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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 JANUARY 2, 2000

                         COMMISSION FILE NO. 333-81347
                            ------------------------

                               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.  [ ]

     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, 2000, as reported on the Nasdaq National Market, was approximately
$515,076,067.

     As of March 1, 2000, the Registrant had outstanding 23,278,316 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 2000 Annual Meeting of Stockholders
to be held on May 24, 2000 which definitive proxy statement shall be filed with
the Securities and Exchange Commission within 120 days after the end of the
fiscal year to which this report relates.
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                               VIXEL CORPORATION

                                   FORM 10-K

                                     INDEX

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                                   PART I
Item 1.   Business....................................................    3
Item 2.   Properties..................................................   16
Item 3.   Legal Proceedings...........................................   16
Item 4.   Submission of Matters to a Vote of Security Holders.........   16

                                  PART II
          Market For Registrant's Common Equity and Related
Item 5.   Stockholder Matters.........................................   17
Item 6.   Selected Financial Data.....................................   18
          Management's Discussion and Analysis of Financial Condition
Item 7.   and Results of Operations...................................   19
Item 7A.  Quantitative and Qualitative Disclosure About Market Risk...   34
Item 8.   Financial Statements and Supplementary Data.................   34
          Changes in and Disagreements with Accountants on Accounting
Item 9.   and Financial Disclosure....................................   34

                                  PART III
Item 10.  Directors and Executive Officers of the Registrant..........   34
Item 11.  Executive Compensation......................................   34
          Security Ownership of Certain Beneficial Owners and
Item 12.  Management..................................................   35
Item 13.  Certain Relationships and Related Transactions..............   35

                                  PART IV
          Exhibits, Financial Statement Schedules and Reports on Form
Item 14.  8-K.........................................................   35
SIGNATURES............................................................   38
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                   SPECIAL NOTE ON FORWARD LOOKING STATEMENTS

     This Annual Report on 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. 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 24 through 34 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 leading provider, based on revenue and units and number of ports
shipped, 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 and our switches and hubs, and other components, which include our
transceivers. 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 that 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

     SIGNIFICANT GROWTH IN ENTERPRISE DATA REQUIREMENTS

     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. Rapid growth of data-intensive applications, such as online transaction
processing, e-commerce, Web hosting, data

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warehousing, data mining, enterprise resource management and the sharing of
multimedia-based information, has dramatically increased the need for
high-capacity, high-performance storage devices and systems. This demand is
compounded when organizations create redundant sources of data to enable
continuous error-free access 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 February 2000, estimated that the worldwide volume of stored
data should grow from approximately 150,000 terabytes in 1999 to approximately
1.7 million terabytes in 2003, representing a compound annual growth rate of
82%.

     The need to support ever-increasing storage requirements presents
enterprises with a number of significant challenges. As employees, customers and
suppliers depend increasingly on data for fundamental business processes,
storage systems and servers must handle greater volumes of input and output
transactions, or I/Os. Additionally, many of the mission-critical applications
utilized in the enterprise today require rapid access to massive amounts of
data. These requirements have placed significant stress on current storage
technology and software applications, many of which were not designed to handle
large volumes of dispersed data. Also, as the number of storage devices
increases, management of data becomes more complex. Organizations have attempted
to address these storage challenges by devoting additional financial and
personnel resources.

     TRADITIONAL SERVER-TO-STORAGE CONNECTION SOLUTIONS ARE INADEQUATE AND
EXPENSIVE

     Enterprises traditionally have attempted to support and manage storage
requirements by linking single servers to dedicated storage devices through
storage interfaces such as the small computer system interface, or SCSI, a
technology that facilitates this captive connection. However, the most commonly-
used SCSI-based storage architecture has significant constraints: it can connect
a single server with only 15 devices; it supports transmission distances of only
25 meters; and it typically permits data transmission speeds of only 40 or 80
megabytes per second, or MBps. Furthermore, SCSI-based storage devices are
dependent on the servers to which they are attached, creating captive pockets of
storage behind each server. This architecture increases the stress on the server
through which all data must pass and results in loss of access to data if the
server goes down. Some enterprises have responded to the limitations of SCSI by
deploying more servers and more storage devices, but this response increases the
complexity and cost of maintaining such storage systems.

     DEVELOPMENT OF FIBRE CHANNEL TECHNOLOGY AND STORAGE AREA NETWORKS

     To address the limitations of traditional server-to-storage connections, a
family of Fibre Channel standards was developed in the early 1990s to facilitate
high-performance storage connectivity solutions. Fibre Channel technology
enables data to be transferred from one network device to another, allowing any
server to access any storage device on the network. The technology combines the
connectivity and distance features of networking with the simplicity and
reliability benefits of the channel, or the dedicated circuit that carries
information to and from data storage devices. Merging network and channel
technologies, Fibre Channel can carry storage as well as network traffic over
the same physical connection. Furthermore, Fibre Channel is capable of
supporting up to 15.5 million devices and transferring data across distances of
10 kilometers at speeds of 200 MBps. Fibre Channel also supports multiple
protocols, including SCSI and Internet Protocol, or IP.

