7,344        |        |  |     | 2,995    |       
|                                                           | Inventories                                                                                                                                                                              |                                            |       | 1,415        |        |  |     | 2,951    |       
|                                                           | Prepaid expenses and other current assets                                                                                                                                                |                                            |       | 2,129        |        |  |     | 1,271    |       
|                                                           |                                                                                                                                                                                          |                                            |       |              |        |  |     |         
|                                                           |                                                                                                                                                                                          | Total current assets                       |       |              | 53,590 |  |     |          | 33,195 | 
|                                                           | Property and equipment, net                                                                                                                                                              |                                            |       | 7,307        |        |  |     | 4,299    |       
|                                                           | Goodwill and other intangibles, net                                                                                                                                                      |                                            |       | 1,680        |        |  |     | 948      |       
|                                                           | Other assets                                                                                                                                                                             |                                            |       | 354          |        |  |     | 323      |       
|                                                           |                                                                                                                                                                                          |                                            |       |              |        |  |     |         
|                                                           |                                                                                                                                                                                          | Total assets                               |       | $            | 62,931 |  |     | $        | 38,765 | 
|                                                           |                                                                                                                                                                                          |                                            |       |              |        |  |     |         
|LIABILITIES AND STOCKHOLDERS
	EQUITY                     
|Current liabilities                                        |                                                                                                                                                                                          |                                            |       |              |        |  |     |         
|                                                           | Current portion of long term debt and capital
	leases                                                                                                                                    |                                            | $     | 2,466        |        |  | $   | 1,340    |       
|                                                           | Accounts payable                                                                                                                                                                         |                                            |       | 5,083        |        |  |     | 4,046    |       
|                                                           | Accrued liabilities                                                                                                                                                                      |                                            |       | 6,627        |        |  |     | 4,022    |       
|                                                           | Deferred revenue                                                                                                                                                                         |                                            |       | 300          |        |  |     | 1,147    |       
|                                                           |                                                                                                                                                                                          |                                            |       |              |        |  |     |         
|                                                           |                                                                                                                                                                                          | Total current liabilities                  |       |              | 14,476 |  |     |          | 10,555 | 
|Long-term debt and capital leases, net of current
	portion |                                                                                                                                                                                          |                                            | 1,510 |              |        |  | 184 |         
|                                                           |                                                                                                                                                                                          |                                            |       |              |        |  |     |         
|                                                           |                                                                                                                                                                                          | Total liabilities                          |       |              | 15,986 |  |     |          | 10,739 | 
|                                                           |                                                                                                                                                                                          |                                            |       |              |        |  |     |         
|Commitments and contingencies                              |                                                                                                                                                                                          |                                            |       |              |        |  |     |         
|Stockholders equity                                       |                                                                                                                                                                                          |                                            |       |              |        |  |     |         
|                                                           | Common stock, $.0015 par value; 60,000,000 shares
	authorized; shares issued: 23,845,041 in 2000 and 24,272,229 in
	2001; shares outstanding: 23,778,374 in 2000 and 23,983,663 in
	2001 |                                            |       | 36           |        |  |     | 36       |       
|                                                           | Additional paid-in capital                                                                                                                                                               |                                            |       | 156,387      |        |  |     | 156,922  |       
|                                                           | Stock-based compensation                                                                                                                                                                 |                                            |       | (2,160       | )      |  |     | (765     | )     
|                                                           | Notes receivable from stockholders                                                                                                                                                       |                                            |       | (5,122       | )      |  |     | (3,745   | )     
|                                                           | Treasury stock, at cost; 66,666 shares in 2000
	and 288,566 shares in 2001                                                                                                               |                                            |       | (50          | )      |  |     | (348     | )     
|                                                           | Accumulated deficit                                                                                                                                                                      |                                            |       | (102,146     | )      |  |     | (124,074 | )     
|                                                           |                                                                                                                                                                                          |                                            |       |              |        |  |     |         
|                                                           |                                                                                                                                                                                          | Total stockholders equity                 |       |              | 46,945 |  |     |          | 28,026 | 
|                                                           |                                                                                                                                                                                          |                                            |       |              |        |  |     |         
|                                                           |                                                                                                                                                                                          | Total liabilities and stockholders equity |       | $            | 62,931 |  |     | $        | 38,765 | 
|                                                           |                                                                                                                                                                                          |                                            |       |              |        |  |     |         

The accompanying notes are an integral part of
these financial statements.

F-2



---



##### Table of Contents



VIXEL CORPORATION

STATEMENT OF OPERATIONS

|                                           |                                                |                                 |           |              |        |              |            |        |        |   |            |        |        | 
|------------------------------------------ | ---------------------------------------------- | ------------------------------- | --------- | ------------ | ------ | ------------ | ---------- | ------ | ------ | - | ---------- | ------ | ------ | 
|                                           |                                                |                                
|                                           |                                                | Fiscal Year Ended              
|                                           |                                                |                                
|                                           |                                                | January 2,                      |           | December 31, |        | December 30,
|                                           |                                                | 2000                            |           | 2000         |        | 2001        
|                                           |                                                |                                 |           |              |        |             
|                                           |                                                |                                
|                                           |                                                | (In thousands, except share and
|                                           |                                                | per share amounts)             
|Revenue                                    |                                                |                                 |           |              |        |              |            |        |        |   |            |       
|                                           | SAN systems                                    |                                 | $         | 25,159       |        |              | $          | 29,610 |        |   | $          | 16,769 |       
|                                           | Components                                     |                                 |           | 13,668       |        |              |            | 3,599  |        |   |            | 5,034  |       
|                                           |                                                |                                 |           |              |        |              |            |        |        |   |            |       
|                                           |                                                | Total revenue                   |           |              | 38,827 |              |            |        | 33,209 |   |            |        | 21,803 | 
|Cost of revenue(1)                         |                                                |                                 | 28,293    |              |        |              | 21,799     |        |        |   | 14,069     |       
|                                           |                                                |                                 |           |              |        |              |            |        |        |   |            |       
|Gross profit                               |                                                |                                 | 10,534    |              |        |              | 11,410     |        |        |   | 7,734      |       
|                                           |                                                |                                 |           |              |        |              |            |        |        |   |            |       
|Operating expenses                         |                                                |                                 |           |              |        |              |            |        |        |   |            |       
|                                           | Research and development(2)                    |                                 |           | 12,788       |        |              |            | 15,570 |        |   |            | 14,657 |       
|                                           | Selling, general and administrative(3)         |                                 |           | 13,643       |        |              |            | 17,437 |        |   |            | 14,423 |       
|                                           | Amortization of goodwill and other intangibles |                                 |           | 1,362        |        |              |            | 2,159  |        |   |            | 820    |       
|                                           | Amortization of stock-based compensation       |                                 |           | 4,286        |        |              |            | 2,825  |        |   |            | 1,353  |       
|                                           |                                                |                                 |           |              |        |              |            |        |        |   |            |       
|                                           |                                                | Total operating expenses        |           |              | 32,079 |              |            |        | 37,991 |   |            |        | 31,253 | 
|                                           |                                                |                                 |           |              |        |              |            |        |        |   |            |       
|Loss from operations                       |                                                |                                 | (21,545   | )            |        |              | (26,581    | )      |        |   | (23,519    | )     
|Interest expense                           |                                                |                                 | (2,039    | )            |        |              | (632       | )      |        |   | (309       | )     
|Interest income                            |                                                |                                 | 1,267     |              |        |              | 3,587      |        |        |   | 1,833      |       
|Other income (loss), net                   |                                                |                                 | (30       | )            |        |              | 69         |        |        |   | 67         |       
|                                           |                                                |                                 |           |              |        |              |            |        |        |   |            |       
|Net loss                                   |                                                | $                               | (22,347   | )            |        | $            | (23,557    | )      |        | $ | (21,928    | )     
|                                           |                                                |                                 |           |              |        |              |            |        |        |   |            |       
|Net loss applicable to common stockholders |                                                | $                               | (22,495   | )            |        | $            | (23,557    | )      |        | $ | (21,928    | )     
|                                           |                                                |                                 |           |              |        |              |            |        |        |   |            |       
|Basic and diluted net loss per share       |                                                | $                               | (2.97     | )            |        | $            | (1.04      | )      |        | $ | (.93       | )     
|                                           |                                                |                                 |           |              |        |              |            |        |        |   |            |       
|Weighted-average shares outstanding        |                                                |                                 | 7,572,389 |              |        |              | 22,710,367 |        |        |   | 23,503,687 |       
|                                           |                                                |                                 |           |              |        |              |            |        |        |   |            |       



---



|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes amortization of stock-based compensation
	of $82, $67 and $28 for the twelve months ended January 2,
	2000, December 31, 2000 and December 30, 2001.          
|   
|(2) | Excludes amortization of stock-based compensation
	of $421, $111 and $32 for the twelve months ended
	January 2, 2000, December 31, 2000 and
	December 30, 2001.       
|   
|(3) | Excludes amortization of stock-based compensation
	of $3,865, $2,714 and $1,321 for the twelve months ended
	January 2, 2000, December 31, 2000 and
	December 30, 2001.

The accompanying notes are an integral part of
these financial statements.

