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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 29, 2002


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

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

The aggregate market value of voting stock held
by non-affiliates of the Registrant based on the closing price
of the Registrants Common Stock on June 28, 2002, as
reported on the Nasdaq National Market, was approximately
$49,991,000. The aggregate market value calculation excludes
5,091,411 shares of common stock held by directors and
officers and stockholders whose beneficial ownership exceeds
five percent of the shares outstanding at June 28, 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 3, 2003, the Registrant had
outstanding 23,231,200 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Registrants definitive Proxy Statement,
which will be filed on or before April 28, 2003, with the
Securities and Exchange Commission in connection with the
Registrants annual meeting of stockholders to be held on
May 20, 2003, is incorporated by reference into
Part III of this Report.



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TABLE OF CONTENTS



|              |                                                                                                         |  |  |  |  |  |  | 
|------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|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                                                
|              | Item 14. Controls and Procedures                                                                       
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES   
|EXHIBIT 10.12
|EXHIBIT 23.1 
|EXHIBIT 99.1 



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VIXEL CORPORATION

FORM 10-K


INDEX

|           |           |  |    |                                                                                                    |  |  |    | 
|---------- | --------- |  | -- | -------------------------------------------------------------------------------------------------- |  |  | -- | 
|           |           |  |    | Page                                                                                              
|           |           |  |    |                                                                                                   
|PART I    
|           | Item  1.  |  |    | Business                                                                                           |  |  | 2  | 
|           | Item  2.  |  |    | Properties                                                                                         |  |  | 9  | 
|           | Item  3.  |  |    | Legal Proceedings                                                                                  |  |  | 9  | 
|           | Item  4.  |  |    | Submission of Matters to a Vote of Security
    Holders                                            |  |  | 10 | 
|PART II   
|           | Item  5.  |  |    | Market For Registrants Common Equity and
    Related Stockholder Matters                          |  |  | 10 | 
|           | Item  6.  |  |    | Selected Financial Data                                                                            |  |  | 11 | 
|           | Item  7.  |  |    | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |  | 13 | 
|           | 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 and Related Stockholder Matters |  |  | 30 | 
|           | Item  13. |  |    | Certain Relationships and Related Transactions                                                     |  |  | 30 | 
|           | Item  14. |  |    | Controls and Procedures                                                                            |  |  | 30 | 
|PART IV   
|           | Item  15. |  |    | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |  |  | 31 | 
|SIGNATURES |           |  | 34 |                                                                                                   

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SPECIAL NOTE ON FORWARD LOOKING
STATEMENTS

This Annual Report on Form 10-K, including
Managements Discussion and Analysis of Financial Condition
and Results of Operations in Item 7, includes
forward-looking statements that involve risks and uncertainties,
as well as assumptions that, if they never materialize, or prove
incorrect, could cause the results of Vixel Corporation to
differ materially from those expressed or implied by such
forward-looking statements. All statements contained in this
report that are not purely historical could be 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 20 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.

AVAILABLE INFORMATION

Vixel files annual, quarterly and current
reports, proxy statements and other information with the SEC.
You may read and copy any reports, statements and other
information filed by Vixel at the SECs Public Reference
Room at 450 Fifth Street N.W., Washington, D.C. 20549.
Please call (800) SEC-0330 for further information on the
Public Reference Room. The SEC maintains an Internet web site
that contains reports, proxy and information statements and
other information regarding issuers, including Vixel, that file
electronically with the SEC. The address for the SECs web
site is http://www.sec.gov.

Vixel makes available, free of charge, through
the investor relations section of its corporate web site its
annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments
to those reports as soon as reasonably practicable after they
are filed with the SEC. The address for Vixels web site is
http://www.vixel.com.




PART I




Item 1.     Business

Overview

We provide technologies and products for data
storage solutions and storage networking applications. Our
current 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 and within storage devices. Our products consist of a
variety of new embedded storage switch products as well as our
Storage Area Networking, or SAN, products that connect computers
to data storage devices in a network configuration. Our new
embedded storage switch products are based on a
switch-on-a-chip, or SOC, that

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utilizes our proprietary InSpeedTM
technology, and can be embedded in a variety of data storage
devices to increase the reliability, improve availability, and
enhance the performance, 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 storage
solutions. Our SAN interconnect products are sold through OEMs,
integrators, distributors and value-added resellers, or VARs, in
combination with their or other vendors products.


Industry Background

During recent years there has been a significant
increase in the volume of data created, processed, accessed and
stored throughout an enterprise. International Data Corporation,
or IDC, an independent research firm, in a report published
during December 2002, estimated that the worldwide volume of
stored data should grow from approximately 500,000 terabytes
during 2002 to approximately 2.6 million terabytes during
2006, representing a compound annual growth rate of over 51%.

In addition, the growth of stored data can be
measured in the growth in the number of hard disk drives that
are used inside of storage devices. External storage systems
consist of a storage intelligence device, or storage controller,
that is connected to multiple shelves, or drawers, that have ten
to 16 hard disk drives in each drawer. The majority of
external storage systems today use Fibre Channel based hard disk
drives. IDC, in a report published during May 2002, estimated
that the number of Fibre Channel drives sold should grow from
approximately 2.6 million during 2002 to over
6.1 million during 2006, representing a compound annual
growth rate of over 27%.

The ever-increasing requirements by end users for
data storage capacity and scaling, faster data access speeds and
constant availability and reliability require manufacturers to
continually look for ways to improve performance, reliability
and availability of their storage devices, while remaining cost
competitive in a highly price-sensitive market. In addition,
traditional server-to-storage connections had several
limitations in meeting the challenges of providing fast,
efficient and reliable access between computers and external
storage devices for end users. We have developed solutions and
products to help address these issues and requirements.

Our Fibre Channel Solutions and
Products

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 and Products

The continued demands for increased storage
system capacity and system scalability and the resulting
performance deterioration resulting from such demand have
emerged as significant issues facing the storage industry. Our
InSpeed Embedded Storage Switch products are designed to cost
effectively address these issues.

In todays typical storage device, a
shared-bus, or loop, architecture is used to connect the storage
controller to the drawers containing the storage disk drives and
to connect each of the storage disk drives within the drawers.
This loop architecture requires the stored data to pass through
several hops between drawers and between disks before being
delivered to the user. This loop architecture creates issues
regarding availability and reliability of the device, slowness,
or latency, created by the number of hops data must pass
through, and limits to the amount of storage capacity that can
be connected to a single storage controller.

To help storage device manufacturers address the
issues related to loop architectures, we have developed a highly
integrated switch-on-a-chip, or SOC, that incorporates our award
winning InSpeed technology. InSpeed 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. The
SOC can be sold in chip form or integrated into full Fibre
Channel switch boxes and modules, or blades, for embedding by
OEMs in their storage solutions.

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InSpeed embedded storage switch products replace
todays loop architectures with a switched architecture.
InSpeed products provide new diagnostic capabilities and
eliminate single point of failure designs that are typically
found in the back-end of storage systems. These embedded
products can be used in two ways inside a storage device. One
way is to use an embedded switch box or blade as what is called
a root switch. A root switch provides direct access from the
storage controller to each drawer in the storage device. The
second way is to use a chip or blade to provide a direct path to
each storage disk in a drawer. We refer to this as an
SBODTM, or switched bunch of disks. Combining both a
root switch and an SBOD within a storage device results in a
complete switched architecture that increases the storage
devices reliability, accessibility, scalability and
serviceability.

Our InSpeed Embedded Storage Switch Family is
available in SOC, blade and box physical formats and includes
the following:



| |                                                                        
| | -----------------------------------------------------------------------
| | Vixel InSpeed Embedded Storage Switch Model
    310 (12 port Unmanaged)

Our InSpeed Model 310 is a 12 port, half-rack,
unmanaged, embedded storage switch that can be easily integrated
into existing storage solutions to create a root switch
configuration. This provides connectivity on the controller path
for isolation of drive drawers, performance enhancement and
increased reliability.



| |                                           
| | ------------------------------------------
| | Vixel InSpeed Embedded Storage
    SOC 312

Our InSpeed SOC 312 is a highly integrated
12 port, 2Gbps SOC. The InSpeed SOC 312 can be
cost-effectively designed into data storage devices to create an
SBOD architecture.



| |                                                                      
| | ---------------------------------------------------------------------
| | Vixel InSpeed Embedded Storage Switch Model
    330 (12 port Managed)

Our InSpeed Model 330 is a 12 port,
full-rack, managed embedded storage switch. It provides the
functionality of an InSpeed Model 310, with the added
benefit of enhanced management capabilities including port
diagnostics and device performance and health monitoring. The
InSpeed Model 330 also provides for easy integration with
SAN management applications through simple network management
protocol, or SNMP, support.



| |                                           
| | ------------------------------------------
| | Vixel InSpeed Embedded Storage
    SOC 320

Our InSpeed SOC 320 was introduced during
January 2003 and is the latest addition to our InSpeed Embedded
Storage Switch Family of products. We plan to release this
second generation of InSpeed-based SOC for general availability
during the second quarter of 2003. This fully integrated 20 port
SOC incorporates a number of new features such as trunking,
fairness and interswitch communications to further enhance
back-end switching capabilities. The new features and diagnostic
capabilities of the InSpeed SOC 320 are designed to
transform traditional 16-drive JBODs into highly reliable SBODs.



| |                                                                         
| | ------------------------------------------------------------------------
| | Vixel InSpeed Embedded Storage Switch Blades
    (Managed and Unmanaged)

We work with OEMs to design, develop and
manufacture customized InSpeed-based embedded storage switch
blades to allow them to leverage the power of InSpeed in the
design of their storage enclosure products. Custom blade
implementations can offer flexibility and architectural
differentiation in terms of port count, optional management
capabilities, hardware integration and the level of features
that can be deployed as compared with standard products.

SAN
Interconnect Solutions and Products

We focus our SAN interconnect solutions primarily
on the rich media and entry-level SAN segments of the overall
SAN market. The rich media market, which includes film and video
editing, broadcast, and medical imaging applications, requires
large amounts of data to be accessed simultaneously by numerous
users. Our Fibre Channel fabric switches provide the bandwidth
and speed to meet the needs of these demanding environments. The
entry-level SAN market requires simple to use networks and low
prices. Our

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new InSpeed-based SAN switches can be used for
high-speed connections between multiple computers and storage
devices to create efficient, easy to use, cost effective SAN
solutions. These entry-level SANs are ideal for small to
mid-size companies or departments within a large enterprise. For
these solutions, the single chip design and features of our
InSpeed-based SAN products do away with the complex and
unnecessary features found in fabric switches designed for large
enterprise environments.


We have several SAN interconnect products for use
in rich media and entry-level environments. Our primary SAN
interconnect products include:



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

Our Vixel 9000 Fibre Channel 2 Gbps fabric
switches provide high performance solutions for demanding
environments, such as the rich media market. We have three
models: the eight port Vixel 9100, the 16 port
Vixel 9200 and the 16 port, high-availability
Vixel 9300HA.



| |                                                                       
| | ----------------------------------------------------------------------
| | Vixel InSpeed Model 315 and InSpeed Model 335
    SAN Storage Switches

Our InSpeed Model 315 and Model 335 leverage the
performance and simplicity of our InSpeed technology to create a
new generation of 2 Gbps SAN switches that minimize the
compatibility issues associated with traditional SAN switching.
Solution providers benefit from condensed qualification cycles
and a reduced overall level of end-user support.

The InSpeed Model 315 is half-rack,
unmanaged 12 port switch that can be used for clustering
applications and providing fan-out ports to end-users. The
full-rack, 12 port InSpeed Model 335 adds management
capabilities with an array of port diagnostics, and device
performance and health monitoring, as well as the ability to
integrate with SAN management applications via SNMP support.

Both our Vixel 9000 series of 2 Gbps
switches and our InSpeed-based 2 Gbps SAN switches are
compatible with 1 Gbps storage devices. In addition to
these SAN interconnect products, we have a number of 1 Gbps
only SAN switch and hub products. However, with the storage
industrys transition to 2 Gbps speeds, we expect
these 1 Gbps only products will decline in use and we
expect to stop manufacturing and selling them over the next two
years.

Customers

Our InSpeed Embedded Storage Switch products were
formally launched during May of 2002. At that time, Network
Appliance, a Network Attached Storage, or NAS, leader, had
already adopted InSpeed. In addition, numerous engagements were
underway with leading storage OEMs for the evaluation of these
products. As the year progressed, HP Corporation, the
worlds leading provider of modular storage systems, also
integrated InSpeed into its Enterprise Virtual Array, or EVA,
line of storage solutions. As of March 15, 2003,
approximately 27 OEMs are formally evaluating InSpeed-based
products, including nine of the top ten storage OEMs.

In addition to HP and Network Appliance, we have
customer relationships with several other OEMs, including Avid
Technology, Inc., BlueArc Corporation, Langchao Electronics,
NEC, and Sun Microsystems, Inc. Our current domestic
distributors include Bell Microproducts and Ingram Micro. In
addition, we have established relationships with Inno Micro
Corporation, ModernTech Computer & Peripheral Ltd.,
Raidtec Corporation Ltd. and Hammer Distribution, Ltd. for
distribution of our products in Europe and Asia.

Our top customers during 2002 were HP (including
Compaq Computer Corporation) and Avid Technology which
represented 41.0% and 14.7% of revenue, respectively. During
2001, Sun Microsystems, Compaq Computer and Avid Technology
represented 33.7%, 18.5% and 14.4% of revenue, respectively.
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 during
those periods.

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

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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.


Sales, Marketing and Customer
Support

We mainly market and sell our embedded storage
switch products to OEMs of high-end disk and tape storage
subsystems. These customers utilize our embedded storage switch
products inside the storage subsystems to implement switched
architectures. The OEMs then sell, install and provide technical
support to end-users of their products, or distribute their
products through integrators, VARs or other resellers.

Our SAN interconnect products are primarily sold
to OEMs of specific operating systems-based servers, including
Unix and Windows NT, and storage networking solutions resellers.
Our customers utilize our SAN interconnect products as
components of their SAN solutions and to deliver end-users
complete factory-configured solutions. These solutions are
generally installed and field-serviced by our customers
technical support organizations.

Our marketing efforts include developing and
extending strategic alliances, promoting the Vixel and InSpeed
brand names, advocating the benefits of switched architectures
within storage systems, active participation in industry
associations and standards committees, and speaking at storage
system related conferences and events.

We have entered into a marketing and distribution
relationship with Vitesse for our current InSpeed-based SOC
products. Under this agreement, Vitesse markets and sells to
identified customers both our original InSpeed SOC and most
recent generation InSpeed embedded storage SOC. Vitesse
purchases these SOC products directly from us and sells them
under their brand.

Our customer service and field engineering teams
provide extensive pre-and post-sale customer support, including
design consultation and in-depth training on our technology and
product implementation to help ensure successful integration our
Fibre Channel solutions. We offer a variety of support options
for our products, including extended-hour support coverage and
immediate product replacement options.

Research and Development

Our mission is to be the embedded storage switch
supplier of choice  regardless of technology. To
accomplish this mission we intend to devote a significant
portion of our development resources to expanding our embedded
product offerings and developing new, higher port count, faster
speed SOCs with additional functionality. Also, we intend to
develop new embedded storage switch technologies that can
address the requirements of new storage system designs. We are
working with storage enclosure OEMs to help specify additional
features, functionality and technologies required to make their
products more robust and scaleable and less expensive.

We also use our InSpeed SOCs to develop Fibre
Channel switches for the entry-level SAN market. We believe the
high degree of integration in our SOCs will help us develop
lower cost switch solutions for these cost sensitive markets.

Our research and development expenses totaled
$11.3 million during fiscal 2002. 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.

Manufacturing

We outsource the manufacturing of our box
products to Suntron Corporation. Suntron is responsible for
nearly all material procurement, assembly, testing, packaging,
and shipment of these products. We do not have a long-term
supply contract with Suntron, therefore, they are not obligated
to manufacture products for us,

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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 key components that are used in our products and
selecting the suppliers of such components. Most of our product
components can be obtained from multiple qualified
manufacturers. While most of the materials used in our box
products are standard, some are proprietary or sole sourced and
require extended lead times. Although we design our own SOCs,
LSI Logic manufactures them. Motorola, Inc. and Intel
Corporation are currently our sole suppliers for
microprocessors. In addition, we license software used in our
switches and hubs from Wind River Systems, Inc. Our supply
management team works closely with strategic suppliers who offer
proprietary or sole-sourced products. In addition, our
operations team is focused on production test equipment
development, manufacturability of our products, effective
transfer of products from development to production, monitoring
of supplier performance and quality, and demand and build
forecasting and scheduling.

Competition

We target our embedded storage switches at a new
and evolving market. As yet no other company has publicly
introduced products similar to our InSpeed family of products.
As this market grows we may face competition from storage
networking switch providers, semiconductor companies, or OEMs,
including our OEM customers, that may choose to develop
technology or products that compete with ours. We believe the
primary competitive factors in the embedded storage switch
market include integration of features and functionality; the
number of ports per SOC; the power consumption of the SOCs;
overall product performance; ability to meet delivery schedules;
price; and strength of distribution channel. To remain
competitive, we must, among other things, invest significant
resources to expand our customer base, develop new products and
enhance our current products. If we fail to do so, our products
may not compete favorably with those of competitors, which could
significantly harm our business.

The SAN interconnect market has become
increasingly competitive. A growing number of server, storage,
tape and storage management vendors offer new SAN-enabled
products. We target the rich media and entry-level SAN markets
with our SAN interconnect products. In these markets, we compete
primarily with Brocade Communications Systems, Inc. and QLogic
Corporation. 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 OEM customers could develop and
introduce products competitive with our product offerings.

Many of our existing and potential competitors
have longer operating histories, greater name recognition and
substantially greater financial, technical, and sales and
marketing resources, and may have larger distribution channels,
access to more customers and a larger installed customer base
than we do. As a result, these companies may be able to
undertake more extensive marketing campaigns and adopt more
aggressive pricing policies than we can. We may not have the
financial resources, technical expertise or marketing,
manufacturing, distribution, and support capabilities to compete
successfully in the future. There can also be no assurance that
we will be able to compete successfully against current or
future competitors or that current or future competitive
pressures will not materially harm our business.