     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. In a SAN, one or more storage devices are attached through
connection points, known as ports, to an interconnecting device, commonly
referred to as an interconnect. These interconnect devices include switches,
hubs and transceivers. Typical Fibre Channel SAN configurations include
point-to-point connections between two devices, an arbitrated loop for up to 126
devices or a switched network, or fabric, which can enable the connection of
millions of devices.

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     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. By bringing networking capabilities into the
storage environment, a SAN offers storage flexibility, fault tolerance, ease of
management and a lower cost of ownership. IDC, in a report that was 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%.

     NEED FOR A COMPREHENSIVE SAN SOLUTION

     Fibre Channel standards have been in place for over five years and the
technology has been adopted by a broad customer base. However, the deployment of
Fibre Channel-based SANs is still at an early stage. In order to meet exploding
data requirements, enterprises typically have turned to multiple Fibre Channel
vendors with point, or single, products. Furthermore, enterprises commonly have
installed multiple SAN configurations provided by different solutions providers
in different areas of their network. These mixed solutions and point products
typically are managed by multiple, disparate software applications.

     These partial solutions offer some but not all of the benefits associated
with Fibre Channel. They are often difficult to deploy and manage as a complete
system and may not interoperate with other Fibre Channel devices. Also, the
additional time needed to test and qualify these fragmented solutions results in
delayed implementation. Furthermore, it may be difficult to integrate these
systems with other enterprise management software and applications. As a result,
enterprises that implement fragmented solutions may not be able to realize the
full benefits of SANs. To handle increased data and performance requirements as
well as growing network complexity, organizations are seeking comprehensive,
integrated SAN management solutions that address a wide variety of data and
storage needs. SAN solutions must accommodate a range of interconnect products
that can interoperate with other products, be deployed easily and scale as the
SAN grows, be managed under one management software solution and be robust
enough to support mission-critical networks.

OUR FIBRE CHANNEL SAN SOLUTION

     We are a leading provider of 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 comprehensive SAN interconnect solutions address the difficulties
customers may encounter when they assemble SAN components from multiple
suppliers. Further, we offer customers the convenience of dealing with a single
full-service vendor, allowing them to avoid the time-consuming and costly
process of qualifying and certifying multiple SAN interconnect vendors.

     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

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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 ASICs that drive the performance
capabilities of our products, we are able to rapidly develop solutions that meet
varying data storage requirements.

     Our software provides comprehensive SAN management. Our SAN InSite 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.
Our SAN InSite software provides comprehensive status, control and diagnostics
for fabric switches, arbitrated loop hubs and transceivers 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, 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 increase 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 leading 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. We plan to leverage our existing customer base and
spectrum of hardware and software products to move beyond single product sales
and aggressively offer and market complete SAN interconnect solutions. With the
adoption of our full portfolio of products, a customer realizes the increased
performance and cost benefits of our interoperable, integrated SAN solution.

     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, transceivers and the software
that
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manages SAN interconnects. As a comprehensive SAN interconnect solutions
provider, we have accumulated extensive Fibre Channel expertise in all SAN
configurations, including point-to-point, arbitrated loop and fabric.
Furthermore, we have taken an active leadership role in Fibre Channel standards
boards that drive the development of Fibre Channel standards. 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. To date we have
established strategic relationships with leading storage solutions providers,
including EMC, Legato and Veritas, to enhance multi-vendor interoperability.
Also, we have recently established strategic relationships with Network
Appliance, Legato, Quantum ATL, SpectraLogic and Veritas to offer an integrated
SAN back-up solution to Network Appliance's network attached storage, or NAS,
customers. We plan to leverage existing and establish new strategic
relationships to promote Fibre Channel solutions and interoperability, and to
enhance the functionality of our products. We will also continue to seek
opportunities to participate in joint technology development with key strategic
partners in order to offer our customers robust, interoperable solutions. We
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.

     Expand our distribution channels. We plan to extend our comprehensive
portfolio of product offerings to existing OEMs as well as sell to new OEMs. We
have relationships with several OEMs, including Amdahl, Avid Sports, Avid
Technology, Bull, Compaq, Hewlett-Packard, IBM, Interphase, 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. We intend to
establish relationships with, and increase sales to, resellers in order to
increase our market presence. We also are actively working to expand our breadth
of internationally-based resellers, particularly those in Europe and Asia.

     Promote the Vixel brand. We plan to continue building awareness of the
Vixel brand in order to position ourselves as the leading provider of
high-performance, cost-effective SAN interconnect solutions. We believe an
established brand will become increasingly important as our distribution
channels expand to include resellers. To promote our brand, we plan to increase
our investments in a range of marketing programs, including trade show
participation, advertising in print publications, direct marketing, public
relations and web-based marketing.