F-3



---



##### Table of Contents



VIXEL CORPORATION

STATEMENT OF CHANGES IN MANDATORILY REDEEMABLE
CONVERTIBLE

PREFERRED STOCK AND STOCKHOLDERS
EQUITY


|                                                                 |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   |         |  
|---------------------------------------------------------------- |  | ------------------------------------ | ---------- | ------------ |  | ---------- | -- | ----------- |  | ---------- | ---------- | -------------- |  | ------------ | -- | ------------- |  | ------ | ------- | ------- |  | ------ | ------ | - |  | - | ------ | - |  |  | ------- |  |  | - | ---- | - |  | - | -------- | - |  | - | ------- | -
|                                                                 |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |        
|                                                                 |  | Mandatorily                          |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |        
|                                                                 |  | Convertible                          |            |              |  |            |    |             |  | Notes      |            |                |  |              |    |              
|                                                                 |  | Preferred Stock                      |            | Common Stock |  | Additional |    |             |  | Receivable |            | Treasury Stock |  |              |    | Total        
|                                                                 |  |                                      |            |              |  | Paid-in    |    | Stock-Based |  | from       |            |                |  | Accumulated  |    | Stockholders
|                                                                 |  | Shares                               |            | Amount       |  | Shares     |    | Amount      |  | Capital    |            | Compensation   |  | Stockholders |    | Shares        |  | Amount |         | Deficit |  | Equity
|                                                                 |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |       
|                                                                 |  |                                     
|                                                                 |  | (In thousands, except share amounts)
|Balance, January 3, 1999                                         |  |                                      | 14,465,777 |              |  | $          | 14 |             |  |            | 2,898,379  |                |  | $            | 5  |               |  | $      | 36,349  |         |  | $      |       |   |  | $ |       |   |  |  | 66,666  |  |  | $ | (50  | ) |  | $ | (56,242  | ) |  | $ | (19,924 | )
|Stock options exercised                                          |  |                                      |            |              |  |            |    |             |  |            | 477,576    |                |  |              | 1  |               |  |        | 748     |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 749     |  
|Stock options granted to third parties                           |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        | 140     |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 140     |  
|Preferred stock Series A warrants exercised                      |  |                                      | 830,412    |              |  |            | 1  |             |  |            |            |                |  |              |    |               |  |        | 649     |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 650     |  
|Common stock warrants issued                                     |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        | 829     |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 829     |  
|Common stock warrants exercised                                  |  |                                      |            |              |  |            |    |             |  |            | 48,269     |                |  |              |   |               |  |        |         |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   |        |  
|Stock options exercised with notes                               |  |                                      |            |              |  |            |    |             |  |            | 1,627,423  |                |  |              | 2  |               |  |        | 5,246   |         |  |        |        |   |  |   | (5,246 | ) |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 2       |  
|Stock-based compensation                                         |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        | 9,753   |         |  |        | (9,753 | ) |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   |        |  
|Amortization of stock-based compensation                         |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        | 4,228  |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 4,228   |  
|Accretion of mandatorily redeemable convertible
	preferred stock |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        | (148    | )       |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | (148    | )
|Issuance of common stock for cash, net of issue
	costs           |  |                                      |            |              |  |            |    |             |  |            | 4,945,000  |                |  |              | 7  |               |  |        | 81,358  |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 81,365  |  
|Conversion of preferred stock Series A                           |  |                                      | (5,721,651 | )            |  |            | (6 | )           |  |            | 3,814,434  |                |  |              | 6  |               |  |        |        |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   |        |  
|Conversion of preferred stock Series B                           |  |                                      | (5,243,806 | )            |  |            | (5 | )           |  |            | 3,495,871  |                |  |              | 5  |               |  |        |        |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   |        |  
|Conversion of preferred stock Series C                           |  |                                      | (571,429   | )            |  |            | (1 | )           |  |            | 380,953    |                |  |              | 1  |               |  |        |        |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   |        |  
|Conversion of preferred stock Series D                           |  |                                      | (2,000,000 | )            |  |            | (2 | )           |  |            | 1,333,333  |                |  |              | 2  |               |  |        |        |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   |        |  
|Conversion of preferred stock Series F                           |  |                                      | (1,759,303 | )            |  |            | (1 | )           |  |            | 1,172,869  |                |  |              | 1  |               |  |        |        |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   |        |  
|Conversion of mandatorily redeemable preferred
	stock            |  |                                      |            |              |  |            |    |             |  |            | 3,019,481  |                |  |              | 5  |               |  |        | 20,146  |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 20,151  |  
|Net loss                                                         |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   | (22,347  | ) |  |   | (22,347 | )
|                                                                 |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   |         |  
|Balance, January 2, 2000                                         |  |                                      |           |              |  |            |   |             |  |            | 23,213,588 |                |  |              | 35 |               |  |        | 155,070 |         |  |        | (5,525 | ) |  |   | (5,246 | ) |  |  | 66,666  |  |  |   | (50  | ) |  |   | (78,589  | ) |  |   | 65,695  |  
|Stock options exercised                                          |  |                                      |            |              |  |            |    |             |  |            | 411,104    |                |  |              | 1  |               |  |        | 680     |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 681     |  
|ESPP shares issued                                               |  |                                      |            |              |  |            |    |             |  |            | 213,550    |                |  |              |   |               |  |        | 1,121   |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 1,121   |  
|Common stock warrants exercised                                  |  |                                      |            |              |  |            |    |             |  |            | 6,799      |                |  |              |   |               |  |        | 10      |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 10      |  
|Amortization of stock-based compensation                         |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        | 2,892  |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 2,892   |  
|Other                                                            |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        | (494    | )       |  |        | 473    |   |  |   | 124    |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 103     |  
|Net loss                                                         |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   | (23,557  | ) |  |   | (23,557 | )
|                                                                 |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   |         |  
|Balance, December 31, 2000                                       |  |                                      |           |              |  |            |   |             |  |            | 23,845,041 |                |  |              | 36 |               |  |        | 156,387 |         |  |        | (2,160 | ) |  |   | (5,122 | ) |  |  | 66,666  |  |  |   | (50  | ) |  |   | (102,146 | ) |  |   | 46,945  |  
|Stock options exercised                                          |  |                                      |            |              |  |            |    |             |  |            | 130,658    |                |  |              |   |               |  |        | 58      |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 58      |  
|ESPP shares issued                                               |  |                                      |            |              |  |            |    |             |  |            | 296,531    |                |  |              |   |               |  |        | 484     |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 484     |  
|Purchase of treasury stock                                       |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        |        |   |  |   |        |   |  |  | 221,900 |  |  |   | (298 | ) |  |   |          |   |  |   | (298    | )
|Amortization of stock-based compensation                         |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        | 1,381  |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 1,381   |  
|Proceeds from stockholders notes receivable                      |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        |        |   |  |   | 1,377  |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 1,377   |  
|Other                                                            |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        | (7      | )       |  |        | 14     |   |  |   |       |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   | 7       |  
|Net loss                                                         |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   | (21,928  | ) |  |   | (21,928 | )
|                                                                 |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   |         |  
|Balance, December 30, 2001                                       |  |                                      |           |              |  | $          |   |             |  |            | 24,272,230 |                |  | $            | 36 |               |  | $      | 156,922 |         |  | $      | (765   | ) |  | $ | (3,745 | ) |  |  | 288,566 |  |  | $ | (348 | ) |  | $ | (124,074 | ) |  | $ | 28,026  |  
|                                                                 |  |                                      |            |              |  |            |    |             |  |            |            |                |  |              |    |               |  |        |         |         |  |        |        |   |  |   |        |   |  |  |         |  |  |   |      |   |  |   |          |   |  |   |         |  

The accompanying notes are an integral part of
these financial statements.

