##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




---

Form 10-K/A

(Amendment No. 1)




---

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



---

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)




---

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




---

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.



---






---

TABLE OF CONTENTS



|             |                                                                                               |  |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | Item 1. Business                                                                             
|PART II     
|             | Item 6. Selected Financial Data                                                              
|             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART III    
|             | Item 11. Executive Compensation                                                              
|PART IV     
|             | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES  
|EXHIBIT 23.1
|EXHIBIT 99.1



---



##### Table of Contents



VIXEL CORPORATION

FORM 10-K


INDEX

|           |           |  |    |                                                                                           |  |  |    | 
|---------- | --------- |  | -- | ----------------------------------------------------------------------------------------- |  |  | -- | 
|           |           |  |    | Page                                                                                     
|           |           |  |    |                                                                                          
|          
|          
|          
|          
|PART I    
|          
|          
|          
|          
|           | Item  1.  |  |    | Business                                                                                  |  |  | 2  | 
|          
|          
|          
|          
|PART II   
|          
|          
|          
|          
|           | Item  6.  |  |    | Selected Financial Data                                                                   |  |  | 9  | 
|          
|          
|          
|          
|           | Item  7.  |  |    | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |  | 11 | 
|          
|          
|          
|          
|PART III  
|          
|          
|          
|          
|           | Item  11. |  |    | Executive Compensation                                                                    |  |  | 28 | 
|          
|          
|          
|          
|PART IV   
|          
|          
|          
|          
|           | Item  15. |  |    | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  |  | 33 | 
|          
|          
|          
|          
|SIGNATURES |           |  | 36 |                                                                                          

1



---



##### Table of Contents



SPECIAL NOTE ON FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K/A, 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 19 through 28 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 incorporated in Colorado in June 1991 under the name
Photonics Research Incorporated and initially developed fiber
optic components for data communications and related
applications. In February 1995, we reincorporated in Delaware
and changed our name to Vixel Corporation. In the first quarter
of 1996, we acquired the Fibre Channel hub and transceiver
product lines from Western Digital Corporation. In 1997 we began
developing our SAN InSite software to manage our SAN
interconnect solutions. In the first quarter of 1998, we
acquired Arcxel Technologies, Inc., a developer of Fibre Channel
switches. In early 1998, we sold

2



---



##### Table of Contents





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 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 July 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

3



---



##### Table of Contents





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 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.

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.

4



---



##### Table of Contents





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

5



---



##### Table of Contents



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. As is common in
an emerging technology industry, our agreements, if any, with
OEMs and distributors are typically non-exclusive, have no
volume commitments, and may be terminated by either party
without cause. Indeed, many of our OEM and distributor customers
carry or utilize competing product lines.

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. Product sales to customer locations outside of the
United States accounted for 21%, 31%, and 39% of total revenue
during fiscal 2000, 2001, and 2002, respectively.

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

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

6



---



##### Table of Contents





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, 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 and
we purchase the SOCs directly and indirectly from them under
purchase orders. Motorola, Inc. and Intel Corporation are
currently our sole suppliers for microprocessors. Our outside
contract-manufacturing firm purchases these microprocessors
under purchase orders. 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 our first to market position
and the field proven performance of our products provide a
competitive advantage over others entering the embedded storage
switch market. We perceive 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. We believe
the performance of our interconnect products and our ability to
deliver high quality product at competitive prices position us
well to

7



---



##### Table of Contents





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. Although we believe that we compete effectively
with our existing competitors, 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 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

8



---



##### Table of Contents





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                                          

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.




PART II






|        |                        
|------- | -----------------------
|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/A. 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/A. The
statement of operations data for the fiscal years ended
January 3, 1999 and January 2, 2000 and the selected
balance sheet data set

9



---



##### Table of Contents





|                                          |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |        |        | 
|----------------------------------------- | ---------------------------------------------- | ---------------------------------------- | ------- | ---------- | ------ | ------------ | ------- | ------------ | ------ | ------------ | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                          |                                                |                                         
|                                          |                                                | 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(1)                        |                                                |                                          | 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(2)                    |                                          |         | 11,110     |        |              |         | 12,788       |        |              |         | 15,570 |        |   |         | 14,657 |        |   |         | 11,307 |       
|                                         
|                                         
|                                         
|                                         
|                                          | Acquired in-process technology                 |                                          |         | 5,118      |        |              |         |             |        |              |         |       |        |   |         |       |        |   |         |       |       
|                                         
|                                         
|                                         
|                                         
|                                          | Selling, general and administrative(3)         |                                          |         | 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  |       
|                                          |                                                |                                          |         |            |        |              |         |              |        |              |         |        |        |   |         |        |        |   |         |       



---



|    |                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes amortization of stock-based compensation of $0, $82,
    $67, $28 and $10 for the fiscal years ended January 3,
    1999, January 2, 2000, December 31, 2000,
    December 30, 2001 and December 29, 2002, respectively.              
|   
|(2) | Excludes amortization of stock-based compensation of $0, $421,
    $111, $32 and $13 for the fiscal years ended January 3,
    1999, January 2, 2000, December 31, 2000,
    December 30, 2001 and December 29, 2002, respectively.            
|   
|(3) | Excludes amortization of stock-based compensation of $0, $3,865,
    $2,714, $1,321 and $578 for the fiscal years ended
    January 3, 1999, January 2, 2000, December 31,
    2000, December 30, 2001 and December 29, 2002,
    respectively.