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

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fabric switches and managed arbitrated loop hubs. Furthermore, 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.

     SAN INSITE INTERCONNECT MANAGEMENT SOFTWARE

     Our SAN InSite interconnect management software provides comprehensive
management functionality across our Fibre Channel switches, managed hubs and
transceivers. SAN InSite provides status and control of the devices that
transport data in a SAN interconnect, and it includes management tools that
proactively detect, isolate and recover from storage networking and data access
problems. We believe our SAN InSite solution is the only management application
in the industry that provides proactive management of fabric switches,
arbitrated loop hubs and transceivers from a single management workstation. The
first version of our interconnect management software was available to customers
in early 1998. Our current version, SAN InSite, is installed in mission-critical
accounts which require a high level of visibility and control over the storage
area network. Key features of our SAN InSite interconnect management software
solution include the following:

     - Single system view. Utilizing a simple graphical user interface and a
       single computer screen, SAN InSite offers a complete view of all managed
       devices in one or more SAN clusters.

     - Built-in fault management. Leveraging the unique architecture and
       embedded software of our switches and managed hubs, SAN InSite is able to
       recognize when a port is bypassed due to a malfunctioning storage or
       server device. When these problems occur, SAN InSite either reports that
       the problem has been automatically corrected or notifies the
       administrator of the need to take corrective action.

     - Monitoring and reporting. SAN InSite automatically monitors the status of
       each SAN interconnect device and keeps track of its activity in an
       electronic record. With a suite of color-coded icons and legends
       displayed on a single computer screen, users can easily monitor and
       quickly identify any changes to the SAN environment. SAN InSite also
       provides special traffic performance monitoring for our Vixel 8100 and
       Vixel 7000 series switches. This feature facilitates capacity planning
       and is displayed through on-screen traffic meters.

     - 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 product set
       and gives customers cost-effective, flexible options for configuring a
       variety of SAN applications.

     - Integrated with other leading functional storage software. We actively
       partner with storage management software vendors in order to facilitate
       the integration of SAN InSite's powerful tools into other enterprise
       management applications. For example, SAN InSite can be launched by
       Veritas' Storage Manager and Hewlett-Packard's HP OpenView, and our
       switches and managed hubs can be configured to send notifications to
       other management platforms.

     We currently include our SAN InSite software with our switches and managed
hubs. We do not sell this software separately from our other products at this
time, although we may do so in the future.

     VIXEL 4000, VIXEL 8100, AND VIXEL 7000 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. We began commercial shipment of our first switch
product, the Vixel 4000, in February 1998. The eight port Vixel 4000 offered
distinct advantages over other switches available at that time, including
support for non-fabric arbitrated loop devices. Our next generation eight port
Vixel 8100 Fibre Channel fabric switch was made commercially available in June
1999, and extended our technology leadership in the switch arena. Enhancements
to our
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Vixel 8100, with its patent-pending 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. The patent-pending capability of our Vixel
       8100 and Vixel 7000 series switches enables these non-fabric arbitrated
       loop devices to benefit from attachment to a fabric SAN.

     - 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 arbitrated loop mode
       and 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.

     - 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. The
sixteen port Vixel 7200 offers the highest port concentration of any Fiber
Channel switch available and fully leverages the space in data center equipment
racks. These switches are 1U (1.75 inches) high, which is approximately half the
height of most switches.

    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. Our managed hubs were available in
November 1997, and our Vixel 2100 Zoning Managed Hubs were available in
September 1999. Vixel managed hubs are designed to enhance customer uptime by
proactively responding to conditions that otherwise would disrupt system
availability. 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.

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     - 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. Our hubs also support time-stamped event logging, a useful
       tool for monitoring SAN status during unattended operation.

     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 sophisticated ASIC incorporated into the Vixel 2100 provides 8
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. By enhancing functionality and reducing costs for
entry-level products, we are well positioned to address a broad segment of the
SAN interconnect market. Introduced in October 1996, our Vixel 1000 has been
tested and proven in a wide range of demanding, mission-critical networks and
continues to be a popular choice for cost-conscious, entry-level SAN
installations. 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, technology specifically designed for
high-speed data transport among disk controllers, arbitrated loop hubs and
fabric switches. We have been shipping gigabit GLMs since September 1996 and
today supply full-speed GLMs for use in host bus adapters and disk controllers.

     As one of the original authors of the GBIC Specification, we have played a
strategic role in enabling modular, high-speed transceivers for Fibre Channel
environments. We have been shipping GBICs to customers since September 1996. Our
GBICs support Serial ID, allowing host enclosures to solicit asset information,
including manufacturer, date of manufacture, serial number and batch number
directly from the GBIC. With our integrated product portfolio, this GBIC Serial
ID information can be read by our managed hubs and fabric switches and reported
to the user via SAN InSite. This feature allows a network

                                       10
<PAGE>   11

administrator to track inventory information from a single management platform,
regardless of where the GBIC is installed in a switch or managed hub.