Intellectual Property

We 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

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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.


During 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. During 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 29, 2002, we had several
pending United States patent applications, as well as pending
patent applications in selected countries abroad, with respect
to a broad scope of SAN technology, including our switch and hub
architecture. However, it is possible that patents may not be
issued for the pending applications and that our issued patents
may not adequately protect our technology from infringement or
prevent others from claiming our technology infringes that of
third parties. We own several trademarks, including Vixel,
InSpeed and SBOD. We also rely on trade secret law and
contractual provisions to protect our intellectual property,
including technology development, which we have decided not to
patent or copyright, or which is not capable of more formal
protection.

On March 3, 2003 we filed a patent
infringement action against QLogic Corporation in the United
States District Court for the District of Delaware. The
complaint states that QLogic is infringing U.S. Patent
No. 6,118,776, entitled Methods and Apparatus for
Fiber Channel Interconnection of Private Loop Devices,
through the unauthorized manufacture, use, sale and offering for
sale of various storage area network switching products,
including QLogics SANBox2 product. We are seeking
unspecified past damages, potential future royalties, or,
alternatively, injunctive relief. We may need to initiate
further litigation in the future to enforce and protect 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.

Employees

As of December 29, 2002 we had
97 employees, of which 47 were engaged in research and
development, 23 in sales, marketing and customer service and
support, 12 in operations, and 15 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 29, 2002 were as follows:

|                  |  |     |    |          |  |                                                                                
|----------------- |  | --- | -- | -------- |  | -------------------------------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|James M. McCluney |  |     | 51 |          |  | President, Chief Executive Officer and Chairman
    of the Board of Directors  
|Kurtis L. Adams   |  |     | 48 |          |  | Chief Financial Officer, Vice President of
    Finance, Secretary and Treasurer
|Stuart B. Berman  |  |     | 46 |          |  | Chief Technology Officer                                                       
|Thomas Hughes     |  |     | 43 |          |  | Vice President of Product Development                                          

8



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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.
During 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 where we lease approximately 43,000 square
feet. Our lease for this facility expires during January 2005.
In addition, we have a research and development and sales
facility located in Irvine, California that occupies
approximately 7,300 square feet. Our lease for this facility
expires during June 2005. 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 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. Subsequent to the filing, the Court issued a summary
judgment releasing our officers and directors from the action.
We intend to defend ourselves vigorously in this matter.

On March 3, 2003 we filed a patent
infringement action against QLogic Corporation in the United
States District Court for the District of Delaware. The
complaint states that QLogic is infringing U.S. Patent
No. 6,118,776, entitled Methods and Apparatus for
Fiber Channel Interconnection of Private Loop Devices,
through the unauthorized manufacture, use, sale and offering for
sale of various storage area network switching products,
including QLogics SANBox2 product. We are seeking
unspecified past damages, potential future royalties, or,
alternatively, injunctive relief.

9



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##### Table of Contents






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
|               |  |      |      |    
|2002           |  |      |      |     |  |   |      | 
|First Quarter  |  | $    | 4.35 |     |  | $ | 1.69 | 
|Second Quarter |  | $    | 4.13 |     |  | $ | 1.61 | 
|Third Quarter  |  | $    | 2.80 |     |  | $ | 1.10 | 
|Fourth Quarter |  | $    | 2.05 |     |  | $ | 1.10 | 
|              
|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 | 

According to the records of our transfer agent,
March 3, 2003, we had 301 stockholders of record of our
common stock. There are a substantially greater number of
persons who are beneficial owners of our common stock.

We have never declared or paid cash dividends on
our common 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 on our
common stock for the foreseeable future. Future dividends on our
common stock, if any, will be determined by our board of
directors. Pursuant to the terms of our Series B
Convertible Preferred Stock issued during February 2003,
dividends accrue on the Series B Convertible Preferred
Stock at an annual rate of 6% of the original issuance price as
adjusted by certain dillutionary events. The cumulative
dividends will be paid in shares of Series B Convertible
Stock during the first year and cash or shares of Series B
Convertible Stock at our option thereafter.

Recent Sales of Unregistered
Securities

We did not sell any unregistered securities
during 2002. During February 2003, we completed an
$8.0 million private placement of 3,809,524 shares of
our newly designated Series B Convertible Preferred Stock
at $2.10 per share. In addition the purchasers of the
Series B Convertible Preferred Stock received warrants to
purchase 1,142,856 shares of our common stock at an
exercise price of $2.63 per share. The sale and issuance of the
Series B Convertible Preferred Stock and warrants were
considered to be exempt from registration pursuant
Section 4(2) or Regulation D of the Securities Act of
1933, as amended. The agreements entered into in connection with
the sale of such securities have been filed as exhibits to our
Current Report on Form 8-K filed with the Securities
Exchange Commission on February 20, 2003. You are
encouraged to review those documents in their entirety for a
full understanding of the terms of these securities.

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 were sold at a

10



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##### Table of Contents



price of $18.00 per share, including the
underwriters 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 29, 2002,
the proceeds were used to repay debt and capital lease
obligations totaling $19.0 million, purchase property and
equipment totaling $5.4 million and $57.0 million was
used for working capital and general corporate purposes.


Securities Authorized for Issuance Under
Equity Compensation Plans

The following table provides information with
respect to our equity compensation plans as of December 29,
2002.

|                                                           |  |                     |           |                     |  |                              |      |   |  |  |           |  
|---------------------------------------------------------- |  | ------------------- | --------- | ------------------- |  | ---------------------------- | ---- | - |  |  | --------- | -
|                                                           |  | Number of           |           |                     |  |                             
|                                                           |  | Securities to be    |           |                     |  | Number of Securities        
|                                                           |  | Issued Upon         |           |                     |  | Remaining Available for     
|                                                           |  | Exercise of         |           | Weighted-Average    |  | Future Issuance Under Equity
|                                                           |  | Outstanding         |           | Exercise Price of   |  | Compensation Plans          
|                                                           |  | Options,            |           | Outstanding Options |  | (Excluding Securities       
|Plan Category                                              |  | Warrants and Rights |           | Warrants and Rights |  | Reflected in Column (a))    
|                                                           |  |                     |           |                     |  |                             
|                                                           |  |                     | (a        | )                   |  |                              | (b   | ) |  |  | (c        | )
|Equity compensation plans approved by
    stockholders(1)  |  |                     | 3,607,175 |                     |  | $                            | 4.66 |   |  |  | 533,908   |  
|Equity compensation plans not approved by
    stockholders |  |                     | 2,068,646 |                     |  | $                            | 3.54 |   |  |  | 1,162,945 |  
|                                                           |  |                     |           |                     |  |                              |      |   |  |  |           |  
|Total                                                      |  |                     | 5,675,821 |                     |  | $                            | 4.25 |   |  |  | 1,696,853 |  
|                                                           |  |                     |           |                     |  |                              |      |   |  |  |           |  






|    |                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Under our 1999 Equity Incentive 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) four
    percent of the total number of shares of common stock
    outstanding at the time, or (ii) 1,700,000 shares of common
    stock.

A description of our 2000 Non-officer Equity
Incentive Plan is set forth under Note 12 of our audited
financial statements filed as part of this annual report. This
compensation plan was adopted without approval of our
stockholders.






|        |                        
|------- | -----------------------
|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 December 31, 2000,
December 30, 2001 and December 29, 2002 and the
balance sheet data as of December 30, 2001 and
December 29, 2002 from the audited financial statements
included in this Annual Report on Form 10-K. The statement
of operations data for the fiscal years ended January 3,
1999 and January 2, 2000 and the selected balance sheet
data set forth below for us as of January 3, 1999.
January 2, 2000 and December 31, 2000 is derived from
our audited financial statements not included in this Annual
Report on Form 10-K. Net loss available to common

11



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##### Table of Contents



stockholders shown below includes our net loss,
as well as the accretion related to our redeemable preferred
stock outstanding during fiscal years 1998 and 1999.


|                                          |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |        |        | 
|----------------------------------------- | ---------------------------------------------- | ---------------------------------------- | ------- | ---------- | ------ | ------------ | ------- | ------------ | ------ | ------------ | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                          |                                                |                                         
|                                          |                                                | For the Fiscal Year Ended               
|                                          |                                                |                                         
|                                          |                                                | January 3,                               |         | January 2, |        | December 31, |         | December 30, |        | December 29,
|                                          |                                                | 1999                                     |         | 2000       |        | 2000         |         | 2001         |        | 2002        
|                                          |                                                |                                          |         |            |        |              |         |              |        |             
|                                          |                                                |                                         
|                                          |                                                | (In thousands, except per share amounts)
|Statements of Operations Data:            |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Revenue                                   |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|                                          | SAN systems                                    |                                          | $       | 15,222     |        |              | $       | 25,159       |        |              | $       | 29,610 |        |   | $       | 16,769 |        |   | $       | 20,606 |       
|                                          | Components                                     |                                          |         | 24,223     |        |              |         | 13,668       |        |              |         | 3,599  |        |   |         | 5,034  |        |   |         |       |       
|                                          |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|                                          |                                                | Total revenue                            |         |            | 39,445 |              |         |              | 38,827 |              |         |        | 33,209 |   |         |        | 21,803 |   |         |        | 20,606 | 
|Cost of revenue                           |                                                |                                          | 36,199  |            |        |              | 28,293  |              |        |              | 21,799  |        |        |   | 14,069  |        |        |   | 10,715  |       
|                                          |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Gross profit                              |                                                |                                          | 3,246   |            |        |              | 10,534  |              |        |              | 11,410  |        |        |   | 7,734   |        |        |   | 9,891   |       
|Operating expenses                        |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|                                          | Research and development                       |                                          |         | 11,110     |        |              |         | 12,788       |        |              |         | 15,570 |        |   |         | 14,657 |        |   |         | 11,307 |       
|                                          | Acquired in-process technology                 |                                          |         | 5,118      |        |              |         |             |        |              |         |       |        |   |         |       |        |   |         |       |       
|                                          | Selling, general and administrative            |                                          |         | 14,521     |        |              |         | 13,643       |        |              |         | 17,437 |        |   |         | 14,423 |        |   |         | 10,699 |       
|                                          | Amortization of goodwill and other intangibles |                                          |         | 2,057      |        |              |         | 1,362        |        |              |         | 2,159  |        |   |         | 820    |        |   |         | 436    |       
|                                          | Amortization of stock-based compensation       |                                          |         |           |        |              |         | 4,286        |        |              |         | 2,825  |        |   |         | 1,353  |        |   |         | 591    |       
|                                          |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|                                          |                                                |                                          | 32,806  |            |        |              | 32,079  |              |        |              | 37,991  |        |        |   | 31,253  |        |        |   | 23,033  |       
|                                          | Restructuring costs                            |                                          |         |           |        |              |         |             |        |              |         |       |        |   |         |       |        |   |         | 1,742  |       
|                                          | Loss (Gain) on sale of assets                  |                                          |         | (9,061     | )      |              |         | 42           |        |              |         |       |        |   |         | 5      |        |   |         | (4,445 | )     
|                                          |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|                                          |                                                | Total operating expenses                 |         |            | 23,745 |              |         |              | 32,121 |              |         |        | 37,991 |   |         |        | 31,258 |   |         |        | 20,330 | 
|Loss from operations                      |                                                |                                          | (20,499 | )          |        |              | (21,587 | )            |        |              | (26,581 | )      |        |   | (23,524 | )      |        |   | (10,439 | )     
|Other (expense) income, net               |                                                |                                          | (734    | )          |        |              | (760    | )            |        |              | 3,024   |        |        |   | 1,596   |        |        |   | 751     |       
|                                          |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Net loss                                  |                                                | $                                        | (21,233 | )          |        | $            | (22,347 | )            |        | $            | (23,557 | )      |        | $ | (21,928 | )      |        | $ | (9,688  | )     
|                                          |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Net loss available to common stockholders |                                                | $                                        | (21,424 | )          |        | $            | (22,495 | )            |        | $            | (23,557 | )      |        | $ | (21,928 | )      |        | $ | (9,688  | )     
|                                          |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Basic and diluted net loss per share      |                                                | $                                        | (8.77   | )          |        | $            | (2.97   | )            |        | $            | (1.04   | )      |        | $ | (0.93   | )      |        | $ | (0.40   | )     
|                                          |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       
|Weighted-average shares outstanding       |                                                |                                          | 2,444   |            |        |              | 7,572   |              |        |              | 22,710  |        |        |   | 23,504  |        |        |   | 24,106  |       
|                                          |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       

|                                                                   |  |                |         |            |  |              |        |              |  |              |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------------------------ |  | -------------- | ------- | ---------- |  | ------------ | ------ | ------------ |  | ------------ | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                                   |  | January 3,     |         | January 2, |  | December 31, |        | December 30, |  | December 29,
|                                                                   |  | 1999           |         | 2000       |  | 2000         |        | 2001         |  | 2002        
|                                                                   |  |                |         |            |  |              |        |              |  |             
|                                                                   |  |               
|                                                                   |  | (In thousands)
|Balance Sheet Data:                                                |  |                |         |            |  |              |        |              |  |              |        |  |  |   |        |  |  |   |        | 
|Cash and cash equivalents                                          |  | $              | 3,841   |            |  | $            | 16,706 |              |  | $            | 17,066 |  |  | $ | 5,036  |  |  | $ | 4,347  | 
|Investments                                                        |  |                | 2,490   |            |  |              | 44,650 |              |  |              | 25,636 |  |  |   | 20,942 |  |  |   | 12,054 | 
|Working capital                                                    |  |                | 285     |            |  |              | 58,820 |              |  |              | 39,114 |  |  |   | 22,640 |  |  |   | 17,047 | 
|Total assets                                                       |  |                | 28,165  |            |  |              | 84,081 |              |  |              | 62,931 |  |  |   | 38,765 |  |  |   | 27,485 | 
|Long-term obligations and noncurrent portion of
    capital leases |  |                | 13,856  |            |  |              | 4,406  |              |  |              | 1,510  |  |  |   | 184    |  |  |   | 350    | 
|Mandatorily redeemable preferred stock                             |  |                | 19,993  |            |  |              |       |              |  |              |       |  |  |   |       |  |  |   |       | 
|Total stockholders equity (deficit)                               |  |                | (19,924 | )          |  |              | 65,695 |              |  |              | 46,945 |  |  |   | 28,026 |  |  |   | 19,508 | 

12



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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
technologies and products for data storage solutions and storage
networking applications. Our offering consists of a variety of
new embedded storage switch products as well as our SAN
interconnect switch and hub products that connect computers to
data storage devices in a network configuration. Our new
embedded storage switch products are based on a
switch-on-a-chip, or SOC. This SOC 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 SOC incorporates our InSpeed technology,
which is an advanced switching architecture that results in a
single chip capable of handling multiple Fibre Channel devices.
The InSpeed SOC 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 reliability, availability
and serviceability. We are also using the InSpeed SOC in Fibre
Channel switches and blades that can be embedded by OEMs in
their storage solutions. This technology can also be used to
offer high performance, low cost switches for entry level SANs.
Revenue from InSpeed-based products represented approximately
39% of our fiscal 2002 revenue.

We derive substantially all of our revenue from
the sale of Fibre Channel products, including embedded storage
switch products, and SAN switches and hubs. We sell these
products primarily to a limited number of OEMs.
HP Corporation (including Compaq Computer Corporation) and
Avid Technology represented 41.0% and 14.7% of revenue,
respectively, for fiscal 2002. 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 during 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 have outsourced our switch and hub box product
manufacturing, fulfillment and repair operations and most of our
materials management to Suntron Corporation
(Suntron). 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 SOCs to third-party manufacturers that
ship these components to Suntron for inclusion in our product
assemblies. In addition, we have outsourced the manufacturing of
our current embedded SOC products to LSI Logic.

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, 2001 and 2002, we
recognized $2.9 million, $1.4 million and
$0.6 million, respectively, of the stock-based compensation
expense.

As of December 29, 2002, we had an
accumulated deficit of $133.8 million and have never been
profitable. We reduced our work force in 2002, sold the assets
relating to our software product offerings, and took other steps
to better align our operating expenses with our strategic
direction and 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.

13



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##### Table of Contents



Restructuring

During April 2002, we adopted and implemented a
restructuring plan to reduce our cost structure and focus on our
InSpeed-based product development and sales. As a result of the
plan, we recorded restructuring charges of $1.7 million,
net of adjustments.

The restructuring plan included a reduction of
approximately 22% of our workforce across all departments that
resulted in a charge of $360,000, net of adjustments relating
primarily to severance.

The restructuring plan included the write-off of
property and equipment that was disposed or removed from
operations and resulted in a charge of $400,000. The property
and equipment consisted primarily of computer equipment and
related software, production and engineering equipment, and
office equipment, furniture, and fixtures. We also recorded
other restructuring costs of $83,000 relating primarily to
impairment of operating lease agreements for equipment and
professional fees incurred in connection with the restructuring
activities.

The restructuring plan included a charge of
$899,000 for the consolidation of space within our Bothell,
Washington corporate headquarters and our engineering facility
in Irvine, California. This charge includes the cost associated
with the idle facility space at these locations for the
remainder of the lease terms.

