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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                         COMMISSION FILE NO. 000-27221
                            ------------------------

                               VIXEL CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                   DELAWARE                                      84-1176506
         (STATE OR OTHER JURISDICTION                         (I.R.S. EMPLOYER
      OF INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)
</TABLE>

                        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 [X]  No [ ]

     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.  Yes [ ]  No [X]

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the closing sale price of the Registrant's Common Stock
on March 1, 2001, as reported on the National Association of Securities Dealers
Automated Market, was approximately $43,742,648.*

     As of March 1, 2001, the Registrant had outstanding 23,860,088 shares of
Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The Registrant has incorporated by reference into Part III of this Form
10-K portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders
to be held on May 22, 2001, which definitive proxy statement shall be filed with
the Securities and Exchange Commission on or before April 30, 2001.

* The aggregate market value calculation excludes 5,442,131 shares of common
  stock held by directors and officers and stockholders whose beneficial
  ownership exceeds 5 percent of the shares outstanding at March 1, 2001.
  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.

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                               VIXEL CORPORATION

                                   FORM 10-K

                                     INDEX

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<S>       <C>                                                           <C>
                                     PART I
Item 1.   Business....................................................    1
Item 2.   Properties..................................................   12
Item 3.   Legal Proceedings...........................................   12
Item 4.   Submission of Matters to a Vote of Security Holders.........   12

                                    PART II
Item 5.   Market For Registrant's Common Equity and Related
          Stockholder Matters.........................................   13
Item 6.   Selected Financial Data.....................................   14
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations...................................   15
Item 7A.  Quantitative and Qualitative Disclosure About Market Risk...   29
Item 8.   Financial Statements and Supplementary Data.................   29
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................   29

                                    PART III
Item 10.  Directors and Executive Officers of the Registrant..........   29
Item 11.  Executive Compensation......................................   29
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   29
Item 13.  Certain Relationships and Related Transactions..............   30

                                    PART IV
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form
          8-K.........................................................   30
SIGNATURES............................................................   33
</TABLE>

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                   SPECIAL NOTE ON FORWARD LOOKING STATEMENTS

     This Form 10-K (this "Report") contains forward-looking statements that
involve risk and uncertainties. The statements contained in this report that are
not purely historical are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended and Section 27A
of the Securities Act of 1933, as amended. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate," "predict," "potential",
"future", "intends" or "continue," the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially.

     Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements, which apply only as of the date of this
Report. Our actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including the risks outlined
on pages 20 through 29 and elsewhere in this Report. We assume no obligation to
update any of the forward-looking statements after the date hereof to conform
such statements to actual results or to changes in our expectations.

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

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

     We are a provider of comprehensive solutions in storage area networks, or
SANs. SANs are networks that are specifically designed to interconnect computer
systems and data storage devices. Our comprehensive SAN interconnect solutions
consist of a variety of products that connect computers to data storage devices
in a network configuration. Our products utilize the Fibre Channel protocol,
which is an American National Standards Institute, or ANSI, defined standard for
the transfer of information between computers and storage devices. Our Fibre
Channel product portfolio consists of our SAN systems, which include our SAN
management software, switches, hubs and transceivers sold with switch products
and other components, which include our transceivers sold to original equipment
manufacturers, or OEMs, for incorporation into their products. Our products
enable data storage devices to connect to one or more computer systems and
facilitate the reliable exchange of large amounts of data at high speeds. Our
products are fully interoperable and designed to perform in concert so customers
can easily deploy a range of SAN configurations, from simple point-to-point
connections to more complex high-performance networks. By offering and
supporting the key components necessary to connect servers and storage, we
enable our customers to turn to one vendor for their SAN interconnect needs.

INDUSTRY BACKGROUND

     In recent years there has been a significant increase in the volume of data
created, processed and accessed throughout the enterprise. This growth has been
fueled by the rapid expansion of the Internet, measured both by the number of
users as well as the number of web-based corporate initiatives which require
continuous access to critical business information 24 hours a day, seven days a
week. Also, rapid growth of data-intensive applications, such as online
transaction processing, e-commerce, Web hosting, data warehousing, data mining,
enterprise resource management and the sharing of multimedia-based information,
has dramatically increased

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the need for high-capacity, high-performance storage devices and systems. This
demand is compounded when organizations create redundant sources of data to
enable continuous error-free access to data. The growth in stored data has been
facilitated by the continued decline in the cost per unit of storage capacity.
International Data Corporation, or IDC, an independent research firm, in a
report published in December 2000, estimated that the worldwide volume of stored
data should grow from approximately 300,000 terabytes in 2000 to approximately
2.9 million terabytes in 2004, representing a compound annual growth rate of
77%.

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

     Typical Fibre Channel SAN configurations include point-to-point connections
between two devices, an arbitrated loop for up to 126 devices and a switched
network, or fabric, which can enable the connection of millions of devices.
These configurations allow SANs to meet a wide variety of storage and network
requirements, from the smallest server-to-storage configuration to complex
enterprise networks. IDC, in a report published in February 2000, estimated that
worldwide revenue from Fibre Channel hub and switch products should grow from
approximately $44 million in 1999 to $4.2 billion in 2003, representing a
compound annual growth rate of over 75%.

OUR FIBRE CHANNEL SAN SOLUTION

     We provide comprehensive SAN interconnect solutions that utilize a variety
of devices to connect computers to storage devices in a network configuration.
We offer a broad portfolio, which includes our:

     - SAN management software;

     - fabric switches, devices that provide high-speed connections between
       multiple computers and storage devices;

     - managed hubs, devices that connect multiple computers and devices in a
       shared environment and can be controlled remotely;

     - entry-level hubs, devices that connect computers and devices without
       remote management functionality; and

     - transceivers, devices that are typically embedded in other Fibre Channel
       products to convert optical and electrical signals.

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

     Our broad product portfolio addresses a wide spectrum of storage
requirements. We offer a wide range of high-performance Fibre Channel
interconnect products, including fabric switches that support scalable Fibre
Channel device connections, managed and entry-level hubs that support arbitrated
loop SAN configurations and transceivers that enhance data transport and device
connectivity throughout the SAN. Our switches, managed hubs and transceivers are
proactively managed from a single platform by our SAN InSite interconnect
management software and support a wide range of SAN configurations. Because we
design our own Application Specific Integrated Circuits, or ASICs, that drive
the performance capabilities of our products, we are able to develop solutions
that meet varying data storage requirements.

     Our software provides comprehensive SAN management. Our SAN InSite(TM)
software is a unified platform that offers a single system view from one
computer screen down to the port level of our fabric switches, managed hubs and
transceivers. It provides comprehensive status, control and diagnostics for
these devices under a single management software umbrella. It is also designed
to seamlessly integrate with other enterprise software applications, such as
storage management and network management platforms. As a result, storage
network management functions, such as proactive monitoring, reporting, policy
management,

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security and fault tolerance, can be integrated and optimized across our devices
in the SAN. We believe this comprehensive network management solution enhances
SAN performance, offers high rates of data availability, promotes network
stability and reduces enterprise information technology staffing, training and
support requirements.

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

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

OUR STRATEGY

     Our objective is to expand our position as a developer and supplier of
comprehensive SAN interconnect solutions. Key elements of our strategy include
the following:

     Offer customers a full Fibre Channel interconnect product portfolio. We are
committed to offering a complete, high-performance SAN interconnect solution
consisting of a full portfolio of switches, hubs, transceivers and management
software. We are focused on selling our SAN solutions to new customers as well
as extending our full product portfolio to existing customers who may be using
only some of our products.

     Leverage our technology platforms and expertise to address rapidly evolving
market demands. We seek to leverage our proven Fibre Channel expertise to
continually develop an expanding range of products in key areas of the SAN
interconnect, including fabric switches, hubs and the software that manages SAN
interconnects. We believe our extensive Fibre Channel expertise, our internally
developed ASICs, and our experienced engineering teams enable us to rapidly
develop and market products that address evolving market demands. To enhance our
technological advantage, we plan to continue to invest significant engineering
resources in product development.

     Extend our SAN interconnect management software leadership. We believe we
offer the most comprehensive and best performing SAN interconnect management
software solution. We intend to extend our leadership position by developing new
management tools, offering additional functionality and enabling further
interoperability with other storage and systems management platforms. We believe
these enhanced SAN interconnect management solutions will increase SAN
reliability and functionality while decreasing total costs of ownership.

     Partner with major storage solutions providers. We intend to continue to
expand our relationships with key storage system and server OEMs, resellers, and
other leading Fibre Channel component and device vendors. We have established
strategic relationships with several industry leaders to provide certified
solutions that are turn key in nature and provide ease of implementation. These
solutions have primarily focused on server clustering, data protection for
network attached storage, or NAS, data back up and mirroring

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applications and video content delivery and editing. Examples of recently
established solution relationships include LAN free tape back up solutions for
the Windows NT market with Spectra Logic, Computer Associates, Veritas Software
and Qlogic, and a multi-vendor SAN clustering solution targeted at entry level
SANs with LSI Logic. We will also seek to accelerate time to market and simplify
deployment of our solutions by continuing to expand our test and verification
lab, the Vixel Verification Lab, or the V2 Lab, and by initiating
pre-certification programs with additional storage solutions providers in our
new Solutions Interoperability Lab.

     Expand our distribution channels. We have relationships with several OEMs,
including Avid Technology, Compaq, Groupe Bull, Hitachi, IBM, NEC, Sun
Microsystems and Unisys. We plan to expand our OEM base, introduce new products,
develop new markets and leverage the systems and service capabilities of
industry-leading OEMs. As end-user awareness of Fibre Channel benefits
increases, we believe that resellers, including distributors and value added
resellers, or VARs, have the potential to become significant sources of revenue.
Our current domestic distributors are Bell Microproducts, Ingram Micro and Tech
Data. In addition we have established relationships with Four Leaf Technologies,
Netcom Storage, Nissho Electronics, Solkenix International and Technology
Distribution Group for distribution of our products in Europe and Asia Pacific.
We intend to establish additional relationships with distributors and VARs in
order to further increase our market presence.

     Promote the Vixel brand. We plan to continue building awareness of the
Vixel brand. We believe an established brand will become increasingly important
as our distribution channels expand to include resellers. To promote our brand,
we plan a range of marketing programs, including trade show participation,
advertising in print publications, direct marketing and public relations.

OUR PRODUCTS

     We offer a comprehensive portfolio of SAN interconnect products, including
SAN management software, high-performance fabric switches, managed and
entry-level hubs and transceivers, including gigabaud link modules, or GLMs, and
gigabit interface converters, or GBICs. Our broad family of interoperable
products enables customers to easily deploy a wide variety of SAN
configurations, from simple point-to-point connections to more complex
high-performance networks built with a combination of fabric switches and
managed arbitrated loop hubs.

  SAN InSite SAN Management Software

     Our SAN InSite SAN management software has evolved through seven releases
spanning over three years of development to become a comprehensive product to
allow isolation and resolution of problems in a SAN. SAN InSite was created and
designed from a SAN administrator's perspective leveraging our in-depth SAN and
Fibre Channel experience. Our newest version of SAN InSite provides
comprehensive management functionality across heterogeneous SAN devices
including host bus adapters, or HBAs, hubs, switches, routers, bridges and
disks. SAN InSite provides discovery, monitoring, and management of these
devices to allow proactive fault and error analysis of the configuration
information and data moving through the SAN.

     Key features of SAN InSite management software are:

     - Discovery/Identification and Advanced Interconnect Display. SAN InSite
       includes advanced discovery techniques to find SAN components and
       identify and display them in either a tree type view for asset control,
       or an advanced topology view to at-a-glance determine the physical
       interconnect and health of each of the devices.

     - Monitoring and Reporting. SAN InSite automatically monitors devices in
       the SAN, alerting the user to changes in health and configuration.
       Detailed performance graphs are provided for Vixel devices to represent
       both consolidated throughput and individual throughput on each port of
       the switches and hubs.

     - Built-in fault management. Monitoring the health and state of the SAN
       devices, SAN InSite reports configuration changes or faults to a standard
       logging mechanism. In addition, critical problems can be

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       emailed immediately to the administrator for resolution before a user on
       the network ever recognizes a problem existed.

     - Advanced device configuration management and diagnostics. A rich set of
       advanced diagnostic tools allows support personnel to test and verify
       communications with new server or storage devices. Using SAN InSite's
       intuitive graphical user interfaces, the user can quickly configure our
       switches and managed hubs for specific application requirements. We
       believe this simplified interface minimizes training and staffing
       requirements, presents a consistent look and feel across our Vixel
       devices and gives customers cost-effective, flexible options for
       configuring a variety of SAN applications.

     - Integrated with other leading management software vendor. SAN InSite is
       integrating with many leading storage and system management providers in
       an ongoing effort to advance SAN deployment and acceptance throughout the
       networking industry. SAN InSite has been certified with Computer
       Associates TNG framework furthering the ease of use and tool integration
       between framework vendors and storage management vendors.

  Vixel 7000, and Vixel 8100 Series Fibre Channel Switches

     Fibre Channel switches connect a wide range of server and storage devices
and provide a high level of performance and flexibility in building large
configurations in a SAN. The Vixel 8100 Fibre Channel fabric switch is our
second-generation eight port switch and was made commercially available in June
1999. Enhancements to our Vixel 8100, with its patented architecture, have been
engineered into our latest series of Fibre Channel switches, the Vixel 7000
series. The eight port Vixel 7100 and sixteen port Vixel 7200 were made
commercially available in March 2000. We believe our Vixel 7000 series line is
one of the highest performing, most cost-effective fabric switch offerings in
the industry. In addition to supporting fabric switch functionality, our Vixel
8100 and Vixel 7000 series switches have the following significant features:

     - High speed and high bandwidth. Our Vixel 8100 and Vixel 7000 series
       switches support full speed, which is 1.0625 gigabits per second, or
       Gbps, in transmit and receive directions per port. In addition, their
       architecture supports wire-speed full bandwidth, which is 100 MBps, in
       both directions per port. Unlike other commercially available switch
       products, our Vixel 8100 and Vixel 7000 series switches provide
       consistent 100 MBps bandwidth between any two ports, which enables
       reliable high-speed traffic in any configuration.

     - Support for non-fabric arbitrated loop devices in a fabric switch. A
       large number of devices currently deployed in SANs cannot communicate
       with fabric configurations. This patented capability of our Vixel 8100
       and Vixel 7000 series switches enables these non-fabric arbitrated loop
       devices to benefit from attachment to a switched SAN environment.

     - Support for arbitrated loop or fabric-attached topologies by the same
       fabric port hardware. The flexible port architecture of the Vixel 8100
       and Vixel 7000 series supports both arbitrated loop and fabric
       configurations and offers significant flexibility and interoperability
       when building SANs. The Vixel 8100 ships fabric ready and can also run in
       arbitrated loop mode. The Vixel 7000 series ships in either full fabric
       or arbitrated loop mode. When shipped in arbitrated loop mode, the Vixel
       7000 series switches can be software upgraded to full fabric.

     - Hardware-based zoning. With hardware-based zoning capabilities, our Vixel
       8100 and Vixel 7000 series allow potentially conflicting operating
       systems, such as Unix and Windows NT, to co-exist in a single SAN
       environment.

     - Full fabric software support services. Our Vixel 8100 and Vixel 7000
       series support ANSI-defined fabric services such as simple name server
       and state change notification. Devices attached to a fabric configuration
       use these services in order to create a full-functioning switched SAN.

     - Scalable architecture. Multiple Vixel 8100 or Vixel 7000 series switches
       can be interconnected without sacrificing performance, enabling the
       creation of large, complex SANs referred to as meshed networks.

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     - Extensive port buffering. Because of the extensive port buffering
       capabilities designed into our Vixel 8100 and Vixel 7000 series switches,
       data can be efficiently transported through our switch.

     In addition to the above features, our Vixel 7100 and Vixel 7200 switches
are designed to provide the highest port density in a compact form factor. These
switches are 1U (1.75 inches) in height and offer high port concentration to
fully leverage the space in data center equipment racks.