OUR TECHNOLOGY

     We believe that our Fibre Channel expertise across a wide range of Fibre
Channel products and SAN configurations has enabled us to develop and ship in
volume leading 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, we
believe, 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 several
patents pending covering our switch architecture.

     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. Our products also are
extensively tested with other vendors' products to ensure cross-vendor
interoperability. In January 1998, we launched our V2 Lab to facilitate robust
interoperability testing and analysis of our products within a multi-vendor
system environment. We believe that our investment of personnel and capital
equipment in this facility has enhanced interoperability and time to market for
our OEMs and resellers. We also use this lab to certify specific SAN
configurations and reduce the need for our distribution partners to undergo
costly and timely testing processes.

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 1999, our top two OEMs were Compaq Computer and Sun Microsystems who
represented 29.9% and 24.5% of revenue, respectively. Other OEMs included
Amdahl, Avid Sports, Avid Technologies, Hewlett-Packard, IBM and Interphase.
However, none of these customers represented more than 10.0% of our total
revenue during the year. Our primary resellers are Bell Microproducts, Ingram
Micro, Nissho Electronics and Tech Data Product Management. In fiscal 1999,
total revenue derived from distribution channel customers represented 6.6% of
total revenue.

     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.

                                       11
<PAGE>   12

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 24 hours a
day, seven days a week telephone support and immediate parts replacement that
enables continuous customer response and rapid replacement of products at
end-user locations. We recently entered into an agreement with Polaris Services,
Inc. whereby they will provide first line telephone support, allowing us to
provide increased customer service resources and leverage our service and
support engineers' time and expertise. 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 October 1998, we launched our Vixel Care Services program to further
enhance the support we provide to our OEMs and resellers. This program includes
comprehensive education and training for our products and Fibre Channel SANs,
telephone support, customized remote support contracts and onsite installation
consulting services. We also have an initiative with our OEMs and resellers to
extend train-the-trainer techniques so they may quickly develop their own
service organizations to support SAN installations that include our products and
SAN InSite management software. We intend to continue providing a high level of
education and service to further support and optimize SANs deployed at end-user
sites.

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 Premier Value Added Reseller 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, Bull, Hammer plc,
RAIDTec, and Siemens. We currently distribute our products in Japan through our
relationship with Nissho Electronics Corporation. We distribute our products in
Asia and Australia through our relationships with ACA Pacific Ltd., Chang Myung
Information Systems, Ipex Group, Modern Tech C&P Ltd., Royton Technologies Ltd.,
Scan Technology and Solkenix International Corporation.

     Our marketing efforts are focused on increasing awareness of our Fibre
Channel products and our Vixel brand, promoting SAN-based solutions in general,
and advocating industry-wide standards and interoperability. Key components of
our marketing efforts include:

     - extending our strategic alliances with other Fibre Channel, SAN storage
       management and enterprise vendors to promote standardization and enhance
       interoperability;

                                       12
<PAGE>   13

     - promoting our SAN solutions under the Vixel brand name to strengthen
       sales through distribution and VAR channels;

     - continuing our active participation in industry associations and
       standards committees to promote and further enhance Fibre Channel
       technology and increase our visibility as industry experts;

     - leveraging major trade show events and SAN conferences to promote our
       comprehensive solution and to continue our leading role in educating
       customers on the value of SANs;

     - expanding our web-based marketing program to provide both product and
       sales information; and

     - in cooperation with other vendors, certifying and packaging complete SAN
       solutions with proven interoperability between SAN interconnects, devices
       and applications.

MANUFACTURING

     We outsource our manufacturing, which reduces our need to make costly
investments in capital equipment and manufacturing facilities. K*TEC
Electronics, a division of Kent Electronics, currently manufactures all our
products. In September 1999, we completed the transition of our GLM transceiver
manufacturing to K*TEC from Solectron. 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 our 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 VLSI. Motorola and Intel are currently our
sole suppliers for microprocessors. Honeywell is our sole supplier of the VCSEL
and NSG is the sole supplier of the IDP used in our transceivers. In addition,
we license software for our hubs from Wind River Systems. 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, and monitoring of supplier performance
and quality.

RESEARCH AND DEVELOPMENT

     We focus our research and development efforts on developing products that
meet the evolving needs of the SAN market. We are developing our SAN
interconnect management software to provide higher levels of management
capabilities for our products and others, including the ability of SAN InSite to
manage other vendors' devices. We also are developing interfaces that interact
with leading systems management software in order to more effectively manage
data transport and data storage throughout the enterprise. Our switch and hub
development efforts are focused on enhancing functionality through the
development of higher-level ASICs, increasing the number of ports and
transmission speed capabilities, and enhancing interoperability with other
vendors' devices. In addition to the development of our core technologies, we
plan to continue to partner with other leading providers of SAN technologies,
products and services to jointly develop high performance SAN products and
support industry standards.

     Our research and development expenses were $12.8 million in fiscal 1999. 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.