The restructuring charges are summarized as
follows:

|                                                  |  |                |       |          |  |          |      |             |  |                   |      |   |  |   |     |   |  |   |     | 
|------------------------------------------------- |  | -------------- | ----- | -------- |  | -------- | ---- | ----------- |  | ----------------- | ---- | - |  | - | --- | - |  | - | --- | 
|                                                  |  |                |       |          |  |          |      |             |  | Accrued          
|                                                  |  |                |       |          |  |          |      |             |  | Restructuring    
|                                                  |  |                |       | Non-cash |  | Cash     |      |             |  | Costs as of      
|Category                                          |  | Total Charge   |       | Charges  |  | Payments |      | Adjustments |  | December 29, 2002
|                                                  |  |                |       |          |  |          |      |             |  |                  
|                                                  |  |               
|                                                  |  | (In thousands)
|Workforce reduction                               |  | $              | 393   |          |  | $        |     |             |  | $                 | (360 | ) |  | $ | (33 | ) |  | $ |    | 
|Consolidation of excess facilities                |  |                | 899   |          |  |          |     |             |  |                   | (286 | ) |  |   |    |   |  |   | 613 | 
|Impairment of long-lived assets and other charges |  |                | 483   |          |  |          | (400 | )           |  |                   | (83  | ) |  |   |    |   |  |   |    | 
|                                                  |  |                |       |          |  |          |      |             |  |                   |      |   |  |   |     |   |  |   |     | 
|Total                                             |  | $              | 1,775 |          |  | $        | (400 | )           |  | $                 | (729 | ) |  | $ | (33 | ) |  | $ | 613 | 
|                                                  |  |                |       |          |  |          |      |             |  |                   |      |   |  |   |     |   |  |   |     | 

We expect to pay the remaining amounts related to
excess facilities space over the remaining lease term of our
Bothell, Washington facility through the first quarter of fiscal
2005.

Sale of Assets

On April 15, 2002, we closed a transaction
with Fujitsu Software Technology Corporation, d/b/a Fujitsu
Softek, involving the acquisition by Fujitsu Softek of our SAN
management software assets, including our SAN management
software, SAN InSiteTM, associated intellectual
property and key development team resources. Upon closing of the
transaction we received proceeds of $2.5 million and a note
for $2.5 million, which became due and was collected with
accrued interest on January 15, 2003. In addition, we have
the right to receive up to an additional $5.0 million from
sales of Fujitsu Softek products based on SAN InSite during the
four-year period after the closing. Net of associated costs and
expenses, we recorded a gain on sale from this transaction of
$4.4 million.

Provision for Income Taxes

Since our inception, we have incurred significant
losses for federal and state income tax purposes. As of
December 29, 2002, we have operating loss carry-forwards of
$97.4 million. These operating loss carryforwards expire on
various dates from 2011 through 2022. We have recorded a
valuation allowance equal to the aggregate 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. Further, these operating
loss carryforwards could be subject to usage limitations due to
changes in our ownership resulting from equity financings.

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Critical Accounting Policies



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

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States, 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 for the reporting periods presented.
Management reviews the estimates and assumptions used for
financial reporting each period. Actual results could differ
materially from those estimates and future changes to such
estimates or assumptions used based could materially and
adversely affect the financial statements. 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, the allowance
for doubtful accounts, warranty reserves and inventory valuation.



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

We recognize revenue when it is realized or
realizable and earned. We consider revenue realized or
realizable and earned when there is persuasive evidence of an
arrangement, the product has been shipped to the customer or the
customer takes possession of the product, the sales price is
fixed or determinable and collectibility is reasonably assured.
We also defer the recognition of revenue for sales subject to
price protections or stock rotation rights until the expiration
of such protections or rights.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Valuation of Long-Lived Assets Including
    Goodwill and Purchased Intangible Assets

We review property and equipment and goodwill for
impairment whenever events or changes in circumstances indicate
the carrying value of an asset may not be recoverable. Our asset
impairment review assesses the fair value of the assets based on
the future cash flows the assets are expected to generate. An
impairment loss is recognized when estimated undiscounted future
cash flows expected to result from the use of the asset plus net
proceeds expected from disposition of the asset (if any) are
less than the carrying value of the asset. This approach uses
our estimates of future market growth, forecasted revenue and
costs, expected periods the assets will be utilized and
appropriate discount rates. Such evaluations of impairment of
long-lived assets including goodwill are an integral part of,
but not limited to, our strategic reviews of our business and
operations performed in conjunction with restructuring actions.
When an impairment is identified, the carrying amount of the
asset is reduced to its estimated fair value. Deterioration of
our business in the future could also lead to impairment
adjustments as such issues are identified.



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

We evaluate the collectibility of our trade
receivables based on a combination of factors. We regularly
analyze our significant customer accounts, and, should we become
aware of a specific customers inability to meet its
obligations to us, we record a specific reserve for bad debt to
reduce the related receivable to the amount we reasonably
believe is collectible. We also record reserves for bad debt for
all other customers based on a variety of factors including the
length of time the receivables are past due, the financial
health of the customer, macroeconomic considerations and
historical experience. If circumstances related to specific
customers change, our estimates of the recoverability of
receivables could be further adjusted.



| |                   
| | ------------------
| | Warranty Provision

We provide for the estimated cost of product
warranties at the time revenue is recognized. While we engage in
extensive product quality programs and processes, including
actively monitoring and evaluating the quality of our contract
manufacturer and other suppliers, our estimated warranty
obligation is affected by product failure rates, product
failures outside of our historical experience, and other costs
incurred in correcting a product failure. We believe that our
current warranty reserve is appropriate, however, if projected
product failure rates or costs differ from our estimates,
revisions to the estimated warranty reserve would be required.

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| |          
| | ---------
| | Inventory

Inventory is carried at the lower of standard
cost (which approximates current cost using a first in, first
out cost flow assumption) or estimated net realizable value. We
perform detailed assessments of our inventory each period, which
includes reviewing, among other factors, demand requirements and
product life cycle plans. Based on our analyses, we record
adjustments to inventory for excess, or obsolescence, when
appropriate, to reflect inventory at its net realizable value.
Revisions to our inventory adjustments may be required if actual
demand or product life cycles differ from our estimates.

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
|                            |                                                |                          
|                            |                                                | December 31,              |       | December 30, |       | December 29,
|                            |                                                | 2000                      |       | 2001         |       | 2002        
|                            |                                                |                           |       |              |       |             
|Revenue                     |                                                |                           |       |              |       |              |        |      |       |  |       |      
|                            | SAN systems                                    |                           |       | 89.2         | %     |              |        | 76.9 | %     |  |       | 100.0 | %    
|                            | Components                                     |                           |       | 10.8         |       |              |        | 23.1 |       |  |       |      |      
|                            |                                                |                           |       |              |       |              |        |      |       |  |       |      
|                            |                                                | Total revenue             |       |              | 100.0 |              |        |      | 100.0 |  |       |       | 100.0 | 
|Cost of revenue             |                                                |                           | 65.6  |              |       |              | 64.5   |      |       |  | 52.0  |      
|                            |                                                |                           |       |              |       |              |        |      |       |  |       |      
|Gross profit                |                                                |                           | 34.4  |              |       |              | 35.5   |      |       |  | 48.0  |      
|Operating expenses          |                                                |                           |       |              |       |              |        |      |       |  |       |      
|                            | Research and development                       |                           |       | 46.9         |       |              |        | 67.2 |       |  |       | 54.9  |      
|                            | Selling, general and administrative            |                           |       | 52.5         |       |              |        | 66.2 |       |  |       | 51.9  |      
|                            | Amortization of goodwill and other intangibles |                           |       | 6.5          |       |              |        | 3.8  |       |  |       | 2.1   |      
|                            | Amortization of stock-based compensation       |                           |       | 8.5          |       |              |        | 6.2  |       |  |       | 2.9   |      
|                            |                                                |                           |       |              |       |              |        |      |       |  |       |      
|                            |                                                |                           | 114.4 |              |       |              | 143.4  |      |       |  | 111.8 |      
|                            | Restructuring costs                            |                           |       |             |       |              |        |     |       |  |       | 8.5   |      
|                            | Loss (Gain) on sale of assets                  |                           |       |             |       |              |        |     |       |  |       | (21.6 | )    
|                            |                                                |                           |       |              |       |              |        |      |       |  |       |      
|                            |                                                | Total operating expenses  |       |              | 114.4 |              |        |      | 143.4 |  |       |       | 98.7  | 
|                            |                                                |                           |       |              |       |              |        |      |       |  |       |      
|Loss from operations        |                                                |                           | (80.0 | )            |       |              | (107.9 | )    |       |  | (50.7 | )    
|Other income (expense), net |                                                |                           | 9.1   |              |       |              | 7.3    |      |       |  | 3.7   |      
|                            |                                                |                           |       |              |       |              |        |      |       |  |       |      
|Net loss                    |                                                |                           | (70.9 | )%           |       |              | (100.6 | )%   |       |  | (47.0 | )%   
|                            |                                                |                           |       |              |       |              |        |      |       |  |       |      



| |                                                               
| | --------------------------------------------------------------
| | Fiscal Years Ended December 30, 2001
    and December 29, 2002

Revenue.Revenue
decreased 5.5% from $21.8 million for the fiscal year ended
December 30, 2001 to $20.6 million for the fiscal year
ended December 29, 2002. During 2002, revenue was generated
from the sale of SAN systems compared to 2001 revenue being
comprised of SAN system revenue (77%) and components revenue
(23%). The shift in revenue composition reflects the
discontinuance of our component transceiver products during the
second quarter of 2001 and the increased sales, both as a
percentage of revenue and gross dollars, of our SOC, switch and
hub products. The 23% increase in SAN system revenue from
$16.8 million for the fiscal year ended December 30,
2001 to $20.6 million for the fiscal year ended
December 29, 2002 reflects the increasing demand for our
InSpeed based switches and SOCs that were first introduced and
went into production during late 2001. Revenue from InSpeed
based products increased to $8.1 million, or 39% of total
revenue, during 2002, compared with $1.7 million, or 8% of
total revenue during 2001. We expect the sale of our InSpeed
based products to continue to increase both in dollar amount and
as a percentage of total revenue during 2003. We expect the
growth in new and existing InSpeed based products to outpace

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anticipated declines in SAN Interconnect products
that may be phased out during the course of 2003, resulting in
an overall increase in revenue in fiscal 2003 as compared with
fiscal 2002.


Cost of revenue.Cost of revenue includes the cost to
acquire finished products from third party contract
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. Cost of revenue decreased 24% from
$14.1 million for the fiscal year ended December 30,
2001 to $10.7 million for the fiscal year ended
December 29, 2002. This $3.4 million decrease in cost
of revenue and the decrease in cost of revenue as a percentage
of revenue (65% for fiscal 2001 compared with 52% for fiscal
2002), reflects the change in product mix towards InSpeed
products, the sales of which generally have higher margins than
other SAN system products and component transceiver products.
Also contributing to higher fiscal 2001 cost of revenue were
provisions for inventory valuations necessary to mark the
remaining transceiver inventory to net realizable value due to
the discontinuance of the transceiver product sales during
mid-2001. We believe that our current infrastructure is
sufficient to service the anticipated increase in demand for our
products during fiscal 2003. However, we anticipate incremental
increases in the total dollars of cost of revenue during 2003 in
line with increased products sales.

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 decreased 23% from
$14.7 million for the fiscal year ended December 30,
2001 to $11.3 million for the fiscal year ended
December 29, 2002. This $3.4 million decrease was
comprised mainly of decreased compensation and depreciation
expenses which decreased $2.4 million and
$0.7 million, respectively. These decreases were primarily
the result of our sale of the SAN InSite software assets which
resulted in decreased headcount and depreciable assets. We
expect to continue to incur significant research and development
expenses during 2003 as we plan to introduce new products and
enhancements to existing products during fiscal 2003.

Selling, general and
administrative.Selling, general and
administrative expenses decreased 26% from $14.4 million
for the fiscal year ended December 30, 2001 to
$10.7 million for the fiscal year ended December 29,
2002. This $3.7 million decrease is due primarily to
decreases in compensation, marketing activities and customer
evaluation, travel, and consulting expenses, which declined
$1.9 million, $0.8 million, $0.4 million, and
$0.4 million respectively. Expense decreases were primarily
a result of restructuring our business to focus on our embedded
switch products.

Amortization of goodwill and other
intangibles.Amortization of goodwill
and other intangibles decreased 50% from $0.8 million for
the fiscal year ended December 30, 2001 to
$0.4 million for the fiscal year ended December 29,
2002. This $0.4 million decrease is due to the cessation of
amortization of goodwill relating to our 1998 acquisition of
Arcxel upon adoption of Statement of Financial Accounting
Standard No. 142 Goodwill and Other Intangible
Assets (SFAS 142). Under the provisions of
SFAS 142 goodwill is not amortized but is instead subject
to annual impairment. Additional impairment testing may be
required when indicators of impairment exist, as defined by
SFAS 142. Our annual impairment testing, performed as of
December 29, 2002, indicated that our recorded goodwill was
not impaired. Barring any future indications of impairment, we
anticipate that amortization of goodwill and other intangibles
will decrease during fiscal 2003 as other intangible assets
become fully amortized during the period.

Amortization of deferred stock compensation.Amortization of deferred stock
compensation decreased 57% from $1.4 million for the fiscal
year ended December 30, 2001 to $0.6 million for the
fiscal year ended December 29, 2002. This $0.8 million
decrease was the result of employees leaving the company due to
the sale of our SAN InSite software assets and the reduction in
force during the second quarter of 2002. Unamortized stock-based
compensation as of December 29, 2002 is $0.1 million
and is expected to be fully amortized to expense during 2003.

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

Revenue.Revenue
decreased 34% from $33.2 million for the fiscal year ended
December 31, 2000 to $21.8 million for the fiscal year
ended December 30, 2001. This $11.4 million aggregate
decrease was primarily a result of a $12.8 million decrease
in SAN system products, specifically entry-level hub product
sales and transceiver products sold as part of SAN system
products. SAN System revenue represented 89% and 77% and
component revenue represented 11% and 23% of total revenue for
the fiscal years ended December 31, 2000 and
December 30, 2001, respectively. Component revenue
increased in absolute dollars primarily due to a single one-time
order of transceiver product from one of our OEMs.

Cost of revenue.Cost of revenue decreased 35% from
$21.8 million for the fiscal year ended December 31,
2000 to $14.1 million for the fiscal year ended
December 30, 2001. This $7.7 million decrease and the
decrease of cost of revenue as a percentage of revenue (66% for
fiscal 2000 and 65% for fiscal 2001) reflects a change in our
product mix as sales of switch products increased while sales of
hub and transceiver products declined. Our switch and hub
products generally had higher gross margins than our transceiver
products. The improved margins generated from sales of our
products during 2001 were offset by $1.1 million, net,
adjustments stemming from warranty, inventory and patent related
issues.

Cost of revenue during fiscal 2001 was also
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 other
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.

Research and development expenses.Research and development expenses
decreased 6% from $15.6 million for the fiscal year ended
December 31, 2000 to $14.7 million for the fiscal year
ended December 30, 2001. This $0.9 million decrease
was primarily due to consulting and temporary services which
decreased an aggregate $1.1 million relating to the
Vixel 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.

Selling, general and administrative expenses.Selling, general and administrative
expenses decreased 17% from $17.4 million for the fiscal
year ended December 31, 2000 to $14.4 million for the
fiscal year ended December 30, 2001. This $3.0 million
decrease was mainly due to reductions of bad debt, advertising
and customer evaluation,travel, professional services,
and recruitment expenses, which declined $0.8 million,
$0.7 million, $0.6 million, $0.6 million and
$0.3 million, respectively. These decreases were primarily
due to a reduction-in-force during 2001 and a reduction of
marketing expenses such as trade show expenses, cooperative
marketing expenses, and advertising development and placement
expenses.

Amortization of goodwill and other
intangibles.Amortization of goodwill
and other intangibles decreased 64% from $2.2 million for
the fiscal year ended December 31, 2000 to
$0.8 million for the fiscal year ended December 30,
2001. This $1.4 million decrease was due to intangible
assets being or becoming fully amortized during fiscal 2000.

Amortization of stock-based compensation.Amortization of stock-based
compensation decreased 50% from $2.8 million for the fiscal
year ended December 31, 2000 to $1.4 million for the
fiscal year ended December 30, 2001. This $1.4 million
decrease was driven by the amortization of deferred stock
compensation

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being accounted for on an accelerated basis and
reaching the later periods of amortization and as a result of
employee terminations, including the reduction in force,
occurring during 2001.


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 $115.3 million
through December 29, 2002. Additionally, we have financed
our operations through capital equipment lease lines, working
capital credit facilities, notes payable, $6.9 million, net
of costs, received from the sale of our laser diode fabrication
facility and gigabit Ethernet product line and
$2.1 million, net of costs, received from the sale of our
SAN InSite software assets. Our principal sources of liquidity
at December 29, 2002 consisted of $4.4 million of cash
and cash equivalents and $12.0 million of investments. In
addition, during early fiscal 2003 we collected a
$2.5 million note due to us from the sale of the SAN InSite
software assets and closed a Series B Convertible Preferred
Stock financing generating net proceeds of approximately
$7.8 million.

Cash utilized by operating activities was
$9.2 million during fiscal 2002, due primarily to net
losses adjusted for non-cash expenses, as well as working
capital required to fund our operations. Cash provided by
investing activities was $9.9 million, primarily related to
maturities of investments, net of purchases of investments and
net proceeds of $2.1 million received from the sale of our
SAN InSite software assets, offset by capital expenditures of
$1.1 million. Cash used in financing activities was
$1.4 million, primarily due to payments of
$1.4 million on our capital leases and a $0.5 million
purchase of treasury stock, offset by net of cash received
pursuant to our Employee Stock Purchase Plan and stock option
plans totaling $0.5 million.

As of December 29, 2002, we had an
accumulated deficit of $133.8 million and have never been
profitable. We reduced our work force during 2002 and sold our
SAN InSite software assets. 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.

Including the proceeds from the sale of preferred
stock and the collection of the note from the sale of SAN InSite
in early 2003, we believe that our existing cash, cash
equivalents and investment balances will be sufficient to meet
our cash requirements at least through the next twenty-four
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, 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.