  Vixel 2100 Zoning Managed Hub and Vixel 2000 and Vixel 2006 Managed Hubs

     Our managed hubs connect devices in a SAN arbitrated loop configuration and
monitor the status of loop and port activity through auto-recovery functionality
and advanced diagnostic capabilities. Key features of our managed hubs include:

     - Six port (Vixel 2006), eight port (Vixel 2100) and 12 port (Vixel 2000)
       configurations using removable GBICs. Our managed hubs give customers the
       flexibility to deploy small or large arbitrated loop installations.
       Because our managed hubs include full GBIC support, customers can mix
       different transceiver types on the same hub and install additional GBICs
       if needed.

     - Loop status indicators. An indicator light on the front of our hub
       products continuously reports to the operator, whether the SAN arbitrated
       loop is operating properly. Loop status also is reported through SAN
       InSite's graphical user interface on a management workstation. These loop
       status information features accelerate problem detection and resolution.

     - Loop integrity and auto-recovery. Our managed hubs automatically detect
       and bypass malfunctioning ports. An alert is posted to the operator via
       SAN InSite, or another management application, so that further corrective
       action can be taken. In addition, our managed hubs have a recovery
       routine that can correct problems without disrupting ongoing loop
       operations. Without this feature, the network would be down until an
       administrator could manually reset each device.

     - Full console interface and event logging. In addition to the SAN InSite
       graphical user interface, our managed hubs support the full command line
       interface favored by some Unix users. This interface facilitates remote
       support of our product by OEMs, resellers or third-party support
       organizations.

     In addition to the above features, our Vixel 2100 Zoning Managed Hub has a
"Hub-on-a-chip" ASIC architecture and can be "zoned" into four separate
segments. Our ASIC incorporated into the Vixel 2100 provides eight fully managed
ports on a single chip. This innovative design strategy enables us to embed more
functionality at a reduced cost and provide the customer with a highly efficient
solution. The zoning feature of the Vixel 2100 allows it to be segmented into
four separate arbitrated loops, each segment providing full 100 MBps bandwidth,
for a variety of departmental and application uses. Zones can be created
dynamically through SAN InSite software or under program control for variable
applications such as tape backup.

  Vixel 1000 Entry-Level Hub

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

  Transceivers

     Our transceivers provide fiber optic connectivity between devices installed
in a SAN. Our fiber optic transceivers include GLMs, which are attachable
modular interfaces for Fibre Channel host bus adapters and disk controllers, and
GBICs, which are removable transceivers for switches, hubs, host bus adapters
and disk controllers. Our current transceivers employ state-of-the-art vertical
cavity surface emitting laser, or VCSEL,

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technology specifically designed for high-speed data transport among disk
controllers, arbitrated loop hubs and fabric switches. We have been shipping
gigabit GLMs and GBICs since September 1996.

OUR TECHNOLOGY

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

     Leadership in SAN interconnect management software. We have a core
competency in the development of SAN interconnect management software which
provides us with a significant competitive advantage. We have leveraged our
knowledge of SAN interconnect components such as fabric switches, managed and
entry-level hubs, and transceivers to develop software that enables a
comprehensive solution to SAN interconnect management.

     Switch architecture. We have developed a full-featured and high-performance
architecture for our switches. Our switches incorporate advanced features, such
as extensive port buffering, to offer high performance in a low-cost
architecture. In addition, our switch architecture is scalable, facilitating
development of new generations of switches, including our Vixel 7000 series
switches that support more ports and faster transmission speeds. We have been
issued two patents covering our switch architecture and our unique private loop
switching functionality. Private loop switching is used in the majority of the
installed SAN environments today.

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

     Switch and managed hub embedded software. Our embedded software expertise
covers a wide range of SAN interconnect devices, including our switches and
managed hubs. We believe we are the only company that designs, develops and
markets a full range of SAN interconnect components. As a result, we believe we
are uniquely positioned to further develop embedded software that maximizes
interoperability and functionality of all of these SAN components while
supporting ANSI and Internet standards.

     Designed-in interoperability. We design standards-based interoperability
into our products from the beginning of the design cycle and thoroughly validate
interoperability throughout the product release process. We facilitate robust
interoperability testing and analysis of our products within a multi-vendor
system environment in our V2 Lab. We believe that our investment of personnel
and capital equipment in this facility has enhanced interoperability and reduced
time to market for our OEM's and resellers. Our products also are extensively
tested with other vendors' products to ensure cross-vendor interoperability. In
addition, we use this lab to certify specific SAN application solutions thereby
reducing the need for our distribution partners to undergo costly and timely
testing processes. Additionally, in December 2000, we launched our Solutions and
Interoperability Lab to facilitate robust interoperability testing and analysis
of our products within a multi-vendor system environment and to validate
multi-vendor SAN applications.

CUSTOMERS

     Our primary customers are original equipment manufacturers, or OEMs, and
resellers who sell to end users and value added resellers, or VARs. During
fiscal 2000, our top two OEMs were Compaq Computer and Sun Microsystems who
represented 25.6% and 21.3% of revenue, respectively. Other current OEMs include
Avid Technology, Groupe Bull, Hitachi, IBM, and Unisys Corporation. However,
none of these customers represented more than 10.0% of our total revenue during
the year. Our primary resellers are Bell Microproducts, Netcom Storage, Modern
Tech Computer & Peripheral, Dot Hill, San Solutions S.A. and Nissho Electronics.
In fiscal 2000, total revenue derived from distribution channel customers
represented 19.6% of total revenue.

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

CUSTOMER SERVICE AND SUPPORT

     We emphasize customer service and support in order to provide our customers
and their end users with the knowledge and resources necessary to successfully
implement and integrate comprehensive, high-performance Fibre Channel solutions.
We offer a variety of support options for our products, including extended hour
support coverage and immediate product replacement options. Our customer service
and systems engineering teams provide extensive pre- and post-sale customer
support, including consultation, network design and in-depth training on SAN
technology and product implementation.

     In December 2000, we announced our new Solutions and Interoperability Lab
at our Bothell, Washington headquarters. This lab enhanced our ability to
provide service to our customers and to certify interoperability with a broad
array of storage products. In addition to a staff of systems engineers and a
wide variety of networking and storage equipment, we are using cooperative
exchange agreements with industry leading storage providers to bring a wide
range of storage products into the facility. Solutions partners and customers
have made use of this facility, and the number of storage products that Vixel
inter-operates with has grown significantly as a result.

     In addition, during 2000 we extended our training capabilities with
investments in our SAN Knowledge Center and the development of an expanded
offering of Fibre Channel SAN training courses. The SAN Knowledge Center is a
resource that our resellers, partners and end users can use to develop SAN
implementation skills and receive training on our products.

SALES AND MARKETING

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

     As the markets for Fibre Channel products and SAN solutions evolve and as
end-user awareness of the benefits of Fibre Channel increases, we believe an
increasing volume of sales will occur through alternative distribution channels,
including resellers and systems integrators. To support our reseller channel, we
recently introduced our Vixel Integration Partner (VIP) program that provides
select resellers with the advanced technical training and sales support
necessary to successfully begin designing, installing and supporting complete,
integrated SAN solutions. As the SAN market continues to develop, we are
establishing additional relationships with select domestic and international
resellers to reach additional markets and increase our geographic coverage. By
serving the needs of both OEMs and resellers, we can leverage the strengths of
our range of customers to further develop the Fibre Channel market and enhance
our ability to address a large end-user base.

     We are expanding internationally by partnering with additional OEMs and
resellers who have a strong international presence and are capable of selling
and installing complex SAN solutions. In Europe, we have a number of
distribution channel partners, including ACAL Electronics, Four Leaf
Technologies, Groupe Bull, Hammer plc, Ideal Hardware Ltd., Infodip, Technology
Distribution Group and Transformation Software Ltd. We currently distribute our
products in Japan through our relationship with Nissho Electronics Corporation.
We distribute our products in Asia, Australia and New Zealand through our
relationships with ACA Pacific Ltd., Datastor, Modern Tech C&P Ltd., Netcom
Storage, Royton Technologies Ltd., Scan Technology and Solkenix International
Corporation.

                                        8
<PAGE>   11

     Our marketing efforts include, extending our strategic alliances, promoting
the Vixel brand name, continuing our active participation in industry
associations and standards committees, and participating in major trade show
events and SAN conferences.

MANUFACTURING

     We outsource our manufacturing to K*Tec Electronics, a division of
Thayer-Blum Funding II LLC. K*Tec is responsible for nearly all material
procurement, assembly and testing, packaging and shipment of our products. We
currently do not have a long-term supply contract with K*Tec. 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 our manufacturing partner is responsible for all facets of the
manufacturing process, we are directly involved in qualifying and designating
suppliers and the key components that are used in our products. Most of our
product components can be obtained from multiple qualified manufacturers. While
most of the materials used in our products are standard, some are proprietary or
sole sourced and require extended lead times. Although we design our own ASICs,
they are manufactured by LSI Logic and Philips Semiconductors (formerly VLSI).
Motorola and Intel are currently our sole suppliers for microprocessors. In
addition, we license software for our hubs and switches from Wind River Systems
and Rapid Logic. Our supply management team works closely with strategically
important suppliers who offer proprietary or sole-sourced products. In addition,
our operations team is focused on production test equipment development,
manufacturability, effective transfer of products from development to
production, monitoring of supplier performance and quality, demand and build
forecasting, and scheduling.

RESEARCH AND DEVELOPMENT

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

     Our switch and hub developments are focused on enhancing real-life data
throughput and lowering the total cost of ownership of complex SANs. Significant
improvements in performance, maintainability and fault isolation have been made
possible by the development of highly integrated ASICs. These development
efforts have allowed us to increase port density and double the transmission
speed of products under development from the current one gigabit per second
speeds to two gigabits per second. Further, in a joint development agreement
with Lucent Technologies we are integrating our Fibre Channel switching
technology with their OptiStar OC-48 and Gigabit Ethernet switching product. The
resulting product delivers Fibre Channel data over Internet Protocol based
networks. Our focus on performance is not only limited to hardware development.
We are developing our SAN interconnect management software, SAN InSite, to
provide very high levels of management capabilities both for our products and
those of other vendors.

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

     Our research and development expenses were $15.6 million in fiscal 2000. 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 the market. 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.

                                        9
<PAGE>   12

COMPETITION

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

     We believe the primary competitive factors in the SAN interconnect market
include: product performance and features; product quality, reliability and
interoperability; ability to meet delivery schedules; the size of installed
customer base; price; strength of distribution channel; and customer service and
technical support. We believe we compete favorably with our competitors on
several of these factors. However, because many of our existing and potential
competitors have longer operating histories, greater name recognition and
substantially greater financial, technical, sales and marketing resources, they
may have larger distribution channels, access to more customers and a larger
installed customer base than we do. These competitors may be able to undertake
more extensive marketing campaigns and adopt more aggressive pricing policies
than we can. To remain competitive, we believe we must, among other things,
invest significant resources in expanding our distribution channels, developing
new products and enhancing our current products. If we fail to do so, our
products will not compete favorably with those of our competitors, which will
significantly harm our business.

INTELLECTUAL PROPERTY

     We attempt to protect our technology through a combination of patents,
copyrights, trade secret laws, 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 proprietary information could have a
material adverse effect on our business, financial condition and results of
operations.

     In September 2000 we were awarded a patent on private loop switching
technology. The patent defines ways to interconnect devices through a switch
without the complexities of full fabric services support. In February 2001 we
were awarded a patent on our Fibre Channel switching technology that covers
unique areas of our architecture that have allowed us to adopt our products
along with the industry evolution to higher speeds and different interfaces. We
have also been awarded one patent with respect to our GBIC transceivers.

     As of December 31, 2000, we had four pending United States patent
applications and pending patent applications in selected countries abroad with
respect to a broad scope of SAN technology including our SAN management
capabilities and switch and hub architecture. However, it is possible that
patents may not be issued for the pending applications and that our issued
patents may not adequately protect our technology from infringement or prevent
others from claiming our technology infringes that of third parties. All our
software products have copyright notices. We own several trademarks, including
Vixel and SAN InSite. We also rely on trade secret law and contractual
provisions to protect our intellectual property, including technology
development, which we have determined not to patent or copyright, or which is
not capable of more formal protection.

     We may need to initiate litigation in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Litigation could result
in substantial costs and diversion of our resources and could materially harm
our business. From time to time we

                                        10
<PAGE>   13

have received, and may receive in the future, notice of infringement claims of
other parties' proprietary rights. For instance, a competing supplier of
transceivers sued us, claiming that features of our GBIC products infringed its
patents. This lawsuit was settled in May 1999. We incurred significant costs in
defending and settling such claims. Infringement or other claims could be
asserted or prosecuted against us in the future, and it is possible that past or
future assertions or prosecutions could harm our business. Any such claims, with
or without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel, cause delays in the development
and release of our products, or require us to develop non-infringing technology
or enter into royalty or licensing arrangements. Such royalty or licensing
arrangements, if required, may not be available on terms acceptable to us, or at
all. For these reasons, infringement claims could materially harm our business.

EMPLOYEES

     As of December 31, 2000 we had 196 employees, of which 88 were engaged in
research and development, 52 in sales, marketing and customer service and
support, 26 in operations and 30 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 OF THE REGISTRANT

     Our executive officers and their ages as of December 31, 2000 were as
follows:

<TABLE>
<CAPTION>
                  NAME                    AGE                         POSITION
                  ----                    ---                         --------
<S>                                       <C>    <C>
James M. McCluney.......................  49     President, Chief Executive Officer and Chairman of
                                                 the Board of Directors
Kurtis L. Adams.........................  46     Chief Financial Officer, Vice President of Finance,
                                                 Secretary and Treasurer
Stuart B. Berman........................  44     Chief Technology Officer
Thomas Hughes...........................  41     Vice President of Product Development
Edmund J. Reilly........................  59     Vice President of Customer Service and Support
</TABLE>

     James M. McCluney has 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. Adams has 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
from November 1989 to February 1991 and the corporate controller and chief
accounting officer from March 1991 to October 1995 for Chipcom Corporation, a
networking company.

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

     Thomas Hughes has 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.

     Edmund J. Reilly has served as our vice president of customer service and
support since March 2000. From May 1999 to December 1999, he served as a
management consultant for CVS.com, an internet based pharmacy. From June 1998 to
May 1999, Mr. Reilly was president and chief executive officer of AmiSoft
Corporation, an ERP software developer. From February 1997 to June 1998, he
served as president and chief

                                        11
<PAGE>   14

operating officer of Stellar One Corporation, a hardware, software and services
provider to the telecommunications market. From January 1994 to February 1997,
Mr. Reilly was vice president of Asia Pacific operations for Motorola
Corporation.

ITEM 2. PROPERTIES

     Our corporate headquarters are located in Bothell, Washington and occupy
approximately 43,000 square feet. Our lease for this facility expires in January
2002 and includes one extension option for a term of three years. In addition,
we have a research and development and sales facility located in Irvine,
California that occupies approximately 13,000 square feet. Our lease for this
facility expires in November 2002. We also lease four domestic sales offices in
West Covina, California, Colorado Springs, Colorado, Gloucester, Massachusetts
and Nashua, New Hampshire and one international sales office in Bejing, China.

ITEM 3. LEGAL PROCEEDINGS

     The Company was not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

                                        12
<PAGE>   15

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

<TABLE>
<CAPTION>
                                                               HIGH      LOW
                                                              ------    ------
<S>                                                           <C>       <C>
2001
First Quarter (through March 1, 2001).......................  $ 4.25    $ 1.38

2000
First Quarter...............................................  $33.50    $15.00
Second Quarter..............................................  $17.13    $ 6.50
Third Quarter...............................................  $ 9.38    $ 4.31
Fourth Quarter..............................................  $ 7.00    $ 1.03

1999
Third Quarter (from October 1, 1999 to October 3, 1999).....  $53.50    $41.00
Fourth Quarter..............................................  $50.25    $17.00
</TABLE>

     As of March 1, 2001 there were approximately 312 stockholders of record and
there are a substantially greater number of Vixel Corporation beneficial owners.
We have never declared or paid cash dividends on our capital stock. We currently
intend to retain any future earnings to fund the development and growth of our
business and do not currently anticipate paying any cash dividends in the
foreseeable future. Future dividends, if any, will be determined by our board of
directors.