                                       13
<PAGE>   14

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 Ancor, Brocade and McDATA. For hub
sales, we compete primarily with Emulex and Gadzoox. For transceiver sales, we
compete primarily with Cielo, Finisar, Hewlett-Packard and IBM. Although we do
not believe that any other vendor offers comprehensive SAN interconnect
management software that directly competes with ours, other vendors, such as
Brocade and Gadzoox, provide single point-device managers for either hub or
fabric switch products, but not across multiple devices, including fabric
switches, hubs and transceivers. 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
are the following:

     - product performance and features;

     - product reliability and interoperability;

     - the size of installed customer base;

     - price;

     - strength of distribution channel;

     - ability to meet delivery schedules; and

     - customer service and technical support.

     We believe we compete favorably with our competitors based on these
factors. However, because many of our existing and potential competitors have
longer operating histories, greater name recognition, larger customer bases 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

     Our success depends on our proprietary technology. 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.

     We have been awarded one patent with respect to our GBIC transceivers. We
also have four pending patent applications in the United States and 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 patent may not adequately protect our technology from infringement or
prevent others from claiming our technology
                                       14
<PAGE>   15

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 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 January 2, 2000 we had 187 employees, of which 83 were engaged in
research and development, 41 in sales and marketing, 34 in operations and 29 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 January 2, 2000 were as
follows:

<TABLE>
<CAPTION>
        NAME           AGE                            POSITION
        ----           ---                            --------
<S>                    <C>  <C>
James M. McCluney....  48   President, Chief Executive Officer and Chairman of the Board
                            of Directors
Kurtis L. Adams......  45   Chief Financial Officer, Vice President of Finance,
                            Secretary and Treasurer
Stuart B. Berman.....  43   Chief Technology Officer
Robert R. Lux........  55   Vice President of Customer Satisfaction and Corporate
                            Quality
Jay R. O'Donald......  56   Vice President of Operations
Stanley H. Reese.....  59   Vice President of Product Development
Arun K. Taneja.......  52   Vice President of Marketing
Ronald G. von          52   Vice President of Worldwide Sales
  Trapp..............
</TABLE>

     James M. McCluney has served as our president, chief executive officer and
director since April 1999. 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

                                       15
<PAGE>   16

chairman and chief technology officer. From February 1993 to June 1996, Mr.
Berman was a Fibre Channel architect for Emulex Corporation, a networking
company.

     Robert R. Lux has served as our vice president of customer satisfaction and
corporate quality since June 1999. From January 1999 to June 1999, he served as
a sales, marketing and corporate quality consultant to us. From November 1998 to
May 1999, he served as general partner of Lux & Associates, a consulting firm.
In April 1995, Mr. Lux founded Bay Stone Software, a software company, and
through October 1998 served as its chairman, president and chief executive
officer. From January 1994 to March 1995, Mr. Lux served as general partner of
Lux & Associates.

     Jay R. O'Donald has served as our vice president of operations since
February 1998. In July 1996, Mr. O'Donald co-founded Arcxel Technologies, and
through February 1998, he served as its president and chief executive officer
and director. From April 1993 to July 1995, Mr. O'Donald was the vice president
of engineering at Emulex Corporation.

     Stanley H. Reese has served as our vice president of product development
since January 1999. From July 1997 to January 1999, he was the vice president of
research and development at VitalCom Corporation, a medical systems company.
From December 1989 to July 1997, Mr. Reese was the vice president of research
and development at Cubix Corporation, a computer company.

     Arun K. Taneja has served as our vice president of marketing since July
1999. From February 1998 to February 1999, he was senior vice president of
marketing and from February 1999 to July 1999 senior vice president of business
development, for Andataco, a storage solutions provider. From June 1996 to
October 1997, Mr. Taneja was vice president of marketing for Invincible
Technologies Corporation, a storage solutions provider. From July 1994 to
February 1996, Mr. Taneja served as vice president of marketing at Axil
Computer, Inc., a manufacturer of SPARC-based workstations and servers.

     Ronald G. von Trapp has served as our vice president of worldwide sales
since July 1999. From October 1997 to July 1999, he was vice president of
worldwide sales and marketing at Mylex, Inc., a developer of hardware and
software for data management. From January 1997 to October 1997, Mr. von Trapp
served as vice president, Americas at Maxtor Inc., a data storage hardware
company. From June 1989 to June 1996 he served as director of sales at Quantum
Corp., a data storage hardware company.

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. 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 believe these existing facilities
will be adequate to meet our needs for the next 12 months. If our growth
continues, we will need larger facilities after that time. We cannot assure you
that suitable additional facilities will be available as needed on commercially
reasonable terms. We also lease five domestic sales offices in Freemont,
California, Columbia, Maryland, Gloucester, Massachusetts, Nashua, New Hampshire
and Houston, Texas.

ITEM 3. LEGAL PROCEEDINGS

     We are not a party to any material legal proceedings.