10



---



##### Table of Contents



|                                                                   |  |                |         |            |  |              |        |              |  |              |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------------------------ |  | -------------- | ------- | ---------- |  | ------------ | ------ | ------------ |  | ------------ | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                                   |  | 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 | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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. The year over year
variations in the percentage of revenue generated by specific
customers fluctuated, particularly during 2002, as a result of
changes in product offerings. Component sales, for which Sun
Microsystems was the major customer, represented 23% of total
revenue during 2001, while we had no component sales during 2002
due to the discontinuance of our transceiver products in the
second quarter of 2001. Similarly, our new InSpeed products were
formally launched and integrated into HPs Enterprise
Virtual Array product during 2002, resulting in an increase in
HPs revenue as a percentage of total revenue. 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

11



---



##### Table of Contents





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.

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, purchased 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

12



---



##### Table of Contents



TM


We do not believe that the sale of our SAN Management Software
will materially impact our existing hub and switch customers as
we maintain a license to provide SAN InSite and customer support
to our hub and switch customers that require the software.

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.

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 delivered to the customer, the sales price is fixed or
determinable and collectability is reasonably assured.

Product is delivered to a customer when shipped or the customer
takes possession of the product. Our products ship freight on
board  shipping point via customer provided transport
carrier. Under circumstances in which we maintain product
inventories at third party facilities where a customer may take
delivery on a just-in-time basis, delivery occurs and legal
title to the product transfers to the customer, when the
customer takes physical possession of the inventory. Once a
product is shipped or removed from a just-in-time inventory
facility, the product may not be returned for credit or refund.

We defer the recognition of revenue for sales subject to price
protections or stock rotation rights offered to select customers
until the expiration of such protections or rights. Price
protections provide customers credit for recent purchases in the
event of product price reductions while stock rotation rights
provide for the return of a limited portion of the customers
prior quarter purchases in exchange for credit to be applied to
future purchases. We defer the portion of sales subject to price
protections or stock rotation rights based on estimated
utilization of such rights. Deferred revenue, to the extent not
utilized, is recognized into revenue upon the expiration of the
rights.

13



---



##### Table of Contents





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



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

14



---



##### Table of Contents



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. We discontinued
the sale of our component transceiver products during 2001 due
to decreased purchases of these products resulting primarily
from product performance issues. 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
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

15



---



##### Table of Contents





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.



| |                                                               
| | --------------------------------------------------------------
| | 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

16



---



##### Table of Contents





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 which decreased cost of revenue
$1.9 million 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 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.

17



---



##### Table of Contents





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 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.

18



---



##### Table of Contents



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.



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results fluctuate significantly and may vary
    in future periods for a number of reasons, including unfavorable
    economic and market conditions, which could adversely affect the
    trading price of our stock.

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, timing and fluctuations of customer orders,
    particularly orders from a limited number of OEMs;

19



---



##### Table of Contents





| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 gain or loss of significant OEMs or other customers;                                                                                                                                                        
|
| |  | 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;                                                                                                                                                      
|
| |  | changes in the mix of products sold or the mix of sales
    channels; 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.



| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our two largest customers accounted for 41% and 14.7% of
    our revenues in fiscal 2002. The loss of one or more of our
    major customers could significantly reduce our revenue and harm
    our operating results.

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.

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

20



---



##### Table of Contents







| |                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are focusing the majority of our development, sales and
    marketing resources on the new embedded storage switch market.
    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. 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.                                                                      

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.



| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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
will 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 to Fibre Channel may emerge and we
    may fail to adopt new technologies on a timely basis, which 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.



| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 products.

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.

21



---



##### Table of Contents





| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | We face intense competition in the storage industry, which
    may lead to reduced prices and sales of our products and
    increased losses.

We target our embedded storage switches at a new and evolving
segment of the storage 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.

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. 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.



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | The storage industry is subject to rapid technological
    change, and we must keep pace with the changes to successfully
    compete.

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



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



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The loss of Suntron, our outside contract manufacturer, or
    the failure to accurately forecast demand for our products or
    manage successfully our relationship with Suntron could
    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

22



---



##### Table of Contents





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 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 in our products
    could increase our costs and reduce our revenue, and damage our
    reputation with current or prospective customers.

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

23



---



##### Table of Contents







| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | 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 senior management or are unable to hire
    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. 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. 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 intense.

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.



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As our international sales expand, our business, financial
    condition and operating results could be adversely affected as a
    result of legal, business, political and economic risks specific
    to our international sales.

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

24



---



##### Table of Contents





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 Fibre Channel products must comply with evolving
    industry standards in the storage markets 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 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.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to adequately protect or enforce our
    intellectual property rights, which could harm our competitive
    position.

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

25



---



##### Table of Contents







| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Third-party claims of infringement of their intellectual
    property rights could affect our ability to market our products,
    require us to seek licenses from third parties, and 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 may continue to be volatile. Accordingly,
    you may not be able to resell your shares of common stock at or
    above the price you paid for them.

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, particularly as a result of
variations between our actual financial results and the
expectations of the investment community, and as a result of
announcements by our competitors and us. Furthermore,
speculation about our strategic position, financial condition,
results of operations, or business can cause significant changes
in our stock price. In addition, the stock market has
experienced extreme price and volume fluctuations that have
affected the market price of many technology companies, in
particular, and that have often been unrelated to the operating
performance of these companies. In addition, the stock market
has recently experienced extreme volatility that often has been
unrelated to the performance of particular companies. These
factors, as well as general and economic conditions, may cause
our stock price to fall regardless of our performance.