RECENT SALES OF UNREGISTERED SECURITIES

     The Company did not sell any unregistered securities during 2000.

USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES

     The Company's Registration Statement on Form S-1 (No. 333-81347) for its
initial public offering of its common stock became effective September 30, 1999.
A total of 4,945,000 shares of the Company's common stock was sold at a price of
$18.00 per share, including the underwriters over-allotment. The initial public
offering resulted in gross proceeds of approximately $89.0 million, of which
approximately $6.2 million was applied toward the underwriting discount. Net
proceeds to the Company were $82.8 million. Expenses related to the offering
totaled approximately $1.4 million. Through December 31, 2000, the proceeds were
applied to repay a $2.0 million promissory note due to Western Digital, a line
of credit borrowing totaling $2.8 million and a note payable to a bank of $7.5
million. In addition, $2.9 million was used to repay capital lease obligations,
$3.2 million was used to purchase property and equipment and $21.3 million was
used for working capital and general corporate purposes. The Company has
invested the remaining net proceeds in short-term, investment grade,
interest-bearing securities.

                                        13
<PAGE>   16

ITEM 6. SELECTED FINANCIAL DATA

     The following selected financial data should be read in conjunction with
our financial statements and related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and other financial
information appearing elsewhere in this Annual Report on Form 10-K. We derived
the statement of operations data for the fiscal years ended January 3, 1999,
January 2, 2000 and December 31, 2000, and the balance sheet data as of January
2, 2000 and December 31, 2000, from the audited financial statements in this
Annual Report on Form 10-K. The statement of operations data for the fiscal
years ended December 29, 1996 and December 28, 1997 and the selected balance
sheet data set forth below for us as of December 29, 1996, December 28, 1997 and
January 3, 1999, is derived from our audited financial statements not included
in this Annual Report on Form 10-K. Net loss available to common stockholders
shown below includes our net loss, as well as the accretion related to our
redeemable preferred stock.

<TABLE>
<CAPTION>
                                                              FOR THE FISCAL YEAR ENDED
                                       ------------------------------------------------------------------------
                                       DECEMBER 29,    DECEMBER 28,    JANUARY 3,    JANUARY 2,    DECEMBER 31,
                                           1996            1997           1999          2000           2000
                                       ------------    ------------    ----------    ----------    ------------
                                                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                    <C>             <C>             <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:
Revenue
  SAN systems........................    $    163        $  3,282       $ 15,222      $ 25,159       $ 29,610
  Components.........................       6,778          19,501         24,223        13,668          3,599
                                         --------        --------       --------      --------       --------
         Total revenue...............       6,941          22,783         39,445        38,827         33,209
Cost of revenue......................       7,342          19,047         36,199        28,211         21,732
                                         --------        --------       --------      --------       --------
Gross profit (loss)..................        (401)          3,736          3,246        10,616         11,477
                                         --------        --------       --------      --------       --------
Operating expenses
  Research and development...........       4,474           9,360         11,110        12,788         15,570
  Acquired in-process technology.....       8,633              --          5,118            --             --
  Selling, general and
    administrative...................       3,549           7,629         14,521        13,643         17,437
  Amortization and writedown of
    goodwill and other intangibles...         167             222          2,057         1,362          2,159
  Amortization of stock based
    compensation.....................          36              50             --         4,368          2,892
                                         --------        --------       --------      --------       --------
         Total operating expenses....      16,859          17,261         32,806        32,161         38,058
                                         --------        --------       --------      --------       --------
Loss from operations.................     (17,260)        (13,525)       (29,560)      (21,545)       (26,581)
Other (expense) income, net..........        (392)           (234)         8,327          (802)         3,024
                                         --------        --------       --------      --------       --------
Net loss.............................    $(17,652)       $(13,759)      $(21,233)     $(22,347)      $(23,557)
                                         ========        ========       ========      ========       ========
Net loss available to common
  stockholders.......................    $(17,693)       $(13,955)      $(21,424)     $(22,495)      $(23,557)
                                         ========        ========       ========      ========       ========
Basic and diluted net loss per
  share..............................    $ (56.87)       $ (18.90)      $  (8.77)     $  (2.97)      $  (1.04)
                                         ========        ========       ========      ========       ========
Weighted-average shares
  outstanding........................         311             738          2,444         7,572         22,710
                                         ========        ========       ========      ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                       DECEMBER 29,    DECEMBER 28,    JANUARY 3,    JANUARY 2,    DECEMBER 31,
                                           1996            1997           1999          2000           2000
                                       ------------    ------------    ----------    ----------    ------------
                                                                    (IN THOUSANDS)
<S>                                    <C>             <C>             <C>           <C>           <C>
BALANCE SHEET DATA:
Cash and cash equivalents............    $ 19,883        $  3,776       $  3,841      $16,706        $17,066
Short-term investments...............          --              --          2,490       44,650         25,636
Working capital......................      18,477           2,352            285       58,820         39,114
Total assets.........................      29,374          19,934         28,165       84,081         62,931
Long-term obligations and noncurrent
  portion of capital leases..........       6,012           6,057         13,856        4,406          1,510
Mandatorily redeemable preferred
  stock..............................      19,327          19,523         19,993           --             --
Total stockholders' equity
  (deficit)..........................     (18,937)        (14,030)       (19,924)      65,695         46,945
</TABLE>

                                        14
<PAGE>   17

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.

COMPANY OVERVIEW

     We are a provider of comprehensive interconnect solutions for use in
storage area networks, or SANs. Our portfolio of Fibre Channel products,
including our SAN management software, fabric switches, arbitrated loop hubs and
transceivers, is fully interoperable and designed to perform in concert to
address a wide variety of data and storage needs.

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

     We derive substantially all of our revenue from the sale of SAN
interconnect products, including switches, hubs and transceivers. We currently
include our SAN InSite software with our switches and managed hubs and do not
sell this software separately from our other products. However, we are in the
latter stages of developing a version of our SAN InSite software that we intend
to license for a fee in the future. SAN systems revenue consists of revenue
generated from our SAN switches, hubs and transceiver products sold as a result
of selling our switches and hubs. Component revenue consists primarily of
revenue generated from the sale of our transceiver products to original
equipment manufacturers, or OEMs, for use in their products.

     We sell our products primarily to a limited number of original equipment
manufacturers. Compaq Computer and Sun Microsystems represented 25.6% and 21.3%
of revenue, respectively, for fiscal 2000. During 1999, Compaq Computer and Sun
Microsystems represented 29.9% and 24.5% of revenue, respectively. No other
individual customer represented more than 10.0% of our total revenue in those
periods. While we are seeking to diversify our customer base and expand the
portion of our revenue that is derived from sales through various distribution
channels, we anticipate that our operating results will continue to depend on
volume sales to a relatively small number of OEMs. We may not be successful in
our efforts to diversify our customer base and the loss of one of our key
customers could significantly reduce our total revenue.

     During fiscal 2000 and 1999, 19.6% and 6.6%, respectively, of our total
revenue was derived from sales to distribution channel customers. We plan to
expand our sales channels to include systems integrators, VARs and additional
distributors in the United States and internationally.

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

     Our gross profit as a percentage of total revenue is affected by the mix of
products sold, sales channels and customers to which our products are sold. Our
gross profit as a percentage of total revenue also is affected

                                        15
<PAGE>   18

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

     Since September 1999, we have outsourced our product manufacturing to one
contract manufacturer, K*Tec Electronics, a division of Thayer-Blum Funding II
LLC. K*Tec also provides distribution and repair operations and most of our
materials management. We purchase certain components directly from suppliers and
resell them to K*Tec at our cost and recognize no revenue from these
transactions. We also outsource the manufacturing of our ASICs to third-party
manufacturers that ship these components to K*Tec for assembly.

     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 1999 and 2000, we recognized $4.4 million and $2.9 million,
respectively, of the stock-based compensation as compensation expense.

     Since our inception, we have incurred significant losses. As of December
31, 2000, we had operating loss carryforwards of $66.0 million for federal
income tax purposes. These operating loss carryforwards expire on various dates
through 2020. We have recorded a valuation allowance equal to the gross deferred
tax asset balance because our accumulated deficit, history of recurring net
losses and possible limitations on the use of carryforwards give rise to
uncertainty as to whether the deferred tax assets are realizable. Further, these
operating loss carryforwards could be subject to usage limitations due to
changes in our ownership resulting from equity financings.

     As of December 31, 2000, we had an accumulated deficit of $102.1 million
and we expect to continue to incur significant losses for the foreseeable
future. We also expect to incur significant product development, sales and
marketing and administrative expenses. 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.

ACQUISITIONS AND DIVESTITURES

     In February 1998, we acquired Arcxel Technologies, Inc. for a total
purchase price of $14.8 million. Arcxel was a developer of Fibre Channel
switches for the SAN market. We acquired this switch company to obtain products
and technology to expand our total SAN interconnect portfolio of products to
include management software, switches, managed hubs, entry-level hubs and
transceiver products. At the time of the acquisition, Arcxel had just introduced
its first product, a Fibre Channel switch.

     Also at the time of the Arcxel acquisition, in-process development projects
included an ASIC, a fabric switch and a switching hub. Both the fabric switch
and the switching hub were being designed to use the in process ASIC, which was
the key technology being developed by Arcxel. Of the total value of the acquired
in-process technology, approximately 74% was associated with the ASIC which was
estimated to be 70% complete at the time of the acquisition, approximately 22%
was associated with the fabric switch which was estimated to be 27% complete and
approximately 4% was associated with the switching hub which was estimated to be
8% complete. The value of the in-process technology related to each of these
projects was determined by estimating the future net cash flows resulting from
products anticipated to result from these projects and discounting the net cash
flows to the date of acquisition using a discount rate of 35%. Since this
acquisition, we completed the development of the ASIC and the fabric switch,
which became our Vixel 8100 product. The Vixel 8100 began generating revenue in
the quarter ended July 4, 1999. Also, subsequent to the acquisition, we decided
not to complete the development of the switching hub that was in process, rather
we are devoting our resources to developing other fabric switches that will use
the ASIC that was in development at the time of the acquisition.

                                        16
<PAGE>   19

     In February, 1998 we sold substantially all of our laser diode fabrication
laboratory and gigabit Ethernet transceiver product line, which was located in
Colorado. We received cash proceeds of $7.2 million and the acquirer assumed the
net liabilities associated with the operations. As a result of this transaction,
we recorded a gain of approximately $9.1 million in fiscal 1998.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                   FOR THE FISCAL YEAR ENDED
                                                            ----------------------------------------
                                                            JANUARY 3,    JANUARY 2,    DECEMBER 31,
                                                               1999          2000           2000
                                                            ----------    ----------    ------------
<S>                                                         <C>           <C>           <C>
Revenue
  SAN systems.............................................     38.6%         64.8%          89.2%
  Components..............................................     61.4          35.2           10.8
                                                              -----         -----          -----
          Total revenue...................................    100.0         100.0          100.0
Cost of revenue...........................................     91.8          72.7           65.4
                                                              -----         -----          -----
Gross profit..............................................      8.2          27.3           34.6
                                                              -----         -----          -----
Operating expenses
  Research and development................................     28.1          32.9           46.9
  Acquired in-process technology..........................     13.0            --             --
  Selling, general and administrative.....................     36.8          35.1           52.5
  Amortization and writedown of goodwill and other
     intangibles..........................................      5.2           3.5            6.5
  Amortization of stock-based compensation................       --          11.3            8.7
                                                              -----         -----          -----
          Total operating expenses........................     83.1          82.8          114.6
                                                              -----         -----          -----
Loss from operations......................................    (74.9)        (55.5)         (80.0)
Other income (expense), net...............................     21.1          (2.1)           9.1
                                                              -----         -----          -----
Net loss..................................................    (53.8)%       (57.6)%        (70.9)%
                                                              =====         =====          =====
</TABLE>

     FISCAL YEARS ENDED JANUARY 3, 1999, JANUARY 2, 2000 AND DECEMBER 31, 2000

     Revenue. Total revenue was $39.4 million, $38.8 million and $33.2 million
in fiscal 1998, 1999 and 2000, respectively. Our SAN systems revenue was $15.2
million, $25.2 million and $29.6 million in fiscal 1998, 1999 and 2000,
respectively. The 65.3% increase in SAN systems revenue in fiscal 1999 compared
with fiscal 1998 was the result of increased sales of each of our switch and hub
products available in 1999. The 17.7% increase in SAN systems revenue in fiscal
2000 compared with fiscal 1999 was the result of increased sales of our switch
products.

     Component and other revenue was $24.2 million, $13.7 million and $3.6
million in fiscal 1998, 1999 and 2000, respectively. Performance issues with our
CD based transceiver products sold primarily in 1997 were identified in late
1998 and early 1999 and resulted in decreased purchases of our transceiver
products in fiscal 1999 as compared with fiscal 1998. These performance issues
combined with certain other warranty issues with our GLM transceiver products
resulted in a further decrease in the purchases of our component products in
fiscal 2000 as compared with fiscal 1999. We anticipate that our component
revenue will continue to decrease as a result of our decision to focus our
resources on the development, sales and marketing of our SAN systems products,
as well as a result of some of our customers' perceptions of our transceiver
performance problems.

     Gross profit. Cost of revenue includes the cost to acquire finished
products from our third party manufacturer of our products, expenses we incur
related to inventory management, product quality testing and customer order
fulfillment, and provisions for warranty expenses and inventory obsolescence.
Gross profit was $3.2 million, $10.6 million and $11.5 million in fiscal 1998,
1999 and 2000, respectively, representing 8.2%, 27.3% and 34.6% of total
revenue, respectively. The increases in both absolute dollars and percentage of
total

                                        17
<PAGE>   20

revenue in 1999 as compared with 1998, and 2000 as compared with 1999, reflect a
change in our product mix, as sales of switch and hub products increased while
sales of transceivers declined. Our switch and hub products generally have
higher gross margins than our transceiver products. In addition, fiscal 1998
gross profit was negatively affected as a result of recording a $3.6 million
warranty provision for our GBIC transceivers and a writedown in the fourth
quarter of fiscal 1998 of developed technologies capitalized as part of our
purchase of Arcxel Technologies. The increase in our warranty provisions in
fiscal 1998 related to the estimated costs to repair or replace those
transceiver products that contain lasers that are showing signs of faster
deterioration than we historically have experienced.

     Research and development expenses. Research and development expenses
consist primarily of salaries and related expenses for personnel engaged in the
design, development and sustaining engineering of our products, consulting and
outside service fees, costs for prototype and test units and other expenses
related to the design, development, testing and enhancement of our products.
Research and development expenses were $11.1 million, $12.8 million and $15.6
million in fiscal 1998, 1999 and 2000, respectively. The 15.3% increase in
research and development expenses in fiscal 1999 compared with fiscal 1998 was
due to increased development costs relating to our management software, switch
and managed hub products. The 21.9% increase in research and development
expenses in fiscal 2000 compared with fiscal 1999 was due to increased
development costs relating to our management software and switch products and to
two development agreements with third parties to embed our switch or ASIC
technology into their products. We believe that continued investment in research
and development is an essential element of our strategic objectives to design
quality products while reducing costs and to leverage our technologies into new
market opportunities. As a result, we expect these expenses to increase in the
future.

     Acquired in-process technology. Acquired in-process technology expenses in
fiscal 1998 related to our acquisition of Arcxel Technologies in February 1998.
This acquired in-process technology was identified and valued by an independent
third party at $5.1 million, 34.5% of the total purchase price, and was expensed
immediately. The value of acquired in-process technology was determined by
estimating future net cash flows resulting from products anticipated to result
from the in-process projects and discounting the net cash flows to the date of
acquisition.

     Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries, commissions and related
expenses for personnel engaged in marketing, sales, finance and information
technology support functions, as well as professional fees, allowance for
doubtful accounts receivable, trade shows and other marketing activities.
Selling, general and administrative expenses for fiscal years 1998, 1999 and
2000 were $14.5 million, $13.6 million and $17.4 million, respectively. The
decrease in both absolute dollars and as a percentage of total revenue in fiscal
1999 compared with fiscal 1998 is the result of expenses we recognized in fiscal
1998 in connection with our defense and settlement of certain patent lawsuits.
The 27.8% increase in the selling, general and administrative expenses in fiscal
2000 compared with fiscal 1999 is primarily due to increases in sales and
customer service and support personnel in 2000.

     Amortization and writedown of goodwill and other intangibles. Amortization
and writedown of goodwill and other intangibles in fiscal 1998, 1999 and 2000
were $2.1 million, $1.4 million and $2.1 million, respectively, representing
5.2%, 3.5% and 6.5%, respectively, of total revenue. The decrease in fiscal 1999
compared with fiscal 1998 is primarily the result of a writeoff in fiscal 1998
of goodwill associated with capitalized developed technology written down in
fiscal 1998. The increase in fiscal 2000 compared with fiscal 1999 is the result
of an increase in the amortization of the intangible assets capitalized in
conjunction with our purchase of Arcxel Technologies in February 1998.

     Amortization of stock-based compensation. Amortization of stock-based
compensation in fiscal 1999 and 2000 was $4.4 million and $2.9 million,
respectively, as a result of stock options granted to employees and consultants
during fiscal 1999 for which we recorded stock-based compensation of $9.8
million. We incurred no amortization of stock-based compensation in fiscal 1998.

                                        18
<PAGE>   21

     Other income (expense), net. Other income (expense), net, consists of the
gain or loss on the sale of business divisions or product lines, interest
income, interest expense and other miscellaneous income or expense. Other
income, net, was $8.3 million in fiscal 1998, other expense, net, was $802,000
in fiscal 1999 and other income, net was $3.0 million in fiscal 2000. Other
income in fiscal 1998 included a one-time $9.1 million gain on the sale of our
laser diode fabrication laboratory and gigabit Ethernet transceiver product
line. Other expense, net in fiscal 1999 was primarily interest expense. Other
income, net in 2000 was primarily interest income relating to our short-term
investments.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, we have financed our operations primarily through the sale
of common stock and preferred stock with aggregate proceeds of approximately
$114.3 million. Additionally, we have financed our operations through capital
equipment lease lines, working capital credit facilities, notes payable and $6.9
million in net cash received from the sale of our laser diode fabrication
facility and gigabit Ethernet product line. Our principal sources of liquidity
at December 31, 2000 consisted of $17.1 million in cash and cash equivalents and
$25.6 million in short-term investments.

     Cash utilized by operating activities was $14.4 million in fiscal 2000, due
to net losses, as well as working capital required to fund our operations. Cash
provided by investing activities was $15.9 million, primarily related to
maturities of short-term investments, net purchases of short-term investments
and capital expenditures of $3.1 million. Cash used in financing activities was
$1.1 million, primarily due to payments on our capital leases and net proceeds
from common stock issued under our Employee Stock Purchase Plan and stock option
plans.

     We believe that our existing cash, cash equivalent and short-term
investment balances will be sufficient to meet our cash requirements at least
through the next twelve 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 expansion of sales, general
and administrative activities, the timing of introductions of new products, and
market acceptance of our products. We cannot assure you that additional equity
or debt financing, if required, will be available on acceptable terms or at all.

RECENT ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for
Derivative Instruments and Certain Hedging Activities," is effective as of
January 1, 2001. These pronouncements establish accounting and reporting
standards for derivative instruments and hedging activities which, among other
things, require that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those derivatives
at fair value. The early adoption of SFAS No. 133 has not materially impacted
our financial position, results of operations or cash flows.

     In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition." SAB 101 as
amended provides guidance with respect to the SEC's interpretation of existing
authoritative accounting guidance on the recognition of revenue in financial
statements. Our adoption of SAB 101, effective January 3, 2000, has not
materially impacted our financial position, results of operations or cash flows.

     The Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Stock Based Compensation" in
March 2000. FIN 44 provides guidance and clarification to the application of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees." Our adoption of FIN 44, effective July 1, 2000, has not materially
impacted our financial position, results of operations or cash flows.

                                        19
<PAGE>   22

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 $23.6 million for the fiscal year ended December 31, 2000, and expect to
incur losses in the future. As of December 31, 2000, we had an accumulated
deficit of $102.1 million. We cannot be certain that we ever will realize
sufficient revenue to achieve profitability. 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.
Even if we do achieve profitability, we may not be able to sustain or increase
profitability.

OUR OPERATING RESULTS ARE DIFFICULT TO FORECAST, MAY FLUCTUATE ON A QUARTERLY
BASIS AND MAY BE ADVERSELY AFFECTED BY MANY FACTORS, WHICH MAY RESULT IN
VOLATILITY IN OUR STOCK PRICE.

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

     - the size, terms and fluctuations of customer orders, particularly orders
       from a limited number of original equipment manufacturers, or OEMs;

     - changes in general economic conditions and specific economic conditions
       in the computer storage and networking industries, such as a change in
       spending levels for information technology products;

     - the timing of customer orders, a large percentage of which are generated
       in the last month of the quarter;

     - our ability to attain and maintain sufficient reliability levels for our
       SAN interconnect products;

     - our ability to develop and market new products;

     - the timing of the introduction or enhancement of products by us, our OEMs
       and our competitors;

     - decreases in the prices at which we can sell our products;

     - the mix of products sold, as our switches and hubs typically have higher
       margins than our transceivers, and the mix of distribution channels
       through which our products are sold; and

     - the ability of our contract manufacturer to produce and distribute our
       products in a timely fashion.

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

OUR OEMS HAVE UNPREDICTABLE ORDER PATTERNS, WHICH MAY CAUSE OUR REVENUE TO VARY
SIGNIFICANTLY FROM PERIOD TO PERIOD.

     Our OEMs tend to order sporadically, and their purchases can vary
significantly from quarter to quarter. Our OEMs generally forecast expected
purchases in advance, but frequently do not order as expected and tend to place
purchase orders only shortly before the scheduled delivery date. We plan our
operating expenses based in part on revenue projections derived from our OEMs'
forecasts. Because most of our expenses are fixed in the short term or incurred
in advance of anticipated revenue, we may not be able to decrease our expenses
in a timely manner to offset any unexpected shortfall in revenue. These order
habits 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.

                                        20
<PAGE>   23

THE LOSS OF ONE OR MORE KEY CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR REVENUE.

     Our success will depend on our continued ability to develop and manage
relationships with significant OEMs and resellers, as well as on the sales
efforts and success of these customers. Compaq Computer and Sun Microsystems
represented 25.6% and 21.3% of our total revenue, respectively, for the year
ended December 31, 2000. Although we are attempting to expand our base of OEMs
and resellers, most of our future revenue may come from a small number of
customers.

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

     - our OEM and reseller agreements are not exclusive and contain no renewal
       obligation;

     - our OEMs and resellers can stop purchasing and marketing our products at
       any time; and

     - our OEM and reseller agreements do not require minimum purchases.

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

OUR SUCCESS IS DEPENDENT UPON ACCEPTANCE OF FIBRE CHANNEL TECHNOLOGY AND THE
GROWTH OF THE EMERGING SAN MARKET.

     Our SAN InSite management software, switches, hubs and transceivers are
used exclusively in SANs. Accordingly, widespread adoption of SANs is critical
to our future success. The market for SANs and related software, switches, hubs
and transceivers is evolving rapidly and it is difficult to predict its
potential size or future growth rate. Our success in generating revenue in this
emerging SAN market will depend on, among other things, our ability to:

     - demonstrate the benefits of SANs and our SAN InSite management software,
       switch, hub and transceiver products to OEMs, resellers and end-users;

     - enhance our existing products and to introduce new products on a timely
       basis to meet changes in customer preferences and evolving industry
       standards;

     - develop, maintain and build relationships with leading OEMs and
       resellers; and

     - accurately predict the direction of industry standards and base our
       products on those industry standards.

Our failure to do any of these activities would adversely affect our ability to
successfully compete in the emerging SAN market.

COMPETING TECHNOLOGIES MAY EMERGE AND WE MAY FAIL TO ADOPT NEW TECHNOLOGIES ON A
TIMELY BASIS. FAILURE TO UTILIZE NEW TECHNOLOGIES MAY DECREASE THE DEMAND FOR
OUR PRODUCTS.

     Emerging technologies, such as Ethernet IP and SCSI over IP, have been
discussed as competing alternatives to SANs. 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 SWITCH AND MANAGED HUB PRODUCTS, OUR SAN MANAGEMENT SOFTWARE PRODUCTS, AND
ROYALTIES FROM TECHNOLOGY DEVELOPMENT AGREEMENTS WITH CUSTOMERS, AND OUR SUCCESS
WILL DEPEND ON WIDESPREAD ACCEPTANCE OF THESE PRODUCTS AND TECHNOLOGIES.

     Our future success depends upon our ability to address the rapidly changing
needs of our customers by developing and introducing high-quality,
cost-effective products as well as product enhancements and services on a timely
basis and by keeping pace with technological developments and emerging industry
standards. If we

                                        21
<PAGE>   24

do not successfully develop, introduce and market new products, especially our
switch and managed hub products, our revenue may decline. We expect to launch
new products and upgrades to existing products, including our 2-gigabit Fibre
Channel switches and our SAN InSite management software upgrade. Our future
revenue growth will depend on the success of our upgrades and new product
launches and product launches by customers for which we are developing products
under technology development agreements and the success of our current switch
and managed hub products. In addition, as we introduce new or enhanced products,
we will have to manage successfully the transition from older products in order
to minimize disruption in our customers' ordering patterns, avoid excessive
levels of older product inventories and ensure that enough supplies of new
products can be delivered to meet our customers' demands. To the extent
customers defer or cancel orders in expectation of new product releases, any
delay in development or introduction of new products could cause our operating
results to suffer.

BECAUSE A SIGNIFICANT PORTION OF OUR REVENUE IS DERIVED FROM SALES OF
ENTRY-LEVEL HUBS AND TRANSCEIVERS, WE ARE DEPENDENT ON CONTINUED WIDESPREAD
MARKET ACCEPTANCE OF THESE PRODUCTS.

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

COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED PRICES AND SALES OF OUR PRODUCTS,
INCREASED LOSSES AND REDUCED MARKET SHARE.

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

     For switch sales, we compete primarily with Brocade Communications, McDATA
Corporation and Qlogic Corporation. For hub sales, we compete primarily with
Emulex Corporation and Gadzoox Networks. For transceiver sales, we compete
primarily with Finisar Corporation, Hewlett-Packard and IBM. Although we do not
believe that any of the above competitors offer comprehensive SAN interconnect
management software that directly competes with ours, other vendors, such as
Brocade and Gadzoox, provide single point-device managers for either switch or
hub products, but not across multiple interconnect devices, including switches,
hubs and transceivers. We are currently developing a version of our SAN InSite
management software to manage third-party devices within the SAN interconnect.
Other software vendors, such as Veritas Software, SANnavigator, Inc., and Prisa
Networks, have introduced or have under development products that may compete
with our product when it is released. Our competitors continue to introduce
improved products with lower prices, and we will have to do the same to remain
competitive. Furthermore, larger companies in other related industries or our
customers may develop or acquire technologies and apply their significant
resources, including their distribution channels and brand recognition, to
capture significant SAN market share. Therefore, we may not be able to compete
successfully in the SAN market.

OUR FAILURE TO ENHANCE OUR EXISTING PRODUCTS AND INTRODUCE NEW PRODUCTS ON A
TIMELY BASIS COULD CAUSE OUR REVENUE TO FALL.

     Given the product life cycles in the markets for our products, any delay or
unanticipated difficulty associated with new product introductions or product
enhancements could significantly harm our business, results of operations and
financial condition. During 2001, we expect to complete development of our new

                                        22
<PAGE>   25

2-gigabit Fibre Channel switch, our "loop switch on a chip" ASIC, a Fibre
Channel switch module for Lucent Technology's OptiStar Edge Switch, and a
version of our SAN InSite management software that will manage third-party
products in the SAN. We may not be able to develop, manufacture and market these
new products or other product enhancements in a timely manner or that 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 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 SALES CYCLE FOR OUR PRODUCTS IS LONG AND WE MAY INCUR SUBSTANTIAL
NON-RECOVERABLE EXPENSES AND DEVOTE SIGNIFICANT RESOURCES TO SALES THAT DO NOT
OCCUR WHEN ANTICIPATED OR AT ALL.

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

FAILURE TO MANAGE OUR OEM AND RESELLER RELATIONSHIPS AND EXPAND OUR DISTRIBUTION
CHANNELS COULD SIGNIFICANTLY REDUCE OUR REVENUE.

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

ANY FAILURE BY US TO SUCCESSFULLY EXECUTE OUR DISTRIBUTION STRATEGY WILL
NEGATIVELY IMPACT OUR REVENUE.

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

     To support and develop opportunities for our indirect distribution
channels, we have recently expanded and may further expand in the future our
field sales and support staffing levels. We cannot assure you that the cost of
this expansion will not exceed the incremental revenue generated or that our
expanded field sales and support staff will be able to compete successfully
against the significantly more extensive and well-funded sales and marketing
operations of many of our current or potential competitors. Our inability to
effectively establish

                                        23
<PAGE>   26

our distribution channels or manage the expansion of our field sales and support
staff would have a material adverse effect on our ability to increase revenue.

THE LOSS OF K*TEC, THE FAILURE TO FORECAST ACCURATELY DEMAND FOR OUR PRODUCTS OR
TO MANAGE SUCCESSFULLY OUR RELATIONSHIP WITH K*TEC WOULD NEGATIVELY AFFECT OUR
BUSINESS.

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

     On October 10, 2000, Kent Electronics announced that it had sold K*Tec
Electronics to Thayer-Blum Funding II LLC. K*Tec Electronics has assured us that
the sale will not affect its ability to meet our manufacturing needs. However,
we cannot be certain that K*Tec will continue to operate in the same manner as
before the sale or be able to meet our manufacturing requirements without
additional cost, or at all.

     K*Tec is not obligated to supply products for us, except as may be provided
in a particular purchase order that K*Tec has accepted. We place purchase orders
with K*Tec 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 K*Tec 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 K*Tec to rapidly achieve volume
production. If we do not effectively manage our relationship with K*Tec, or if
K*Tec experiences delays, disruptions, capacity constraints or quality control
problems in its manufacturing operations, our ability to ship products to our
customers could be delayed and our competitive position and reputation could be
harmed. Qualifying a new contract manufacturer and commencing volume production
is expensive and time consuming. If we are required to or choose to change
contract manufacturers, we may lose revenue and damage our customer
relationships.

WE MAY LOSE SALES IF OUR SOLE SOURCE SUPPLIERS FAIL TO MEET OUR NEEDS.

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

     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

                                        24
<PAGE>   27

delay delivery of our products to our customers. Any of these occurrences would
negatively impact our business and operating results.

UNDETECTED SOFTWARE OR HARDWARE DEFECTS COULD INCREASE OUR COSTS AND REDUCE OUR
REVENUE.

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

A COMPONENT IN OUR TRANSCEIVERS HAS EXPERIENCED AN ABNORMALLY HIGH FAILURE RATE,
WHICH HAS ADVERSELY AFFECTED AND COULD IN THE FUTURE AFFECT OUR SALES.

     We observed, and some customers confirmed, that in certain applications our
GBIC and GLM transceivers manufactured prior to March 1998 that incorporated a
third party CD laser experienced an abnormally high failure rate. We no longer
use the laser as a result of this problem, we recorded a warranty reserve of
$3.6 million in the fourth quarter of fiscal 1998. Although we have settled
claims by customers that purchased the majority of these products, there is a
risk that additional claims could occur and that the total amount reserved may
be inadequate to cover all potential claims. Claims against us in excess of the
amount of our reserves could have a material adverse effect on our business and
financial condition. Partially as a result of this problem, Sun Microsystems and
Hewlett-Packard stopped purchasing our transceiver products and we have seen our
component revenue decrease from $24.2 million in fiscal 1998 to $13.7 million in
fiscal 1999 to $3.6 million in fiscal 2000. We anticipate that revenue from our
component GBIC and GLM transceivers will continue to decrease as we have decided
to focus our resources on our SAN systems products.