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

     None.

                                       16
<PAGE>   17

                                    PART II

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

     Our common stock is quoted on the Nasdaq National Market under the symbol
"VIXL". Public trading of our common stock commenced on October 1, 1999, and our
fiscal third quarter ended October 3, 1999. Prior to October 1, 2000, 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.

<TABLE>
<CAPTION>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
1999
Third Quarter (from October 1, 1999 to October 3, 1999).....  $53.50   $41.00
Fourth Quarter..............................................  $50.25   $17.00
2000
First Quarter (through March 17, 2000)......................  $33.50   $15.00
</TABLE>

     As of March 1, 2000 there were approximately 298 holders of record of our
common stock. We have never declared or paid cash dividends on our capital
stock. We currently intend to retain any future earnings to fund the development
and growth of our business and 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 the fourth
quarter of 1999.

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,
covering an aggregate of 4,945,000 shares of Common Stock, including the
underwriters' over-allotment. A total of 4,945,000 shares of the Company's
common stock was sold at a price of $18.00 per share to an underwriting
syndicate led by BancBoston Robertson Stephens, Inc., Bear, Stearns & Co. Inc.
and Needham & Co., Inc. The Offering commenced on October 1, 1999 and closed on
October 15, 1999. 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 January 2, 2000, the proceeds were applied to repay an 8.69% promissory
note and accrued interest due to Western Digital totaling approximately $2.0
million, a line of credit borrowing totaling $2.8 million and a note payable to
a bank of $7.5 million. In addition, $6.7 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.

                                       17
<PAGE>   18

ITEM 6. SELECTED FINANCIAL DATA

     The following selected financial data should be read in conjunction with
our financial statements and related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and other financial
information appearing elsewhere in this Annual Report on Form 10-K. We derived
the statement of operations data for the fiscal years ended December 28, 1997,
January 3, 1999 and January 2, 2000 and the balance sheet data as of January 3,
1999 and January 2, 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 31, 1995 and December 29, 1996 and the selected balance sheet data set
forth below for us as of December 31, 1995, December 29, 1996 and December 28,
1997 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 31,   DECEMBER 29,   DECEMBER 28,   JANUARY 3,   JANUARY 2,
                                                    1995           1996           1997          1999         2000
                                                ------------   ------------   ------------   ----------   ----------
                                                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                             <C>            <C>            <C>            <C>          <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
  SAN systems.................................    $    --        $    163       $  3,282      $ 13,389     $ 22,937
  Components..................................        399           6,778         19,501        26,056       15,890
                                                  -------        --------       --------      --------     --------
         Total revenue........................        399           6,941         22,783        39,445       38,827
Cost of revenue...............................        521           7,342         19,047        36,199       28,211
                                                  -------        --------       --------      --------     --------
Gross profit (loss)...........................       (122)           (401)         3,736         3,246       10,616
                                                  -------        --------       --------      --------     --------
Operating expenses:
  Research and development....................      1,678           4,474          9,360        11,110       12,788
  Acquired in-process technology..............         --           8,633             --         5,118           --
  Selling, general and administrative.........        967           3,549          7,629        14,521       13,643
  Amortization and writedown of goodwill and
    intangibles...............................         --             167            222         2,057        1,362
  Amortization of deferred compensation.......         38              36             50            --        4,368
                                                  -------        --------       --------      --------     --------
         Total operating expenses.............      2,683          16,859         17,261        32,806       32,161
                                                  -------        --------       --------      --------     --------
Loss from operations..........................     (2,805)        (17,260)       (13,525)      (29,560)     (21,545)
Other (expense) income, net...................       (154)           (392)          (234)        8,327         (802)
                                                  -------        --------       --------      --------     --------
Net loss......................................    $(2,959)       $(17,652)      $(13,759)     $(21,233)    $(22,347)
                                                  =======        ========       ========      ========     ========
Net loss available to common stockholders.....    $(2,959)       $(17,693)      $(13,955)     $(21,424)    $(22,495)
                                                  =======        ========       ========      ========     ========
Basic and diluted net loss per share..........    $(26.47)       $ (56.87)      $ (18.90)     $  (8.77)    $  (2.97)
                                                  =======        ========       ========      ========     ========
Weighted-average shares outstanding...........        112             311            738         2,444        7,572
                                                  =======        ========       ========      ========     ========
Pro forma net loss available to common
  stockholders (unaudited)....................                                                             $(22,347)
                                                                                                           ========
Pro forma basic and diluted net loss per share
  (unaudited).................................                                                             $  (1.30)
                                                                                                           ========
Pro forma weighted-average shares outstanding
  (unaudited).................................                                                               17,174
                                                                                                           ========
</TABLE>