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our preferred stockholders have significant control over
    us and may approve or reject matters contrary to the common
    stockholders vote or interests.

In February 2003, we completed a private placement of
Series B Convertible Preferred Stock (the
Series B Preferred) and warrants to purchase
common stock. So long as 1,450,000 shares of Series B
Preferred remain outstanding, the Series B Preferred
holders have the right to appoint a director to our board and
certain actions, such as the authorization and sale of certain
senior securities, that we may wish to undertake require the
consent of the holders of a majority of the outstanding shares
of Series B Preferred, voting as a separate class. The
interests of the holders of our Series B Preferred will not
necessarily be identical to those of holders of our common
stock. For instance, in the event of certain change in control
transactions, the holders of the Series B Preferred are
entitled to payment of a liquidation preference prior to the
payment of any consideration to the holders of our common stock.
This may cause the holders of the Series B Preferred to
favor or oppose a merger or sale of the Company or its assets in
circumstances where holders of common stock may have a contrary
desire.



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | The sale of a substantial number of shares of our common
    stock could cause the market price of our shares to
    decline.

Sales of a substantial number of shares of our common stock in
the public market, or the appearance that such shares are
available for sale, could adversely affect the market price for
our common stock. In connection with our private placement of
preferred stock in February 2003, we agreed to file
registration statements with the SEC covering the resale by
those investors of 3,809,524 shares of common stock underlying
the conversion of the Series B Preferred and 1,142,856
shares of common stock that may be issued upon the exercise of
the warrants issued in that private placement. Once registered
for resale these shares will become freely tradeable, subject
only to prospectus delivery requirements and possible
restrictions under Rule 144. The registration of

26



---



##### Table of Contents







| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may seek to raise additional capital, but additional
    funds may not be available on terms acceptable to us or at all,
    limiting our ability to develop new products or respond to
    competitive pressures.

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 require, or could elect to pursue, additional
financing to fund our operations in the future. If we need to
raise additional capital, we may not be able to do so on
favorable terms, or at all, especially if we experience
disappointing operating results. 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.



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

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



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

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

27



---



##### Table of Contents






PART III






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

Compensation
of Directors

Each non-employee director representing common stockholders of
the Company receives an annual retainer of $12,000 for his or
her service on the Board of Directors with an additional $1,000
annual retainer if serving as a committee chairman, payable
immediately following the annual meeting of stockholders. In
addition to the annual retainer, each non-employee director of
the Company receives $500 for attendance by telephone and $1,000
for attendance in person at Board of Directors meetings. The
members of the Board of Directors are also eligible for
reimbursement for their expenses incurred in connection with
attendance at Board of Directors meetings in accordance with
Company policy. The members of the Audit, Compensation and
Corporate Governance and Nominating Committees each receive $500
for attendance by telephone or in person at such committee
meetings, provided that the committee meetings are not held in
conjunction with Board of Director meetings. The Series B
Director and directors that are employees do not receive
compensation for attendance at Board of Directors or committee
meetings, but are reimbursed for their expenses incurred in
connection with attendance at such meetings in accordance with
Company policy. During the fiscal year ended December 29,
2002, the total compensation paid to non-employee directors was
$77,500.

Under the Companys 1999 Equity Incentive Plan (the
1999 Plan), each person who is elected or appointed
for the first time to be a non-employee director receives an
initial option grant on the date of his or her election or
appointment to the Board of Directors to purchase 60,000 shares
of the Companys common stock, 20,000 shares of which shall
vest on the date of grant and 20,000 shares of which shall vest
on each of the first and second anniversaries of the date of
grant. In addition, beginning at the first annual meeting of
stockholders following the third anniversary of each
non-employee directors election to the Board of Directors,
each such director shall automatically, on the day after the
Companys annual meeting of stockholders, receive a fully
vested option grant to purchase 20,000 shares of the
Companys common stock. Non-employee directors who serve
less than a full year from their third anniversary to the next
annual meeting of stockholders will be granted a pro rata
portion of their option shares based on their length of service.
All options granted to non-employee directors are for a term of
ten years and are granted at the fair market value of the
Companys common stock on the date of grant. The
Series B Director does not receive option grants for
service as a director.

In May 2002, Messrs. Haggerty, Spicer and Wolfen in
recognition of their service on the Board of Directors each
received a grant of options to purchase 20,000 shares of common
stock at an exercise price of $3.06 per share, the fair market
value on the date of grant. In January 2003,
Messrs. Haggerty, Spicer and Wolfen in recognition of their
service on the Board of Directors each received a grant of
options to purchase 100,000 shares of common stock at an
exercise price of $2.52 per share, the fair market value on the
date of grant. The options granted in May 2002 and January 2003
are fully vested, immediately exercisable and expire ten years
from the date of grant. Upon joining the Board of Directors in
December 2001, Mr. Cordell received an initial option grant
to purchase 60,000 shares of the Companys common stock at
an exercise price of $1.57 per share, the fair market value on
the date of grant. The options are one-third vested and
immediately exercisable as of the date of grant with the
remainder vesting one-third on each of the first and second
anniversaries from the date of grant. The option expires ten
years from the date of grant.