IF WE FAIL TO SUCCESSFULLY DEVELOP THE VIXEL BRAND, OUR REVENUE MAY NOT GROW AND
OUR STOCK PRICE MAY FALL.

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

IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE AND INTEGRATE QUALIFIED
PERSONNEL, WE MAY NOT BE SUCCESSFUL.

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

     We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, technical, sales and marketing,
finance and operations personnel. The loss of services of any of our key
personnel could have a negative impact on our business. Many of our employees
have only recently joined us. If we are unable to integrate new employees in a
timely and cost-effective manner, our operating results

                                        25
<PAGE>   28

may suffer. We also need to increase the number of technical staff members with
experience in high-speed networking applications, ASIC design and software
development as we further develop our product line. Competition for these highly
skilled employees in our industry is intense. Our failure to attract and retain
these key employees could have a material adverse effect on our business,
results of operations and financial condition.

     The loss of the services of any of our key employees, the inability to
attract or retain qualified personnel in the future or delays in hiring required
personnel could hinder the development and introduction of and negatively impact
our ability to sell our products. 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.

WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES, WHICH WILL SUBJECT US TO
ADDITIONAL BUSINESS RISKS.

     Our revenue from international sales represented 24.8% of our total revenue
for the year ended December 31, 2000. We plan to expand our international sales
activities, especially in Europe and Asia. Our international sales growth will
be limited if we are unable to establish relationships with international
distributors, establish foreign operations, effectively manage international
sales channels, hire additional personnel and develop relationships with service
organizations. We cannot be certain that we will be able to establish, generate
and build market demand for our products internationally. Our international
operations will be subject to a number of risks, including:

     - increased complexity and costs of managing international operations;

     - multiple protectionist, conflicting and changing governmental laws and
       regulations;

     - longer sales cycles;

     - difficulties in collecting accounts receivables;

     - reduced or limited protections of intellectual property rights; and

     - political and economic instability.

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

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

                                        26
<PAGE>   29

OUR PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT
REGULATIONS, AND IF WE CANNOT DEVELOP PRODUCTS THAT ARE COMPATIBLE WITH THESE
EVOLVING STANDARDS, OUR BUSINESS WILL SUFFER.

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

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

OUR INTELLECTUAL PROPERTY PROTECTION MAY PROVE TO BE INADEQUATE WHICH COULD
NEGATIVELY AFFECT OUR ABILITY TO COMPETE.

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

THIRD-PARTY CLAIMS OF INFRINGEMENT OF THEIR INTELLECTUAL PROPERTY RIGHTS COULD
ADVERSELY AFFECT OUR BUSINESS.

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

OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.

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

     - actual or anticipated fluctuations in our operating results;

     - losses of our key OEMs or reduction in their purchases of our products;

     - changes in financial estimates by securities analysts;

                                        27
<PAGE>   30

     - changes in market valuations of other technology companies;

     - announcements by us or our competitors of significant technical
       innovations, contracts, acquisitions, strategic partnerships, joint
       ventures or capital commitments;

     - additions or departures of key personnel; and

     - future sales of capital stock.

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

WE MAY NOT BE ABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS, LIMITING OUR ABILITY
TO GROW.

     We believe that our existing cash, cash equivalents and short-term
investment balances will be sufficient to meet our capital requirements at least
through the next twelve months. However, we may need, or could elect, to seek
additional funding prior to that time. If we need to raise additional funds, we
may not be able to do so on favorable terms, or at all. Further, if we issue
equity securities, existing stockholders may experience additional dilution or
the new equity securities may have rights, preferences or privileges senior to
those of existing holders. If we cannot raise funds on acceptable terms, we may
not be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated funding
requirements.

WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT MAY DILUTE OUR STOCKHOLDERS AND CAUSE
US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES.

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

     These purchases also involve numerous risks, including:

     - problems assimilating the purchased operations, technologies or products;

     - unanticipated costs associated with the acquisition;

     - diversion of management's attention from our core business;

     - adverse effects on existing business relationships with suppliers and
       customers;

     - incorrect estimates made in the accounting for acquisitions;

     - risks associated with entering markets in which we have no or limited
       prior experience; and

     - potential loss of key employees of purchased organizations.

OUR CORPORATE OFFICES AND PRINCIPAL PRODUCT DEVELOPMENT FACILITY ARE LOCATED IN
A REGION THAT IS SUBJECT TO EARTHQUAKES AND OTHER NATURAL DISASTERS.

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

                                        28
<PAGE>   31

OUR STOCKHOLDER RIGHTS PLAN, CERTIFICATE OF INCORPORATION AND DELAWARE LAW COULD
ADVERSELY AFFECT THE PERFORMANCE OF OUR STOCK.

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     Our investment portfolio, with a fair value of $25.6 million as of December
31, 2000, is invested in commercial paper, government securities and corporate
indebtedness that could experience an adverse decline in fair value should an
increase in interest rates occur. In addition, declines in interest rates could
have an adverse impact on interest earnings for our investment portfolio. We do
not currently hedge against this interest rate exposure.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item concerning the Company's directors
and nominees is incorporated by reference to the Company's 2001 Proxy Statement
under the caption "Election of Directors", and for the executive officers of the
Company, the information is included in Part I, Item 1, under the caption
"Executive Officers of the Registrant."

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item is incorporated by reference to the
Company's 2001 Proxy Statement under the section titled "Executive
Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is incorporated by reference to the
Company's 2001 Proxy Statement under the sections titled "Record Date and Voting
Securities" and "Security Ownership."

                                        29
<PAGE>   32

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this item is incorporated by reference to the
Company's 2001 Proxy Statement under the section titled "Certain Transactions."

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

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

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

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................  F-1
Balance Sheet...............................................  F-2
Statement of Operations.....................................  F-3
Statement of Changes in Mandatorily Redeemable Convertible
  Preferred Stock and Stockholders' Equity (Deficit)........  F-4
Statement of Cash Flows.....................................  F-5
Notes to Financial Statements...............................  F-6
</TABLE>

     (2) Financial Statement Schedules.

       REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES

To the Board of Directors
of Vixel Corporation

     Our audits of the financial statements referred to in our report dated
February 1, 2001 appearing in this Report on Form 10-K also included an audit of
the financial statement schedules listed in item 14(a)(2) of this Form 10-K. In
our opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.

PricewaterhouseCoopers LLP

Seattle, Washington
February 1, 2001

                                        30
<PAGE>   33

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

     For the Years Ended January 3, 1999, January 2, 2000 and December 31, 2000
(in thousands):

<TABLE>
<CAPTION>
                                                      BALANCE AT   CHARGED TO                  BALANCE AT
                                                      BEGINNING    COSTS AND                     END OF
                    DESCRIPTION                       OF PERIOD     EXPENSES    (DEDUCTIONS)     PERIOD
                    -----------                       ----------   ----------   ------------   ----------
<S>                                                   <C>          <C>          <C>            <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended January 3, 1999..........................    $   36       $  400       $  (205)       $  231
Year ended January 2, 2000..........................       231          171          (152)          250
Year ended December 31, 2000........................       250          701          (101)          850
ACCRUED WARRANTY COSTS
Year ended January 3, 1999..........................       294        4,333          (237)        4,390
Year ended January 2, 2000..........................     4,390        3,252        (4,693)        2,949
Year ended December 31, 2000........................     2,949        1,975        (1,526)        3,398
ALLOWANCE FOR INVENTORY OBSOLESCENCE
Year ended January 3, 1999..........................       414          214          (145)          483
Year ended January 2, 2000..........................       483          139           (57)          565
Year ended December 31, 2000........................       565        1,066          (603)        1,028
</TABLE>

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

     (3) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 3.1(1)   Amended and Restated Certificate of Incorporation of
          Registrant (Exhibit 3.2)
 3.2(2)   Certificate of Designation of Series A Junior Participating
          Preferred Stock (Exhibit 3.1)
 3.3(1)   Bylaws of the Registrant (Exhibit 3.4)
 4.1(1)   Specimen Stock Certificate
 4.2(1)   Amended and Restated Investors' Rights Agreement dated
          February 17, 1998
 4.3(1)   First Amendment to Amended and Restated Investors' Rights
          Agreement dated February 17, 1998
 4.4(2)   Rights Agreement dated November 15, 2000, between the
          Registrant and Computer Share Trust Company, Inc. (Exhibit
          4.1)
 4.5(2)   Form of rights Certificate (Exhibit 4.2)
10.1(1)   Form of Indemnity Agreement to be entered into by the
          Registrant and each of its directors and executive officers
10.2(1)   Amended and Restated 1995 Stock Option Plan and forms of
          agreements thereunder
10.3(1)   Master Lease Agreement between Registrant and Transamerica
          Business Credit Corporation dated May 23, 1997 (Exhibit
          10.4)
10.4(1)   Master Lease Agreement between Registrant and Comdisco, Inc.
          dated January 18, 1996, together with addendum dated January
          18, 1996 (Exhibit 10.5)
10.5(1)   Turnkey Manufacturing Agreement with K*Tec Electronics, a
          division of Kent Electronics Company, dated May 5, 1997
          (Exhibit 10.7)
10.6(1)   Employment Agreement between Registrant and Stuart B. Berman
          dated February 17, 1998 (Exhibit 10.9)
10.7(1)   Employment Agreement between Registrant and James McCluney
          dated April 26, 1999 (Exhibit 10.12)
</TABLE>

                                        31
<PAGE>   34

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
10.8(1)   Restricted Stock Purchase Agreement between Registrant and
          Gregory R. Olbright dated April 30, 1999 (Exhibit 10.14)
10.9(1)   Restricted Stock Purchase Agreement between Registrant and
          Kurtis L. Adams dated May 20, 1999 (Exhibit 10.15)
10.10(1)  Full Recourse Promissory Note between Registrant and Stuart
          B. Berman dated April 16, 1999 (Exhibit 10.16)
10.11(1)  Form of Full Recourse Promissory Note between Registrant and
          its executive officers (Exhibit 10.17)
10.12(1)  Form of Full Recourse Promissory Note between Registrant and
          its directors (Exhibit 10.18)
10.13(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)
10.14(1)  Lease Agreement between Arcxel Technologies, Inc. and Aetna
          Life Insurance Company, dated November 1, 1997, assigned to
          Registrant August 24, 1998 (Exhibit 10.20)
10.15(1)  Vixel Corporation 1999 Employee Stock Purchase Plan and
          forms of agreements thereunder (Exhibit 10.22)*
10.16     Vixel Corporation 1999 Equity Incentive Plan, as amended
10.17(1)  Form of Stock Pledge Agreement between the Registrant and
          its directors (Exhibit 10.24)
10.18(1)  Warrant, dated March 30, 1999, issued to Western Digital
          Corporation (Exhibit 4.11)
10.19(1)  Warrant, dated August 30, 1999, issued to Sun Microsystems,
          Inc. (Exhibit 4.12)
10.20(3)  Vixel Corporation 2000 Non-officer Equity Incentive Plan and
          forms of agreements thereunder (Exhibit 99.1)*
23.1      Consent of PricewaterhouseCoopers LLP, Independent
          Accountants
24.1      Power of Attorney. Reference is made to the signature page.
</TABLE>

---------------
(1) Incorporated by reference to designated exhibits to the Company Registration
    Statement on Form S-1 (File No. 333-81347), declared effective on September
    30, 1999.

(2) Incorporated by reference to designated exhibits to Company's current report
    on Form 8-K filed with the Securities and Exchange Commission on November
    17, 2000.

(3) Incorporated by reference to designated exhibits to Company's Registration
    Statement on Form S-8 (File No. 333-39000)

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

(b) REPORTS ON FORM 8-K.

     We filed the following reports on Form 8-K during the fourth quarter of
2000 and through the filing of this Annual Report:

          (i) Form 8-K dated November 15, 2000 announcing that Vixel's Board of
              Directors approved the adoption of a Shareholder Rights Plan.

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

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

                                        32
<PAGE>   35

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Bothell, King County, State of Washington, on this 29th day of March, 2001.

                                          VIXEL CORPORATION

                                          By:     /s/ JAMES M. MCCLUNEY
                                            ------------------------------------
                                                     James M. McCluney
                                             Chief Executive Officer, President
                                                             and
                                             Chairman of the Board of Directors

                               POWER OF ATTORNEY

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

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

<TABLE>
<CAPTION>
                   SIGNATURE                                     TITLE                       DATE
                   ---------                                     -----                       ----
<S>                                               <C>                                   <C>
             /s/ JAMES M. MCCLUNEY                 Chief Executive Officer, President   March 29, 2001
------------------------------------------------      and Chairman of the Board of
               James M. McCluney                     Directors (Principal Executive
                                                                Officer)

              /s/ KURTIS L. ADAMS                    Chief Financial Officer, Vice      March 29, 2001
------------------------------------------------  President of Finance, Secretary and
                Kurtis L. Adams                    Treasurer (Principal Financial and
                                                          Accounting Officer)

            /s/ CHARLES A. HAGGERTY                             Director                March 29, 2001
------------------------------------------------
              Charles A. Haggerty

             /s/ TIMOTHY M. SPICER                              Director                March 29, 2001
------------------------------------------------
               Timothy M. Spicer

              /s/ WERNER F. WOLFEN                              Director                March 29, 2001
------------------------------------------------
                Werner F. Wolfen
</TABLE>

                                        33
<PAGE>   36

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                            DESCRIPTION
-------                            -----------
<C>        <S>
 3.1(1)    Amended and Restated Certificate of Incorporation of
           Registrant (Exhibit 3.2)
 3.2(2)    Certificate of Designation of Series A Junior Participating
           Preferred Stock (Exhibit 3.1)
 3.3(1)    Bylaws of the Registrant (Exhibit 3.4)
 4.1(1)    Specimen Stock Certificate
 4.2(1)    Amended and Restated Investors' Rights Agreement dated
           February 17, 1998
 4.3(1)    First Amendment to Amended and Restated Investors' Rights
           Agreement dated February 17, 1998
 4.4(2)    Rights Agreement dated November 15, 2000, between the
           Registrant and Computer Share Trust Company, Inc. (Exhibit
           4.1)
 4.5(2)    Form of rights Certificate (Exhibit 4.2)
10.1(1)    Form of Indemnity Agreement to be entered into by the
           Registrant and each of its directors and executive officers
10.2(1)    Amended and Restated 1995 Stock Option Plan and forms of
           agreements thereunder
10.3(1)    Master Lease Agreement between Registrant and Transamerica
           Business Credit Corporation dated May 23, 1997 (Exhibit
           10.4)
10.4(1)    Master Lease Agreement between Registrant and Comdisco, Inc.
           dated January 18, 1996, together with addendum dated January
           18, 1996 (Exhibit 10.5)
10.5(1)    Turnkey Manufacturing Agreement with K*Tec Electronics, a
           division of Kent Electronics Company, dated May 5, 1997
           (Exhibit 10.7)
10.6(1)    Employment Agreement between Registrant and Stuart B. Berman
           dated February 17, 1998 (Exhibit 10.9)
10.7(1)    Employment Agreement between Registrant and James McCluney
           dated April 26, 1999 (Exhibit 10.12)
10.8(1)    Restricted Stock Purchase Agreement between Registrant and
           Gregory R. Olbright dated April 30, 1999 (Exhibit 10.14)
10.9(1)    Restricted Stock Purchase Agreement between Registrant and
           Kurtis L. Adams dated May 20, 1999 (Exhibit 10.15)
10.10(1)   Full Recourse Promissory Note between Registrant and Stuart
           B. Berman dated April 16, 1999 (Exhibit 10.16)
10.11(1)   Form of Full Recourse Promissory Note between Registrant and
           its executive officers (Exhibit 10.17)
10.12(1)   Form of Full Recourse Promissory Note between Registrant and
           its directors (Exhibit 10.18)
10.13(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)
10.14(1)   Lease Agreement between Arcxel Technologies, Inc. and Aetna
           Life Insurance Company, dated November 1, 1997, assigned to
           Registrant August 24, 1998 (Exhibit 10.20)
10.15(1)   Vixel Corporation 1999 Employee Stock Purchase Plan and
           forms of agreements thereunder (Exhibit 10.22)
10.16      Vixel Corporation 1999 Equity Incentive Plan, as amended
10.17(1)   Form of Stock Pledge Agreement between the Registrant and
           its directors (Exhibit 10.24)
10.18(1)   Warrant, dated March 30, 1999, issued to Western Digital
           Corporation (Exhibit 4.11)
10.19(1)   Warrant, dated August 30, 1999, issued to Sun Microsystems,
           Inc. (Exhibit 4.12)
10.20(3)   Vixel Corporation 2000 Non-officer Equity Incentive Plan and
           forms of agreements thereunder (Exhibit 99.1)
23.1       Consent of PricewaterhouseCoopers LLP, Independent
           Accountants
24.1       Power of Attorney. Reference is made to the signature page.
</TABLE>

---------------
(1) Incorporated by reference to designated exhibits to the Company Registration
    Statement on Form S-1 (File No. 333-81347), declared effective on September
    30, 1999.