<TABLE>
<CAPTION>
                                                DECEMBER 31,   DECEMBER 29,   DECEMBER 28,   JANUARY 3,   JANUARY 2,
                                                    1995           1996           1997          1999         2000
                                                ------------   ------------   ------------   ----------   ----------
                                                                           (IN THOUSANDS)
<S>                                             <C>            <C>            <C>            <C>          <C>
BALANCE SHEET DATA:
Cash and cash equivalents.....................    $ 7,883        $ 19,883       $  3,776      $  3,841     $ 16,706
Investments...................................         --              --             --         2,490       44,650
Working capital...............................      7,959          18,477          2,352           285       58,820
Total assets..................................     12,318          29,374         19,934        28,165       84,081
Long-term obligations and noncurrent portion
  of capital leases...........................      2,056           6,012          6,057        13,856        4,406
Mandatorily redeemable preferred stock........         --          19,327         19,523        19,993           --
Total stockholders' (deficit) equity..........      8,980         (18,937)       (14,030)      (19,924)      65,695
</TABLE>

                                       18
<PAGE>   19

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
included elsewhere in this Report.

COMPANY OVERVIEW

     We are a leading 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. Our revenue includes SAN
systems revenue as well as component and other revenue. SAN systems revenue
consists of revenue generated from our SAN switches and hubs. Component revenue
consists primarily of revenue generated from the sale of our transceivers.

     We sell our products primarily to a limited number of original equipment
manufacturers. Compaq Computer and Sun Microsystems represented 29.9% and 24.5%
of revenue, respectively for fiscal 1999. During 1998, Sun Microsystems and
Hewlett-Packard represented 54.4% and 12.3% 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 1999 and 1998, 6.6% and 4.6%, 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 by fluctuations
in manufacturing volumes and component costs, manufacturing costs
                                       19
<PAGE>   20

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

     During the period January through September 1999 we outsourced our product
manufacturing to two contract manufacturers, K*TEC Electronics, a division of
Kent Electronics, and Solectron Corporation. The planned transition for moving
all production to K*TEC was successfully completed in September 1999. All
equipment and materials were moved from Solectron to K*TEC or our Bothell
facility. Our strategy with this transition is to reduce indirect costs
associated with supplier management and performance tracking and to use the
efficiencies of K*TEC's consolidated purchasing power and materials management
capabilities to reduce average cost of goods sold. 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 deferred compensation of $9.8 million. Deferred
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, we recognized $4.4 million of the deferred compensation as
compensation expense.

     Since our inception, we have incurred significant losses. As of January 2,
2000, we had operating loss carryforwards of $51.5 million for federal income
tax purposes. These operating loss carryforwards expire on various dates through
2019. 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 January 2, 2000, we had an accumulated deficit of $78.6 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 Technologies 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. This product became our
Vixel 4000 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%
with the fabric switch which was estimated to be 27% compete and approximately
4% 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
                                       20
<PAGE>   21

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.

     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
                                                            ----------------------------------------
                                                            DECEMBER 28,    JANUARY 3,    JANUARY 2,
                                                                1997           1999          2000
                                                            ------------    ----------    ----------
<S>                                                         <C>             <C>           <C>
Revenue:
  SAN systems.............................................       14.4%          33.9%         59.1%
  Components..............................................       85.6           66.1          40.9
                                                               ------         ------        ------
          Total revenue...................................      100.0          100.0         100.0
Cost of revenue...........................................       83.6           91.8          72.7
                                                               ------         ------        ------
Gross profit..............................................       16.4            8.2          27.3
                                                               ------         ------        ------
Operating expenses:
  Research and development................................       41.1           28.1          32.9
  Acquired in-process technology..........................         --           13.0            --
  Selling, general and administrative.....................       33.5           36.8          35.1
  Amortization and writedown of goodwill and
     intangibles..........................................        1.0            5.2           3.5
  Amortization of deferred compensation...................        0.2             --          11.3
                                                               ------         ------        ------
          Total operating expenses........................       75.8           83.1          82.8
                                                               ------         ------        ------
Loss from operations......................................      (59.4)         (74.9)        (55.5)
Other (expense) income, net...............................       (1.0)          21.1          (2.1)
                                                               ------         ------        ------
Net loss..................................................      (60.4)%        (53.8)%       (57.6)%
                                                               ======         ======        ======
</TABLE>

FISCAL YEARS ENDED JANUARY 2, 2000, JANUARY 3, 1999 AND DECEMBER 28, 1997

     Revenue. Total revenue was $38.8 million, $39.4 million and $22.8 million
in fiscal 1999, 1998 and 1997, respectively. Our SAN systems revenue was $22.9
million, $13.4 million and $3.3 million in fiscal 1999, 1998 and 1997,
respectively. The 71% 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 308% increase in SAN systems revenue in fiscal
1998 compared with fiscal 1997 was the result of increased sales of our
entry-level hubs as well as revenue generated by our switch and hub products
that were introduced during fiscal 1998. SAN systems revenue in 1997 consisted
solely of revenue from our entry-level hubs.