28



---



##### Table of Contents



Compensation
of Executive Officers

The following table shows for the three most recent fiscal years
ending December 29, 2002, December 30, 2001, and
December 31, 2000, compensation awarded or paid to, or
earned by, the Companys chief executive officer and its
other three most highly compensated executive officers at
December 29, 2002 (the Named Executive
Officers):

Summary Compensation Table

|                            |                          |                     |      |              |  |            |         |                 |  |           |           |                 |  |  |        |        |     |  |         |         |  |  |   |   | 
|--------------------------- | ------------------------ | ------------------- | ---- | ------------ |  | ---------- | ------- | --------------- |  | --------- | --------- | --------------- |  |  | ------ | ------ | --- |  | ------- | ------- |  |  | - | - | 
|                            |                          |                     |      |              |  |            |         |                 |  | Long-Term |           |                
|                            |                          |                     |      | Compensation |  |           
|                            |                          | Annual Compensation |      | Awards       |  |           
|                            |                          |                     |      |              |  |           
|                            |                          |                     |      | Securities   |  |           
|                            |                          |                     |      | Other Annual |  | Underlying |         | All Other      
|Name and principal position |                          | Year                |      | Salary($)    |  | Bonus($)   |         | Compensation($) |  | Option(#) |           | Compensation($)
|                            |                          |                     |      |              |  |            |         |                 |  |           |           |                
|James M. McCluney           |                          |                     | 2002 |              |  |            | 300,000 |                 |  |           | 1,010,975 | (1)             |  |  |       |        |     |  | 250,000 |         |  |  |  |  
|                            | President and Chief      |                     |      | 2001         |  |            |         | 300,000         |  |           |           | 179,325         |  |  |        |       |     |  |         | 200,000 |  |  |   |  | 
|                            | Executive Officer        |                     |      | 2000         |  |            |         | 300,000         |  |           |           | 186,797         |  |  |        | 4,348  | (2) |  |         |        |  |  |   |  | 
|                           
|                           
|                           
|                           
|Kurtis L. Adams             |                          |                     | 2002 |              |  |            | 185,000 |                 |  |           | 38,965    |                 |  |  |       |        |     |  | 175,000 |         |  |  |  |  
|                            | Chief Financial Officer  |                     |      | 2001         |  |            |         | 185,000         |  |           |           | 43,485          |  |  |        |       |     |  |         | 150,000 |  |  |   |  | 
|                            |                          |                     | 2000 |              |  |            | 163,308 |                 |  |           |          |                 |  |  |       |        |     |  | 50,000  |         |  |  |  |  
|                           
|                           
|                           
|                           
|Stuart B. Berman            |                          |                     | 2002 |              |  |            | 193,231 |                 |  |           |          |                 |  |  |       |        |     |  |        |         |  |  |  |  
|                            | Chief Technology Officer |                     |      | 2001         |  |            |         | 160,000         |  |           |           | 10,000          |  |  |        |       |     |  |         | 250,000 |  |  |   |  | 
|                            |                          |                     | 2000 |              |  |            | 159,654 |                 |  |           |          |                 |  |  |       |        |     |  |        |         |  |  |  |  
|                           
|                           
|                           
|                           
|Thomas Hughes               |                          |                     | 2002 |              |  |            | 200,000 |                 |  |           | 33,750    |                 |  |  | 15,139 | (3)    |     |  |        |         |  |  |  |  
|                            | Vice President, Product  |                     |      | 2001         |  |            |         | 200,000         |  |           |           | 45,000          |  |  |        | 17,136 | (2) |  |         | 525,000 |  |  |   |  | 
|                            | Development              |                     |      | 2000         |  |            |         | 150,000         |  |           |           | 67,500          |  |  |        | 68,414 | (2) |  |         | 290,000 |  |  |   |  | 



---



|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of cash bonus of $475,475 and stock bonus of
    425,000 shares of common stock with a value on the date of
    the award of $535,500.
|   
|(2) | Consists of relocation expense payments.                                                                                                       
|   
|(3) | Consists of $3,998 of personal travel benefits and $11,141 of
    relocation expense payments.                                                 

29



---



##### Table of Contents



Stock Option Grants And Exercises in Last Fiscal Year

The following table shows certain information regarding stock
options granted to the Named Executive Officers during fiscal
2002. No stock appreciation rights were granted in fiscal 2002.
All options granted to these executive officers during the last
fiscal year were granted under the Companys 1999 Plan.
Each option has a ten-year term, subject to earlier termination
if the optionees service with the Company terminates.
Unless otherwise noted, options vest at the rate of 25% on the
first anniversary of the date of grant and quarterly thereafter
in twelve equal installments. The percentage of total options
set forth below is based on options to purchase 1,679,100 shares
of common stock granted during fiscal 2002. As of
December 29, 2002, options to purchase
5,675,821 shares were outstanding under all of the
Companys equity incentive plans, and options to purchase
1,696,853 shares remained available for grant as of
December 29, 2002. All options are granted at the fair
market value on the date of grant as determined by the
Companys Board of Directors. Potential realizable values
are net of exercise price, but before associated taxes based on
the terms of the option at the time of grant. The 5% and 10%
assumed annual rates of compounded stock price appreciation are
mandated by the Securities and Exchange Commission and do not
represent the Companys estimate or projection of the
Companys future common stock price. Unless the market
price of the common stock appreciates over the option term, no
value will be realized from the option grants made to the Named
Executive Officers.