(2) Incorporated by reference to designated exhibits to Company's current report
    on Form 8-K filed with the Securities and Exchange Commission on November
    17, 2000.

(3) Incorporated by reference to designated exhibits to Company's Registration
    Statement on Form S-8 (File No. 333-39000)

                                        34
<PAGE>   37

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of Vixel Corporation

     In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in mandatorily redeemable convertible preferred stock
and stockholders' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of Vixel Corporation at January 2,
2000 and December 31, 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Seattle, Washington
February 1, 2001

                                       F-1
<PAGE>   38

                               VIXEL CORPORATION

                                 BALANCE SHEET
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                              JANUARY 2,    DECEMBER 31,
                                                                 2000           2000
                                                              ----------    ------------
<S>                                                           <C>           <C>
Current assets
  Cash and cash equivalents.................................   $ 16,706      $  17,066
  Short-term investments....................................     44,650         25,636
  Accounts receivable, net of allowance for doubtful
     accounts of $250 and $850, respectively................      5,344          7,344
  Inventories...............................................      3,321          1,415
  Prepaid expenses and other current assets.................      2,779          2,129
                                                               --------      ---------
          Total current assets..............................     72,800         53,590
  Property and equipment, net...............................      6,915          7,307
  Goodwill and other intangibles, net.......................      3,838          1,680
  Other assets..............................................        528            354
                                                               --------      ---------
          Total assets......................................   $ 84,081      $  62,931
                                                               ========      =========

                     LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
  Current portion of long-term debt and capital leases......   $  2,894      $   2,466
  Accounts payable..........................................      4,480          5,083
  Accrued liabilities.......................................      6,606          6,927
                                                               --------      ---------
          Total current liabilities.........................     13,980         14,476
Long-term debt and capital leases, net of current portion...      3,406          1,510
Other long-term liabilities.................................      1,000             --
                                                               --------      ---------
          Total liabilities.................................     18,386         15,986
                                                               --------      ---------
Commitments and contingencies
Stockholders' equity (deficit)
  Common stock, $.0015 par value; 60,000,000 shares
     authorized; 23,213,588 and 23,845,041 shares issued and
     outstanding, respectively..............................         35             36
  Additional paid-in capital................................    155,070        156,387
  Stock-based compensation..................................     (5,525)        (2,160)
  Notes receivable from stockholders........................     (5,246)        (5,122)
  Treasury stock, at cost; 66,666 shares....................        (50)           (50)
  Accumulated deficit.......................................    (78,589)      (102,146)
                                                               --------      ---------
          Total stockholders' equity........................     65,695         46,945
                                                               --------      ---------
          Total liabilities and stockholders' equity
           (deficit)........................................   $ 84,081      $  62,931
                                                               ========      =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-2
<PAGE>   39

                               VIXEL CORPORATION

                            STATEMENT OF OPERATIONS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                         FISCAL YEAR ENDED
                                                              ----------------------------------------
                                                              JANUARY 3,    JANUARY 2,    DECEMBER 31,
                                                                 1999          2000           2000
                                                              ----------    ----------    ------------
<S>                                                           <C>           <C>           <C>
Revenue
  SAN systems...............................................  $   15,222    $   25,159    $    29,610
  Components................................................      24,223        13,668          3,599
                                                              ----------    ----------    -----------
          Total revenue.....................................      39,445        38,827         33,209
Cost of revenue.............................................      36,199        28,211         21,732
                                                              ----------    ----------    -----------
Gross profit................................................       3,246        10,616         11,477
                                                              ----------    ----------    -----------
Operating expenses
  Research and development..................................      11,110        12,788         15,570
  Acquired in-process technology............................       5,118            --             --
  Selling, general and administrative.......................      14,521        13,643         17,437
  Amortization and writedown of goodwill and other
     intangibles............................................       2,057         1,362          2,159
  Amortization of stock-based compensation..................          --         4,368          2,892
                                                              ----------    ----------    -----------
          Total operating expenses..........................      32,806        32,161         38,058
                                                              ----------    ----------    -----------
Loss from operations........................................     (29,560)      (21,545)       (26,581)
Interest expense............................................      (1,256)       (2,039)          (632)
Interest income.............................................         414         1,267          3,587
Gain on sale of division....................................       9,061            --             --
Other income (loss), net....................................         108           (30)            69
                                                              ----------    ----------    -----------
Net loss....................................................  $  (21,233)   $  (22,347)   $   (23,557)
                                                              ==========    ==========    ===========
Net loss applicable to common stockholders..................  $  (21,424)   $  (22,495)   $   (23,557)
                                                              ==========    ==========    ===========
Basic and diluted net loss per share........................  $    (8.77)   $    (2.97)   $     (1.04)
                                                              ==========    ==========    ===========
Weighted-average shares outstanding.........................   2,443,769     7,572,389     22,710,367
                                                              ==========    ==========    ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-3
<PAGE>   40

                               VIXEL CORPORATION

           STATEMENT OF CHANGES IN MANDATORILY REDEEMABLE CONVERTIBLE
               PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                      MANDATORILY                                                          NOTES
                                      CONVERTIBLE                                                        RECEIVABLE
                                    PREFERRED STOCK        COMMON STOCK       ADDITIONAL   STOCK-BASED      FROM
                                  -------------------   -------------------    PAID-IN       COMPEN-       STOCK-
                                    SHARES     AMOUNT     SHARES     AMOUNT    CAPITAL       SATION       HOLDERS
                                  ----------   ------   ----------   ------   ----------   -----------   ----------
<S>                               <C>          <C>      <C>          <C>      <C>          <C>           <C>
Balance, December 29, 1997......  12,706,474    $12      1,011,452    $ 2      $ 21,015      $    --      $    --
Stock issued upon acquisition of
 Arcxel Technologies, Inc.......   1,759,303      2      1,026,525      2        12,115
Stock options assumed upon
 acquisition of Arcxel
 Technologies, Inc..............                                                  2,566
Shares repurchased above fair
 value..........................                                                    251
Stock options exercised.........                           860,402      1           378
Stock options granted to third
 parties........................                                                    215
Accretion of mandatorily
 redeemable convertible
 preferred stock................                                                   (191)
Net loss........................
                                  ----------    ---     ----------    ---      --------      -------      -------
Balance, January 3, 1999........  14,465,777     14      2,898,379      5        36,349           --           --
Stock options exercised.........                           477,576      1           748
Stock options granted to third
 parties........................                                                    140
Preferred stock Series A
 warrants exercised.............     830,412      1                                 649
Common stock warrants issued....                                                    829
Common stock warrants
 exercised......................                            48,269     --
Stock options exercised with
 notes..........................                         1,627,423      2         5,246                    (5,246)
Stock-based compensation........                                                  9,753       (9,753)
Amortization of stock-based
 compensation...................                                                               4,228
Accretion of mandatorily
 redeemable convertible
 preferred stock................                                                   (148)
Issuance of common stock for
 cash, net of issue costs.......                         4,945,000      7        81,358
Conversion of preferred stock
 Series A.......................  (5,721,651)    (6)     3,814,434      6            --
Conversion of preferred stock
 Series B.......................  (5,243,806)    (5)     3,495,871      5            --
Conversion of preferred stock
 Series C.......................    (571,429)    (1)       380,953      1            --
Conversion of preferred stock
 Series D.......................  (2,000,000)    (2)     1,333,333      2            --
Conversion of preferred stock
 Series F.......................  (1,759,303)    (1)     1,172,869      1            --
Conversion of mandatorily
 redeemable preferred stock.....                         3,019,481      5        20,146
Net loss........................
                                  ----------    ---     ----------    ---      --------      -------      -------
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)
                                  ==========    ===     ==========    ===      ========      =======      =======

<CAPTION>
                                                                    TOTAL
                                                                   STOCK-
                                  TREASURY STOCK                  HOLDERS'
                                  ---------------   ACCUMULATED   (DEFICIT)
                                  SHARES   AMOUNT     DEFICIT      EQUITY
                                  ------   ------   -----------   ---------
<S>                               <C>      <C>      <C>           <C>
Balance, December 29, 1997......  66,666    $(50)    $ (35,009)   $(14,030)
Stock issued upon acquisition of
 Arcxel Technologies, Inc.......                                    12,119
Stock options assumed upon
 acquisition of Arcxel
 Technologies, Inc..............                                     2,566
Shares repurchased above fair
 value..........................                                       251
Stock options exercised.........                                       379
Stock options granted to third
 parties........................                                       215
Accretion of mandatorily
 redeemable convertible
 preferred stock................                                      (191)
Net loss........................                       (21,233)    (21,233)
                                  ------    ----     ---------    --------
Balance, January 3, 1999........  66,666     (50)      (56,242)    (19,924)
Stock options exercised.........                                       749
Stock options granted to third
 parties........................                                       140
Preferred stock Series A
 warrants exercised.............                                       650
Common stock warrants issued....                                       829
Common stock warrants
 exercised......................                                        --
Stock options exercised with
 notes..........................                                         2
Stock-based compensation........                                        --
Amortization of stock-based
 compensation...................                                     4,228
Accretion of mandatorily
 redeemable convertible
 preferred stock................                                      (148)
Issuance of common stock for
 cash, net of issue costs.......                                    81,365
Conversion of preferred stock
 Series A.......................                                        --
Conversion of preferred stock
 Series B.......................                                        --
Conversion of preferred stock
 Series C.......................                                        --
Conversion of preferred stock
 Series D.......................                                        --
Conversion of preferred stock
 Series F.......................                                        --
Conversion of mandatorily
 redeemable preferred stock.....                                    20,151
Net loss........................                       (22,347)    (22,347)
                                  ------    ----     ---------    --------
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
                                  ======    ====     =========    ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-4
<PAGE>   41

                               VIXEL CORPORATION

                            STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                         FISCAL YEAR ENDED
                                                              ----------------------------------------
                                                              JANUARY 3,    JANUARY 2,    DECEMBER 31,
                                                                 1999          2000           2000
                                                              ----------    ----------    ------------
<S>                                                           <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss..................................................   $(21,233)     $(22,347)      $(23,557)
  Adjustments to reconcile net loss to net cash used in
    operating activities
    Depreciation............................................      2,334         2,473          3,439
    Acquired in-process technology..........................      5,118            --             --
    Amortization of goodwill and other intangibles..........      3,061         1,741          2,158
    Writedown of impaired assets............................      1,564            --             --
    Amortization of debt discount...........................        192           172             --
    Stock-based compensation................................        303         4,369          2,892
    Loss on disposal of property and equipment..............         --            42             --
    Gain on sale of division................................     (9,061)           --             --
    Changes in
       Accounts receivable, net.............................       (857)         (563)        (2,000)
       Inventories..........................................       (667)       (1,775)         1,906
       Prepaid expenses and other assets....................        (82)         (748)           824
       Accounts payable and accrued liabilities.............     10,100          (762)           924
       Other long-term liabilities..........................         --            --         (1,000)
                                                               --------      --------       --------
         Net cash used in operating activities..............     (9,228)      (17,398)       (14,414)
                                                               --------      --------       --------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of short-term investments........................     (2,490)      (44,650)       (31,454)
  Maturities of short-term investments......................         --         2,490         50,468
  Purchase of property and equipment........................     (1,663)         (582)        (3,131)
  Cash paid for acquisition of Arcxel Technologies, Inc.....        (16)           --             --
  Proceeds from sale of division............................      6,865            --             --
                                                               --------      --------       --------
         Net cash provided by (used in) investing
           activities.......................................      2,696       (42,742)        15,883
                                                               --------      --------       --------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of long-term note payable..........      7,500           712             --
  Principal payments on long-term debt and capital leases...     (1,308)      (10,489)        (3,039)
  Amortization of debt issuance costs.......................         27            16             16
  Proceeds from exercise of stock options and warrants......        378           751            690
  Proceeds from common stock granted under Employee Stock
    Purchase Plan...........................................         --            --          1,121
  Proceeds from issuance of preferred stock, net............         --           650             --
  Proceeds from issuance of common stock, net...............         --        81,365             --
  Other financing activities................................         --            --            103
                                                               --------      --------       --------
         Net cash provided by (used in) financing
           activities.......................................      6,597        73,005         (1,109)
                                                               --------      --------       --------
Net increase in cash and cash equivalents...................         65        12,865            360
Cash and cash equivalents, beginning of period..............      3,776         3,841         16,706
                                                               --------      --------       --------
Cash and cash equivalents, end of period....................   $  3,841      $ 16,706       $ 17,066
                                                               ========      ========       ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid for interest....................................   $    922      $  2,039       $    582
                                                               ========      ========       ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
  ACTIVITIES
  Equipment purchased under capital leases..................   $  3,187      $  1,470       $    700
                                                               ========      ========       ========
  Issuance of detachable stock warrants.....................   $    279      $    838       $     --
                                                               ========      ========       ========
  Issuance of common stock for notes receivable.............   $     --      $  5,246       $     --
                                                               ========      ========       ========
  Accretion of mandatorily redeemable preferred stock.......   $    191      $    148       $     --
                                                               ========      ========       ========
  Acquisition (Note 2)
  Sale of division (Note 3)
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-5
<PAGE>   42

                               VIXEL CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

     Vixel Corporation (the "Company") is a provider of comprehensive
interconnect solutions for use in storage area networks, or SANs. The Company's
products include SAN management software, fabric switches, arbitrated loop hubs
and transceivers. The Company currently sells its products primarily to
manufacturers as well as resellers worldwide.

FISCAL YEAR

     The Company has a 52 or 53-week fiscal year ending on the Sunday closest to
December 31. The fiscal years ended January 3, 1999, January 2, 2000 and
December 31, 2000 were 53, 52 and 52 weeks respectively.

REVENUE RECOGNITION

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

CONCENTRATION OF MANUFACTURING AND CREDIT RISK AND SALES TO MAJOR CUSTOMERS

     Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily accounts receivable, cash
equivalents and investments. The Company performs ongoing credit evaluations of
its commercial customers' financial condition and requires no collateral from
these customers. The Company maintains an allowance for doubtful accounts
receivable based upon its historical experience and the expected collectibility
of all accounts receivable. Credit losses to date have been within the Company's
estimates. The Company has a cash and short-term investment policy that
generally restricts investments to ensure preservation of principal and
maintenance of liquidity.

     The Company sells its products primarily to a limited number of original
equipment manufacturers. Compaq Computer and Sun Microsystems represented 26%
and 21% of revenue, respectively, for fiscal 2000. In fiscal 1999, Compaq
Computer and Sun Microsystems represented 30% and 25% of revenue, respectively.
In fiscal 1998, Sun Microsystems and Hewlett-Packard represented 54% and 12% of
revenue, respectively.