Commitments and Other Obligations

During the ordinary course of business we enter
into commitments and other obligations that are contractual in
nature and, unless amended reflect future cash uses. The table
below sets forth those commitments as of December 29, 2002
(in thousands):

|                                    |       |       |       |         |  |              |     |           |  |   |     |     |  |   |   |   | 
|----------------------------------- | ----- | ----- | ----- | ------- |  | ------------ | --- | --------- |  | - | --- | --- |  | - | - | - | 
|Description                         |       | Total |       | Current |  | 1 to 2 years |     | 3-5 years
|                                    |       |       |       |         |  |              |     |          
|Capital Leases  Including Interest |       | $     | 236   |         |  | $            | 187 |           |  | $ | 46  |     |  | $ | 3 |  
|Operating Leases                    |       |       | 1,371 |         |  |              | 627 |           |  |   | 744 |     |  |   |  |  
|                                    |       |       |       |         |  |              |     |           |  |   |     |     |  |   |   |  
|                                    | Total |       | $     | 1,607   |  |              | $   | 814       |  |   | $   | 790 |  |   | $ | 3 | 
|                                    |       |       |       |         |  |              |     |           |  |   |     |     |  |   |   |  

Recent Accounting Pronouncements

Effective December 30, 2002, we adopted
Statement of Financial Accounting Standard No. 143
Accounting for Obligations Associated with the Retirement
of Long-Lived Assets (SFAS 143). The provisions of
SFAS 143 apply to all entities that incur obligations
associated with the retirement of tangible

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long-lived assets. SFAS 143 is effective for
fiscal years beginning after June 15, 2002. We are
currently evaluating the potential impacts of SFAS 143 on
our operating results, financial position or cash flows.


Effective December 31, 2001, we adopted
Statement of Financial Accounting Standard No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 addresses issues
relating to the implementation of SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and develops a model
for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. Our adoption of
SFAS 144 did not materially impact our operating results,
financial position or cash flows.

Effective May 15, 2002, we adopted Statement
of Financial Accounting Standard No. 145 Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections
(SFAS 145). SFAS 145 requires gains and losses on
extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as
previously required under SFAS No. 4 Reporting
Gains and Losses from the Extinguishment of Debt.
Extraordinary treatment will be required for certain
extinguishments as provided in APB No. 30 Reporting
the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions.
SFAS 145 also amends SFAS No. 13 Accounting
for Leases to require certain modifications to capital
leases be treated as sale-leaseback transactions and modifies
the accounting for sub-leases when the original lessee remains a
secondary obligor (or guarantor). Our adoption of SFAS 145
did not materially impact our operating results, financial
position or cash flows.

Effective December 31, 2002, we adopted
Statement of Financial Accounting Standard No. 146
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). SFAS 146 addresses
prospective financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF
Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be
recognized and measured at fair value when the liability is
incurred versus on the date of the entitys commitment to
an exit plan as required under ETIF 94-3. SFAS 146 is
effective prospectively for exit or disposal activities that are
initiated after December 31, 2002. Our adoption of
SFAS 145 did not materially impact our operating results,
financial position or cash flows.

During December 2002, the FASB issued Statement
of Financial Accounting Standard No. 148, Accounting
for Stock-Based Compensation  Transition and
Disclosure (SFAS 148) which amends the guidance set
forth in Statement of Financial Accounting Standard No. 123
Accounting for Stock-Based Compensation
(SFAS 123). SFAS 148 provides guidance for companies
that elect to change their accounting for employee stock based
compensation to the fair value method of accounting. The
statement amends, expands and increases the frequency of the
existing disclosure requirements to require more prominent and
quarterly of the effects of stock based compensation of
SFAS 123. The interim disclosure provisions become
effective for us starting with the quarter ending March 30,
2003. We are currently evaluating the potential impacts of
SFAS 148 on our operating results, financial position or
cash flows.

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 $9.7 million for
fiscal year 2002, and expect to incur losses in the future. As
of December 29, 2002, we had an accumulated deficit of
$133.8 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.

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| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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;                                                                                                 
|
| |  | the rate of market acceptance of our InSpeed
    technology;                                                                                                                                                    
|
| |  | the length of time needed by customers for the
    evaluation and integration of our products;                                                                                                                  
|
| |  | delays in or longer than expected design cycles
    for new products;                                                                                                                                           
|
| |  | our ability to attain and maintain sufficient
    reliability levels for our products;                                                                                                                          
|
| |  | our ability to develop and market new products;                                                                                                                                                                 
|
| |  | 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 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.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | 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 HP (including Compaq
Computer Corporation) and Avid Technology represented 41.0% and
14.7% of revenue, respectively, for the twelve month period
ended December 29, 2002. 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.

21



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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 the market
    acceptance of our embedded storage switch products and growth of
    the storage market.

We are focusing the majority of our development,
sales and marketing resources on the new embedded storage switch
market. Our InSpeed based products incorporate a relatively new
technology we developed for this market. Accordingly if the
acceptance of our InSpeed technology and InSpeed based products
by large OEMs does not materialize, or the market for back-end
embedded storage switches does not grow, our results of
operations and financial condition could be harmed
significantly. Our success in generating revenue in this market
will depend on, among other things, our ability to:



| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | demonstrate the benefits of embedded switch
    products to OEMs;                                                                                                                  
|
| |  | enhance our existing embedded storage switch
    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 storage OEMs; 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 be successful in this market.



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



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, SATA (Serial Advanced
Technology Attachment) 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.

22



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| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We expect that a growing percentage of our
    future revenue will be derived from our InSpeed technology-based
    products 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 InSpeed products and product launches by
customers that incorporate our InSpeed SOCs and switches. In
addition, as we introduce new or enhanced InSpeed products, we
will have to manage successfully the transition from older
releases 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.



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

We target our embedded storage switches at a new
and evolving market. As yet no other company has publicly
introduced products similar to our InSpeed family of products.
As this market grows we may face competition from storage
networking switch providers, including Brocade Communications
Systems, Inc. and QLogic Corporation, semiconductor companies,
or OEMs, including our OEM customers, that may choose to develop
technology or products that compete with ours.

We may not be able to compete successfully in the
SAN market. The markets for SAN interconnect products are highly
competitive and 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 could have a
material adverse effect on our business, results of operations
and financial condition.

Our current competitors include a number of
domestic and international companies, many of which have longer
operating histories, greater name recognition and substantially
greater financial, technical, and sales and marketing resources,
and may have larger distribution channels, access to more
customers and a larger installed customer base than we do. As a
result, these companies may be able to undertake more extensive
marketing campaigns and adopt more aggressive pricing policies
than we can. We may not have the financial resources, technical
expertise or marketing, manufacturing, distribution, and support
capabilities to compete successfully in the future. There can
also be no assurance that we will be able to compete
successfully against current or future competitors or that
current or future competitive pressures will not materially harm
our business.

For SAN interconnect sales, we compete primarily
with Brocade Communications Systems, Inc. and QLogic
Corporation. Our competitors continue to introduce improved SAN
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 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;

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| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | difficulties in hiring and retaining necessary
    personnel;                              
|
| |  | difficulties in reallocating engineering
    resources and overcoming resource limitations;
|
| |  | difficulties with independent contractors or
    development partners;                     
|
| |  | changing market or competitive product
    requirements; and                               
|
| |  | unanticipated engineering complexities.                                                    



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

We rely on OEMs and resellers 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 effectively market their products that utilize our
products, could substantially reduce our revenue and seriously
harm our business.



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, an outside
contract-manufacturing firm, to manufacture, store and ship our
box products. We share Suntrons manufacturing and assembly
capacity with numerous companies whose needs may conflict with
ours. If Suntron is unable, unwilling, or fails 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 for an undeterminable period of
time. 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 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, or reduces or discontinues 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 SOCs, 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

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our switches and hubs. If we cannot supply our
SOCs or other products due to a lack of availability of the
single source 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, including InSpeed based
products, 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,
cause significant customer relations problems, and damage our
reputation.



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

We believe that establishing and maintaining the
Vixel and InSpeed brands 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 Fibre Channel products. If
we fail to promote our brands successfully, or if we incur
excessive expenses in an attempt to promote and maintain the
Vixel or InSpeed brands, our business, results of operations and
financial condition may be materially and 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 or Inspeed brands may decline
and our business may 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 ASIC design
as we further develop our product line. Competition for these
highly skilled employees in our industry is

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##### Table of Contents



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
39% of our total revenue for the twelve month period ended
December 29, 2002. We plan to expand our international
sales, especially in Japan and Asia. Our international sales
growth will be limited if we are unable to establish
relationships with international OEMs and 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;                                                                   
|
| |  | 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 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 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 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 storage
device or a SAN must utilize the same standards in order to
operate together. Our products comprise only a part of a storage

26



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##### Table of Contents



device or 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, including InSpeed. 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
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.

On March 3, 2003 we filed a patent
infringement action against QLogic Corporation in the United
States District Court for the District of Delaware. The
complaint states that QLogic is infringing U.S. Patent
No. 6,118,776, entitled Methods and Apparatus for
Fiber Channel Interconnection of Private Loop Devices,
through the unauthorized manufacture, use, sale and offering for
sale of various storage area network switching products,
including QLogics SANBox2 product. We are seeking
unspecified past damages, potential future royalties, or,
alternatively, injunctive relief.

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.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | 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;

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| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                                                                                                                      
|
| |  | future sales of capital stock.                                                                                                                                                 
|
| |  | political and economic instability, including,
    but not limited to war, military actions, and acts of terrorism;
    and                                                    
|
| |  | force majeure events.                                                                                                                                                          

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.

Including the proceeds from the sale of preferred
stock and the collection of the note from the sale of SAN InSite
in early 2003, we believe that our existing cash, cash
equivalent and investment balances will be sufficient to meet
our cash requirements at least through the next twenty-four
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;                                          
|
| |  | 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.

28



---



##### Table of Contents





| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | 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
$12.1 million as of December 29, 2002, 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 Item 15(a) and included herein
beginning on page F-1.






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

None.

29



---



##### 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
2003 Proxy Statement under the caption Election of
Directors and information concerning our executive
officers is included in Part I, Item I, under the
caption Executive Officers.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is
incorporated by reference to our 2003 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 2003 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 2003 Proxy Statement under the
section titled Certain Transactions.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

We conducted an evaluation of our controls and
procedures, as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, within 90 days
of the filing of this report. Based on this evaluation, our
principal executive officer and principal financial officer
concluded that, as of the date of the evaluation, our disclosure
controls were effective in providing reasonable assurance that
the material information required to be included in our reports
filed with the Securities and Exchange Commission is properly
recorded, processed, summarized, and reported within the time
specified periods pursuant to SEC rules. It should be noted that
the design of any system of control is based in part upon
certain assumptions, and there can be no assurance that any
design will succeed in achieving its stated objectives.

In addition, there were no significant changes in
our system of internal control or in other factors that could
significantly impact these controls subsequent to the date of
evaluation. Furthermore, we have not identified any material
deficiencies or weaknesses in our system of internal control,
therefore no corrective actions were taken.

30



---



##### Table of Contents






PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K



|    |                                                              
|--- | -------------------------------------------------------------
|(a) | The following documents are filed as part of this
    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 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 December 31, 2000, December 30, 2001
and December 29, 2002 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 Schedule |  |      | 33 | 
|Schedule II  Valuation and
    Qualifying Accounts                   |  |      | 33 | 



| |     |          
| | --- | ---------
| | (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                                                           
|        | 3.3(4)  |             |  | Certificate of Designation of Series B
    Convertible Preferred Stock                                                                    
|        | 3.4(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.                               
|        | 4.5(2)  |             |  | Form of Rights Certificate                                                                                                                
|        | 4.6(4)  |             |  | Form of Warrant to Purchase Common Stock of Vixel
    Corporation.                                                                        
|        | 4.7(4)  |             |  | Registration Rights Agreement dated as of
    February 14, 2003, by and between Vixel Corporation and the
    investors signatory thereto.
|        | 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) |             |  | Turnkey Manufacturing Agreement with K*Tec
    Electronics, a division of Kent Electronics Company, dated
    May 5, 1997 (Exhibit 10.7)  
|        | 10.4(1) |             |  | Employment Agreement between Registrant and
    Stuart B. Berman dated February 17, 1998 (Exhibit 10.9)*                                  

31



---



##### Table of Contents



|        |           |             |  |                                                                                                                                                                       
|------- | --------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 10.5(1)   |             |  | Employment Agreement between Registrant and James
    McCluney dated April 26, 1999 (Exhibit 10.12)*                                                                  
|        | 10.6(1)   |             |  | Restricted Stock Purchase Agreement between
    Registrant and Kurtis L. Adams dated May 20, 1999
    (Exhibit 10.15)                                                 
|        | 10.7(1)   |             |  | Full Recourse Promissory Note between Registrant
    and Stuart B. Berman dated April 16, 1999
    (Exhibit 10.16)                                                    
|        | 10.8(1)   |             |  | Form of Full Recourse Promissory Note between
    Registrant and its executive officers (Exhibit 10.17)                                                               
|        | 10.9(1)   |             |  | Form of Full Recourse Promissory Note between
    Registrant and its directors (Exhibit 10.18)                                                                        
|        | 10.10(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)        
|        | 10.11(5)  |             |  | Second Amendment to Lease Agreement between
    Registrant and Sun Life Assurance Company of Canada (U.S.) dated
    November 28, 2001.                               
|        | 10.12     |             |  | Sublease Agreement between Registrant and
    Inter-Tel Technologies, Inc., dated October 7, 2002
    (Exhibit 10.20)                                                 
|        | 10.13(1)  |             |  | Vixel Corporation 1999 Employee Stock Purchase
    Plan and forms of agreements thereunder (Exhibit 10.22)*                                                           
|        | 10.14(1)  |             |  | Vixel Corporation 1999 Equity Incentive Plan, as
    amended*                                                                                                         
|        | 10.15(1)  |             |  | Form of Stock Pledge Agreement between the
    Registrant and its directors (Exhibit 10.24)                                                                           
|        | 10.16(3)  |             |  | Vixel Corporation 2000 Non-officer Equity
    Incentive Plan and forms of agreements thereunder
    (Exhibit 99.1)*                                                   
|        | 10.17(4)  |             |  | Series B Convertible Preferred Stock and
    Warrant Purchase Agreement between the Registrant and the
    Investors signatory thereto, dated as of February 18, 2003.
|        | 10.18(6) |             |  | Asset Purchase Agreement between Registrant and
    Fujitsu Technology Corporation, dated April 4, 2002.                                                              
|        | 23.1      |             |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants                                                                                                    
|        | 24.1      |             |  | Power of Attorney. Reference is made to the
    signature page                                                                                                        
|        | 99.1      |             |  | Certification of Chief Executive Officer and
    Chief Financial Officer.                                                                                             



---



|    |                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 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) filed June 9, 2000.                               
|   
|(4) | Incorporated by reference to Companys
    current report on Form 8-K filed with the Securities and
    Exchange Commission on February 20, 2003.                               
|   
|(5) | Incorporated by reference to Companys
    Annual Report on Form 10-K filed with the Securities and
    Exchange Commission on April 1, 2002.                                   
|   
|(6) | Incorporated by reference to Registrants
    current report on Form 8-K filed with the Securities and
    Exchange Commission on April 30, 2002.                               



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | Confidential treatment granted as to certain
    portions of this agreement.



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

32



---



##### Table of Contents





|    |                     
|--- | --------------------
|(b) | Reports on Form 8-K.

The Registrant filed a current report on
Form 8-K on October 1, 2002 under Item 5, with
respect to the Registrants announcement of its adoption of
a stock repurchase program.



|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|(c) | See Exhibits listed under Item 15(a)(3).                                                   
|   
|(d) | The financial statement schedules required by
    this item are listed under Item 15(a)(2).

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL
STATEMENT SCHEDULE

To the Board of Directors of Vixel Corporation

Our audits of the financial statements referred
to in our report dated January 28, 2003 except as to the
second paragraphs of Note 9, Legal Proceedings and of
Note 10, and Note 16 as to which the date is
March 3, 2003 appearing in this Annual Report on
Form 10-K also included an audit of the financial statement
schedule listed in Item 15(a)(2) of this Form 10-K. In
our opinion, this financial statement schedule presents fairly,
in all material respects, the information set forth therein when
read in conjunction with the related financial statements.



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

Seattle, Washington

January 28, 2003


SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

For the years ended December 31, 2000,
December 30, 2001, and December 29, 2002 (in
thousands):

|                                  |  |                     |       |                    |  |              |       |               |  |   |        |   |  |   |       | 
|--------------------------------- |  | ------------------- | ----- | ------------------ |  | ------------ | ----- | ------------- |  | - | ------ | - |  | - | ----- | 
|                                  |  | Balance at          |       | Amounts Charged to |  |              |       | Balance at   
|                                  |  | Beginning of Period |       | Costs and Expenses |  | (Deductions) |       | End of Period
|                                  |  |                     |       |                    |  |              |       |              
|Allowance for doubtful accounts   |  |                     |       |                    |  |              |       |               |  |   |        |   |  |   |       | 
|Year ended December 31, 2000.     |  | $                   | 250   |                    |  | $            | 701   |               |  | $ | (101   | ) |  | $ | 850   | 
|Year ended December 30, 2001.     |  | $                   | 850   |                    |  | $            | 108   |               |  | $ | (569   | ) |  | $ | 389   | 
|Year ended December 29, 2002.     |  | $                   | 389   |                    |  | $            | 8     |               |  | $ | (211   | ) |  | $ | 186   | 
|Accrued warranty costs            |  |                     |       |                    |  |              |       |               |  |   |        |   |  |   |       | 
|Year ended December 31, 2000.     |  | $                   | 2,949 |                    |  | $            | 1,975 |               |  | $ | (1,526 | ) |  | $ | 3,398 | 
|Year ended December 30, 2001.     |  | $                   | 3,398 |                    |  | $            | 604   |               |  | $ | (1,867 | ) |  | $ | 2,135 | 
|Year ended December 29, 2002.     |  | $                   | 2,135 |                    |  | $            | 427   |               |  | $ | (813   | ) |  | $ | 1,749 | 
|Allowance for inventory valuation |  |                     |       |                    |  |              |       |               |  |   |        |   |  |   |       | 
|Year ended December 31, 2000.     |  | $                   | 565   |                    |  | $            | 1,066 |               |  | $ | (603   | ) |  | $ | 1,028 | 
|Year ended December 30, 2001.     |  | $                   | 1,028 |                    |  | $            | 4,413 |               |  | $ | (1,379 | ) |  | $ | 4,062 | 
|Year ended December 29, 2002.     |  | $                   | 4,062 |                    |  | $            | 925   |               |  | $ | (1,403 | ) |  | $ | 3,584 | 

33



---



##### 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
27th day of March, 2003.



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



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

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

POWER OF ATTORNEY

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)                  |  | March 27, 2003
|                                            
|/s/ KURTIS L. ADAMSKurtis L. Adams           |  | Chief Financial Officer, Vice
    President of Finance, Secretary and
    Treasurer (Principal Financial and
    Accounting Officer) |  | March 27, 2003
|                                            
|/s/ ROBERT Q. CORDELL IIRobert Q. Cordell II |  | Director                                                                                                                             |  | March 27, 2003
|                                            
|/s/ CHARLES A. HAGGERTYCharles A. Haggerty   |  | Director                                                                                                                             |  | March 27, 2003
|                                            
|/s/ ROBERT S. MESSINARobert S. Messina       |  | Director                                                                                                                             |  | March 27, 2003
|                                            
|/s/ JAMI K. NACHTSHEIMJami K. Nachtsheim     |  | Director                                                                                                                             |  | March 27, 2003
|                                            
|/s/ PETER J. PERRONEPeter J. Perrone         |  | Director                                                                                                                             |  | March 27, 2003
|                                            
|/s/ TIMOTHY M. SPICERTimothy M. Spicer       |  | Director                                                                                                                             |  | March 27, 2003
|                                            
|/s/ WERNER F. WOLFENWerner F. Wolfen         |  | Director                                                                                                                             |  | March 27, 2003

34



---



##### 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, stockholders
equity and of cash flows present fairly, in all material
respects, the financial position of Vixel Corporation at
December 29, 2002 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 29, 2002 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.