|                  |  |                   |         |              |  |           |       |                      |  |                        |      |     |  |  |          |  |  |  |         |  |  |  |           | 
|----------------- |  | ----------------- | ------- | ------------ |  | --------- | ----- | -------------------- |  | ---------------------- | ---- | --- |  |  | -------- |  |  |  | ------- |  |  |  | --------- | 
|                  |  |                   |         |              |  |           |       |                     
|                  |  | Individual Grants |         |              |  |           |       | Potential Realizable
|                  |  |                   |         |              |  |           |       | Value at Assumed    
|                  |  |                   |         | % of Total   |  |           |       |                      |  | Annual Rates of Stock 
|                  |  | Shares            |         | Options      |  |           |       |                      |  | Price Appreciation for
|                  |  | Underlying        |         | Granted to   |  | Exercise  |       |                      |  | Option Term($)        
|                  |  | Options           |         | Employees in |  | Price Per |       | Expiration           |  |                       
|Name              |  | Granted(#)        |         | Fiscal 2002  |  | Share($)  |       | Date                 |  | 5%                     |      | 10%
|                  |  |                   |         |              |  |           |       |                      |  |                        |      |    
|James M. McCluney |  |                   | 250,000 |              |  |           | 14.89 |                      |  |                        | 2.95 |     |  |  | 05/22/12 |  |  |  | 463,810 |  |  |  | 1,175,385 | 
|                 
|                 
|                 
|                 
|Kurtis L. Adams   |  |                   | 175,000 | (1)          |  |           | 10.42 |                      |  |                        | 1.26 |     |  |  | 10/01/12 |  |  |  | 138,671 |  |  |  | 351,420   | 
|                 
|                 
|                 
|                 
|Stuart B. Berman  |  |                   |        |              |  |           |      |                      |  |                        |     |     |  |  |         |  |  |  |        |  |  |  |          | 
|                 
|                 
|                 
|                 
|Thomas Hughes     |  |                   |        |              |  |           |      |                      |  |                        |     |     |  |  |         |  |  |  |        |  |  |  |          | 



---



|    |                                                                               
|--- | ------------------------------------------------------------------------------
|(1) | These shares vest 50% at the date of grant and 50% six months
    after grant.

30



---



##### Table of Contents



Aggregated Option Exercises During Last Fiscal Year And
Fiscal Year End Option Values

The following table sets forth the number of shares of common
stock acquired upon exercise of stock options by the Named
Executive Officers during fiscal 2002, and the number and value
of the shares of common stock underlying unexercised options
held by Named Executive Officers as of December 29, 2002.
The value realized is based on the fair market value of the
underlying securities as of the date of exercise, less the per
share exercise price, multiplied by the number of shares
underlying the option. The value of unexercised in-the-money
options is based on $1.88, the closing price of our common stock
on December 27, 2002, the last trading day of our fiscal
year 2002, less the exercise price, multiplied by the number of
shares underlying the option.

|                  |  |             |   |             |  |                        |   |                          |  |             |         |               |  |  |         |  |  |  |        |  |  |  |        | 
|----------------- |  | ----------- | - | ----------- |  | ---------------------- | - | ------------------------ |  | ----------- | ------- | ------------- |  |  | ------- |  |  |  | ------ |  |  |  | ------ | 
|                  |  |             |   |             |  |                        |   |                         
|                  |  |             |   |             |  | Shares Underlying      |   | Value of the Unexercised
|                  |  |             |   |             |  | Unexercised Options at |   | In-the-Money Options at 
|                  |  | Shares      |   |             |  | December 29, 2002(#)   |   | December 29, 2002($)    
|                  |  | Acquired on |   | Value       |  |                        |   |                         
|Name              |  | Exercise(#) |   | Realized($) |  | Exercisable            |   | Unexercisable            |  | Exercisable |         | Unexercisable
|                  |  |             |   |             |  |                        |   |                          |  |             |         |              
|James M. McCluney |  |             |  |             |  |                        |  |                          |  |             | 450,000 | (1)           |  |  |        |  |  |  |       |  |  |  |       | 
|                 
|                 
|                 
|                 
|Kurtis L. Adams   |  |             |  |             |  |                        |  |                          |  |             | 257,054 |               |  |  | 213,546 |  |  |  | 59,000 |  |  |  | 68,500 | 
|                 
|                 
|                 
|                 
|Stuart B. Berman  |  |             |  |             |  |                        |  |                          |  |             | 90,625  |               |  |  | 159,375 |  |  |  | 9,500  |  |  |  | 28,500 | 
|                 
|                 
|                 
|                 
|Thomas Hughes     |  |             |  |             |  |                        |  |                          |  |             | 291,250 |               |  |  | 273,750 |  |  |  | 59,375 |  |  |  | 35,625 | 



---



|    |                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | These shares are exercisable pursuant to an early exercise
    provision in Mr. McCluneys stock option letter
    agreement. As of December 29, 2002, 87,500 shares were
    vested.

Employment Severance and Change of Control Agreements

In April 1999, the Company entered into an employment agreement
with James M. McCluney, the Companys president and
chief executive officer. The agreement requires the Company to
pay Mr. McCluney an annual incentive bonus of up to 100% of
his base salary rate then in effect, with a target payout of 50%
of his base salary, based upon performance criteria to be
determined by the Compensation Committee. The annual incentive
bonus is earned and vested if (a) the performance
objectives established by the Compensation Committee have been
satisfied during that year and (b) Mr. McCluney serves
as the Companys president and chief executive officer for
the year and during the first quarter of the following calendar
year. Mr. McCluney may defer all or any portion of his
annual incentive bonus. In the event that Mr. McCluney is
terminated without cause, he will be entitled to severance in
the amount of one years base salary at the rate then in
effect, any deferred incentive bonuses and continued vesting of
his stock options for one year.