     The Company's inventory is produced by one contract manufacturer. The
Company believes that alternative manufacturing sources could be obtained and
qualified to supply its products.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company's financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable, accrued
liabilities, long-term debt and capital leases. Except for long-term debt and
capital leases, the carrying amounts of financial instruments approximate fair
value due to their short maturities. The fair value of long-term debt and
capital leases at January 2, 2000 and December 31, 2000

                                       F-6
<PAGE>   43
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

is not materially different from the carrying amount, based on interest rates
available to the Company for similar types of arrangements.

CASH AND CASH EQUIVALENTS

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

SHORT-TERM INVESTMENTS

     Short-term investments consist of highly rated commercial paper and
corporate bonds that have maturities at time of purchase between three and six
months. These investments are classified as available-for-sale and are recorded
at market value, which approximates cost. The unrealized gains or losses at
January 2, 2000 and December 31, 2000 did not have a material impact on the
Company's financial position.

INVENTORIES

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

PROPERTY AND EQUIPMENT

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

<TABLE>
<S>                                                        <C>
Test equipment...........................................  1 - 3 years
Furniture and office and computer equipment..............      5 years
Software.................................................      3 years
Leasehold improvements...................................  2 - 5 years
</TABLE>

     The cost of equipment held under capital leases is equal to the lower of
the net present value of the minimum lease payments or the fair value of the
leased property at the inception of the lease. Leasehold improvements are
amortized over the shorter of their useful lives or the term of the related
lease. Maintenance and repairs, which neither materially add to the value of the
asset nor prolong its life, are charged to expense as incurred. Gains or losses
on dispositions of property and equipment are included in other income (loss),
net.

SEGMENT INFORMATION

     The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 supersedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management approach." The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS 131 also requires disclosures about products
and services, geographic areas and major customers. The Company has determined
that it does not have any separately reportable business or geographic segments.

GOODWILL AND OTHER INTANGIBLES

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

                                       F-7
<PAGE>   44
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

IMPAIRMENT OF LONG-LIVED ASSETS

     The Company continually reviews the carrying value of long-lived assets,
including, but not limited to, property and equipment and goodwill and other
intangibles to determine whether impairment has occurred. The carrying value of
long-lived assets 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.

     In December 1998, the Company identified impairment in the value of
developed technology acquired in the purchase of Arcxel Technologies, Inc. The
impairment arose as a result of the development of a next-generation switch
product which had better functionality and a lower cost than Arcxel's existing
switch product at the time of the acquisition. At the time of the Arcxel
acquisition, the Company believed that both the existing switch product and the
next-generation product, which was under development, could co-exist, each
serving customer needs. However, the functionality and cost-effectiveness of the
next-generation switch exceeded the Company's original expectations, which led
to a much shorter product life than originally anticipated for the existing
switch product when the value of developed technology was determined.
Accordingly, the carrying values of both the developed technology and the
portion of goodwill allocated to the developed technology have been written down
to their fair value in accordance with Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. Impairment losses of $1,564,000 and
$691,000 have been recorded in cost of sales and amortization expense,
respectively, in the statement of operations during the year ended January 3,
1999. There were no impairment losses recorded in fiscal 1999 or 2000.

INCOME TAXES

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

WARRANTY

     The Company offers product warranties of one to five years. Estimated
future warranty obligations related to certain products are provided by charges
to operations in the period in which the related revenue is recognized. These
estimates are based on historical warranty experience and other relevant
information of which the Company is aware. During the years ended January 3,
1999, January 2, 2000 and December 31, 2000, warranty expense was $4,333,000,
$3,252,000 and $1,975,000, respectively.

ADVERTISING

     The Company expenses advertising costs as incurred. During the years ended
January 3, 1999, January 2, 2000 and December 31, 2000, advertising expenses
were approximately $33,000, $7,000 and $224,000, respectively.

RESEARCH AND DEVELOPMENT

     Research and development costs are expensed as incurred.

NET LOSS PER SHARE

     Basic net loss per share represents the net loss available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period, excluding shares of restricted stock subject
                                       F-8
<PAGE>   45
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

to repurchase. Diluted net loss per share represents the net loss available to
common stockholders divided by the weighted-average number of common shares
outstanding including the potentially dilutive impact of common stock options
and warrants, convertible preferred stock and shares of restricted stock subject
to repurchase. Common stock options and warrants are converted using the
treasury stock method. Convertible preferred stock is converted using the as
if-converted method. Basic and diluted net losses per share are equal for the
periods presented because the impact of common stock equivalents is
anti-dilutive. Potentially dilutive securities totaling 8,748,029, 4,947,658 and
4,508,577 shares for the years ended January 3, 1999, January 2, 2000 and
December 31, 2000, 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 in the
basic and diluted net loss per share calculations for the periods indicated (in
thousands):

<TABLE>
<CAPTION>
                                                              FISCAL YEAR ENDED
                                                   ----------------------------------------
                                                   JANUARY 3,    JANUARY 2,    DECEMBER 31,
                                                      1999          2000           2000
                                                   ----------    ----------    ------------
<S>                                                <C>           <C>           <C>
Numerator:
  Net loss.......................................   $(21,233)     $(22,347)      $(23,557)
  Accretion of mandatorily redeemable convertible
     preferred stock.............................       (191)         (148)            --
                                                    --------      --------       --------
          Net loss applicable to common
            stockholders.........................   $(21,424)     $(22,495)      $(23,557)
                                                    ========      ========       ========
</TABLE>

STOCK OPTIONS

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

USE OF ESTIMATES

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

RECENT ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for
Derivative Instruments and Certain Hedging Activities," is effective as of
January 1, 2001. These pronouncements establish accounting and reporting
standards for derivative instruments and hedging

                                       F-9
<PAGE>   46
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

activities which, among other things, require that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those derivatives at fair value. The early adoption of SFAS
No. 133 has not materially impacted our financial position, results of
operations or cash flows.

     In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition." SAB 101 as
amended provides guidance with respect to the SEC's interpretation of existing
authoritative accounting guidance on the recognition of revenue in financial
statements. Our adoption of SAB 101, effective January 3, 2000, has not
materially impacted our financial position, results of operations or cash flows.

     The Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Stock Based Compensation" in
March 2000. FIN 44 provides guidance and clarification to the application of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees." Our adoption of FIN 44, effective July 1, 2000, has not materially
impacted our financial position, results of operations or cash flows.

RECLASSIFICATION

     Certain items in the January 3, 1999 and January 2, 2000 financial
statements have been reclassified to conform to the December 31, 2000
presentation. These reclassifications have no impact on stockholders' equity
(deficit), net loss or cash flows as previously reported.

LIQUIDITY

     The Company has incurred significant losses since inception and expects to
incur losses in the future. As of December 31, 2000, the Company had an
accumulated deficit of $102.1 million. The Company expects to incur significant
product development, sales, marketing and administrative expenses, and will need
to generate significant revenue to achieve and maintain profitability. The
Company cannot be certain that it ever will realize sufficient revenue to
achieve profitability. Even if the Company does achieve profitability, it may
not be able to sustain or increase profitability.

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

 2. ACQUISITION

     On February 17, 1998, the Company acquired Arcxel Technologies, Inc.
(Arcxel), a manufacturer of Fibre Channel switches. The Company acquired all
outstanding shares of Arcxel's common stock and Series A preferred stock in
exchange for 1,026,525 shares of the Company's common stock and 1,759,303 shares
of the Company's Series F preferred stock. The acquisition was accounted for
using the purchase method of accounting.

     A summary of the purchase price paid follows (in thousands):

<TABLE>
<S>                                                          <C>
Consideration:
  Value of common stock....................................  $ 5,081
  Value of preferred stock.................................    7,037
  Fair value of assumed stock options......................    2,566
  Acquisition costs........................................      157
                                                             -------
                                                             $14,841
                                                             =======
</TABLE>

                                       F-10
<PAGE>   47
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     The value of the Series F preferred stock issued to the sellers of Arcxel
was determined through arms-length negotiations with the sellers. The value of
the common stock issued to the sellers was determined using the "income
approach" discounted cash flow model. The assumptions used in the model included
five year income and cash flow projections, a discount rate of 35% and a
terminal value multiple of five times projected earnings before interest and
taxes in the fifth year of the projections. The value derived from the
discounted cash flow model was reduced by a 39% private company adjustment to
reflect differences in size, liquidity, predictability of earnings, access to
capital and other characteristics of the Company compared to a public company.
The common stock was valued as the residual of the total value of the Company
less the value of all classes of preferred stock outstanding.

     The fair value of the Arcxel stock options assumed by the Company was
determined using the Black-Scholes model with the following weighted average
assumptions: exercise price of $0.45 per share, fair value of common stock of
$4.95 per share, expected life of 3.48 years, risk-free interest rate of 5.55%,
and no volatility or dividend yield factors.

     A summary of assets acquired and liabilities assumed at the date of the
acquisition, as determined in accordance with APB 16, is presented below (in
thousands):

<TABLE>
<S>                                                          <C>
Cash.......................................................  $   141
Accounts receivable........................................       53
Inventory..................................................      216
Prepaid expenses and other current assets..................       63
Property and equipment.....................................      404
Acquired in-process technology.............................    5,118
Goodwill and intangibles...................................    9,198
Other assets...............................................      161
Accounts payable...........................................     (170)
Accrued liabilities........................................      (87)
Capital leases.............................................     (256)
                                                             -------
                                                             $14,841
                                                             =======
</TABLE>

     The acquired in-process technology had not yet reached technological
feasibility and had no alternative future use. The acquired in-process
technology was recorded as expense at the time of the acquisition. The valuation
of the acquired in-process technology was based upon estimates by the Company
and a valuation by a third-party appraiser. The valuation of the in-process
technology related to this acquisition was determined by estimating the future
net cash flows resulting from products anticipated to result from this
acquisition and discounting the net cash flows to the date of acquisition using
a discount rate of 35%. The discount rate used to value the acquired in-process
technology is based on the inherent risk surrounding the development of the
acquired technology. Given that the valuation of the acquired in-process
technology was an estimate, actual results may change. If the estimate of the
in-process technology were to decrease, the value assigned to goodwill and
intangibles would increase. Included in intangibles are developed technology
(products), core technology, and other intangible assets.

                                       F-11
<PAGE>   48
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     The results of operations of Arcxel are included in the financial
statements from the date of acquisition. Unaudited pro forma results as if
Arcxel had been included in the financial results since the beginning of the
year prior to the acquisition are as follows (in thousands):

<TABLE>
<CAPTION>
                                                            JANUARY 2,
                                                               1999
                                                            ----------
<S>                                                         <C>
Revenue...................................................   $ 39,497
Net loss..................................................    (21,875)
Basic and diluted net loss per share......................      (9.03)
</TABLE>

     The unaudited pro forma results are not necessarily indicative of the
results of operations that would have been reported had the acquisition occurred
prior to the beginning of the period presented. In addition, they are not
intended to be indicative of future results.

 3. SALE OF DIVISION

     On February 13, 1998, the Company sold substantially all of the laser diode
fabrication facility and gigabit Ethernet transceiver product line of its
Colorado division for cash proceeds of $7,250,000 and the assumption of net
liabilities of the Colorado division. The Company recorded a gain of
approximately $9,061,000 related to the sale. In connection with the sale,
certain employees of the division elected to receive accelerated vesting of
their stock options. The Company recorded an expense of $163,000 related to this
accelerated vesting. The Company also recorded cash expenses of $385,000 in
connection with this sale. For the period from December 29, 1997 through
February 13, 1998, revenue and net loss of the division were $120,000 and
$1,047,000, respectively. These amounts are included in the Company's statement
of operations.

 4. INVENTORIES

     Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                              JANUARY 2,    DECEMBER 31,
                                                                 2000           2000
                                                              ----------    ------------
<S>                                                           <C>           <C>
Raw materials...............................................    $1,258        $ 1,177
Finished goods..............................................     2,628          1,266
Less: Writedown to expected realizable value................      (565)        (1,028)
                                                                ------        -------
                                                                $3,321        $ 1,415
                                                                ======        =======
</TABLE>

 5. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                              JANUARY 2,    DECEMBER 31,
                                                                 2000           2000
                                                              ----------    ------------
<S>                                                           <C>           <C>
Test equipment..............................................   $ 5,814        $ 7,606
Furniture and office and computer equipment.................     3,956          4,982
Software....................................................     1,979          2,984
Leasehold improvements......................................       252            260
                                                               -------        -------
                                                                12,001         15,832
Less: accumulated depreciation and amortization.............    (5,086)        (8,525)
                                                               -------        -------
                                                               $ 6,915        $ 7,307
                                                               =======        =======
</TABLE>

                                       F-12
<PAGE>   49
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     Assets underlying capital leases included above are $9,051,000 and
$9,751,000 at January 2, 2000 and December 31, 2000, respectively, and
accumulated depreciation and amortization thereon aggregates $3,499,000 and
$5,883,000 at January 2, 2000 and December 31, 2000, respectively.

 6. GOODWILL AND OTHER INTANGIBLES

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

<TABLE>
<CAPTION>
                                                              JANUARY 2,    DECEMBER 31,
                                                                 2000           2000
                                                              ----------    ------------
<S>                                                           <C>           <C>
Goodwill....................................................   $ 4,917        $ 4,120
Developed technology........................................     3,344             --
Core technology.............................................     2,183          2,183
Covenants not to compete....................................       166            166
Workforce...................................................       381            381
                                                               -------        -------
                                                                10,991          6,850
Less: accumulated amortization..............................    (4,897)        (2,914)
       impairment writedown.................................    (2,256)        (2,256)
                                                               -------        -------
                                                               $ 3,838        $ 1,680
                                                               =======        =======
</TABLE>

 7. ACCRUED LIABILITIES

     Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                              JANUARY 2,    DECEMBER 31,
                                                                 2000           2000
                                                              ----------    ------------
<S>                                                           <C>           <C>
Accrued warranty costs......................................    $2,949         $3,398
Accrued payroll and related benefits........................     2,002          1,126
Accrued business taxes......................................       726            519
Accrued professional fees...................................       160             85
Accrued license fee.........................................        --          1,000
Other.......................................................       769            799
                                                                ------         ------
                                                                $6,606         $6,927
                                                                ======         ======
</TABLE>

 8. LINE OF CREDIT, CAPITAL LEASES AND LONG TERM DEBT

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

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

     Additionally, in October 1999, the Company repaid in full its outstanding
note payable, including accrued interest, to Western Digital Corporation.

                                       F-13
<PAGE>   50
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                              JANUARY 2,    DECEMBER 31,
                                                                 2000           2000
                                                              ----------    ------------
<S>                                                           <C>           <C>
Note payable, interest rate of 6.15%, due in equal monthly
  installments through February 2001........................   $   712        $    55
Capital lease obligations, net of unamortized discount of
  $18 and $16, respectively.................................     5,588          3,921
                                                               -------        -------
                                                                 6,300          3,976
Less: Current portion.......................................    (2,894)        (2,466)
                                                               -------        -------
                                                               $ 3,406        $ 1,510
                                                               =======        =======
</TABLE>

     Maturities of long-term debt and capital leases at December 31, 2000 are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                                         TOTAL
                                                                                       LONG-TERM
                                                             CAPITAL    LONG-TERM       DEBT AND
                        FISCAL YEAR                          LEASES       DEBT       CAPITAL LEASES
                        -----------                          -------    ---------    --------------
<S>                                                          <C>        <C>          <C>
2001.......................................................    2,674        55            2,729
2002.......................................................    1,417        --            1,417
2003.......................................................      140        --              140
                                                             -------      ----          -------
Total minimum payments.....................................    4,231        55            4,286
Less: portion representing interest........................     (309)       --             (309)
Less: unamortized discount.................................       (1)       --               (1)
                                                             -------      ----          -------
Present value of long-term debt and capital lease
  obligations..............................................    3,921        55            3,976
Less: current portion......................................   (2,411)      (55)          (2,466)
                                                             -------      ----          -------
Long-term debt and capital leases, net of current
  portion..................................................  $ 1,510      $ --          $ 1,510
                                                             =======      ====          =======
</TABLE>

 9. COMMITMENTS AND CONTINGENCIES

  Operating leases

     The Company has commitments under long-term operating leases, principally
for building space and office equipment. These leases require payment of
property taxes and include escalation clauses and options to extend the lease
terms for three to five years. The related rent expense has been recognized on a
straight-line basis.