F-4



---



##### Table of Contents



VIXEL CORPORATION

STATEMENT OF CASH FLOWS

|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |         |       |        |         |  
|----------------------------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------------- | ---------------------------------------- | ---------------------------------------------------- | ----- | ------------ | ------- | ------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | -
|                                                                        |                                                                             |                                               
|                                                                        |                                                                             | Fiscal Year Ended                             
|                                                                        |                                                                             |                                               
|                                                                        |                                                                             | January 2,                                     |                                          | December 31,                                         |       | December 30,
|                                                                        |                                                                             | 2000                                           |                                          | 2000                                                 |       | 2001        
|                                                                        |                                                                             |                                                |                                          |                                                      |       |             
|                                                                        |                                                                             |                                               
|                                                                        |                                                                             | (In thousands)                                
|Cash flows from operating activities                                    |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        | Net loss                                                                    |                                                | $                                        | (22,347                                              | )     |              | $       | (23,557 | )     |        | $       | (21,928 | )    
|                                                                        | Adjustments to reconcile net loss to net cash
	used in operating activities |                                                |                                          |                                                      |       |              |         |         |       |        |         |         |      
|                                                                        |                                                                             | Depreciation                                   |                                          |                                                      | 2,473 |              |         |         | 3,439 |        |         |         | 4,104 |       
|                                                                        |                                                                             | Amortization of goodwill and other intangibles |                                          |                                                      | 1,741 |              |         |         | 2,158 |        |         |         | 732   |       
|                                                                        |                                                                             | Amortization of debt discount                  |                                          |                                                      | 172   |              |         |         |      |        |         |         |      |       
|                                                                        |                                                                             | Stock-based compensation                       |                                          |                                                      | 4,369 |              |         |         | 2,892 |        |         |         | 1,388 |       
|                                                                        |                                                                             | Loss on disposal of property and equipment     |                                          |                                                      | 42    |              |         |         |      |        |         |         | 4     |       
|                                                                        |                                                                             | Changes in                                     |                                          |                                                      |       |              |         |         |       |        |         |         |       |       
|                                                                        |                                                                             |                                                | Accounts receivable, net                 |                                                      |       | (563         | )       |         |       | (2,000 | )       |         |       | 4,349  |        
|                                                                        |                                                                             |                                                | Inventories                              |                                                      |       | (1,775       | )       |         |       | 1,906  |         |         |       | (1,536 | )      
|                                                                        |                                                                             |                                                | Prepaid expenses and other assets        |                                                      |       | (748         | )       |         |       | 824    |         |         |       | 879    |        
|                                                                        |                                                                             |                                                | Accounts payable and accrued liabilities |                                                      |       | (762         | )       |         |       | 624    |         |         |       | (3,642 | )      
|                                                                        |                                                                             |                                                | Deferred revenue                         |                                                      |       |             |         |         |       | 300    |         |         |       | 847    |        
|                                                                        |                                                                             |                                                | Other long-term liabilities              |                                                      |       |             |         |         |       | (1,000 | )       |         |       |       |        
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        |                                                                             |                                                |                                          | Net cash used in operating activities                |       |              | (17,398 | )       |       |        | (14,414 | )       |       |        | (14,803 | )
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|Cash flows from investing activities                                    |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        | Purchase of short-term investments                                          |                                                |                                          | (44,650                                              | )     |              |         | (31,454 | )     |        |         | (35,033 | )    
|                                                                        | Maturities of short-term investments                                        |                                                |                                          | 2,490                                                |       |              |         | 50,468  |       |        |         | 39,727  |      
|                                                                        | Purchase of property and equipment                                          |                                                |                                          | (582                                                 | )     |              |         | (3,131  | )     |        |         | (1,065  | )    
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        |                                                                             |                                                |                                          | Net cash provided by (used in) investing
	activities |       |              | (42,742 | )       |       |        | 15,883  |         |       |        | 3,629   |  
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|Cash flows from financing activities                                    |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        | Repayment of stockholders notes receivable                                  |                                                |                                          | 712                                                  |       |              |         |        |       |        |         | 1,377   |      
|                                                                        | Principal payments on long-term debt and capital
	leases                    |                                                |                                          | (10,489                                              | )     |              |         | (3,039  | )     |        |         | (2,478  | )    
|                                                                        | Amortization of debt issuance costs                                         |                                                |                                          | 16                                                   |       |              |         | 16      |       |        |         | 1       |      
|                                                                        | Proceeds from exercise of stock options and
	warrants                       |                                                |                                          | 751                                                  |       |              |         | 690     |       |        |         | 58      |      
|                                                                        | Proceeds from common stock granted issued
	Employee Stock Purchase Plan     |                                                |                                          |                                                     |       |              |         | 1,121   |       |        |         | 484     |      
|                                                                        | Purchase of treasury stock                                                  |                                                |                                          |                                                     |       |              |         |        |       |        |         | (298    | )    
|                                                                        | Proceeds from issuance of preferred stock, net                              |                                                |                                          | 650                                                  |       |              |         |        |       |        |         |        |      
|                                                                        | Proceeds from issuance of common stock, net                                 |                                                |                                          | 81,365                                               |       |              |         |        |       |        |         |        |      
|                                                                        | Other financing activities                                                  |                                                |                                          |                                                     |       |              |         | 103     |       |        |         |        |      
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        |                                                                             |                                                |                                          | Net cash provided by (used in) financing
	activities |       |              | 73,005  |         |       |        | (1,109  | )       |       |        | (856    | )
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|Net increase (decrease) in cash and cash
	equivalents                   |                                                                             |                                                | 12,865                                   |                                                      |       |              | 360     |         |       |        | (12,030 | )      
|Cash and cash equivalents, beginning of period                          |                                                                             |                                                | 3,841                                    |                                                      |       |              | 16,706  |         |       |        | 17,066  |        
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|Cash and cash equivalents, end of period                                |                                                                             | $                                              | 16,706                                   |                                                      |       | $            | 17,066  |         |       | $      | 5,036   |        
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|Supplemental disclosure of cash flow
	information                       |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        | Cash paid for interest                                                      |                                                | $                                        | 2,039                                                |       |              | $       | 582     |       |        | $       | 275     |      
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|Supplemental disclosure of non-cash investing
	and financing activities |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        | Equipment purchased under capital leases                                    |                                                | $                                        | 1,470                                                |       |              | $       | 700     |       |        | $       | 35      |      
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        | Issuance of detachable stock warrants                                       |                                                | $                                        | 838                                                  |       |              | $       |        |       |        | $       |        |      
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        | Issuance of common stock for notes receivable                               |                                                | $                                        | 5,246                                                |       |              | $       |        |       |        | $       |        |      
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        | Accretion of mandatorily redeemable preferred
	stock                        |                                                | $                                        | 148                                                  |       |              | $       |        |       |        | $       |        |      
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        | Issuance of stock options granted to non-employee                           |                                                | $                                        |                                                     |       |              | $       |        |       |        | $       | 7       |      
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        
|                                                                        | Use of prepaid expenses to acquire property and
	equipment                  |                                                | $                                        |                                                     |       |              | $       |        |       |        | $       | 10      |      
|                                                                        |                                                                             |                                                |                                          |                                                      |       |              |         |         |       |        |         |        

The accompanying notes are an integral part of
these financial statements.

F-5



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##### Table of Contents



VIXEL CORPORATION

NOTES TO FINANCIAL STATEMENTS

1.     Organization
and summary of significant accounting policies



| |             
| | ------------
| | Organization

Vixel Corporation is a provider of comprehensive
Fibre Channel products and technologies for use in data storage
solutions and storage area networking applications. Our products
include multivendor certified solutions, fabric switches,
arbitrated loop hubs, embedded storage switch products and SAN
management software. Our products and technologies are used by
major system suppliers and are available worldwide through our
network of value-added resellers, integrators and OEMs.



| |            
| | -----------
| | Fiscal Year

We have a 52 or 53-week fiscal year ending on the
Sunday closest to December 31. The fiscal years ended
January 2, 2000, December 31, 2000 and
December 30, 2001 were each 52 weeks.



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

Revenue is generally recognized at the time of
product shipment, unless there are future obligations for
installation, or product demonstration units are shipped.
Revenue from products shipped with future installation
obligations is recognized when we meet the future obligation.
Revenue is not recognized on demonstration units unless the
customer ultimately purchases the unit, and the related revenue
is recognized at that time. A portion of products sold to
distributors is subject to stock rotation rights, and this
portion of revenue is deferred until the stock rotation period
has passed. An allowance is provided for estimated future
warranty costs and sales returns. In addition to a product
warranty, we offer post-sale telephone customer support and
consulting and installation services. Consulting and most
installation services are billed to customers separately, and
revenue for these services is recognized when the service is
provided. Telephone support is included in the sales price of
our products and is not sold separately. The cost of providing
this telephone support is not material.

We receive royalty revenue under license
agreements with a number of third parties that sell products
based on technology developed by us. The license agreements
provide for the payment of royalties to us based on sales of the
licensed product. We record royalty revenue based on sales
reported to us by the licensee, which occurred during the
relevant period. There are no future performance obligations on
our license agreements.



| |                                                                             
| | ----------------------------------------------------------------------------
| | Concentration of Manufacturing and Credit
	Risk and Sales to Major Customers

Financial instruments that potentially subject us
to concentrations of credit risk are primarily accounts
receivable, cash equivalents and investments. We perform ongoing
credit evaluations of our commercial customers financial
condition and require no collateral from these customers. We
maintain an allowance for doubtful accounts receivable based
upon our historical experience and the expected collectibility
of all accounts receivable. Credit losses to date have been
within our estimates. We have a cash and short-term investment
policy that generally restricts investments to ensure
preservation of principal and maintenance of liquidity.

We sell our products primarily to a limited
number of original equipment manufacturers. Sun Microsystems,
Compaq Computer and Avid Technologies represented 34%, 19% and
14% of revenue, respectively, for fiscal 2001. Compaq Computer
and Sun Microsystems represented 26% and 21% of revenue,
respectively, for fiscal 2000. In fiscal 1999, Compaq Computer
and Sun Microsystems represented 30% and 25% of revenue,
respectively.

We rely on a single third party manufacturer for
the production of the majority of products. Additionally, we
have licensed the manufacturing and selling of our Fibre Channel
switch ASIC to a third party

F-6



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

manufacturer. The inability of our third party
manufacturers to fulfill supply and production requirements
could negatively impact future results. However, we believe that
alternative manufacturing sources could be obtained and
qualified to supply our products.



| |                                     
| | ------------------------------------
| | Fair Value of Financial
	Instruments

Our financial instruments consist of cash and
cash equivalents, short-term investments, accounts receivable,
accounts payable, accrued liabilities and capital leases. Except
for capital leases, the carrying amounts of financial
instruments approximate fair value due to their short
maturities. The fair value of capital leases at
December 31, 2000 and December 30, 2001 is not
materially different from the carrying amount, based on interest
rates available to us for similar types of arrangements.



| |                                  
| | ---------------------------------
| | Derivative Financial
	Instruments

We follow the requirements of Statement of
Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities. This established accounting and reporting
standard for derivative instruments and for hedging activities
requires among other things, that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those derivatives at fair value.
To date we have not engaged in any derivative or hedging
activities.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Highly liquid investments purchased with original
or remaining maturities of three months or less at the date of
purchase are considered to be cash equivalents.



| |                       
| | ----------------------
| | Short-Term Investments

Short-term investments consist of highly rated
commercial paper and corporate bonds that have maturities at
time of purchase between three and six months. These investments
are classified as available-for-sale and are recorded at market
value, which approximates cost. The specific identification
method is used to determine the cost basis of securities sold.
For the years ended January 2, 2000, December 31, 2000
and December 30, 2001, no gains or losses were realized on
the sale of short-term investments. The unrealized gains or
losses at December 31, 2000 and December 30, 2001 did
not have a material impact on our financial position.



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

Inventories are stated at the lower of cost or
market, cost being determined by the first-in, first-out cost
flow assumption.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment is recorded at cost and
depreciated using the straight-line method over the estimated
useful lives of the respective assets as follows:

|                                            |  |  |           | 
|------------------------------------------- |  |  | --------- | 
|Test equipment                              |  |  | 1-3 years | 
|Furniture and office and computer equipment |  |  | 3-5 years | 
|Software                                    |  |  | 3 years   | 
|Leasehold improvements                      |  |  | 2-5 years | 

Leasehold improvements are amortized over the
shorter of their useful lives or the remaining term of the
related lease. Maintenance and repairs, which do not materially
add to the value of the asset nor prolong its life, are charged
to expense as incurred. When property and equipment is retired
or otherwise disposed of, the

F-7



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

cost and related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is
included in other income (loss), net.



| |       
| | ------
| | Leases

We lease various items of equipment and property
through both operating and capital lease agreements. Under
capital leasing agreements, the present value of the future
minimum lease payments payable over the lease term, or the fair
value of the leased property at the inception of the lease, is
recorded as a fixed asset. The corresponding leasing commitments
are shown as amounts payable to the lessor. Depreciation of
leased assets is charged to the statement of operations over the
shorter of the lease term or the useful lives of equivalent
owned assets.