Under the terms of Mr. McCluneys option agreements,
he may exercise all or any portion of the unvested options;
however, Vixel has a right to repurchase any of his unvested
shares. In April 1999, Mr. McCluney exercised an unvested
option for 1,000,000 shares. In January 2003, the Company
repurchased 937,500 of such shares and, as of March 3,
2003, the Company has the right to repurchase up to 41,678 of
such shares. If there is a change in control of Vixel and
Mr. McCluneys options are not assumed or replaced
with a substantially equivalent option, or if
Mr. McCluneys employment is terminated either
(i) involuntarily by a successor company other than for
cause or (ii) by Mr. McCluney for good reason, then
all of the option shares will accelerate and vest immediately as
follows: the number of shares for which the option is
exercisable as of the date of consummation of the change in
control (less the number of shares as to which the option has
been previously exercised), plus the greater of
(1) one-half of the number of unvested shares subject to
the option as of the consummation of the change in control or
(2) one years vesting of the option.

In September 1998, the Company entered into an employment
agreement with Kurtis L. Adams, its chief financial officer
and vice president of finance. Under the employment agreement,
if there is a change in control and Mr. Adams is terminated
without cause or if there is a significant change in his
responsibilities, then the greater of one-half of his unvested
option shares or one years worth of vesting of the
unvested option shares will immediately vest and become
exercisable. In May 2001, the Board of Directors approved
severance benefits for Mr. Adams. Upon a change in control,
if Mr. Adams is terminated without cause, or if there is a
significant change in his responsibilities, benefits or working
location and he resigns as a result of such

31



---



##### Table of Contents





In March 2000, the Company entered into an employment letter
agreement with Thomas Hughes, its vice president, product
development. In the event that Mr. Hughes is terminated
without cause, or if there is a significant change in his
responsibilities, benefits or working location and he resigns as
a result of such significant changes, he will be entitled to
severance in the amount of six months base salary at the rate
then in effect, plus payment for all COBRA medical/dental
coverage for the severance period. Under the agreement, upon a
change in control, if Mr. Hughes is terminated without
cause, or if there is a significant change in his
responsibilities and he resigns as a result of such significant
change, the greater of one-half of his unvested options or one
years worth of vesting of the unvested options will
immediately vest and become exercisable.

The Board of Directors has approved change in control provisions
for stock options granted to Stuart B. Berman since March 2000.
Mr. Bermans stock option agreements provide that if
there is a change in control of Vixel and, within twelve months
after the effective date of such change in control, his
employment is terminated either (i) involuntarily by a
successor company other than for cause or (ii) by the
option holder for good reason, then the greater of one-half of
the unvested options or one years worth of vesting of the
unvested options will immediately vest and become exercisable.
In May 2001, the Board of Directors approved severance benefits
for Mr. Berman. Upon a change in control, if
Mr. Berman is terminated without cause, or if there is a
significant change in his responsibilities, benefits or working
location and he resigns as a result of such significant changes,
he will be entitled to severance in the amount of six months
base salary at the rate then in effect, plus payment for all
COBRA medical/dental coverage for the severance period.

Compensation Committee Interlocks and Insider
Participation

None of the members of the Compensation Committee is or has
been, at any time since formation, an officer or employee of the
Company. No member of the Compensation Committee and none of the
executive officers serves as a member of the board of directors
or compensation committee or other committee of any entity that
has one or more executive officers serving as a member of the
Companys Board of Directors or Compensation Committee.

32



---



##### 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 |  |      | 35 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Schedule II  Valuation and
    Qualifying Accounts                   |  |      | 35 | 



| |     |          
| | --- | ---------
| | (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 Suntron
    Corp., as successor to K*Tec Electronics Corporation, 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)*                                   

33



---



##### 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                                                                                                    
|        | 99.1      |             |  | Certification of Chief Executive Officer and
    Chief Financial Officer.                                                                                             



---



| |   |                  
| | - | -----------------
| | + | Previously filed.



|    |                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

34



---



##### 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



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 | 

35



---



##### 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/A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Bothell,
King County, State of Washington, on this
1st day of July, 2003.



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



| |     |                    
| | --- | -------------------
| | By: | /s/ KURTIS L. ADAMS

| |                                    
| | -----------------------------------
| |                                    
| | Kurtis L. Adams                    
| | Chief Financial Officer, Vice      
| | President of Finance, Secretary and
| | Treasurer                          