     Future minimum lease payments under all non-cancelable operating lease
obligations at December 31, 2000 total $1,096,000, of which $784,000 are due in
fiscal 2001 and $312,000 are due in fiscal 2002.

     Total rent expense was approximately $1,235,000, $1,191,000 and $1,150,000
during the years ended January 3, 1999, January 2, 2000 and December 31, 2000,
respectively.

  Legal proceedings

     During the year ended December 28, 1997, the Company was named as the
defendant in two patent infringement actions and was conducting the defense of
another patent infringement action brought against one of its contract
manufacturers, for which the Company was an indemnity. Two of the patent
infringement actions, including the action brought against the contract
manufacturer, were dismissed without prejudice during the year ended January 3,
1999. During the year ended January 3, 1999, the Company was named as defendant
in another patent infringement action filed by the plaintiff in the remaining
action.

                                       F-14
<PAGE>   51
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     In May 1999, the Company entered into a settlement agreement with the
plaintiff in these remaining patent infringement actions. Under the settlement
agreement, the Company is obligated to make certain future payments, which were
provided for in the year ended January 3, 1999.

10. RELATED PARTY TRANSACTIONS

     During the year ended January 3, 1999, the Company issued to its then
president a stock subscription note receivable of $3,497,000 or $5.00 per share
for a total of 700,000 vested and unvested common shares under the Company's
stock option plan. In October 1998, the Company canceled the portion of the note
receivable related to 569,441 unvested shares. Upon cancellation of the portion
of the note for the 130,559 vested shares, the Company recognized compensation
expense of $251,000 for the excess of the stock subscription price over the
initial fair value of the common stock.

     In April and May of 1999, the Company entered into separate note receivable
arrangements with certain officers and directors in connection with the exercise
of stock options. These notes total $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.

11. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

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

12. STOCKHOLDERS' EQUITY

STOCK SPLIT

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

INITIAL PUBLIC OFFERING

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

SHAREHOLDER RIGHTS PLAN

     In November 2000, the Company 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 the Company one
unit consisting of 1/100 of a share of Series A Junior Participating Preferred
Stock for $70 per unit, subject to adjustment. The Rights become exercisable if
a person or group ("Acquiring Person") has acquired, or obtained the right to
acquire, 15% or more of the outstanding shares of common stock. Upon exercise
and

                                       F-15
<PAGE>   52
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

payment of the purchase price for the Rights, the Rights holder (other than an
Acquiring Person) will have the right to receive Company common stock (or, in
certain circumstances, cash, property or other securities of the Company) equal
to two times the exercise price of the Right. The Company is entitled to redeem
the Rights at any time prior to the expiration of the Rights in December 2010.
The Company is entitled to redeem the Rights in whole, but not in part, at a
price of $0.01 per Right, subject to adjustment.

  Convertible preferred stock

     All convertible preferred stock outstanding automatically converted to
10,197,460 shares of common stock upon closing of the Company's initial public
offering on October 6, 1999. As of January 2, 2000 and December 31, 2000, the
Company has authorized 5,000,000 shares of preferred stock and has no preferred
stock outstanding.

13. STOCK OPTION AND STOCK PURCHASE PLANS

     In February 1995, the Company 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 common stock of the Company.
Shares originally reserved under the plan totaled 5,133,332 and were increased
to 6,133,334 in April 1999.

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

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

     Under the 1995 Plan, 1999 Plan and 2000 Plan, incentive stock options are
granted at an exercise price not less than the fair market value of the common
stock on the date of grant. Under the three plans, incentive stock options and
nonqualified stock options for employees generally vest over four years. Such
options expire ten years after the date of grant. Nonqualified stock options for
nonemployees generally vest immediately and expire five years after the date of
grant.

     As of December 31, 2000, 743,094, 93,212 and 1,070,800 options were
available for grant under the 1995 Plan, 1999 Plan and 2000 Plan, respectively,
net of grants, exercises and cancellations.

     In August 1999, the stockholders approved an Employee Stock Purchase Plan
(the "ESPP"). Under the ESPP, 300,000 shares of common stock are 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.

     Upon a decline in the fair value of the Company's common stock, the Board
of Directors authorized on December 14, 1998 the exchange of all outstanding
options under the stock option plan with an exercise price of $3.38 per share or
higher for new stock options. As a result, optionees were given the opportunity
to receive repriced options at $3.08 per share. The repriced options had a new
vesting schedule, under which electing optionees received credit toward the
vesting of their option equal to one-half of the time elapsed under their old
option. Options for 568,137 shares of common stock were repriced and exchanged
for new options issued in December 1998.

                                       F-16
<PAGE>   53
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     The following table summarizes stock option activity for the three fiscal
years in the period ended December 31, 2000:

<TABLE>
<CAPTION>
                                                                          WEIGHTED-    WEIGHTED-
                                                                           AVERAGE      AVERAGE
                                                                          EXERCISE       FAIR
                                                              SHARES        PRICE        VALUE
                                                            ----------    ---------    ---------
<S>                                                         <C>           <C>          <C>
Outstanding at December 29, 1997..........................   2,560,353     $ 1.20
  Granted.................................................   3,426,073     $ 3.79        $1.25
  Exercised...............................................    (860,402)    $ 2.49
  Canceled................................................  (2,261,969)    $ 3.66
                                                            ----------
Outstanding at January 3, 1999............................   2,864,055     $ 2.27
  Granted
     Exercise price equal to the fair value of the stock
       at the date of grant...............................      16,700     $34.50        $1.95
     Exercise price less than the fair value of the stock
       at the date of grant...............................   2,304,158     $ 5.04        $3.41
     Exercise price greater than the fair value of the
       stock at the date of grant.........................     606,242     $10.99        $0.67
  Exercised...............................................  (2,104,999)    $ 2.85
  Canceled................................................    (758,449)    $ 2.87
                                                            ----------
Outstanding at January 2, 2000............................   2,927,707     $ 5.84
  Granted.................................................   2,484,102     $12.46        $9.56
  Exercised...............................................    (411,104)    $ 1.68
  Canceled................................................  (1,562,338)    $ 9.49
                                                            ----------
Outstanding at December 31, 2000..........................   3,438,367     $ 9.47
                                                            ==========
Options exercisable at:
  January 3, 1999.........................................     645,947     $ 1.61
  January 2, 2000.........................................     682,338     $ 2.05
  December 31, 2000.......................................     780,830     $ 3.99
</TABLE>

     Options granted in the years ended January 3, 1999 and December 31, 2000
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 31, 2000:

<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING
                   ----------------------------------------
                                     WEIGHTED-AVERAGE
                                ---------------------------        OPTIONS EXERCISABLE
                                   REMAINING                   ---------------------------
                                  CONTRACTUAL                                 WEIGHTED-
   RANGE OF        NUMBER OF       LIFE (IN        EXERCISE    NUMBER OF       AVERAGE
EXERCISE PRICES     SHARES          YEARS)          PRICE       SHARES      EXERCISE PRICE
---------------    ---------    ---------------    --------    ---------    --------------
<S>                <C>          <C>                <C>         <C>          <C>
$ 0.10 - $ 0.30      162,116         6.32           $ 0.17      162,105         $ 0.17
$ 0.45 - $ 0.98      168,269         6.85           $ 0.89      148,700         $ 0.89
$ 2.50 - $ 3.38      433,922         8.08           $ 3.04      188,487         $ 3.10
$ 4.19 - $ 5.88      565,653         9.29           $ 4.74       67,832         $ 4.68
$ 6.00 - $13.75    1,353,932         9.16           $ 8.68      210,968         $ 8.40
$16.00 - $23.00      725,725         9.18           $21.80          613         $21.00
$26.94 - $36.81       28,750         9.07           $29.70        2,125         $36.29
                   ---------                                    -------
$ 0.10 - $36.81    3,438,367         8.80           $ 9.47      780,830         $ 3.99
                   =========                                    =======
</TABLE>

                                       F-17
<PAGE>   54
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     The Company applies the accounting provisions prescribed in APB 25 and
related interpretations. In certain instances, the Company has issued stock
options with an exercise price less than the fair value of the Company's 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 $4,228,000 and $2,892,000 was recorded in the fiscal years ended
January 2, 2000 and December 31, 2000, respectively. Additionally, during the
fiscal years ended January 3, 1999 and January 2, 2000, the Company recorded
$52,000 and $140,000, respectively of compensation expense related to the
issuance of stock options for services provided by consultants. The value of
these stock options was determined based on their fair value using the
Black-Scholes valuation model. In the year ended December 31, 2000, there were
no stock options issued for services provided by consultants.

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

<TABLE>
<CAPTION>
                                                           JANUARY 3,    JANUARY 2,    DECEMBER 31,
                                                              1999          2000           2000
                                                           ----------    ----------    ------------
<S>                                                        <C>           <C>           <C>
Net loss
  As reported............................................   $(21,233)     $(22,347)      $(23,557)
  Pro forma..............................................   $(21,487)     $(23,523)      $(27,780)
Basic and diluted net loss per share
  As reported............................................   $  (8.77)     $  (2.97)      $  (1.04)
  Pro forma..............................................   $  (8.87)     $  (3.11)      $  (1.22)
</TABLE>

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

<TABLE>
<CAPTION>
                                   FISCAL YEAR ENDED             PERIOD FROM            FISCAL YEAR ENDED
                                   -----------------    -----------------------------   -----------------
                                                         JANUARY 4,       OCTOBER 1,
                                                           1999 TO         1999 TO
                                      JANUARY 3,        SEPTEMBER 30,     JANUARY 2,      DECEMBER 31,
                                         1999               1999             2000             2000
                                   -----------------    -------------    ------------   -----------------
<S>                                <C>                  <C>              <C>            <C>
Expected term....................     5 years             5 years          4 years        4 years
Risk-free interest rate..........  4.22% - 5.64%        4.66% - 5.62%    5.42% - 5.93%     6.11%
Dividend yield...................        0%                  0%               0%             0%
Volatility.......................        0%                  0%              80%            85%
</TABLE>

     The December 14, 1998 option-repricing event is considered a modification
of an existing option. For determination of the pro forma amounts, these
modifications are treated as if new options had been issued and any additional
incremental value recorded in the year of repricing is immediately expensed for
vested options and amortized to expense over the remaining vesting period for
nonvested options.

14. STOCK WARRANTS

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

     In conjunction with the Series B preferred stock offering, the Company
issued warrants to purchase 654,333 shares of Series A preferred stock. The
warrants had an exercise price of $1.25 per share. In conjunction with the
Series E preferred stock offering in October 1996, the Company issued warrants
to purchase 69,261 shares of Series E preferred stock. The warrants have an
exercise price of $5.63 per share and

                                       F-18
<PAGE>   55
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

expire on October 16, 2001. The Company also had outstanding a warrant to
purchase 240,000 shares of Series A preferred stock at an exercise price of
$1.25 per share, which was exercised on October 5, 1999.

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

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

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

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

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

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

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

     Warrants to purchase common stock outstanding as of December 31, 2000 are
summarized below:

<TABLE>
<CAPTION>
NUMBER OF SHARES    EXERCISE PRICE                   EXPIRATION DATE
----------------    --------------                   ---------------
<S>                 <C>               <C>
          56,667        $ 5.25                       October 6, 2004
          46,174        $ 8.45                      October 16, 2001
         150,000        $11.00                     September 30, 2002
          77,660        $15.00             November 25, 2003 to March 31, 2004
        --------
         330,501
        ========
</TABLE>

                                       F-19
<PAGE>   56
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     The following summarizes stock warrant activity:

<TABLE>
<S>                                                           <C>
Outstanding at January 3, 1999..............................   811,367
Warrants issued.............................................   160,993
Warrants canceled...........................................    (8,875)
Warrants exercised..........................................  (601,873)
                                                              --------
Outstanding at January 2, 2000..............................   361,612
Warrants canceled...........................................   (24,312)
Warrants exercised..........................................    (6,799)
                                                              --------
Outstanding at December 31, 2000............................   330,501
                                                              ========
</TABLE>

15. INCOME TAXES

     At December 31, 2000 the Company has net operating loss carryforwards of
approximately $65,995,000, which may be used to offset future taxable income.
These carryforwards expire beginning in 2010 through 2020. 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. The Company believes that, pursuant to Section 382 of the Internal
Revenue Code, there was a change in ownership of the Company in 1995 and that a
substantial portion of the net operating loss carryforwards generated in or
prior to 1995 (approximately $2,700,000) are significantly limited and
potentially unusable. Future changes in the Company's ownership may further
limit the use of such carryforward benefits.

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

<TABLE>
<CAPTION>
                                                              FISCAL YEAR ENDED
                                                  ------------------------------------------
                                                   JANUARY 3,     JANUARY 2,    DECEMBER 31,
                                                      1999           2000           2000
                                                  ------------    ----------    ------------
<S>                                               <C>             <C>           <C>
Tax at statutory rate...........................    $(7,219)       $(7,598)       $(8,009)
Nondeductible items.............................      2,236            243            249
Effect of state taxes...........................       (734)        (1,119)          (707)
Change in tax credits...........................       (990)          (918)           341
Change in valuation allowance...................      6,718          9,646          6,566
Other...........................................        (11)          (254)         1,560
                                                    -------        -------        -------
                                                    $    --        $    --        $    --
                                                    =======        =======        =======
</TABLE>

     The Company's net deferred tax assets consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                              JANUARY 2,    DECEMBER 31,
                                                                 2000           2000
                                                              ----------    ------------
<S>                                                           <C>           <C>
Net operating loss carryforwards............................   $ 20,075       $ 24,418
Goodwill and intangibles....................................      2,397          2,720
Credit carryforwards........................................      2,258          2,599
Accrued warranty costs......................................      1,150          1,257
Amortization of stock-based compensation....................      1,704          2,635
Other accruals..............................................        510            870
Other.......................................................        732            893
                                                               --------       --------
Gross deferred tax assets...................................     28,826         35,392
Less: valuation allowance...................................    (28,826)       (35,392)
                                                               --------       --------
Net deferred tax asset......................................   $     --       $     --
                                                               ========       ========
</TABLE>

                                       F-20
<PAGE>   57
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     The Company has recorded a valuation allowance equal to the net deferred
tax asset balance because the Company's 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.

16. RETIREMENT SAVINGS PLAN

     The Company sponsors a retirement savings plan that qualifies under
Internal Revenue Code Section 401(k). The plan covers all qualified employees.
The plan provides that the Company may make contributions as determined by the
Board of Directors. The Company contributed $398,000 and $447,000 to the plan in
fiscal years ended January 3, 1999 and January 2, 2000, respectively. The
Company did not contribute in the year ended December 31, 2000.

17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following summarizes selected financial information for each of the two
years in the period ended December 31, 2000 (data may not add due to rounding,
in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                        Q1         Q2         Q3         Q4
                                                      -------    -------    -------    -------
<S>                                                   <C>        <C>        <C>        <C>
2000
Total revenue.......................................  $ 7,777    $ 7,781    $ 8,502    $ 9,149
Gross profit........................................    2,222      2,497      3,074      3,684
Net loss............................................   (6,267)    (6,325)    (5,844)    (5,121)
Basic and diluted net loss per share................  $ (0.28)   $ (0.28)   $ (0.25)   $ (0.22)

1999
Total revenue.......................................  $10,522    $11,537    $ 8,903    $ 7,864
Gross profit........................................    2,993      3,393      2,648      1,582
Net loss............................................   (4,039)    (5,808)    (6,527)    (5,964)
Basic and diluted net loss per share................  $ (1.40)   $ (1.42)   $ (1.36)   $ (0.28)
</TABLE>

                                       F-21