Other leases are treated as operating leases.
Rent amounts are charged to the statement of operations on a
straight-line basis over the term of the operating lease.



| |                    
| | -------------------
| | Segment Information

We follow the requirements of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information which requires management
approach. The management approach designates the internal
organization that is used by management for making operating
decisions and assessing performance as the source of the
Companys reportable segments. SFAS 131 also requires
disclosures about products and services, geographic areas and
major customers. We have determined that we do not have any
separately reportable business or geographic segments.



| |                                
| | -------------------------------
| | Goodwill and Other
	Intangibles

Goodwill and other intangibles represent costs in
excess of net assets of businesses acquired, acquired technology
and other intangible assets. Goodwill and other intangibles are
being amortized over periods ranging from three to five years,
using the straight-line method and is recorded as amortization
of goodwill and other intangibles in the statement of operations.



| |                                 
| | --------------------------------
| | Impairment of Long-Lived
	Assets

We continually review the carrying value of
long-lived assets, including, but not limited to, property and
equipment and goodwill and other intangibles to determine
whether impairment has occurred. The carrying value of a
long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is less than its carrying
value. In that event, a loss is recognized for the amount by
which the carrying value exceeds the fair value of the
long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with
the risk involved. There were no impairment losses recorded in
fiscal 1999, 2000 or 2001.



| |             
| | ------------
| | Income Taxes

We account for income taxes under the liability
method, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax
bases of assets and liabilities. If it is more likely than not
that some portion of a deferred tax asset will not be realized,
a valuation allowance is recorded.

F-8



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)



| |         
| | --------
| | Warranty

We offer product warranties of one to five years.
Estimated future warranty obligations related to certain
products are provided by charges to operations in the period in
which the related revenue is recognized. These estimates are
based on historical warranty experience and other relevant
information of which we are aware. During the years ended
January 2, 2000, December 31, 2000 and
December 30, 2001, warranty expense was $3,252,000,
$1,975,000 and $603,000, respectively.



| |                           
| | --------------------------
| | Software Development Costs

In accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed, we have capitalized
eligible computer software development costs upon the
establishment of technological feasibility, which is defined as
completion of designing, coding, and testing activities. For the
years ended January 2, 2000 and December 31, 2000, the
amount of costs eligible for capitalization, after consideration
of factors such as realizable value, were not material and,
accordingly, all software development costs were charged to
research and development expense. During the year ended
December 30, 2001, we capitalized $106,000 in eligible
software development costs. These costs are being amortized in
proportion to expected revenues or over 3 years whichever
results in the greater charge. Amortization expense was $18,000
during the year-ended December 30, 2001.



| |                         
| | ------------------------
| | Research and Development

Research and development costs are expensed as
incurred in accordance with SFAS No. 2, Accounting
for Research and Development Costs.



| |            
| | -----------
| | Advertising

We expense advertising costs as incurred. During
the years ended January 2, 2000, December 31, 2000 and
December 30, 2001, advertising expenses were approximately
$7,000, $224,000 and $126,000, respectively.



| |                   
| | ------------------
| | Net Loss per Share

Basic net loss per share represents the net loss
available to common stockholders divided by the weighted-average
number of common shares outstanding during the period, excluding
shares of restricted stock subject to repurchase. Diluted net
loss per share represents the net loss available to common
stockholders divided by the weighted-average number of common
shares outstanding including the potentially dilutive impact of
common stock options and warrants, convertible preferred stock
and shares of restricted stock subject to repurchase. Common
stock options and warrants are converted using the treasury
stock method. Convertible preferred stock is converted using the
as if-converted method. Basic and diluted net losses per share
are equal for the periods presented because the impact of common
stock equivalents is anti-dilutive. Potentially dilutive
securities totaling 4,947,658, 4,508,577 and 5,482,464 shares
for the years ended January 2, 2000, December 31, 2000
and December 30, 2001, respectively, were excluded from
diluted net loss per share due to their anti-dilutive effect.

F-9



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The following table sets forth the computation of
the numerators and denominators in the basic and diluted net
loss per share calculations for the periods indicated (in
thousands, except share amounts):

|             |                                                                  |                                            |   |              |         |              |   |            |         |   |   |            |         |  
|------------ | ---------------------------------------------------------------- | ------------------------------------------ | - | ------------ | ------- | ------------ | - | ---------- | ------- | - | - | ---------- | ------- | -
|             |                                                                  |                                           
|             |                                                                  | Fiscal Year Ended                         
|             |                                                                  |                                           
|             |                                                                  | January 2,                                 |   | December 31, |         | December 30,
|             |                                                                  | 2000                                       |   | 2000         |         | 2001        
|             |                                                                  |                                            |   |              |         |             
|Numerator:   |                                                                  |                                            |   |              |         |              |   |            |         |   |   |           
|             | Net loss                                                         |                                            | $ | (22,347      | )       |              | $ | (23,557    | )       |   | $ | (21,928    | )      
|             | Accretion of mandatorily redeemable convertible
	preferred stock |                                            |   | (148         | )       |              |   |           |         |   |   |           |        
|             |                                                                  |                                            |   |              |         |              |   |            |         |   |   |           
|             |                                                                  | Net loss applicable to common stockholders |   | $            | (22,495 | )            |   | $          | (23,557 | ) |   | $          | (21,928 | )
|             |                                                                  |                                            |   |              |         |              |   |            |         |   |   |           
|Denominator: |                                                                  |                                            |   |              |         |              |   |            |         |   |   |           
|             | Weighted-average shares outstanding                              |                                            |   | 7,572,389    |         |              |   | 22,710,367 |         |   |   | 23,503,687 |        
|             |                                                                  |                                            |   |              |         |              |   |            |         |   |   |           



| |              
| | -------------
| | Stock Options

Our accounting for stock option plans is subject
to the provisions of FAS No. 123, Accounting for
Stock-Based Compensation.Under the provisions of this
statement, employee stock-based compensation expense is measured
using either the intrinsic-value method as prescribed by
Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, or the fair
value method described in FAS 123. Companies choosing the
intrinsic-value method are required to disclose the pro forma
impact of the fair value method on net income. We have elected
to continue accounting for our employee and director stock-based
awards under the provisions of APB 25. We have implemented
FAS 123 for stock-based awards to other than employees and
directors.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could
differ from those estimates. Amounts in the financial
statements, which are particularly susceptible to changes in
estimates in the near term, include the recoverability of
goodwill and other intangibles and the adequacy of the
allowances for doubtful accounts receivable, sales returns,
inventory obsolescence and product warranty costs.



| |                                  
| | ---------------------------------
| | Recent Accounting
	Pronouncements

In June 2001, the Financial Accounting Standards
Board, or FASB, issued FAS No. 141, Business
Combinations, and FAS No. 142, Goodwill and
Other Intangible Assets. FAS 141 supersedes
Accounting Principles Bulletin No. 16, Business
Combinations and FAS No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises and
FAS 142 supersedes APB No. 17,Intangible
Assets. These statements require use of the purchase
method of accounting for all business combinations initiated
after July 30, 2001, thereby eliminating use of the
pooling-of-interests method. Goodwill and indefinite lived
intangible assets will no longer be amortized but will be tested
for impairment at least annually. Additionally, new criteria
have been established that determine whether an acquired
intangible asset should be recognized separately from goodwill.
The entire provisions of FAS 141 and FAS 142 become
effective for us commencing with fiscal year 2002. We do not
expect this accounting pronouncement to have a significant
impact on our financial position or results of operations.

F-10



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

In June 2001, the FASB issued FAS No. 143
Accounting for Obligations Associated with the Retirement
of Long-Lived Assets. The provisions of FAS 143 apply
to all entities that incur obligations associated with the
retirement of tangible long-lived assets. FAS 143 is effective
for financial statements issued for fiscal years beginning after
June 15, 2002 and will become effective for us commencing
with our 2003 fiscal year. We do not expect this accounting
pronouncement to have a significant impact on our financial
position or results of operations.

In August 2001, the FASB issued FAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. FAS 144 provides guidance on the accounting
for the impairment or disposal of long-lived assets. The
objectives of FAS 144 are to address issues relating to the
implementation of FAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and to develop a model for long-lived assets
to be disposed of by sale, whether previously held and used or
newly acquired. FAS 144 is effective for financial
statements issued for fiscal years beginning after
December 15, 2001 and will become effective for us
commencing with fiscal year 2002. We do not expect this
accounting pronouncement to have a significant impact on our
financial position or results of operations.



| |                 
| | ----------------
| | Reclassification

Certain items in the January 2, 2000 and
December 31, 2000 financial statements have been
reclassified to conform to the December 30, 2001
presentation. These reclassifications have no impact on
stockholders equity, net loss or cash flows as previously
reported.



| |          
| | ---------
| | Liquidity

We have incurred significant losses since
inception and expect to continue incurring losses in the near
future. As of December 30, 2001, we had an accumulated
deficit of $124.1 million. We expect to incur significant
product development, sales, marketing and administrative
expenses annually, and will need to generate significant revenue
to achieve and maintain profitability. We cannot be certain that
we ever will realize sufficient revenue to achieve
profitability. Even if we do achieve profitability, we may not
be able to sustain or increase profitability.

We believe that our existing cash, cash
equivalents and short-term investment balances will be
sufficient to meet our capital requirements at least through the
next twelve months. However, we may need, or could elect, to
seek additional funding prior to that time. There can be no
assurance that additional capital will be available to us on
favorable terms, or at all.