36



---



##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors



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  
|                                                                   |  |                                      |            | Paid-in    |  | Stock-Based |    | from        
|                                                                   |  | Shares                               |            | Amount     |  | Capital     |    | Compensation |  | Stockholders
|                                                                   |  |                                      |            |            |  |             |    |              |  |             
|                                                                   |  |                                     
|                                                                   |  | (In thousands, except share amounts)
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Balance, January 2,
    2000                                       |  |                                      | 23,213,588 |            |  | $           | 35 |              |  | $            | 155,070 |   |  | $ | (5,525 | ) |  | $ | (5,246 | )
|                                                                   |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   |        |  
|Stock options exercised                                            |  |                                      | 411,104    |            |  |             | 1  |              |  |              | 680     |   |  |   |        |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|ESPP shares issued                                                 |  |                                      | 213,550    |            |  |             |   |              |  |              | 1,121   |   |  |   |        |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Common stock warrants exercised                                    |  |                                      | 6,799      |            |  |             |   |              |  |              | 10      |   |  |   |        |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Amortization of stock-based compensation                           |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   | 2,892  |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other                                                              |  |                                      |            |            |  |             |    |              |  |              | (494    | ) |  |   | 473    |   |  |   | 124    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Net loss                                                           |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   |        |  
|                                                                   |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   |        |  
|Balance, December 31, 2000                                         |  |                                      | 23,845,041 |            |  |             | 36 |              |  |              | 156,387 |   |  |   | (2,160 | ) |  |   | (5,122 | )
|                                                                   |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   |        |  
|Stock options exercised                                            |  |                                      | 130,658    |            |  |             |   |              |  |              | 58      |   |  |   |        |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|ESPP shares issued                                                 |  |                                      | 296,531    |            |  |             |   |              |  |              | 484     |   |  |   |        |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Purchase of treasury stock                                         |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Amortization of stock-based compensation                           |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   | 1,381  |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Proceeds from stockholders notes receivable                        |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   | 1,377  |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Option grants to non-employees                                     |  |                                      |            |            |  |             |    |              |  |              | 7       |   |  |   |        |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other                                                              |  |                                      |            |            |  |             |    |              |  |              | (14     | ) |  |   | 14     |   |  |   |       |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Net loss                                                           |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   |        |  
|                                                                   |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   |        |  
|Balance, December 30, 2001                                         |  |                                      | 24,272,230 |            |  |             | 36 |              |  |              | 156,922 |   |  |   | (765   | ) |  |   | (3,745 | )
|                                                                   |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   |        |  
|Stock options exercised                                            |  |                                      | 163,422    |            |  |             |   |              |  |              | 141     |   |  |   |        |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|ESPP shares issued                                                 |  |                                      | 255,130    |            |  |             | 1  |              |  |              | 361     |   |  |   |        |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Stock issued to an officer                                         |  |                                      | 425,000    |            |  |             | 1  |              |  |              | 535     |   |  |   |        |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Purchase of treasury stock                                         |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Amortization of stock-based compensation                           |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   | 601    |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Reversal of stock- based compensation for
    terminated employees |  |                                      |            |            |  |             |    |              |  |              | (47     | ) |  |   | 47     |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Option grants to non-employees                                     |  |                                      |            |            |  |             |    |              |  |              | 13      |   |  |   |        |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Net loss                                                           |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   |        |  
|                                                                   |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   |        |  
|Balance, December 29, 2002                                         |  |                                      | 25,115,782 |            |  | $           | 38 |              |  | $            | 157,925 |   |  | $ | (117   | ) |  | $ | (3,745 | )
|                                                                   |  |                                      |            |            |  |             |    |              |  |              |         |   |  |   |        |   |  |   |        |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                   |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   |         |  
|------------------------------------------------------------------ |  | ------------------------------------ | ------- | ----------- |  | ------------- | ---- | ------ |  | - | -------- | - |  | - | ------- | -
|                                                                   |  |                                      |         |             |  |              
|                                                                   |  | Treasury Stock                       |         |             |  | Total        
|                                                                   |  |                                      |         | Accumulated |  | Stockholders
|                                                                   |  | Shares                               |         | Amount      |  | Deficit       |      | Equity
|                                                                   |  |                                      |         |             |  |               |      |       
|                                                                   |  |                                     
|                                                                   |  | (In thousands, except share amounts)
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Balance, January 2,
    2000                                       |  |                                      | 66,666  |             |  | $             | (50  | )      |  | $ | (78,589  | ) |  | $ | 65,695  |  
|                                                                   |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   |         |  
|Stock options exercised                                            |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 681     |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|ESPP shares issued                                                 |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 1,121   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Common stock warrants exercised                                    |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 10      |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Amortization of stock-based compensation                           |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 2,892   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other                                                              |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 103     |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Net loss                                                           |  |                                      |         |             |  |               |      |        |  |   | (23,557  | ) |  |   | 23,557  | )
|                                                                   |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   |         |  
|Balance, December 31, 2000                                         |  |                                      | 66,666  |             |  |               | (50  | )      |  |   | (102,146 | ) |  |   | 46,945  |  
|                                                                   |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   |         |  
|Stock options exercised                                            |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 58      |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|ESPP shares issued                                                 |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 484     |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Purchase of treasury stock                                         |  |                                      | 221,900 |             |  |               | (298 | )      |  |   |          |   |  |   | (298    | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Amortization of stock-based compensation                           |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 1,381   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Proceeds from stockholders notes receivable                        |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 1,377   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Option grants to non-employees                                     |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 7       |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other                                                              |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Net loss                                                           |  |                                      |         |             |  |               |      |        |  |   | (21,928  | ) |  |   | (21,928 | )
|                                                                   |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   |         |  
|Balance, December 30, 2001                                         |  |                                      | 288,566 |             |  |               | (348 | )      |  |   | (124,074 | ) |  |   | 28,026  |  
|                                                                   |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   |         |  
|Stock options exercised                                            |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 141     |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|ESPP shares issued                                                 |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 362     |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Stock issued to an officer                                         |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 536     |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Purchase of treasury stock                                         |  |                                      | 247,700 |             |  |               | (483 | )      |  |   |          |   |  |   | (483    | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Amortization of stock-based compensation                           |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 601     |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Reversal of stock- based compensation for
    terminated employees |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   |        |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Option grants to non-employees                                     |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   | 13      |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Net loss                                                           |  |                                      |         |             |  |               |      |        |  |   | (9,688   | ) |  |   | (9,688  | )
|                                                                   |  |                                      |         |             |  |               |      |        |  |   |          |   |  |   |         |  
|Balance, December 29, 2002                                         |  | $                                    | 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



---



##### 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 delivered to the customer, the sales price is fixed or
determinable and collectability is reasonably assured.