As described in Note 6, Vixel Corporation
adopted the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets, effective December 31, 2001.



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



|                                                         | 
|-------------------------------------------------------- | 
|Seattle, Washington                                      | 
|January 28, 2003, except as to the second
    paragraphs | 
|of Note 9, Legal Proceedings, and of
    Note 10 and     | 
|Note 16 as to which the date is
    March 3, 2003        | 

F-1



---



##### Table of Contents



VIXEL CORPORATION

BALANCE SHEET

|                                         |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |          |        | 
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------ | ------ |  | - | -------- | ------ | 
|                                         |                                                                                                                                                                                                                             | December 30,                               |   | December 29,
|                                         |                                                                                                                                                                                                                             | 2001                                       |   | 2002        
|                                         |                                                                                                                                                                                                                             |                                            |   |             
|                                         |                                                                                                                                                                                                                             |                                           
|                                         |                                                                                                                                                                                                                             | (In thousands, except share               
|                                         |                                                                                                                                                                                                                             | amounts)                                  
|ASSETS                                  
|Current assets                           |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         
|                                         | Cash and cash equivalents                                                                                                                                                                                                   |                                            | $ | 5,036        |        |  | $ | 4,347    |       
|                                         | Investments                                                                                                                                                                                                                 |                                            |   | 20,942       |        |  |   | 12,054   |       
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $389 and $186, respectively                                                                                                                              |                                            |   | 2,995        |        |  |   | 2,782    |       
|                                         | Inventories                                                                                                                                                                                                                 |                                            |   | 2,951        |        |  |   | 1,503    |       
|                                         | Note receivable                                                                                                                                                                                                             |                                            |   |             |        |  |   | 2,500    |       
|                                         | Prepaid expenses and other current assets                                                                                                                                                                                   |                                            |   | 1,271        |        |  |   | 1,488    |       
|                                         |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         
|                                         |                                                                                                                                                                                                                             | Total current assets                       |   |              | 33,195 |  |   |          | 24,674 | 
|                                         | Property and equipment, net                                                                                                                                                                                                 |                                            |   | 4,299        |        |  |   | 2,243    |       
|                                         | Goodwill and other intangibles, net                                                                                                                                                                                         |                                            |   | 948          |        |  |   | 423      |       
|                                         | Other assets                                                                                                                                                                                                                |                                            |   | 323          |        |  |   | 145      |       
|                                         |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         
|                                         |                                                                                                                                                                                                                             | Total assets                               |   | $            | 38,765 |  |   | $        | 27,485 | 
|                                         |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities                      |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         
|                                         | Current portion of capital leases                                                                                                                                                                                           |                                            | $ | 1,340        |        |  | $ | 178      |       
|                                         | Accounts payable                                                                                                                                                                                                            |                                            |   | 4,046        |        |  |   | 2,900    |       
|                                         | Accrued liabilities                                                                                                                                                                                                         |                                            |   | 4,022        |        |  |   | 3,507    |       
|                                         | Deferred revenue                                                                                                                                                                                                            |                                            |   | 1,147        |        |  |   | 735      |       
|                                         | Accrued restructuring costs, current portion                                                                                                                                                                                |                                            |   |             |        |  |   | 307      |       
|                                         |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         
|                                         |                                                                                                                                                                                                                             | Total current liabilities                  |   |              | 10,555 |  |   |          | 7,627  | 
|                                         | Capital leases, net of current portion                                                                                                                                                                                      |                                            |   | 184          |        |  |   | 44       |       
|                                         | Accrued restructuring costs, net of current
    portion                                                                                                                                                                     |                                            |   |             |        |  |   | 306      |       
|                                         |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         
|                                         |                                                                                                                                                                                                                             | Total liabilities                          |   |              | 10,739 |  |   |          | 7,977  | 
|                                         |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         
|Commitments and contingencies            |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         
|Stockholders equity                     |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         
|                                         | Common stock, $.0015 par value; 60,000,000 shares
    authorized; 24,272,230 and 25,115,782 shares issued and
    23,983,664 and 24,579,516 shares outstanding at
    December 30, 2001 and December 29, 2002, respectively |                                            |   | 36           |        |  |   | 38       |       
|                                         | Additional paid-in capital                                                                                                                                                                                                  |                                            |   | 156,922      |        |  |   | 157,925  |       
|                                         | Stock-based compensation                                                                                                                                                                                                    |                                            |   | (765         | )      |  |   | (117     | )     
|                                         | Notes receivable from stockholders                                                                                                                                                                                          |                                            |   | (3,745       | )      |  |   | (3,745   | )     
|                                         | Treasury stock, at cost; 288,566 and 536,266
    shares at December 30, 2001 and December 29, 2002,
    respectively                                                                                                        |                                            |   | (348         | )      |  |   | (831     | )     
|                                         | Accumulated deficit                                                                                                                                                                                                         |                                            |   | (124,074     | )      |  |   | (133,762 | )     
|                                         |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         
|                                         |                                                                                                                                                                                                                             | Total stockholders equity                 |   |              | 28,026 |  |   |          | 19,508 | 
|                                         |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         
|                                         |                                                                                                                                                                                                                             | Total liabilities and stockholders equity |   | $            | 38,765 |  |   | $        | 27,485 | 
|                                         |                                                                                                                                                                                                                             |                                            |   |              |        |  |   |         

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

F-2



---



##### Table of Contents



VIXEL CORPORATION

STATEMENT OF OPERATIONS

|                                     |                                                |                                          |         |              |        |              |         |        |        |   |         |        |        | 
|------------------------------------ | ---------------------------------------------- | ---------------------------------------- | ------- | ------------ | ------ | ------------ | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                     |                                                |                                         
|                                     |                                                | Fiscal Year Ended                       
|                                     |                                                |                                         
|                                     |                                                | December 31,                             |         | December 30, |        | December 29,
|                                     |                                                | 2000                                     |         | 2001         |        | 2002        
|                                     |                                                |                                          |         |              |        |             
|                                     |                                                |                                         
|                                     |                                                | (In thousands, except per share amounts)
|Revenue                              |                                                |                                          |         |              |        |              |         |        |        |   |         |       
|                                     | SAN systems                                    |                                          | $       | 29,610       |        |              | $       | 16,769 |        |   | $       | 20,606 |       
|                                     | Components                                     |                                          |         | 3,599        |        |              |         | 5,034  |        |   |         |       |       
|                                     |                                                |                                          |         |              |        |              |         |        |        |   |         |       
|                                     |                                                | Total revenue                            |         |              | 33,209 |              |         |        | 21,803 |   |         |        | 20,606 | 
|Cost of revenue(1)                   |                                                |                                          | 21,799  |              |        |              | 14,069  |        |        |   | 10,715  |       
|                                     |                                                |                                          |         |              |        |              |         |        |        |   |         |       
|Gross profit                         |                                                |                                          | 11,410  |              |        |              | 7,734   |        |        |   | 9,891   |       
|Operating expenses                   |                                                |                                          |         |              |        |              |         |        |        |   |         |       
|                                     | Research and development(2)                    |                                          |         | 15,570       |        |              |         | 14,657 |        |   |         | 11,307 |       
|                                     | Selling, general and administrative(3)         |                                          |         | 17,437       |        |              |         | 14,423 |        |   |         | 10,699 |       
|                                     | Amortization of goodwill and other intangibles |                                          |         | 2,159        |        |              |         | 820    |        |   |         | 436    |       
|                                     | Amortization of stock-based compensation       |                                          |         | 2,825        |        |              |         | 1,353  |        |   |         | 591    |       
|                                     |                                                |                                          |         |              |        |              |         |        |        |   |         |       
|                                     |                                                |                                          | 37,991  |              |        |              | 31,253  |        |        |   | 23,033  |       
|Restructuring costs                  |                                                |                                          |        |              |        |              |        |        |        |   | 1,742   |       
|Loss (gain) on sales of assets       |                                                |                                          |        |              |        |              | 5       |        |        |   | (4,445  | )     
|                                     |                                                |                                          |         |              |        |              |         |        |        |   |         |       
|                                     |                                                | Total operating expenses                 |         |              | 37,991 |              |         |        | 31,258 |   |         |        | 20,330 | 
|Loss from operations                 |                                                |                                          | (26,581 | )            |        |              | (23,524 | )      |        |   | (10,439 | )     
|Interest expense                     |                                                |                                          | (632    | )            |        |              | (309    | )      |        |   | (67     | )     
|Interest income                      |                                                |                                          | 3,587   |              |        |              | 1,833   |        |        |   | 797     |       
|Other income (loss), net             |                                                |                                          | 69      |              |        |              | 72      |        |        |   | 21      |       
|                                     |                                                |                                          |         |              |        |              |         |        |        |   |         |       
|Net loss                             |                                                | $                                        | (23,557 | )            |        | $            | (21,928 | )      |        | $ | (9,688  | )     
|                                     |                                                |                                          |         |              |        |              |         |        |        |   |         |       
|Basic and diluted net loss per share |                                                | $                                        | (1.04   | )            |        | $            | (0.93   | )      |        | $ | (0.40   | )     
|                                     |                                                |                                          |         |              |        |              |         |        |        |   |         |       
|Weighted-average shares outstanding  |                                                |                                          | 22,710  |              |        |              | 23,504  |        |        |   | 24,106  |       
|                                     |                                                |                                          |         |              |        |              |         |        |        |   |         |       



---



|    |                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes amortization of stock-based compensation
    of $67, $28, and $10 for the fiscal years ended
    December 31, 2000, December 30, 2001, and
    December 29, 2002, respectively.       
|   
|(2) | Excludes amortization of stock-based compensation
    of $111, $32, and $13 for the fiscal years ended
    December 31, 2000, December 30, 2001, and
    December 29, 2002, respectively.      
|   
|(3) | Excludes amortization of stock-based compensation
    of $2,714, $1,321, and $578 for the fiscal years ended
    December 31, 2000, December 30, 2001, and
    December 29, 2002, respectively.

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

F-3



---



##### Table of Contents



VIXEL CORPORATION

STATEMENT OF CHANGES IN STOCKHOLDERS
EQUITY

|                                                                   |  |                                      |            |            |  |             |    |              |  |                |         |             |  |               |        |         |  |        |        |   |  |   |         |  |  |   |      |   |  |   |          |   |  |   |         |  
|------------------------------------------------------------------ |  | ------------------------------------ | ---------- | ---------- |  | ----------- | -- | ------------ |  | -------------- | ------- | ----------- |  | ------------- | ------ | ------- |  | ------ | ------ | - |  | - | ------- |  |  | - | ---- | - |  | - | -------- | - |  | - | ------- | -
|                                                                   |  |                                      |            |            |  |             |    | Notes        |  |                |         |             |  |              
|                                                                   |  | Common Stock                         |            | Additional |  |             |    | Receivable   |  | Treasury Stock |         |             |  | Total        
|                                                                   |  |                                      |            | Paid-in    |  | Stock-Based |    | from         |  |                |         | Accumulated |  | Stockholders
|                                                                   |  | Shares                               |            | Amount     |  | Capital     |    | Compensation |  | Stockholders   |         | Shares      |  | Amount        |        | Deficit |  | Equity
|                                                                   |  |                                      |            |            |  |             |    |              |  |                |         |             |  |               |        |         |  |       
|                                                                   |  |                                     
|                                                                   |  | (In thousands, except share amounts)
|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   |  
|Option grants to non-employees                                     |  |                                      |            |            |  |             |    |              |  |                | 7       |             |  |               |        |         |  |        |        |   |  |   |         |  |  |   |      |   |  |   |          |   |  |   | 7       |  
|Other                                                              |  |                                      |            |            |  |             |    |              |  |                | (14     | )           |  |               | 14     |         |  |        |       |   |  |   |         |  |  |   |      |   |  |   |          |   |  |   |        |  
|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  |  
|                                                                   |  |                                      |            |            |  |             |    |              |  |                |         |             |  |               |        |         |  |        |        |   |  |   |         |  |  |   |      |   |  |   |          |   |  |   |         |  
|Stock options exercised                                            |  |                                      | 163,422    |            |  |             |   |              |  |                | 141     |             |  |               |        |         |  |        |        |   |  |   |         |  |  |   |      |   |  |   |          |   |  |   | 141     |  
|ESPP shares issued                                                 |  |                                      | 255,130    |            |  |             | 1  |              |  |                | 361     |             |  |               |        |         |  |        |        |   |  |   |         |  |  |   |      |   |  |   |          |   |  |   | 362     |  
|Stock issued to an officer                                         |  |                                      | 425,000    |            |  |             | 1  |              |  |                | 535     |             |  |               |        |         |  |        |        |   |  |   |         |  |  |   |      |   |  |   |          |   |  |   | 536     |  
|Purchase of treasury stock                                         |  |                                      |            |            |  |             |    |              |  |                |         |             |  |               |        |         |  |        |        |   |  |   | 247,700 |  |  |   | (483 | ) |  |   |          |   |  |   | (483    | )
|Amortization of stock-based compensation                           |  |                                      |            |            |  |             |    |              |  |                |         |             |  |               | 601    |         |  |        |        |   |  |   |         |  |  |   |      |   |  |   |          |   |  |   | 601     |  
|Reversal of stock- based compensation for
    terminated employees |  |                                      |            |            |  |             |    |              |  |                | (47     | )           |  |               | 47     |         |  |        |        |   |  |   |         |  |  |   |      |   |  |   |          |   |  |   |        |  
|Option grants to non-employees                                     |  |                                      |            |            |  |             |    |              |  |                | 13      |             |  |               |        |         |  |        |        |   |  |   |         |  |  |   |      |   |  |   |          |   |  |   | 13      |  
|Net loss                                                           |  |                                      |            |            |  |             |    |              |  |                |         |             |  |               |        |         |  |        |        |   |  |   |         |  |  |   |      |   |  |   | (9,688   | ) |  |   | (9,688  | )
|                                                                   |  |                                      |            |            |  |             |    |              |  |                |         |             |  |               |        |         |  |        |        |   |  |   |         |  |  |   |      |   |  |   |          |   |  |   |         |  
|Balance, December 29, 2002                                         |  |                                      | 25,115,782 |            |  | $           | 38 |              |  | $              | 157,925 |             |  | $             | (117   | )       |  | $      | (3,745 | ) |  | $ | 536,266 |  |  | $ | (831 | ) |  | $ | (133,762 | ) |  | $ | 19,508  |  
|                                                                   |  |                                      |            |            |  |             |    |              |  |                |         |             |  |               |        |         |  |        |        |   |  |   |         |  |  |   |      |   |  |   |          |   |  |   |         |  