2.     Inventories

Inventories consist of the following (in
thousands):

|                                             |  |              |       |              |  |   |        |  
|-------------------------------------------- |  | ------------ | ----- | ------------ |  | - | ------ | -
|                                             |  | December 31, |       | December 30,
|                                             |  | 2000         |       | 2001        
|                                             |  |              |       |             
|Raw materials                                |  | $            | 1,177 |              |  | $ | 4,781  |  
|Finished goods                               |  |              | 1,200 |              |  |   | 2,232  |  
|Less: Writedown to expected realizable value |  |              | (962  | )            |  |   | (4,062 | )
|                                             |  |              |       |              |  |   |        |  
|                                             |  | $            | 1,415 |              |  | $ | 2,951  |  
|                                             |  |              |       |              |  |   |        |  

F-11



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

3.     Property and
Equipment

Property and equipment consists of the following
(in thousands):

|                                                |  |              |        |              |  |   |         |  
|----------------------------------------------- |  | ------------ | ------ | ------------ |  | - | ------- | -
|                                                |  | December 31, |        | December 30,
|                                                |  | 2000         |        | 2001        
|                                                |  |              |        |             
|Test equipment                                  |  | $            | 7,606  |              |  | $ | 6,451   |  
|Furniture and office and computer equipment     |  |              | 4,982  |              |  |   | 4,847   |  
|Software                                        |  |              | 2,984  |              |  |   | 3,139   |  
|Leasehold improvements                          |  |              | 260    |              |  |   | 258     |  
|                                                |  |              |        |              |  |   |         |  
|                                                |  |              | 15,832 |              |  |   | 14,695  |  
|Less: accumulated depreciation and amortization |  |              | (8,525 | )            |  |   | (10,396 | )
|                                                |  |              |        |              |  |   |         |  
|                                                |  | $            | 7,307  |              |  | $ | 4,299   |  
|                                                |  |              |        |              |  |   |         |  

The cost of assets underlying capital leases
included above are $9,751,000 and $5,647,000 at
December 31, 2000 and December 30, 2001, respectively,
and accumulated depreciation and amortization thereon aggregates
$5,883,000 and $4,033,000 at December 31, 2000 and
December 30, 2001, respectively.

4.     Goodwill and
Other Intangibles

Goodwill and other intangibles consist of the
following (in thousands):

|                               |  |              |        |              |  |   |        |  
|------------------------------ |  | ------------ | ------ | ------------ |  | - | ------ | -
|                               |  | December 31, |        | December 30,
|                               |  | 2000         |        | 2001        
|                               |  |              |        |             
|Goodwill                       |  | $            | 4,120  |              |  | $ | 4,120  |  
|Core technology                |  |              | 2,183  |              |  |   | 2,183  |  
|Convenants not to compete      |  |              | 166    |              |  |   | 166    |  
|Workforce                      |  |              | 381    |              |  |   | 381    |  
|Software development costs     |  |              |       |              |  |   | 106    |  
|                               |  |              |        |              |  |   |        |  
|                               |  |              | 6,850  |              |  |   | 6,956  |  
|Less: accumulated amortization |  |              | (2,914 | )            |  |   | (3,752 | )
|impairment writedown           |  |              | (2,256 | )            |  |   | (2,256 | )
|                               |  |              |        |              |  |   |        |  
|                               |  | $            | 1,680  |              |  | $ | 948    |  
|                               |  |              |        |              |  |   |        |  

5.     Accrued
Liabilities

Accrued liabilities consist of the following (in
thousands):

|                                     |  |              |       |              |  |   |       | 
|------------------------------------ |  | ------------ | ----- | ------------ |  | - | ----- | 
|                                     |  | December 31, |       | December 30,
|                                     |  | 2000         |       | 2001        
|                                     |  |              |       |             
|Accrued warranty costs               |  | $            | 3,398 |              |  | $ | 2,135 | 
|Accrued payroll and related benefits |  |              | 1,126 |              |  |   | 970   | 
|Accrued business taxes               |  |              | 519   |              |  |   | 367   | 
|Accrued professional fees            |  |              | 85    |              |  |   | 85    | 
|Accrued license fee                  |  |              | 1,000 |              |  |   |      | 
|Other                                |  |              | 499   |              |  |   | 465   | 
|                                     |  |              |       |              |  |   |       | 
|                                     |  | $            | 6,627 |              |  | $ | 4,022 | 
|                                     |  |              |       |              |  |   |       | 

F-12



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

6.     Line of
Credit, Capital Leases and Long-Term Debt

In October 1998, we renewed a $5,000,000 line of
credit facility with a bank, which matured on September 30,
1999 and bore interest at LIBOR (5.108% at January 3, 1999)
plus 4.75%. The outstanding principal balance could not exceed
80% of the Companys eligible accounts receivable. On
June 22, 1999, we increased a line of credit facility to
$7,500,000 and extended its maturity to September 30, 2000.
Subsequently, in October 1999, the line of credit was cancelled.

In October 1988, we entered into a $7,500,000
note payable to the same bank due September 30, 1999. The
note bore interest at LIBOR (5.108% at January 3, 1999)
plus 4.75% and was collateralized by our inventory, equipment,
receivables, intangibles and deposit accounts. On June 22,
1999 we extended the note payable to September 30, 2000. In
November 1999, the note payable was paid in full.

Additionally, in October 1999, we repaid in full
an outstanding note payable, including accrued interest, to
Western Digital Corporation.

Long-term debt and capital leases consist of the
following (in thousands):

|                                                                                                                 |  |              |        |              |  |   |        |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | -
|                                                                                                                 |  | December 31, |        | December 30,
|                                                                                                                 |  | 2000         |        | 2001        
|                                                                                                                 |  |              |        |             
|Note payable, interest rate of 6.15%, due in
	equal monthly installments through February 2001                   |  | $            | 55     |              |  | $ |       |  
|Capital lease obligations, net of unamortized
	discount of $16 at December 31, 2000 and $1 at
	December 30, 2001 |  |              | 3,921  |              |  |   | 1,524  |  
|                                                                                                                 |  |              |        |              |  |   |        |  
|                                                                                                                 |  |              | 3,976  |              |  |   | 1,524  |  
|Less: Current portion                                                                                            |  |              | (2,466 | )            |  |   | (1,340 | )
|                                                                                                                 |  |              |        |              |  |   |        |  
|                                                                                                                 |  | $            | 1,510  |              |  | $ | 184    |  
|                                                                                                                 |  |              |        |              |  |   |        |  

Maturities of capital leases at December 30,
2001 are as follows (in thousands):

|                                           |  |         |        |  
|------------------------------------------ |  | ------- | ------ | -
|                                           |  | Capital
|Fiscal Year                                |  | Leases 
|                                           |  |        
|2002                                       |  | $       | 1,408  |  
|2003                                       |  |         | 150    |  
|2004                                       |  |         | 10     |  
|2005                                       |  |         | 9      |  
|2006                                       |  |         | 2      |  
|                                           |  |         |        |  
|Total minimum payments                     |  |         | 1,579  |  
|Less: portion representing interest        |  |         | (55    | )
|                                           |  |         |        |  
|Present value of capital lease obligations |  |         | 1,524  |  
|Less: Current portion                      |  |         | (1,340 | )
|                                           |  |         |        |  
|Capital leases, net of current portion     |  | $       | 184    |  
|                                           |  |         |        |  

7.     Commitments
and Contingencies



| |                 
| | ----------------
| | Operating Leases

The Company has commitments under long-term
operating leases, principally for building space and office
equipment. These leases require payment of property taxes and
include escalation clauses and an option

F-13



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

to extend the lease term of five years. The
related rent expense has been recognized in the statement of
operations on a straight-line basis.

Future minimum lease payments under all
non-cancelable operating lease obligations at December 30,
2001 are as follows (in thousands):

|            |  |                |       | 
|----------- |  | -------------- | ----- | 
|            |  | Future Minimum
|Fiscal Year |  | Lease Payments
|            |  |               
|2002        |  | $              | 806   | 
|2003        |  |                | 541   | 
|2004        |  |                | 548   | 
|2005        |  |                | 46    | 
|            |  |                |       | 
|            |  | $              | 1,941 | 
|            |  |                |       | 

Total rent expense was approximately $1,191,000,
$1,150,000 and $1,077,000 during the years ended January 2,
2000, December 31, 2000 and December 30, 2001,
respectively.



| |                  
| | -----------------
| | Legal Proceedings

On November 15, 2001, a securities class
action was filed in the United States District Court in the
Southern District of New York against two of our officers and
directors and certain underwriters who participated in our
initial public offering in late 1999. The complaint alleges
violations under Section 10(b) of the Securities Exchange Act of
1934 and Section 11 of the Securities Act of 1933 and seeks
unspecified damages on behalf of persons who purchased our stock
during the period October 1, 1999 through December 6,
2000. We intend to defend ourselves vigorously in this matter.
Accordingly, we have not recognized any liability related to
this claim.

8.     Related Party
Transactions

In April and May of 1999, we entered into
separate note receivable arrangements with certain officers and
directors in connection with the exercise of stock options.
These notes totaling, $5,246,000, bear interest at 5.75% per
annum and are due upon the earlier of four years from issuance
or six months after the termination of employment or service.
The notes are collateralized by the shares of stock acquired
upon exercise of the stock options. As of December 30, 2001
the outstanding balance of the notes was $3,745,000. During the
years ended January 2, 2000, December 31, 2000 and
December 30, 2001, we recognized interest income of
$206,000, $310,000 and $305,000, respectively.

9.     Mandatorily
Redeemable Convertible Preferred Stock

Our Series E convertible preferred stock
included a provision whereby, beginning in October 2001, holders
of a majority of such stock had the right to require us to
repurchase the shares at a redemption price of $4.50 per share
plus any declared and unpaid dividends. This stock automatically
converted to 3,019,481 shares of common stock upon closing of
our initial public offering on October 6, 1999. Prior to
conversion, the redemption value of the mandatorily redeemable
stock was being accreted over the period from issuance to the
applicable earliest redemption date using the effective interest
method.