Product is delivered to a customer when shipped or the customer
takes possession of the product. Our products ship freight on
board  shipping point via customer provided transport
carrier. Under circumstances in which we maintain product
inventories at third party facilities where a customer may take
delivery on a just-in-time basis, delivery occurs and legal
title to the product transfers to the customer, when the
customer takes physical possession of the inventory. Once a
product is shipped or removed from a just-in-time inventory
facility, the product may not be returned for credit or refund.

We defer the recognition of revenue for sales subject to price
protections or stock rotation rights offered to select customers
until the expiration of such protections or rights. Price
protections provide customers credit for recent purchases in the
event of product price reductions while stock rotation rights
provide for the return of a limited portion of the customers
prior quarter purchases in exchange for credit to be applied to
future purchases. We defer the portion of sales subject to price
protections or stock rotation rights based on estimated
utilization of such rights. Deferred revenue, to the extent not
utilized, is recognized into revenue upon the expiration of the
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.

F-6



---



##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)

We offer our products for sale primarily in the United States,
Europe and Asia. Product sales to customer locations outside the
United States generated 21%, 31%, and 39% of total revenue
during the fiscal years ended December 31, 2000,
December 30, 2001 and December 29, 2002, respectively.
All sales are denominated in United States dollars.

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.



| |                          
| | -------------------------
| | 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

F-7



---



##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)

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.



| |                                     
| | ------------------------------------
| | 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. Warranty
coverages provide for the repair or replacement of defective
products, at our option. 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.
Cost associated with warranty coverage may include replacement
product, parts, labor and other costs. The

F-8



---



##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)

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.



| |            
| | -----------
| | 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

F-9



---



##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)

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 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.

F-10



---



##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)



| |            
| | -----------
| | Legal Costs

From time to time, we are subject to various legal proceedings
and claims in the ordinary course of business. Costs incurred
relating to such proceedings and claims are expensed in the
period in which they are incurred.



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

In accordance with SFAS No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, we have capitalized eligible computer software
development costs upon the establishment of technological
feasibility, which is defined as completion of designing,
coding, and testing activities. For the years ended
December 31, 2000 and December 29, 2002, the amount of
costs eligible for capitalization, after consideration of
factors such as realizable value, were not material and,
accordingly, all software development costs were charged to
research and development expense. During the year ended
December 30, 2001, we capitalized $106,000 in eligible
software development costs. In conjunction with sale of our SAN
InSite assets during 2002, the remaining net book value of the
capitalized software development cost was included in the basis
of the assets sold.



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

F-11



---



##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)

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.

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.

F-12



---



##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)

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 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  |  
|                                             |  |              |        |              |  |   |        |  

F-13



---



##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)



|   |                       
|-- | ----------------------
|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: |                            |              |        |              |   |   |        |       
|                              
|                              
|                              
|                              
|                               | Goodwill                   |              |        | (3,186       | ) |   |        | (3,186 | )
|                              
|                              
|                              
|                              
|                               | Core technology            |              |        | (1,692       | ) |   |        | (2,129 | )
|                              
|                              
|                              
|                              
|                               | Software development costs |              |        | (18          | ) |   |        |       |  
|                               |                            |              |        |              |   |   |        |       
|                               |                            |              | (4,896 | )            |   |   | (5,315 | )     
|                               |                            |              |        |              |   |   |        |       
|                               |                            | $            | 948    |              |   | $ | 423    |       
|                               |                            |              |        |              |   |   |        |       

Goodwill, until the adoption of SFAS 142, and other
intangible assets are amortized over their estimated useful
lives of 5 years.

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.

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

F-14



---



##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)

$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-15



---



##### 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, however
due to uncertainty surrounding the final resolution of the
matter we cannot reasonably estimate our potential exposure, if
any.

F-16



---



##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)

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.



|    |                           
|--- | --------------------------
|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

F-17



---



##### Table of Contents



VIXEL CORPORATION


NOTES TO FINANCIAL STATEMENTS  (Continued)

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.

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-18



---



##### 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-19



---



##### 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-20



---



##### 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-21



---



##### 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-22



---



##### 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 Suntron
    Corp., as successor to K*Tec Electronics Corporation, 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.
|        | 10 | .18(6)     |  | Asset Purchase Agreement between Registrant and
    Fujitsu Technology Corporation, dated April 4, 2002.                                                              



---



##### Table of Contents



|        |    |             |  |                                                                          
|------- | -- | ----------- |  | -------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 23 | .1          |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants       
|        | 99 | .1          |  | Certification of Chief Executive Officer and
    Chief Financial Officer.



---

+ Previously filed.



|    |                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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/A 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)        

July 1, 2003



---



##### Table of Contents



CERTIFICATION

I, Kurtis L. Adams, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this Annual Report on Form 10-K/A 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)                      

July 1, 2003