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                                                     
|                                                                           |                                                                                |                                                                       
|                                                                           |                                                                                | December 31,                                                           |                                          | December 30,                              |       | December 29,
|                                                                           |                                                                                | 2000                                                                   |                                          | 2001                                      |       | 2002        
|                                                                           |                                                                                |                                                                        |                                          |                                           |       |             
|                                                                           |                                                                                |                                                                       
|                                                                           |                                                                                | (In thousands)                                                        
|Cash flows from operating activities                                       |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|                                                                           | Net loss                                                                       |                                                                        | $                                        | (23,557                                   | )     |              | $       | (21,928 | )     |        | $       | (9,688  | )     
|                                                                           | Adjustments to reconcile net loss to net cash
    used in operating activities |                                                                        |                                          |                                           |       |              |         |         |       |        |         |         |       
|                                                                           |                                                                                | Depreciation                                                           |                                          |                                           | 3,439 |              |         |         | 4,104 |        |         |         | 2,655  |       
|                                                                           |                                                                                | Amortization of goodwill and other intangibles                         |                                          |                                           | 2,158 |              |         |         | 732   |        |         |         | 525    |       
|                                                                           |                                                                                | Stock-based compensation                                               |                                          |                                           | 2,892 |              |         |         | 1,388 |        |         |         | 1,150  |       
|                                                                           |                                                                                | Provisions for doubtful accounts, inventory
    valuation and warranty |                                          |                                           | 3,742 |              |         |         | 442   |        |         |         | (882   | )     
|                                                                           |                                                                                | Non-cash restructuring costs                                           |                                          |                                           |      |              |         |         |      |        |         |         | 400    |       
|                                                                           |                                                                                | Gain on sale of SAN InSite assets                                      |                                          |                                           |      |              |         |         |      |        |         |         | (4,500 | )     
|                                                                           |                                                                                | Loss on disposal of property and equipment                             |                                          |                                           |      |              |         |         | 5     |        |         |         | 56     |       
|                                                                           |                                                                                | Changes in                                                             |                                          |                                           |       |              |         |         |       |        |         |         |        |       
|                                                                           |                                                                                |                                                                        | Accounts receivable                      |                                           |       | (2,701       | )       |         |       | 4,428  |         |         |        | 428    |       
|                                                                           |                                                                                |                                                                        | Inventories                              |                                           |       | 840          |         |         |       | (4,884 | )       |         |        | 2,384  |       
|                                                                           |                                                                                |                                                                        | Prepaid expenses and other assets        |                                           |       | 824          |         |         |       | 879    |         |         |        | (39    | )     
|                                                                           |                                                                                |                                                                        | Accounts payable and accrued liabilities |                                           |       | (1,351       | )       |         |       | (816   | )       |         |        | (1,930 | )     
|                                                                           |                                                                                |                                                                        | Deferred revenue                         |                                           |       | 300          |         |         |       | 847    |         |         |        | (412   | )     
|                                                                           |                                                                                |                                                                        | Accrued restructuring costs              |                                           |       |             |         |         |       |       |         |         |        | 613    |       
|                                                                           |                                                                                |                                                                        | Other long-term liabilities              |                                           |       | (1,000       | )       |         |       |       |         |         |        |       |       
|                                                                           |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|                                                                           |                                                                                |                                                                        |                                          | Net cash used in operating activities     |       |              | (14,414 | )       |       |        | (14,803 | )       |        |        | (9,240 | )
|                                                                           |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|Cash flows from investing activities                                       |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|                                                                           | Purchase of short-term investments                                             |                                                                        |                                          | (31,454                                   | )     |              |         | (35,033 | )     |        |         | (17,099 | )     
|                                                                           | Maturities of short-term investments                                           |                                                                        |                                          | 50,468                                    |       |              |         | 39,727  |       |        |         | 25,987  |       
|                                                                           | Proceeds from the sale of property and equipment                               |                                                                        |                                          |                                          |       |              |         |        |       |        |         | 33      |       
|                                                                           | Proceeds from the sale of SAN InSite assets, net
    of costs                  |                                                                        |                                          |                                          |       |              |         |        |       |        |         | 2,059   |       
|                                                                           | Purchase of property and equipment                                             |                                                                        |                                          | (3,131                                    | )     |              |         | (1,065  | )     |        |         | (1,076  | )     
|                                                                           |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|                                                                           |                                                                                |                                                                        |                                          | Net cash provided by investing activities |       |              | 15,883  |         |       |        | 3,629   |         |        |        | 9,904  |  
|                                                                           |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|Cash flows from financing activities                                       |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|                                                                           | Repayment of stockholders notes receivable                                     |                                                                        |                                          |                                          |       |              |         | 1,377   |       |        |         |        |       
|                                                                           | Principal payments on long-term debt and capital
    leases                    |                                                                        |                                          | (3,039                                    | )     |              |         | (2,478  | )     |        |         | (1,373  | )     
|                                                                           | Amortization of debt issuance costs                                            |                                                                        |                                          | 16                                        |       |              |         | 1       |       |        |         |        |       
|                                                                           | Proceeds from exercise of stock options and
    warrants                       |                                                                        |                                          | 690                                       |       |              |         | 58      |       |        |         | 141     |       
|                                                                           | Issuance of Employee Stock Purchase Plan shares                                |                                                                        |                                          | 1,121                                     |       |              |         | 484     |       |        |         | 362     |       
|                                                                           | Purchase of treasury stock                                                     |                                                                        |                                          |                                          |       |              |         | (298    | )     |        |         | (483    | )     
|                                                                           | Other financing activities                                                     |                                                                        |                                          | 103                                       |       |              |         |        |       |        |         |        |       
|                                                                           |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|                                                                           |                                                                                |                                                                        |                                          | Net cash used in financing activities     |       |              | (1,109  | )       |       |        | (856    | )       |        |        | (1,353 | )
|                                                                           |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|Net increase (decrease) in cash and cash
    equivalents                   |                                                                                |                                                                        | 360                                      |                                           |       |              | (12,030 | )       |       |        | (689    | )      
|Cash and cash equivalents, beginning of period                             |                                                                                |                                                                        | 16,706                                   |                                           |       |              | 17,066  |         |       |        | 5,036   |        
|                                                                           |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|Cash and cash equivalents, end of period                                   |                                                                                | $                                                                      | 17,066                                   |                                           |       | $            | 5,036   |         |       | $      | 4,347   |        
|                                                                           |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|Supplemental disclosure of cash flow
    information                       |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|                                                                           | Cash paid for interest                                                         |                                                                        | $                                        | 582                                       |       |              | $       | 275     |       |        | $       | 67      |       
|Supplemental disclosure of non-cash investing
    and financing activities |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|                                                                           | Equipment purchased under capital leases                                       |                                                                        | $                                        | 700                                       |       |              | $       | 35      |       |        | $       | 85      |       
|                                                                           |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|                                                                           | Sale of San InSite assets in exchange for note
    receivable                  |                                                                        | $                                        |                                          |       |              | $       |        |       |        | $       | 2,500   |       
|                                                                           |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|                                                                           | Deferred stock compensation reversed during period                             |                                                                        | $                                        |                                          |       |              | $       |        |       |        | $       | 47      |       
|                                                                           |                                                                                |                                                                        |                                          |                                           |       |              |         |         |       |        |         |        
|                                                                           | 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 switch-on-a-chip (SOC) embedded storage switch
products, fabric switches, and arbitrated loop hubs. Our
products and technologies are used by major system suppliers and
are available worldwide through our network of OEMs,
integrators, and value-added resellers.



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

We have a 52 or 53-week fiscal year ending on the
Sunday closest to December 31. The fiscal years ended
December 31, 2000, December 30, 2001, and
December 29, 2002 were each 52 weeks.



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

We recognize revenue when it is realized or
realizable and earned. We consider revenue realized or
realizable and earned when there is persuasive evidence of an
arrangement, the product has been shipped to the customer or the
customer takes possession of the product, the sales price is
fixed or determinable and collectability is reasonably assured.
We defer the recognition of revenue for sales subject to price
protections or stock rotation rights until the expiration of
such protections or rights



| |                                                                                
| | -------------------------------------------------------------------------------
| | 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 maintain an
allowance for doubtful accounts receivable based upon our
historical experience, circumstances that become known to us,
and the expected collectability 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 OEMs. HP Corporation (including Compaq Computer
Corporation) and Avid Technology represented 41.0% and 14.7% of
revenue, respectively, for fiscal 2002. 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 during 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 rely on a single third party manufacturer for
the production of the majority of products. Additionally, we
have licensed the manufacturing of our Fibre Channel SOCs to a
third party 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, investments, accounts receivable, accounts
payable, accrued liabilities and capital leases. Due to our
financial instruments being of relatively short duration, the
carrying amounts of financial instruments approximate their fair
value.

F-6



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)



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

Cash balances are carried at an institution
insured by the Federal Deposit Insurance Corporation, however
the balances carried occasionally exceed insurance maximums. We
have not experienced any losses due to account balances
exceeding insurance maximums and believe the potential risk of
such loss to be minimal. Highly liquid investments purchased
with original or remaining maturities of 90 days or less at
the date of purchase are considered to be cash equivalents.
Investments deemed to be cash equivalents must comply with our
investment policies and are generally consistent in composition
to our investments.



| |            
| | -----------
| | Investments

Investments consist of highly rated commercial
paper and corporate bonds that have maturities at time of
purchase between three and twelve months. These investments are
classified as available-for-sale and are recorded at market
value, which currently approximates cost. The specific
identification method is used to determine the cost basis of
securities sold. For the years ended December 31, 2000,
December 30, 2001, and December 29, 2002 no gains or
losses were realized on the sale of investments. Unrealized
gains or losses at December 30, 2001 and December 29,
2002 did not materially impact on our financial position.



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

Inventory is carried at the lower of standard
cost (which approximates current cost using a first in, first
out cost flow assumption) or estimated net realizable value. To
the extent cost exceeds net realizable value, a provision is
charged to current period expense to mark the inventory to net
realizable value.



| |                       
| | ----------------------
| | 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 cost and related accumulated
depreciation are removed from the accounts, and we recognize any
resulting gain or loss during the current period.



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

We lease property and equipment 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.

F-7



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)



| |                                         
| | ----------------------------------------
| | Goodwill and Other Intangible
    Assets

Goodwill and other intangibles represent costs in
excess of net assets of businesses acquired, acquired technology
and other intangible assets. Beginning December 31, 2001,
goodwill is no longer being amortized and is instead subject to
annual impairment testing pursuant to the provisions of
Statement of Financial Accounting Standard No. 142
Goodwill and Other Intangible Assets. No indications
of impairment were noted during fiscal 2002. Other intangibles
assets are amortized over periods ranging from three to five
years, using the straight-line method.



| |                                    
| | -----------------------------------
| | 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 indicators of impairment exist. 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
during fiscal years 2000, 2001 or 2002.



| |             
| | ------------
| | 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 in the
financial statements and the tax basis of assets and liabilities
using enacted tax rates expected to be in effect when the are
realized. If it is more likely than not that some portion of a
deferred tax asset will not be realized, a valuation allowance
is recorded.



| |         
| | --------
| | 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. The following table sets
forth the amount of warranty accrued, expensed and utilized or
adjusted during each of the three years ended December 31,
2000, December 30, 2001, and December 29, 2002:

|                             |  |            |       |            |  |              |       |                |  |   |        |   |  |   |       | 
|---------------------------- |  | ---------- | ----- | ---------- |  | ------------ | ----- | -------------- |  | - | ------ | - |  | - | ----- | 
|                             |  |            |       | Amounts    |  |              |       |               
|                             |  | Balance at |       | Charged to |  |              |       |               
|                             |  | Beginning  |       | Costs and  |  |              |       | Balance at End
|                             |  | of Period  |       | Expenses   |  | (Deductions) |       | of Period     
|                             |  |            |       |            |  |              |       |               
|Accrued warranty costs       |  |            |       |            |  |              |       |                |  |   |        |   |  |   |       | 
|Year ended December 31, 2000 |  | $          | 2,949 |            |  | $            | 1,975 |                |  | $ | (1,526 | ) |  | $ | 3,398 | 
|Year ended December 30, 2001 |  | $          | 3,398 |            |  | $            | 604   |                |  | $ | (1,867 | ) |  | $ | 2,135 | 
|Year ended December 29, 2002 |  | $          | 2,135 |            |  | $            | 427   |                |  | $ | (813   | ) |  | $ | 1,749 | 



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

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

F-8



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)



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

We expense advertising costs as incurred. During
the years ended December 31, 2000 and December 30,
2001, advertising expenses were approximately $224,000 and
$126,000. We did not incur advertising expenses during the year
ended December 29, 2002.



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

Basic net loss per share represents the net loss
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. 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, consisting of
unvested shares of common stock outstanding and options and
warrants to purchase common stock, totaling 4,509,000, 5,482,000
and 5,893,000 shares for the years ended December 31, 2000,
December 30, 2001, and December 29,2002, respectively,
were excluded from diluted net loss per share due to their
anti-dilutive effect.

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):

|             |                                     |                   |   |              |   |              |   |         |   |  |   |        |  
|------------ | ----------------------------------- | ----------------- | - | ------------ | - | ------------ | - | ------- | - |  | - | ------ | -
|             |                                     |                  
|             |                                     | Fiscal Year Ended
|             |                                     |                  
|             |                                     | December 31,      |   | December 30, |   | December 29,
|             |                                     | 2000              |   | 2001         |   | 2002        
|             |                                     |                   |   |              |   |             
|Numerator:   |                                     |                   |   |              |   |              |   |         |   |  |   |       
|             | Net loss                            |                   | $ | (23,557      | ) |              | $ | (21,928 | ) |  | $ | (9,688 | )
|Denominator: |                                     |                   |   |              |   |              |   |         |   |  |   |       
|             | Weighted-average shares outstanding |                   |   | 22,710       |   |              |   | 23,504  |   |  |   | 24,106 |  



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

We account for stock option grants pursuant to
the provisions of Statement of Financial Accounting Standard
No. 123 Accounting for Stock-Based Compensation
(SFAS 123). Under the provisions of SFAS 123, employee
stock-based compensation expense is measured using either the
intrinsic-value method as prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), or the fair value method
described in SFAS 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 account for
equity grants to other than employees and directors pursuant to
the fair value provisions of SFAS 123.

Had we determined compensation expense based on
the fair value of the option at the grant date for all stock
options issued to employees and for shares issued to employees
at a discount pursuant to the Employee

F-9



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Stock Purchase Plan, our net loss and net loss
per share would have been increased to the pro forma amounts
indicated below (in thousands, except per share amounts):

|                                                                 |             |              |         |              |   |              |         |         |   |   |        |         |  
|---------------------------------------------------------------- | ----------- | ------------ | ------- | ------------ | - | ------------ | ------- | ------- | - | - | ------ | ------- | -
|                                                                 |             | December 31, |         | December 30, |   | December 29,
|                                                                 |             | 2000         |         | 2001         |   | 2002        
|                                                                 |             |              |         |              |   |             
|Net loss as reported                                             |             | $            | (23,557 | )            |   | $            | (21,928 | )       |   | $ | (9,688 | )      
|Stock based compensation included in net loss as
    reported(*) |             |              |        |              |   |              |        |         |   |   |       |        
|Stock based compensation pursuant to fair value
    accounting   |             |              | (4,223  | )            |   |              | (4,716  | )       |   |   | (3,124 | )      
|                                                                 |             |              |         |              |   |              |         |         |   |   |        |        
|                                                                 | Pro forma   |              | $       | (27,780      | ) |              | $       | (26,644 | ) |   | $      | (12,812 | )
|                                                                 |             |              |         |              |   |              |         |         |   |   |        |        
|Basic and diluted net loss per share                             |             |              |         |              |   |              |         |         |   |   |        |        
|                                                                 | As reported |              | $       | (1.04        | ) |              | $       | (0.93   | ) |   | $      | (0.40   | )
|                                                                 |             |              |         |              |   |              |         |         |   |   |        |        
|                                                                 | Pro forma   |              | $       | (1.22        | ) |              | $       | (1.13   | ) |   | $      | (0.53   | )
|                                                                 |             |              |         |              |   |              |         |         |   |   |        |        



---



|    |                                                                 
|--- | ----------------------------------------------------------------
|(*) | Does not include amortization of deferred stock
    compensation

The stock based compensation pursuant to fair
value accounting information presented has been determined as if
we had accounted for our stock options issued to employees under
the fair value method for all periods presented. The fair value
of each option granted is estimated at the date of grant using
the following weighted-average assumptions:

|                        |  |              |         |              |  |              |         |   |  |  |         |  
|----------------------- |  | ------------ | ------- | ------------ |  | ------------ | ------- | - |  |  | ------- | -
|                        |  | December 31, |         | December 30, |  | December 29,
|                        |  | 2000         |         | 2001         |  | 2002        
|                        |  |              |         |              |  |             
|Expected term           |  |              | 4 years |              |  |              | 5 years |   |  |  | 5 years |  
|Risk-free interest rate |  |              | 6.11    | %            |  |              | 4.56    | % |  |  | 2.79    | %
|Dividend yield          |  |              | 0       | %            |  |              | 0       | % |  |  | 0       | %
|Volatility              |  |              | 85      | %            |  |              | 85      | % |  |  | 100     | %



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

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States, 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 for the reporting periods presented.
Actual results could differ materially 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, income taxes, and product
warranty costs.



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

Effective December 30, 2002, we adopted
Statement of Financial Accounting Standard No. 143
Accounting for Obligations Associated with the Retirement
of Long-Lived Assets (SFAS 143). The provisions of
SFAS 143 apply to all entities that incur obligations
associated with the retirement of tangible long-lived assets.
SFAS 143 is effective for fiscal years beginning after
June 15, 2002. We are currently evaluating the potential
impacts of SFAS 143 on our operating results, financial
position or cash flows.

Effective December 31, 2001, we adopted
Statement of Financial Accounting Standard No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 addresses issues

F-10



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

relating to the implementation of SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and develops a model
for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. Our adoption of
SFAS 144 did not materially impact our operating results,
financial position or cash flows.

Effective May 15, 2002, we adopted Statement
of Financial Accounting Standard No. 145 Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections
(SFAS 145). SFAS 145 requires gains and losses on
extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as
previously required under SFAS No. 4 Reporting
Gains and Losses from the Extinguishment of Debt.
Extraordinary treatment will be required for certain
extinguishments as provided in APB No. 30 Reporting
the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions.
SFAS 145 also amends SFAS No. 13 Accounting
for Leases to require certain modifications to capital
leases be treated as sale-leaseback transactions and modifies
the accounting for sub-leases when the original lessee remains a
secondary obligor (or guarantor). Our adoption of SFAS 145
did not materially impact our operating results, financial
position or cash flows.

Effective December 31, 2002, we adopted
Statement of Financial Accounting Standard No. 146
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). SFAS 146 addresses
prospective financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF
Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring). SFAS 146 requires that a liability
for a cost associated with an exit or disposal activity be
recognized and measured at fair value when the liability is
incurred versus on the date of the entitys commitment to
an exit plan as required under ETIF 94-3. SFAS 146 is
effective prospectively for exit or disposal activities that are
initiated after December 31, 2002. Our adoption of
SFAS 145 did not materially impact our operating results,
financial position or cash flows.