F-14



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

10.     Stockholders
Equity



| |            
| | -----------
| | Stock Split

On August 12, 1999, our Board of Directors
declared a two-for-three reverse stock split of our common stock
which was effective on August 27, 1999. All common share
and per share amounts have been restated to reflect this stock
split.



| |                        
| | -----------------------
| | Initial Public Offering

The Securities and Exchange Commission declared
our Registration Statement on Form S-1 for our initial
public offering of 4,300,000 shares of common stock effective on
September 30, 1999. This transaction with the underwriters
closed on October 6, 1999 and we realized net proceeds of
$71,982,000. Subsequently, on October 12, 1999, the
underwriters exercised their over-allotment option for 645,000
shares of common stock and we realized net proceeds of
$10,797,000.



| |                        
| | -----------------------
| | Shareholder Rights Plan

In November 2000, we adopted a Shareholder Rights
Plan that provides for Preferred Stock Purchase Rights
(Rights) that attach to, and transfer with, each
outstanding share of common stock. When the Rights become
exercisable, each Right entitles the holder to purchase from us
one unit consisting of  1/100 of a share of Series A
Junior Participating Preferred Stock for $70 per unit, subject
to adjustment. The Rights become exercisable if a person or
group (Acquiring Person) has acquired, or obtained
the right to acquire, 15% or more of the outstanding shares of
common stock. Upon exercise and payment of the purchase price
for the Rights, the Rights holder (other than an Acquiring
Person) will have the right to receive our common stock (or, in
certain circumstances, cash, property or other securities of the
Company) equal to two times the exercise price of the Right. We
are entitled to redeem the Rights at any time prior to the
expiration of the Rights in December 2010. We are entitled to
redeem the Rights in whole, but not in part, at a price of $0.01
per Right, subject to adjustment.



| |                            
| | ---------------------------
| | Convertible Preferred Stock

All convertible preferred stock outstanding
automatically converted to 10,197,460 shares of common stock
upon closing of our initial public offering on October 6,
1999. As of January 2, 2000, December 31, 2000 and
December 30, 2001, we have authorized 5,000,000 shares of
preferred stock and have no preferred stock outstanding.

11.     Stock Option
and Stock Purchase Plans

In February 1995, we adopted the 1995 Stock
Option Plan (the 1995 Plan) which provides for the
grant of incentive and nonqualified stock options to directors,
employees and consultants to purchase our common stock. Shares
originally reserved under the plan totaled 5,133,332 and were
increased to 6,133,334 in April 1999. As of December 30,
2001, there are no further options available for grant under the
1995 Plan.

In August 1999, the stockholders approved the
1999 Equity Incentive Plan (the 1999 Plan) which
provides for the grant of incentive and nonqualified stock
options to directors, employees and consultants of the Company.
Under the 1999 Plan, 1,700,000 shares of common stock were
initially reserved for issuance, with annual increases each
January 1, beginning with January 1, 2001, equal to
the lesser of (i) 4% of the total number of shares of
common stock outstanding at the time or (ii) 1,700,000
shares of common stock.

In May 2000, the Board of Directors adopted the
2000 Non-officer Equity Incentive Plan (the 2000
Plan) which provides for the grant of nonqualified stock
options to employees and consultants of the Company. Under the
2000 Plan, 1,900,000 shares of common stock are reserved for
issuance.

F-15



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Under the 1995 Plan and 1999 Plan, incentive
stock options are granted at an exercise price not less than the
fair market value of the common stock on the date of grant.
Under the three plans, incentive stock options and nonqualified
stock options for employees generally vest over four years. Such
options expire ten years after the date of grant. Nonqualified
stock options for nonemployees generally vest immediately and
expire two to five years after the date of grant.

As of December 30, 2001, 243,333 and 604,669
options were available for grant under the 1999 Plan and the
2000 Plan, respectively, net of grants, exercises and
cancellations.

In August 1999, the stockholders approved an
Employee Stock Purchase Plan (the ESPP). Under the
ESPP, 300,000 shares of common stock were initially reserved for
issuance to eligible employees at a price equal to 85% of the
fair market value of the common stock on the offering or
purchase date as defined in the ESPP. Beginning with
January 1, 2001, and continuing annually through and
including January 1, 2009, the number of reserved shares
will be increased by the lesser of (i) one percent of the
total number of shares of common stock outstanding at the time
or (ii) 300,000 shares. As of December 30, 2001,
28,369 shares were reserved for future issuance under the ESPP.

The following table summarizes stock option
activity for the three fiscal years in the period ended
December 30, 2001:

|                                 |                   |                                                                               |           |            |           |           |      |       |       |  |   |      |      | 
|-------------------------------- | ----------------- | ----------------------------------------------------------------------------- | --------- | ---------- | --------- | --------- | ---- | ----- | ----- |  | - | ---- | ---- | 
|                                 |                   |                                                                               |           | Weighted-  |           | Weighted-
|                                 |                   |                                                                               |           | Average    |           | Average  
|                                 |                   |                                                                               |           | Exercise   |           | Fair     
|                                 |                   | Shares                                                                        |           | Price      |           | Value    
|                                 |                   |                                                                               |           |            |           |          
|Outstanding at January 3, 1999   |                   |                                                                               | 2,864,055 |            |           | $         | 2.27 |       |       |  |   |     
|                                 | Granted           |                                                                               |           |            |           |           |      |       |       |  |   |      |     
|                                 |                   | Exercise price equal to the fair value of the
	stock at the date of grant     |           |            | 16,700    |           |      | $     | 34.50 |  |   | $    | 1.95 | 
|                                 |                   | Exercise price less than the fair value of the
	stock at the date of grant    |           |            | 2,304,158 |           |      | $     | 5.04  |  |   | $    | 3.41 | 
|                                 |                   | Exercise price greater than the fair value of the
	stock at the date of grant |           |            | 606,242   |           |      | $     | 10.99 |  |   | $    | 0.67 | 
|                                 | Exercised         |                                                                               |           | (2,104,999 | )         |           | $    | 2.85  |       |  |   |      |     
|                                 | Canceled          |                                                                               |           | (758,449   | )         |           | $    | 2.87  |       |  |   |      |     
|                                 |                   |                                                                               |           |            |           |           |      |       |       |  |   |     
|Outstanding at January 2, 2000   |                   |                                                                               | 2,927,707 |            |           | $         | 5.84 |       |       |  |   |     
|                                 | Granted           |                                                                               |           | 2,484,102  |           |           | $    | 12.46 |       |  | $ | 9.56 |     
|                                 | Exercised         |                                                                               |           | (411,104   | )         |           | $    | 1.68  |       |  |   |      |     
|                                 | Canceled          |                                                                               |           | (1,562,338 | )         |           | $    | 9.49  |       |  |   |      |     
|                                 |                   |                                                                               |           |            |           |           |      |       |       |  |   |     
|Outstanding at December 31, 2000 |                   |                                                                               | 3,438,367 |            |           | $         | 9.47 |       |       |  |   |     
|                                 | Granted           |                                                                               |           | 2,830,800  |           |           | $    | 2.51  |       |  | $ | 1.41 |     
|                                 | Exercised         |                                                                               |           | (130,658   | )         |           | $    | 0.45  |       |  |   |      |     
|                                 | Canceled          |                                                                               |           | (817,893   | )         |           | $    | 10.43 |       |  |   |      |     
|                                 |                   |                                                                               |           |            |           |           |      |       |       |  |   |     
|Outstanding at December 30, 2001 |                   |                                                                               | 5,320,616 |            |           | $         | 5.84 |       |       |  |   |     
|                                 |                   |                                                                               |           |            |           |           |      |       |       |  |   |     
|Options exercisable at:          |                   |                                                                               |           |            |           |           |      |       |       |  |   |     
|                                 | January 2, 2000   |                                                                               |           | 682,338    |           |           | $    | 2.05  |       |  |   |      |     
|                                 | December 31, 2000 |                                                                               |           | 780,830    |           |           | $    | 3.99  |       |  |   |      |     
|                                 | December 30, 2001 |                                                                               |           | 1,634,980  |           |           | $    | 7.12  |       |  |   |      |     

F-16



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Options granted in the years ended
December 31, 2000 and December 30, 2001 were granted
with exercise prices equal to the fair market value of the stock.

The following summarizes information about stock
options outstanding and exercisable at December 30, 2001:

|                         |  |           |           |                     |  |                     |      |           |  |                |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | --------- | --------- | ------------------- |  | ------------------- | ---- | --------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |           |           |                     |  |                     |      |          
|                         |  |           |           | Options Outstanding |  |                     |      |          
|                         |  |           |           |                     |  |                     |      |          
|                         |  |           |           |                     |  |                    
|                         |  |           |           | Weighted-Average    |  | Options Exercisable
|                         |  |           |           |                     |  |                    
|                         |  |           |           | Remaining           |  |                     |      |           |  | Weighted-     
|                         |  | Number of |           | Contractual         |  | Exercise            |      | Number of |  | Average       
|Range of Exercise Prices |  | Shares    |           | Life (in Years)     |  | Price               |      | Shares    |  | Exercise Price
|                         |  |           |           |                     |  |                     |      |           |  |               
|$ 0.10 - $ 0.98          |  |           | 468,939   |                     |  |                     | 7.77 |           |  | $              | 0.74  |  |  |  | 202,121   |  |  | $ | 0.68  | 
|$ 1.13 - $ 1.50          |  |           | 617,250   |                     |  |                     | 9.72 |           |  | $              | 1.47  |  |  |  | 115,000   |  |  | $ | 1.46  | 
|$ 1.53 - $ 2.31          |  |           | 538,000   |                     |  |                     | 9.72 |           |  | $              | 1.80  |  |  |  | 76,250    |  |  | $ | 1.56  | 
|$ 2.50 - $ 3.29          |  |           | 741,738   |                     |  |                     | 8.31 |           |  | $              | 3.13  |  |  |  | 208,307   |  |  | $ | 3.06  | 
|$ 3.38 - $ 3.65          |  |           | 73,149    |                     |  |                     | 9.06 |           |  | $              | 3.63  |  |  |  | 65,647    |  |  | $ | 3.63  | 
|$ 3.97 - $ 3.97          |  |           | 750,000   |                     |  |                     | 9.07 |           |  | $              | 3.97  |  |  |  | 60,000    |  |  | $ | 3.97  | 
|$ 4.19 - $ 6.00          |  |           | 573,199   |                     |  |                     | 8.22 |           |  | $              | 4.94  |  |  |  | 268,167   |  |  | $ | 5.18  | 
|$ 6.64 - $ 9.00          |  |           | 589,719   |                     |  |                     | 8.41 |           |  | $              | 7.56  |  |  |  | 237,795   |  |  | $ | 7.86  | 
|$ 9.06 - $20.19          |  |           | 639,409   |                     |  |                     | 7.99 |           |  | $              | 13.25 |  |  |  | 255,848   |  |  | $ | 13.50 | 
|$20.38 - $36.81          |  |           | 329,212   |                     |  |                     | 8.21 |           |  | $              | 22.80 |  |  |  | 145,845   |  |  | $ | 22.87 | 
|                         |  |           |           |                     |  |                     |      |           |  |                |       |  |  |  |           |  |  |   |       | 
|$ 0.10 - $36.81          |  |           | 5,320,616 |                     |  |                     | 8.64 |           |  | $              | 5.84  |  |  |  | 1,634,980 |  |  | $ | 7.12  | 
|                         |  |           |           |                     |  |                     |      |           |  |                |       |  |  |  |           |  |  |   |       | 