During December 2002, the FASB issued Statement
of Financial Accounting Standard No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure
(SFAS 148) which amends the guidance set forth in Statement
of Financial Accounting Standard No. 123 Accounting
for Stock-Based Compensation (SFAS 123).
SFAS 148 provides guidance for companies that elect to
change their accounting for employee stock based compensation to
the fair value method of accounting. The statement amends,
expands and increases the frequency of the existing disclosure
requirements to require more prominent and quarterly of the
effects of stock based compensation of SFAS 123. The
interim disclosure provisions become effective for us starting
with the quarter ending March 30, 2003. We are currently
evaluating the potential impacts of SFAS 148 on our
operating results, financial position or cash flows.



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

Certain items in the December 31, 2000 and
December 30, 2001 financial statements have been
reclassified to conform to the December 29, 2002
presentation. These reclassifications have no impact on
stockholders equity, net loss or cash flows as previously
reported.



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

As of December 29, 2002, we had an
accumulated deficit of $133.8 million and have never been
profitable. We reduced our work force during 2002 and sold our
SAN InSite software assets. Furthermore, subsequent to
December 29, 2002, we completed an $8.0 million round
of Series B Convertible Preferred Stock financing. 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.

F-11



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Including the proceeds from the sale of preferred
stock and the collection of the note from the sale of SAN InSite
in early 2003, we believe that our existing cash, cash
equivalent and investment balances are sufficient to meet our
cash requirements through December 28, 2003. 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, 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.



|   |              
|-- | -------------
|2. | Restructuring

During April 2002, we adopted and implemented a
restructuring plan to reduce our cost structure and focus on our
InSpeed-based product development and sales. As a result of the
plan, we recorded restructuring charges of $1.7 million,
net of adjustments.

The restructuring plan included a reduction of
approximately 22% of our workforce across all departments that
resulted in a charge of $360,000, net of adjustments, relating
primarily to severance.

The restructuring plan included the write-off of
property and equipment that was disposed or removed from
operations and resulted in a charge of $400,000. The property
and equipment consisted primarily of computer equipment and
related software, production and engineering equipment, and
office equipment, furniture, and fixtures. We also recorded
other restructuring costs of $83,000 relating primarily to
impairment of operating lease agreements for equipment and
professional fees incurred in connection with the restructuring
activities.

The restructuring plan included a charge of
$899,000 for the consolidation of space within our Bothell,
Washington corporate headquarters and our engineering facility
in Irvine, California. This charge includes the cost associated
with the idle facility space at these locations for the
remainder of the lease terms.

The restructuring charges are summarized as
follows:

|                                                  |  |                |       |          |  |          |      |             |  |                   |      |   |  |   |     |   |  |   |     | 
|------------------------------------------------- |  | -------------- | ----- | -------- |  | -------- | ---- | ----------- |  | ----------------- | ---- | - |  | - | --- | - |  | - | --- | 
|                                                  |  |                |       |          |  |          |      |             |  | Accrued          
|                                                  |  |                |       |          |  |          |      |             |  | Restructuring    
|                                                  |  |                |       | Non-cash |  | Cash     |      |             |  | Costs as of      
|Category                                          |  | Total Charge   |       | Charges  |  | Payments |      | Adjustments |  | December 29, 2002
|                                                  |  |                |       |          |  |          |      |             |  |                  
|                                                  |  |               
|                                                  |  | (In thousands)
|Workforce reduction                               |  | $              | 393   |          |  | $        |     |             |  | $                 | (360 | ) |  | $ | (33 | ) |  | $ |    | 
|Consolidation of excess facilities                |  |                | 899   |          |  |          |     |             |  |                   | (286 | ) |  |   |    |   |  |   | 613 | 
|Impairment of long-lived assets and other charges |  |                | 483   |          |  |          | (400 | )           |  |                   | (83  | ) |  |   |    |   |  |   |    | 
|                                                  |  |                |       |          |  |          |      |             |  |                   |      |   |  |   |     |   |  |   |     | 
|Total                                             |  | $              | 1,775 |          |  | $        | (400 | )           |  | $                 | (729 | ) |  | $ | (33 | ) |  | $ | 613 | 
|                                                  |  |                |       |          |  |          |      |             |  |                   |      |   |  |   |     |   |  |   |     | 

We expect to pay the remaining amounts related to
excess facilities space over the remaining lease term of our
Bothell, WA facility through the first quarter of fiscal 2005.



|   |               
|-- | --------------
|3. | Sale of Assets

On April 15, 2002, we closed a transaction
with Fujitsu Software Technology Corporation, d/b/a Fujitsu
Softek, involving the acquisition by Fujitsu Softek of our SAN
management software assets, including our SAN management
software, SAN InSite, associated intellectual property and
key development team resources. Upon closing of the transaction
we received $2.5 million and a note for $2.5 million,
which became due and was collected with accrued interest on
January 15, 2003. In addition, we have the right to receive
up

F-12



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

to an additional $5.0 million from sales of
Fujitsu Softek products based on SAN InSite during the four-year
period after the closing. Net of associated costs and expenses,
we recorded a gain on sale from this transaction of
$4.4 million.



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

Inventories consist of the following (in
thousands):

|                                             |  |              |        |              |  |   |        |  
|-------------------------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | -
|                                             |  | December 30, |        | December 29,
|                                             |  | 2001         |        | 2002        
|                                             |  |              |        |             
|Raw materials                                |  | $            | 4,781  |              |  | $ | 3,244  |  
|Finished goods                               |  |              | 2,232  |              |  |   | 1,843  |  
|Less: Writedown to expected realizable value |  |              | (4,062 | )            |  |   | (3,584 | )
|                                             |  |              |        |              |  |   |        |  
|                                             |  | $            | 2,951  |              |  | $ | 1,503  |  
|                                             |  |              |        |              |  |   |        |  



|   |                       
|-- | ----------------------
|5. | Property and Equipment

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

|                                                |  |              |         |              |  |   |        |  
|----------------------------------------------- |  | ------------ | ------- | ------------ |  | - | ------ | -
|                                                |  | December 30, |         | December 29,
|                                                |  | 2001         |         | 2002        
|                                                |  |              |         |             
|Test equipment                                  |  | $            | 6,451   |              |  | $ | 3,831  |  
|Furniture and office and computer equipment     |  |              | 4,847   |              |  |   | 3,282  |  
|Software                                        |  |              | 3,139   |              |  |   | 1,566  |  
|Leasehold improvements                          |  |              | 258     |              |  |   | 244    |  
|                                                |  |              |         |              |  |   |        |  
|                                                |  |              | 14,695  |              |  |   | 8,923  |  
|Less: accumulated depreciation and amortization |  |              | (10,396 | )            |  |   | (6,680 | )
|                                                |  |              |         |              |  |   |        |  
|                                                |  | $            | 4,299   |              |  | $ | 2,243  |  
|                                                |  |              |         |              |  |   |        |  

The cost of assets underlying capital leases
included above are $5,647,000 and $535,000 at December 30,
2001 and December 29, 2002, respectively, and accumulated
depreciation and amortization thereon aggregates $4,033,000 and
$361,000 at December 30, 2001 and December 29, 2002,
respectively.



|   |                               
|-- | ------------------------------
|6. | Goodwill and Other Intangibles

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

|                               |  |              |        |              |  |   |        |  
|------------------------------ |  | ------------ | ------ | ------------ |  | - | ------ | -
|                               |  | December 30, |        | December 29,
|                               |  | 2001         |        | 2002        
|                               |  |              |        |             
|Goodwill                       |  | $            | 3,555  |              |  | $ | 3,555  |  
|Core technology                |  |              | 2,183  |              |  |   | 2,183  |  
|Software development costs     |  |              | 106    |              |  |   |       |  
|                               |  |              |        |              |  |   |        |  
|                               |  |              | 5,844  |              |  |   | 5,738  |  
|Less: accumulated amortization |  |              | (4,896 | )            |  |   | (5,315 | )
|                               |  |              |        |              |  |   |        |  
|                               |  | $            | 948    |              |  | $ | 423    |  
|                               |  |              |        |              |  |   |        |  

The net book value of the identifiable intangible
assets relating to capitalized software costs was expensed in
conjunction with the sale of our storage area networking
management software, SAN InSite, and related assets and
resources during the second quarter of fiscal 2002.

F-13



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Effective December 31, 2001, the beginning
of fiscal 2002, we adopted Statement of Financial Accounting
Standard No. 142 Goodwill and Other Intangible
Assets (SFAS 142). Upon adoption, pursuant to the
provisions of SFAS 142 we discontinued the amortization of
goodwill with a net book value of $369,000. The following table
presents net loss and net loss per share for the previous fiscal
years on an as adjusted basis as if SFAS 142 had been
adopted at the beginning of fiscal 2000:

|                                                       |  |                    |         |              |  |              |         |   |  |   |        |  
|------------------------------------------------------ |  | ------------------ | ------- | ------------ |  | ------------ | ------- | - |  | - | ------ | -
|                                                       |  |                   
|                                                       |  | Fiscal Years Ended
|                                                       |  |                   
|                                                       |  | December 31,       |         | December 30, |  | December 29,
|                                                       |  | 2000               |         | 2001         |  | 2002        
|                                                       |  |                    |         |              |  |             
|Net loss  as reported                                 |  | $                  | (23,557 | )            |  | $            | (21,928 | ) |  | $ | (9,688 | )
|Amortization of goodwill                               |  |                    | 892     |              |  |              | 375     |   |  |   |       |  
|                                                       |  |                    |         |              |  |              |         |   |  |   |        |  
|Net loss  as adjusted                                 |  | $                  | (22,665 | )            |  | $            | (21,553 | ) |  | $ | (9,688 | )
|                                                       |  |                    |         |              |  |              |         |   |  |   |        |  
|Basic and diluted net loss per share 
    as adjusted |  | $                  | (0.99   | )            |  | $            | (0.92   | ) |  | $ | (0.40  | )
|                                                       |  |                    |         |              |  |              |         |   |  |   |        |  
|Weighted-average shares outstanding                    |  |                    | 22,710  |              |  |              | 23,504  |   |  |   | 24,106 |  
|                                                       |  |                    |         |              |  |              |         |   |  |   |        |  

Pursuant to the requirements of SFAS 142,
identifiable intangible assets will continue to be amortized
over their useful lives. Current estimated amortization expense
for our identifiable intangible assets is expected to be $54,000
for fiscal year 2003, at which time they will be fully amortized.

In addition to discontinuing the amortization of
goodwill, SFAS 142 requires that we perform goodwill
impairment tests on an annual basis or when indicators of
impairment exist. Pursuant to the requirements of SFAS 142,
we performed an impairment test of goodwill as of
December 29, 2002 and we determined that goodwill was not
impaired. There can be no assurance, however, that future
goodwill impairment tests will not result in a charge to
earnings.



|   |                    
|-- | -------------------
|7. | Accrued Liabilities

Accrued liabilities consist of the following (in
thousands):

|                                        |  |              |       |              |  |   |       | 
|--------------------------------------- |  | ------------ | ----- | ------------ |  | - | ----- | 
|                                        |  | December 30, |       | December 29,
|                                        |  | 2001         |       | 2002        
|                                        |  |              |       |             
|Accrued warranty costs                  |  | $            | 2,135 |              |  | $ | 1,749 | 
|Accrued payroll and related liabilities |  |              | 970   |              |  |   | 989   | 
|Accrued business taxes                  |  |              | 367   |              |  |   | 239   | 
|Accrued professional fees               |  |              | 85    |              |  |   | 239   | 
|Other                                   |  |              | 465   |              |  |   | 291   | 
|                                        |  |              |       |              |  |   |       | 
|                                        |  | $            | 4,022 |              |  | $ | 3,507 | 
|                                        |  |              |       |              |  |   |       | 

F-14



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)



|   |               
|-- | --------------
|8. | Capital Leases

Future minimum capital lease payments as of
December 29, 2002 are as follows (in thousands):

|                                           |  |         |      |  
|------------------------------------------ |  | ------- | ---- | -
|                                           |  | Capital
|Fiscal Year                                |  | Leases 
|                                           |  |        
|2003                                       |  | $       | 187  |  
|2004                                       |  |         | 37   |  
|2005                                       |  |         | 9    |  
|2006                                       |  |         | 3    |  
|                                           |  |         |      |  
|Total minimum payments                     |  |         | 236  |  
|Less: portion representing interest        |  |         | (14  | )
|                                           |  |         |      |  
|Present value of capital lease obligations |  |         | 222  |  
|Less: Current portion                      |  |         | (178 | )
|Capital leases, net of current portion     |  | $       | 44   |  
|                                           |  |         |      |  



|   |                              
|-- | -----------------------------
|9. | Commitments and Contingencies



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

We have commitments under long-term operating
leases, principally for building space and office equipment.
These leases require payment of property taxes. 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 29,
2002 are as follows (in thousands):

|            |  |                |       | 
|----------- |  | -------------- | ----- | 
|            |  | Future Minimum
|Fiscal Year |  | Lease Payments
|            |  |               
|2003        |  | $              | 627   | 
|2004        |  |                | 648   | 
|2005        |  |                | 96    | 
|            |  |                |       | 
|            |  | $              | 1,371 | 
|            |  |                |       | 

Total rent expense was approximately $1,150,000,
$1,077,000, and $670,000 during the years ended
December 31, 2000, December 30, 2001, and
December 29, 2002, respectively. The decrease in rental
expense during fiscal 2002 was due to a portion of future
facility lease obligations being expensed during 2002 as part of
a restructuring plan adopted during the second quarter of 2002.



| |                  
| | -----------------
| | 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. Subsequent to the filing, the Court
issued a summary judgment releasing our officers and directors
from the action. We intend to defend ourselves vigorously in
this matter.

On March 3, 2003 we filed a patent
infringement action against QLogic Corporation in the United
States District Court for the District of Delaware. The
complaint states that QLogic is infringing U.S. Patent

F-15



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

No. 6,118,776, entitled Methods and
Apparatus for Fiber Channel Interconnection of Private Loop
Devices, through the unauthorized manufacture, use, sale
and offering for sale of various storage area network switching
products, including QLogics SANBox2 product. We are
seeking unspecified past damages, potential future royalties,
or, alternatively, injunctive relief.



|    |                           
|--- | --------------------------
|10. | Related Party Transactions

During 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 originally 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 29, 2002 the outstanding balance of the notes was
$3,745,000. During the years ended December 31, 2000,
December 30, 2001, and December 29, 2002 we recognized
interest income on the notes of $310,000, $305,000, and
$215,000, respectively.

During January 2003, we repurchased approximately
1,359,000 shares from two officers in a non-cash transaction and
collected cash of approximately $260,000 from the officers in
full satisfaction of the principal and unpaid interest balances
of the officers notes totaling $3.6 million. Approximately
300,000 of the 1,359,000 shares repurchased by the company were
granted to an officer within six months of the repurchase.
Therefore, the 300,000 are subject to variable accounting
pursuant to the provisions of EITF 00-23 Issues Related to
the Accounting for Stock Compensation under APB Opinion
No. 25 and FASB Interpretation No. 44 and
resulted in a non-cash compensation charge to earnings during
the first quarter of 2003 of approximately $350,000.



|    |                     
|--- | --------------------
|11. | Stockholders Equity

Shareholder
Rights Plan

During 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 without the approval of our Board of Directors.
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) 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

As of December 31, 2000, December 30,
2001, and December 29, 2002 we have authorized 5,000,000
shares of preferred stock, designated 600,000 shares as
Series A Junior Participating Preferred Stock and have no
preferred stock outstanding.



|    |                                          
|--- | -----------------------------------------
|12. | Stock Option and Stock Purchase
    Plans

During 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 29,
2002, there are no further options available for grant under the
1995 Plan.

F-16



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

During 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 our directors, employees and consultants. 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.

During 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 our employees and consultants. Under the 2000 Plan,
2,700,000 shares of common stock are reserved for issuance.

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 non-employees generally vest immediately and
expire two to five years after the date of grant.

As of December 29, 2002, 533,908 and
1,162,945 options were available for grant under the 1999 Plan
and the 2000 Plan, respectively, net of grants, exercises and
cancellations.

During 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 29, 2002,
13,151 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 29, 2002:

|                                 |           |        |           |            |   |           |      |       |  |  |   |      | 
|-------------------------------- | --------- | ------ | --------- | ---------- | - | --------- | ---- | ----- |  |  | - | ---- | 
|                                 |           |        |           | Weighted-  |   | Weighted-
|                                 |           |        |           | Average    |   | Average  
|                                 |           |        |           | Exercise   |   | Fair     
|                                 |           | Shares |           | Price      |   | Value    
|                                 |           |        |           |            |   |          
|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 |       |  |  |   |     
|                                 | Granted   |        |           | 1,679,100  |   |           | $    | 2.23  |  |  | $ | 1.95 | 
|                                 | Exercised |        |           | (163,422   | ) |           | $    | 0.86  |  |  |   |      | 
|                                 | Canceled  |        |           | (1,160,473 | ) |           | $    | 9.76  |  |  |   |      | 
|                                 |           |        |           |            |   |           |      |       |  |  |   |     
|Outstanding at December 29, 2002 |           |        | 5,675,821 |            |   | $         | 4.25 |       |  |  |   |     
|                                 |           |        |           |            |   |           |      |       |  |  |   |     

F-17



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

|                        |                   |        |  |           |  |           |   |      |  |  |  |  | 
|----------------------- | ----------------- | ------ |  | --------- |  | --------- | - | ---- |  |  |  |  | 
|                        |                   |        |  | Weighted- |  | Weighted-
|                        |                   |        |  | Average   |  | Average  
|                        |                   |        |  | Exercise  |  | Fair     
|                        |                   | Shares |  | Price     |  | Value    
|                        |                   |        |  |           |  |          
|Options exercisable at: |                   |        |  |           |  |           |   |      |  |  |  | 
|                        | December 31, 2000 |        |  | 780,830   |  |           | $ | 3.99 |  |  |  |  | 
|                        | December 30, 2001 |        |  | 1,634,980 |  |           | $ | 7.12 |  |  |  |  | 
|                        | December 29, 2002 |        |  | 2,721,573 |  |           | $ | 4.95 |  |  |  |  | 

Options granted in the years ended
December 31, 2000, December 30, 2001, and
December 29, 2002 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 29, 2002:

|                         |  |           |           |                     |  |                     |      |           |  |                |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | --------- | --------- | ------------------- |  | ------------------- | ---- | --------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |           |           |                     |  |                     |      |          
|                         |  |           |           | 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
|                         |  |           |           |                     |  |                     |      |           |  |               
|$ 0.01 - $ 1.00          |  |           | 253,940   |                     |  |                     | 7.45 |           |  | $              | 0.67  |  |  |  | 132,644   |  |  | $ | 0.57  | 
|$ 1.01 - $ 1.50          |  |           | 839,500   |                     |  |                     | 9.01 |           |  | $              | 1.42  |  |  |  | 422,280   |  |  | $ | 1.42  | 
|$ 1.51 - $ 2.00          |  |           | 680,500   |                     |  |                     | 9.21 |           |  | $              | 1.66  |  |  |  | 224,802   |  |  | $ | 1.56  | 
|$ 2.01 - $ 3.00          |  |           | 666,875   |                     |  |                     | 9.08 |           |  | $              | 2.77  |  |  |  | 107,654   |  |  | $ | 2.52  | 
|$ 3.01 - $ 3.25          |  |           | 731,289   |                     |  |                     | 8.14 |           |  | $              | 3.06  |  |  |  | 351,886   |  |  | $ | 3.06  | 
|$ 3.26 - $ 3.50          |  |           | 351,816   |                     |  |                     | 8.36 |           |  | $              | 3.29  |  |  |  | 133,064   |  |  | $ | 3.29  | 
|$ 3.51 - $ 4.00          |  |           | 810,000   |                     |  |                     | 8.09 |           |  | $              | 3.95  |  |  |  | 421,874   |  |  | $ | 3.92  | 
|$ 4.01 - $ 7.00          |  |           | 556,891   |                     |  |                     | 7.15 |           |  | $              | 5.67  |  |  |  | 401,434   |  |  | $ | 5.60  | 
|$ 7.01 - $15.00          |  |           | 556,110   |                     |  |                     | 7.09 |           |  | $              | 9.65  |  |  |  | 368,446   |  |  | $ | 9.63  | 
|$15.01 - $36.82          |  |           | 228,900   |                     |  |                     | 7.14 |           |  | $              | 20.40 |  |  |  | 157,489   |  |  | $ | 20.42 | 
|                         |  |           |           |                     |  |                     |      |           |  |                |       |  |  |  |           |  |  |   |       | 
|$ 0.01 - $36.82          |  |           | 5,675,821 |                     |  |                     | 8.24 |           |  | $              | 4.25  |  |  |  | 2,721,573 |  |  | $ | 4.95  | 
|                         |  |           |           |                     |  |                     |      |           |  |                |       |  |  |  |           |  |  |   |       | 

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,
$1,381,000 and $601,000 was recorded during the fiscal years
ended December 31, 2000, December 30, 2001, and
December 29, 2002, respectively.

Additionally, during the fiscal years ended
December 30, 2001 and December 29, 2002 we recorded $7,000
and $13,000, respectively, of 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. During the fiscal year
ended December 31, 2000, there were no stock options issued
for services provided by consultants.



|    |               
|--- | --------------
|13. | Stock Warrants

In conjunction with our previous financing
activities we have issued warrants to purchase various classes
of our securities. Upon the closing of our IPO during 1999 all
outstanding warrants to purchase preferred stock were converted
into warrants to purchase common stock on an as converted basis.
As of December 29, 2002,

F-18



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

all warrants outstanding were warrants to
purchase 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. Warrants to
purchase 361,612 shares of common stock were outstanding at
January 2, 2000. During fiscal 2000, 24,312 warrants were
canceled and 6,799 warrants were exercised. During fiscal 2001
and 2002, 46,174 and 150,000 warrants expired, respectively. The
following table summarizes the remaining warrants outstanding as
of December 29, 2002:

|                 |         |          |  |                 |  |   |       |  |  |  |                   | 
|---------------- | ------- | -------- |  | --------------- |  | - | ----- |  |  |  | ----------------- | 
|                 |         |          |  |                
|Number of Shares |         |          |  |                
|                 |         |          |  |                
|                 |         | Exercise |  | Expiration Date
|                 |         | Price    |  |                
|                 |         |          |  |                
|                 | 56,667  |          |  |                 |  | $ | 5.25  |  |  |  | October 6, 2004   | 
|                 | 66,667  |          |  |                 |  | $ | 15.00 |  |  |  | November 25, 2003 | 
|                 | 10,993  |          |  |                 |  | $ | 15.00 |  |  |  | March 31, 2004    | 
|                 |         |          |  |                 |  |   |       |  |  |  |                   | 
|                 | 134,327 |          |  |                 |  |   |       |  |  |  |                   | 
|                 |         |          |  |                 |  |   |       |  |  |  |                   | 



|    |             
|--- | ------------
|14. | Income Taxes

At December 29, 2002 we had net operating
loss carry-forwards of approximately $97.4 million, which
may be used to offset future taxable income. These carryforwards
expire beginning in 2010 through 2022. 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 $2.7 million)
is significantly limited and potentially unusable. Future
changes in the Companys ownership may further limit the
use of such carry-forward benefits. Credits of approximately
$3.1 million related to research and development will
expire beginning in 2010 through 2022.

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
|                              |  |                  
|                              |  | December 31,      |        | December 30, |  | December 29,
|                              |  | 2000              |        | 2001         |  | 2002        
|                              |  |                   |        |              |  |             
|Tax at statutory rate         |  | $                 | (8,009 | )            |  | $            | (7,455 | ) |  | $ | (3,391 | )
|Nondeductible items           |  |                   | 249    |              |  |              | 120    |   |  |   | 35     |  
|Effect of state taxes         |  |                   | (707   | )            |  |              | (662   | ) |  |   | (102   | )
|Change in tax credits         |  |                   | 341    |              |  |              | (973   | ) |  |   | (787   | )
|Change in valuation allowance |  |                   | 6,566  |              |  |              | 9,373  |   |  |   | 4,604  |  
|Other                         |  |                   | 1,560  |              |  |              | (403   | ) |  |   | (359   | )
|                              |  |                   |        |              |  |              |        |   |  |   |        |  
|                              |  | $                 |       |              |  | $            |       |   |  | $ |       |  
|                              |  |                   |        |              |  |              |        |   |  |   |        |  

F-19



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

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

|                                         |  |              |         |              |  |   |         |  
|---------------------------------------- |  | ------------ | ------- | ------------ |  | - | ------- | -
|                                         |  | December 30, |         | December 29,
|                                         |  | 2001         |         | 2002        
|                                         |  |              |         |             
|Net operating loss carryforwards         |  | $            | 31,940  |              |  | $ | 36,024  |  
|Goodwill and intangibles                 |  |              | 2,357   |              |  |   | 2,100   |  
|Credit carry-forwards                    |  |              | 3,572   |              |  |   | 3,143   |  
|Accrued warranty costs                   |  |              | 790     |              |  |   | 647     |  
|Inventory reserves                       |  |              | 1,509   |              |  |   | 1,335   |  
|Amortization of stock-based compensation |  |              | 3,146   |              |  |   | 3,368   |  
|Depreciation                             |  |              | 845     |              |  |   | 543     |  
|Other accruals                           |  |              | 373     |              |  |   | 345     |  
|                                         |  |              |         |              |  |   |         |  
|Gross deferred tax assets                |  |              | 44,765  |              |  |   | 47,505  |  
|Less: valuation allowance                |  |              | (44,765 | )            |  |   | (47,505 | )
|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.



|    |                        
|--- | -----------------------
|15. | 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 did not contribute to the plan during the fiscal years ended
December 31, 2000, December 30, 2001 or
December 29, 2002



|    |                 
|--- | ----------------
|16. | Subsequent Event

During February 2003 we completed an
$8.0 million private placement of 3,809,524 shares of our
newly designated Series B Convertible Preferred Stock at
$2.10 per share. In addition the purchasers of the Series B
Convertible Preferred Stock received warrants to purchase
1,142,856 shares of common stock with a strike price of $2.63
per share and a 5 year term.

Holders of Series B Convertible Preferred
Stock are entitled to 0.8936 vote per share until Holders
shares are converted into shares of Common Stock. Each share of
Series B Convertible Preferred Stock is currently
convertible into one share of common stock, subject to
adjustment for certain dilutive events. Shares of Series B
Convertible Preferred Stock automatically convert to common
stock, if, at anytime after three years from the original issue
date, the common stock has been traded with a volume weighted
average price in excess of $7.00 per share for twenty of the
previous thirty trading days with a minimum average trading
volume of 200,000 shares per day.

In addition, holders of Series B Convertible
Preferred Stock are entitled to receive cumulative dividends at
the rate of 6% per annum, payable on a quarterly basis on
May 15, August 15, November 15 and
February 15 of each year. Dividends on the preferred stock
will be paid in shares of Series B Convertible Preferred
Stock during the first year after closing and then, at our
discretion, in either shares of Series B Convertible
Preferred Stock or cash.

In the event of our liquidation, dissolution or
winding up, the holders of Series B Convertible Preferred
Stock, shall be entitled to receive a liquidation preference
over the holders of Common Stock equal to the

F-20



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##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS 
(Continued)

greater of (i) $2.10 per share of
Series B Convertible Preferred Stock held and any declared
but unpaid dividends, and (ii) the amount that would have
been paid to the holders of Series B Convertible Preferred
Stock had such preferred shares been converted to Common Stock
immediately prior to such liquidation, dissolution or winding up.

On or after the date occurring seven years from
the original issue date the holders of a majority of the then
outstanding shares of Series B Convertible Preferred Stock
may require us to effect a redemption of outstanding shares of
Series B Preferred Stock at the original issuance price of
$2.10 per share. Due to these redemption rights afforded to the
holders of Series B Convertible Preferred Stock, the
proceeds allocated to the Series B Preferred Stock will be
classified outside of stockholders equity on the balance
sheet on the mezzanine between total liabilities and
stockholders equity.

We received $7.8 million, net of issuance
costs, from the sale and issuance of our Series B
Convertible Preferred Stock and allocated $6.7 million to
the Series B Convertible Preferred Stock and
$1.1 million to the warrants to purchase common stock based
on their relative fair values on the date of issuance pursuant
to Accounting Principles Board Opinion No. 14
Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants. The fair value used to allocate
proceeds to the Series B Convertible Preferred Stock was
based upon a valuation that considered, among other things, the
closing price of the common stock on the date of closing, the
impact of the preferred stock on market capitalization on an as
converted basis, dividend rights, liquidation preferences and
redemption rights. The fair value used to allocate proceeds to
the warrants to purchase common stock was based on a Black
Scholes valuation model and the following assumptions: exercise
price $2.63; no dividends; term of 5 years; risk free
interest rate of 3.02%; and volatility of 107.4%.



|    |                                                  
|--- | -------------------------------------------------
|17. | Selected Quarterly Financial Data
    (Unaudited)

The following summarizes selected financial
information for each of the two years in the period ended
December 29, 2002 (in thousands, except per share amounts):

|                                     |  |    |        |    |  |    |        |    |  |   |        |   |  |   |        |  
|------------------------------------ |  | -- | ------ | -- |  | -- | ------ | -- |  | - | ------ | - |  | - | ------ | -
|                                     |  | Q1 |        | Q2 |  | Q3 |        | Q4
|                                     |  |    |        |    |  |    |        |   
|2002                                 |  |    |        |    |  |    |        |    |  |   |        |   |  |   |        |  
|Total revenue                        |  | $  | 4,720  |    |  | $  | 4,810  |    |  | $ | 5,014  |   |  | $ | 6,062  |  
|Gross profit                         |  |    | 2,118  |    |  |    | 2,308  |    |  |   | 2,471  |   |  |   | 2,994  |  
|Net loss                             |  |    | (4,337 | )  |  |    | (215   | )  |  |   | (2,649 | ) |  |   | (2,487 | )
|Basic and diluted net loss per share |  | $  | (0.18  | )  |  | $  | (0.01  | )  |  | $ | (0.11  | ) |  | $ | (0.10  | )
|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  | )

F-21



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##### Table of Contents



EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                       
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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                                                                                       
|        | 3  | .3(4)       |  | Certificate of Designation of Series B
    Convertible Preferred Stock                                                                                                
|        | 3  | .4(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.                                                           
|        | 4  | .5(2)       |  | Form of Rights Certificate                                                                                                                                            
|        | 4  | .6(4)       |  | Form of Warrant to Purchase Common Stock of Vixel
    Corporation.                                                                                                    
|        | 4  | .7(4)       |  | Registration Rights Agreement dated as of
    February 14, 2003, by and between Vixel Corporation and the
    investors signatory thereto.                            
|        | 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)       |  | Turnkey Manufacturing Agreement with K*Tec
    Electronics, a division of Kent Electronics Company, dated
    May 5, 1997 (Exhibit 10.7)                              
|        | 10 | .4(1)       |  | Employment Agreement between Registrant and
    Stuart B. Berman dated February 17, 1998 (Exhibit 10.9)*                                                              
|        | 10 | .5(1)       |  | Employment Agreement between Registrant and James
    McCluney dated April 26, 1999 (Exhibit 10.12)*                                                                  
|        | 10 | .6(1)       |  | Restricted Stock Purchase Agreement between
    Registrant and Kurtis L. Adams dated May 20, 1999
    (Exhibit 10.15)                                                 
|        | 10 | .7(1)       |  | Full Recourse Promissory Note between Registrant
    and Stuart B. Berman dated April 16, 1999
    (Exhibit 10.16)                                                    
|        | 10 | .8(1)       |  | Form of Full Recourse Promissory Note between
    Registrant and its executive officers (Exhibit 10.17)                                                               
|        | 10 | .9(1)       |  | Form of Full Recourse Promissory Note between
    Registrant and its directors (Exhibit 10.18)                                                                        
|        | 10 | .10(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 | .11(5)      |  | Second Amendment to Lease Agreement between
    Registrant and Sun Life Assurance Company of Canada (U.S.) dated
    November 28, 2001.                               
|        | 10 | .12         |  | Sublease Agreement between Registrant and
    Inter-Tel Technologies, Inc., dated October 7, 2002
    (Exhibit 10.20)                                                 
|        | 10 | .13(1)      |  | Vixel Corporation 1999 Employee Stock Purchase
    Plan and forms of agreements thereunder (Exhibit 10.22)*                                                           
|        | 10 | .14(1)      |  | Vixel Corporation 1999 Equity Incentive Plan, as
    amended*                                                                                                         
|        | 10 | .15(1)      |  | Form of Stock Pledge Agreement between the
    Registrant and its directors (Exhibit 10.24)                                                                           
|        | 10 | .16(3)      |  | Vixel Corporation 2000 Non-officer Equity
    Incentive Plan and forms of agreements thereunder
    (Exhibit 99.1)*                                                   
|        | 10 | .17(4)      |  | Series B Convertible Preferred Stock and
    Warrant Purchase Agreement between the Registrant and the
    Investors signatory thereto, dated as of February 18, 2003.



---



##### Table of Contents



|        |    |             |  |                                                                                                         
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .18(6)     |  | Asset Purchase Agreement between Registrant and
    Fujitsu Technology Corporation, dated April 4, 2002.
|        | 23 | .1          |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants                                      
|        | 24 | .1          |  | Power of Attorney. Reference is made to signature
    page.                                             
|        | 99 | .1          |  | Certification of Chief Executive Officer and
    Chief Financial Officer.                               



---



|    |                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 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) filed June 9, 2000.                               
|   
|(4) | Incorporated by reference to Companys
    current report on Form 8-K filed with the Securities and
    Exchange Commission on February 20, 2003.                               
|   
|(5) | Incorporated by reference to Companys
    Annual Report on Form 10-K filed with the Securities and
    Exchange Commission on April 1, 2002.                                   
|   
|(6) | Incorporated by reference to Registrants
    current report on Form 8-K filed with the Securities and
    Exchange Commission on April 30, 2002.                               



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | Confidential treatment granted as to certain
    portions of this agreement.



---



##### Table of Contents



CERTIFICATION

I, James M. McCluney, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this Annual Report on
    Form 10-K of Vixel Corporation;                                                                                                                                                                                                                                                                   
|
| | 2. | Based on my knowledge, this Annual Report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    Annual Report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this Annual Report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this Annual Report;                       
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                           



| |    |                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant
    is made known to us by others within the registrant,
    particularly during the period during which this Annual Report
    is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing of this Annual
    Report (the Evaluation Date); and                                                                     
|
| | c) | presented in this Annual Report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                          



| |    |                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of the
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this Annual Report whether there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of our most recent evaluation, including any corrective
    actions with regard to significant deficiencies and material
    weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ JAMES M. MCCLUNEY                    
| |                                          
| | James M. McCluney                        
| | Chief Executive Officer and
    President
| | (Principal Executive Officer)            

March 27, 2003



---



##### Table of Contents



CERTIFICATION

I, Kurtis L. Adams, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this Annual Report on
    Form 10-K of Vixel Corporation;                                                                                                                                                                                                                                                                   
|
| | 2. | Based on my knowledge, this Annual Report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    Annual Report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this Annual Report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this Annual Report;                       
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                           



| |    |                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant
    is made known to us by others within the registrant,
    particularly during the period during which this Annual Report
    is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing of this Annual
    Report (the Evaluation Date); and                                                                     
|
| | c) | presented in this Annual Report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                          



| |    |                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of the
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officer
    and I have indicated in this Annual Report whether there were
    significant changes in internal controls or in other factors
    that could significantly affect internal controls subsequent to
    the date of our most recent evaluation, including any corrective
    actions with regard to significant deficiencies and material
    weaknesses.



| |                                                        
| | -------------------------------------------------------
| | /s/ KURTIS L. ADAMS                                    
| |                                                        
| | Kurtis L. Adams                                        
| | Chief Financial Officer, Vice President of
    Finance,
| | Secretary, and Treasurer                               
| | (Principal Financial Officer)                          

March 27, 2003