We apply the accounting provisions prescribed in
APB 25 and related interpretations. In certain instances, we
have issued stock options with an exercise price less than the
fair value of our common stock at the date of grant.
Accordingly, total compensation costs related to these stock
options of approximately $9,753,000 was deferred during fiscal
1999. The stock-based compensation costs are being amortized
over the vesting period of the options, generally four years.
Amortization of stock-based compensation costs of $2,892,000 and
$1,381,000 was recorded in the fiscal years ended
December 31, 2000 and December 30, 2001, respectively.
Additionally, during the fiscal years ended January 2, 2000
and December 30, 2001, we recorded $140,000 and $7,000,
respectively, of compensation expense related to the issuance of
stock options for services provided by consultants. The value of
these stock options was determined based on their fair value
using the Black-Scholes valuation model. In the year ended
December 31, 2000, there were no stock options issued for
services provided by consultants.

Had we determined compensation expense based on
the fair value of the option at the grant date for all stock
options issued to employees, the Companys net loss and net
loss per share would have been increased to the pro forma
amounts indicated below (in thousands, except per share amounts):

|                                     |             |            |   |              |   |              |   |         |   |  |   |         |  
|------------------------------------ | ----------- | ---------- | - | ------------ | - | ------------ | - | ------- | - |  | - | ------- | -
|                                     |             | January 2, |   | December 31, |   | December 30,
|                                     |             | 1999       |   | 2000         |   | 2001        
|                                     |             |            |   |              |   |             
|Net loss                             |             |            |   |              |   |              |   |         |   |  |   |        
|                                     | As reported |            | $ | (22,347      | ) |              | $ | (23,557 | ) |  | $ | (21,928 | )
|                                     | Pro forma   |            | $ | (23,523      | ) |              | $ | (27,780 | ) |  | $ | (26,644 | )
|Basic and diluted net loss per share |             |            |   |              |   |              |   |         |   |  |   |        
|                                     | As reported |            | $ | (2.97        | ) |              | $ | (1.04   | ) |  | $ | (.93    | )
|                                     | Pro forma   |            | $ | (3.11        | ) |              | $ | (1.22   | ) |  | $ | (1.13   | )

F-17



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The pro forma information has been determined as
if we had accounted for our stock options issued to employees
under the minimum value method for all periods prior to the
Company becoming a public entity and fair value method for all
periods subsequent to the Company becoming a public entity. The
fair value of each option is estimated at the date of grant
using the following weighted-average assumptions:

|                        |  |               |               |            |  |              |               |              |  |  |         |  |  |  |         | 
|----------------------- |  | ------------- | ------------- | ---------- |  | ------------ | ------------- | ------------ |  |  | ------- |  |  |  | ------- | 
|                        |  | January 4,    |               | October 1, |  |              |               |             
|                        |  | 1999 to       |               | 1999 to    |  |              |               |             
|                        |  | September 30, |               | January 2, |  | December 31, |               | December 30,
|                        |  | 1999          |               | 2000       |  | 2000         |               | 2001        
|                        |  |               |               |            |  |              |               |             
|Expected term           |  |               | 5 years       |            |  |              | 4 years       |              |  |  | 4 years |  |  |  | 5 years | 
|Risk-free interest rate |  |               | 4.66% - 5.62% |            |  |              | 5.42% - 5.93% |              |  |  | 6.11%   |  |  |  | 4.56%   | 
|Dividend yield          |  |               | 0%            |            |  |              | 0%            |              |  |  | 0%      |  |  |  | 0%      | 
|Volatility              |  |               | 0%            |            |  |              | 80%           |              |  |  | 85%     |  |  |  | 85%     | 

12.     Stock
Warrants

All stock warrants have been valued using the
Black-Scholes valuation model.

In conjunction with the Series B preferred
stock offering, we issued warrants to purchase 654,333 shares of
Series A preferred stock. The warrants had an exercise
price of $1.25 per share. In conjunction with the Series E
preferred stock offering in October 1996, we also issued
warrants to purchase 69,261 shares of Series E preferred
stock. The warrants had an exercise price of $5.63 per share and
expired unexercised on October 16, 2001. The Company also
had outstanding a warrant to purchase 240,000 shares of
Series A preferred stock at an exercise price of $1.25 per
share, which was exercised on October 5, 1999.

During May 1997, we issued warrants to purchase
25,000 shares of Series E preferred stock with an exercise
price of $5.62 per share. These warrants were issued in
conjunction with obtaining a capital lease line. The warrants
were recorded at their fair value of $89,000, which was recorded
as a debt issue cost and was amortized over the term of the
lease line. On October 6, 2000, such warrants expired
unexercised.

During December 1998, we issued warrants to
purchase shares of Series E preferred stock with an
exercise price of $8.25. These warrants were exercisable at any
time after issuance for a period of five years and were issued
in conjunction with obtaining a capital lease line. The warrants
were recorded at their fair value of $49,000, which was recorded
as a debt issue cost and was amortized over 36 months.
Warrants to purchase additional shares of Series E
preferred stock were also issued in November 1998, in
conjunction with obtaining a term loan. These warrants have an
exercise price of $10.00 per share and are exercisable through
November 25, 2003. The warrants have been recorded at their
fair value of $230,000 as an original issue discount, which was
amortized over the life of the term loan, which was repaid
during fiscal 1999.

During March 1999, we issued warrants to purchase
shares of Series E preferred stock with an exercise price
of $10.00 per share. The warrants are exercisable at any time
after issuance for a period of five years. These warrants were
issued in conjunction with extending a loan. The $9,000 fair
value of the warrants was recorded as an original issue
discount, which was amortized over the remaining life of the
loan, which was repaid during fiscal 1999.

On October 5, 1999, in conjunction with our
initial public offering, 519,490 warrants to purchase
Series A preferred stock were exercised for proceeds of
$650,000. The remaining 374,843 Series A preferred stock
warrants were exercised, through a cashless exercise, to
purchase 310,922 shares of Series A preferred stock.
Immediately thereafter, all shares of Series A preferred
stock issued upon the exercise of warrants were converted into
553,605 shares of common stock.

Upon the closing of our initial public offering
on October 6, 1999 all remaining outstanding warrants to
purchase preferred stock were converted into 211,612 warrants to
purchase common stock.

F-18



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

During September 1999, we issued warrants to
purchase 150,000 shares of common stock with an exercise price
of $11.00 per share. The warrants are exercisable through
September 30, 2002. These warrants were issued to a
customer. The $829,000 fair value of the warrants was recorded
as a charge against the warranty accrual.

During November 1999, warrants to purchase 57,143
shares of common stock were exercised through a cashless
exercise to purchase 48,269 shares of common stock. During March
2000, warrants to purchase 14,444 shares of common stock were
exercised through a cashless exercise to purchase 6,799 shares
of common stock.

There were 361,612 warrants outstanding at
January 2, 2000. During fiscal 2000, 24,312 warrants were
canceled and 6,799 warrants were exercised. There was no warrant
activity during fiscal 2001. At December 31, 2000 and
December 30, 2001, 330,501 warrants were outstanding, as
summarized below:

|                 |         |                |  |                 |  |   |       |  |  |  |                                     | 
|---------------- | ------- | -------------- |  | --------------- |  | - | ----- |  |  |  | ----------------------------------- | 
|                 |         |                |  |                
|Number of Shares |         | Exercise Price |  | Expiration Date
|                 |         |                |  |                
|                 | 56,667  |                |  |                 |  | $ | 5.25  |  |  |  | October 6, 2004                     | 
|                 | 46,174  |                |  |                 |  | $ | 8.45  |  |  |  | October 16, 2001                    | 
|                 | 150,000 |                |  |                 |  | $ | 11.00 |  |  |  | September 30, 2002                  | 
|                 | 77,660  |                |  |                 |  | $ | 15.00 |  |  |  | November 25, 2003 to March 31, 2004 | 
|                 |         |                |  |                 |  |   |       |  |  |  |                                     | 
|                 | 330,501 |                |  |                 |  |   |       |  |  |  |                                     | 
|                 |         |                |  |                 |  |   |       |  |  |  |                                     | 

13.     Income
Taxes

At December 30, 2001 we had net operating
loss carryforwards of approximately $85,400,000, which may be
used to offset future taxable income. These carryforwards expire
beginning in 2010 through 2021. The Internal Revenue Code places
certain limitations on the annual amount of net operating loss
carryforwards that can be utilized if certain changes in the
Companys ownership occur. We believe that, pursuant to
Section 382 of the Internal Revenue Code, there was a
change in ownership of the Company in 1995 and that a
substantial portion of the net operating loss carryforwards
generated in or prior to 1995 (approximately $2,700,000) is
significantly limited and potentially unusable. Future changes
in the Companys ownership may further limit the use of
such carryforward benefits. Credits of approximately $3,572,000
related to research and development will expire through 2021.

A reconciliation of taxes on results of
operations at the federal statutory rate to the actual tax
benefit is as follows (in thousands):

|                              |  |                   |        |              |  |              |        |   |  |   |        |  
|----------------------------- |  | ----------------- | ------ | ------------ |  | ------------ | ------ | - |  | - | ------ | -
|                              |  |                  
|                              |  | Fiscal Year Ended
|                              |  |                  
|                              |  | January 2,        |        | December 31, |  | December 30,
|                              |  | 1999              |        | 2000         |  | 2001        
|                              |  |                   |        |              |  |             
|Tax at statutory rate         |  | $                 | (7,598 | )            |  | $            | (8,009 | ) |  | $ | (7,455 | )
|Nondeductible items           |  |                   | 243    |              |  |              | 249    |   |  |   | 120    |  
|Effect of state taxes         |  |                   | (1,119 | )            |  |              | (707   | ) |  |   | (662   | )
|Change in tax credits         |  |                   | (918   | )            |  |              | 341    |   |  |   | (973   | )
|Change in valuation allowance |  |                   | 9,646  |              |  |              | 6,566  |   |  |   | 9,373  |  
|Other                         |  |                   | (254   | )            |  |              | 1,560  |   |  |   | (403   | )
|                              |  |                   |        |              |  |              |        |   |  |   |        |  
|                              |  | $                 |       |              |  | $            |       |   |  | $ |       |  
|                              |  |                   |        |              |  |              |        |   |  |   |        |  

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VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Net deferred tax assets consist of the following
(in thousands):

|                                         |  |              |         |              |  |   |         |  
|---------------------------------------- |  | ------------ | ------- | ------------ |  | - | ------- | -
|                                         |  | December 31, |         | December 30,
|                                         |  | 2000         |         | 2001        
|                                         |  |              |         |             
|Net operating loss carryforwards         |  | $            | 24,418  |              |  | $ | 31,585  |  
|Goodwill and intangibles                 |  |              | 2,720   |              |  |   | 2,539   |  
|Credit carryforwards                     |  |              | 2,599   |              |  |   | 3,572   |  
|Accrued warranty costs                   |  |              | 1,257   |              |  |   | 790     |  
|Amortization of stock-based compensation |  |              | 2,635   |              |  |   | 3,146   |  
|Other accruals                           |  |              | 870     |              |  |   | 1,391   |  
|Other                                    |  |              | 893     |              |  |   | 1,742   |  
|                                         |  |              |         |              |  |   |         |  
|Gross deferred tax assets                |  |              | 35,392  |              |  |   | 44,765  |  
|Less: valuation allowance                |  |              | (35,392 | )            |  |   | (44,765 | )
|                                         |  |              |         |              |  |   |         |  
|Net deferred tax asset                   |  | $            |        |              |  | $ |        |  
|                                         |  |              |         |              |  |   |         |  

We have recorded a valuation allowance equal to
the net deferred tax asset balance because our accumulated
deficit, history of recurring net losses and possible
limitations on the use of carryforwards give rise to uncertainty
as to whether the deferred tax assets are realizable.

14.     Retirement
Savings Plan

We sponsor a retirement savings plan that
qualifies under Internal Revenue Code Section 401(k). The
plan covers all qualified employees. The plan provides that we
may make contributions as determined by the Board of Directors.
We contributed $447,000 to the plan in the fiscal year ended
January 2, 2000. We did not contribute to the plan in the
fiscal years ended December 31, 2000 and December 30,
2001.

15.     Selected
Quarterly Financial Data (Unaudited)

The following summarizes selected financial
information for each of the two years in the period ended
December 30, 2001 (in thousands, except per share amounts,
data may not add due to rounding):

|                                     |  |    |        |    |  |    |        |    |  |   |        |   |  |   |        |  
|------------------------------------ |  | -- | ------ | -- |  | -- | ------ | -- |  | - | ------ | - |  | - | ------ | -
|                                     |  | Q1 |        | Q2 |  | Q3 |        | Q4
|                                     |  |    |        |    |  |    |        |   
|2001                                 |  |    |        |    |  |    |        |    |  |   |        |   |  |   |        |  
|Total revenue                        |  | $  | 6,054  |    |  | $  | 6,491  |    |  | $ | 4,607  |   |  | $ | 4,651  |  
|Gross profit                         |  |    | 2,215  |    |  |    | 2,494  |    |  |   | 1,168  |   |  |   | 1,857  |  
|Net loss                             |  |    | (6,790 | )  |  |    | (5,144 | )  |  |   | (5,598 | ) |  |   | (4,396 | )
|Basic and diluted net loss per share |  | $  | (0.29  | )  |  | $  | (0.22  | )  |  | $ | (0.24  | ) |  | $ | (0.19  | )
|2000                                 |  |    |        |    |  |    |        |    |  |   |        |   |  |   |        |  
|Total revenue                        |  | $  | 7,777  |    |  | $  | 7,781  |    |  | $ | 8,502  |   |  | $ | 9,149  |  
|Gross profit                         |  |    | 2,196  |    |  |    | 2,481  |    |  |   | 3,061  |   |  |   | 3,672  |  
|Net loss                             |  |    | (6,267 | )  |  |    | (6,325 | )  |  |   | (5,844 | ) |  |   | (5,121 | )
|Basic and diluted net loss per share |  | $  | (0.28  | )  |  | $  | (0.28  | )  |  | $ | (0.25  | ) |  | $ | (0.22  | )

F-20



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INDEX TO EXHIBITS

|        |          |             |  |                                                                                                                                                                     
|------- | -------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 3.1(1)   |             |  | Amended and Restated Certificate of Incorporation
	of Registrant (Exhibit 3.2)                                                                                      
|        | 3.2(2)   |             |  | Certificate of Designation of Series A
	Junior Participating Preferred Stock (Exhibit 3.1)                                                                          
|        | 3.3(1)   |             |  | Bylaws of the Registrant (Exhibit 3.4)                                                                                                                              
|        | 4.1(1)   |             |  | Specimen Stock Certificate                                                                                                                                          
|        | 4.2(1)   |             |  | Amended and Restated Investors Rights
	Agreement dated February 17, 1998                                                                                           
|        | 4.3(1)   |             |  | First Amendment to Amended and Restated
	Investors Rights Agreement dated February 17, 1998                                                                        
|        | 4.4(2)   |             |  | Rights Agreement dated November 15, 2000,
	between the Registrant and Computer Share Trust Company, Inc.
	(Exhibit 4.1)                                             
|        | 4.5(2)   |             |  | Form of Rights Certificate (Exhibit 4.2)                                                                                                                            
|        | 10.1(1)  |             |  | Form of Indemnity Agreement to be entered into by
	the Registrant and each of its directors and executive officers                                                  
|        | 10.2(1)  |             |  | Amended and Restated 1995 Stock Option Plan and
	forms of agreements thereunder                                                                                     
|        | 10.3(1)  |             |  | Master Lease Agreement between Registrant and
	Transamerica Business Credit Corporation dated May 23, 1997
	(Exhibit 10.4)                                          
|        | 10.4(1)  |             |  | Master Lease Agreement between Registrant and
	Comdisco, Inc. dated January 18, 1996, together with
	addendum dated January 18, 1996 (Exhibit 10.5)                 
|        | 10.5(1)  |             |  | Turnkey Manufacturing Agreement with K*Tec
	Electronics, a division of Kent Electronics Company, dated
	May 5, 1997 (Exhibit 10.7)                                  
|        | 10.6(1)  |             |  | Employment Agreement between Registrant and
	Stuart B. Berman dated February 17, 1998
	(Exhibit 10.9)                                                               
|        | 10.7(1)  |             |  | Employment Agreement between Registrant and James
	McCluney dated April 26, 1999 (Exhibit 10.12)                                                                    
|        | 10.8(1)  |             |  | Restricted Stock Purchase Agreement between
	Registrant and Kurtis L. Adams dated May 20, 1999
	(Exhibit 10.15)                                                     
|        | 10.9(1)  |             |  | Full Recourse Promissory Note between Registrant
	and Stuart B. Berman dated April 16, 1999
	(Exhibit 10.16)                                                        
|        | 10.10(1) |             |  | Form of Full Recourse Promissory Note between
	Registrant and its executive officers (Exhibit 10.17)                                                                
|        | 10.11(1) |             |  | Form of Full Recourse Promissory Note between
	Registrant and its directors (Exhibit 10.18)                                                                         
|        | 10.12(1) |             |  | Lease Agreement between Registrant and Sun Life
	Assurance Company of Canada (U.S.) dated December 5, 1996,
	as amended January 22, 1997 (Exhibit 10.19)            
|        | 10.13    |             |  | Second Amendment to Lease Agreement between
	Registrant and Sun Life Assurance Company of Canada (U.S.) dated
	January 13, 1997.                                    
|        | 10.14(1) |             |  | Lease Agreement between Arcxel Technologies, Inc.
	and Aetna Life Insurance Company, dated November 1, 1997,
	assigned to Registrant August 24, 1998 (Exhibit 10.20)
|        | 10.15(1) |             |  | Vixel Corporation 1999 Employee Stock Purchase
	Plan and forms of agreements thereunder (Exhibit 10.22)                                                             
|        | 10.16(1) |             |  | Vixel Corporation 1999 Equity Incentive Plan, as
	amended                                                                                                           
|        | 10.17(1) |             |  | Form of Stock Pledge Agreement between the
	Registrant and its directors (Exhibit 10.24)                                                                            
|        | 10.18(3) |             |  | Vixel Corporation 2000 Non-officer Equity
	Incentive Plan and forms of agreements thereunder
	(Exhibit 99.1)                                                        
|        | 23.1     |             |  | Consent of PricewaterhouseCoopers LLP,
	Independent Accountants                                                                                                     
|        | 24.1     |             |  | Power of Attorney. Reference is made to the
	signature page                                                                                                         



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|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to designated exhibits
	to the Companys Registration Statement on Form S-1
	(File No. 333-81347), declared effective on
	September 30, 1999.
|   
|(2) | Incorporated by reference to designated exhibits
	to Companys current report on Form 8-K filed with the
	Securities and Exchange Commission on November 17, 2000.     
|   
|(3) | Incorporated by reference to designated exhibits
	to Companys Registration Statement on Form S-8 (File
	No. 333-39000)