     Component and other revenue was $15.9 million, $26.1 million and $19.5
million in fiscal 1999, 1998 and 1997, 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. 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. For a more complete discussion of the
performance problems with our transceivers,

                                       21
<PAGE>   22

see "Factors that may Affect Results of Operations and Financial Condition -- A
component used in our transceivers has experienced an abnormally high failure
rate which has adversely affected and could in the future affect our sales." The
33.6% increase in fiscal 1998 compared with fiscal 1997 was primarily the result
of an increase in sales of our transceiver products.

     Gross profit. Cost of revenue includes the cost to acquire finished
products from third party manufacturers of our products, expenses we incur
related to inventory management, product quality testing and customer order
fulfillment, and provisions for warranty expenses and inventory obsolescence.
Gross profit was $10.6 million, $3.2 million and $3.7 million in fiscal 1999,
1998 and 1997, respectively, representing 27.3%, 8.2% and 16.4% of total
revenue, respectively. The increase in both absolute dollars and percentage of
total revenue in 1999 as compared with 1998 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.
Indications of this problem were first noticed in late fiscal 1998 to early
fiscal 1999. This also resulted in the decrease in gross profit in both absolute
dollars and as a percentage of revenue in fiscal 1998 as compared with fiscal
1997.

     Research and development expenses. Research and development expenses
consist primarily of salaries and related expenses for personnel engaged in the
design, development and sustaining engineering of our products, consulting and
outside service fees, costs for prototype and test units and other expenses
related to the design, development, testing and enhancement of our products.
Research and development expenses were $12.8 million, $11.1 million and $9.4
million in fiscal 1999, 1998 and 1997, respectively. The increase in research
and development expenses in fiscal 1999 compared with fiscal 1998 and the
increase in fiscal 1998 compared with fiscal 1997 were due to increased
development costs relating to our management software, switch and managed hub
products. The increase in fiscal 1998 compared with fiscal 1997 was partially
offset by a reduction in research and development expenses as a result of the
sale of our laser diode fabrication facility and gigabit Ethernet transceiver
product line to Cielo Communications in February 1998. We believe that continued
investment in research and development is an essential element of our strategic
objectives to design quality products while reducing costs. 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
estimation 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 were $13.6 million, $14.5 million
and $7.6 million, respectively, representing 35.1%, 36.8% and 33.5% of total
revenue, 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. In addition to these expenses, the
increase in fiscal 1998 selling, general and administrative expenses as compared
with fiscal 1997 were primarily related to increases in sales, marketing and
administrative personnel to support our revenue growth. We expect selling,
general and administrative expenses to increase in the future, primarily to
support our strategies of expanding our indirect distribution channels and our
international sales and marketing activities.

                                       22
<PAGE>   23

     Amortization and writedown of goodwill and intangibles. Amortization and
writedown of goodwill and intangibles in fiscal 1999, 1998 and 1997 were $1.4
million, $2.1 million and $222,000, respectively, representing 3.5%, 5.2% and
1.0%, 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. In
addition to this writeoff, the increase in fiscal 1998 compared with fiscal 1997
was the result of amortization of goodwill and intangibles resulting from our
acquisition of Arcxel Technologies in February 1998. The amount amortized in
fiscal 1997 is related to goodwill and intangibles resulting from our
acquisition of the Fibre Channel hub and transceiver product lines from Western
Digital in the first quarter of fiscal 1996.

     Amortization of deferred compensation. Amortization of deferred
compensation in fiscal 1999 was $4.4 million as a result of stock options
granted to employees and consultants during the year for which we recorded
deferred compensation of $9.8 million and stock options granted to nonemployees
for services performed. Amortization of deferred compensation in fiscal 1997 was
$50,000, which we recognized as a result of stock option grants to nonemployees.
We incurred no amortization of deferred compensation in fiscal 1998.

     Other (expense) income, net. Other (expense) income, 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
expense, net, was $802,000 in fiscal 1999, other income, net, was $8.3 million
in fiscal 1998 and other expense, net, was $234,000 in fiscal 1997. 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.

LIQUIDITY AND CAPITAL RESOURCES

     Our principal sources of liquidity at January 2, 2000 consisted of $16.7
million in cash and cash equivalents, $44.7 million in short-term investments
and a $2.5 million capital equipment lease line of credit. As of January 2,
2000, we had utilized $1.5 million under the capital equipment lease line.
Borrowings under the capital equipment lease line of credit bear interest at
8.25% per annum, are payable ratably over a 36 month term and are collateralized
by the fixed assets that we lease under the line of credit. This capital lease
line of credit expires on March 31, 2000.

     Since inception, we have financed our operations primarily through the sale
of common stock and preferred stock with aggregate proceeds of approximately
$112.5 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.

     Cash utilized by operating activities was $17.4 million in fiscal 1999,
$9.2 million in fiscal 1998 and $13.6 million in fiscal 1997. The cash utilized
in each of these periods was due to net losses, as well as working capital
required to fund our operations. Cash used in investing activities primarily
consisted of capital expenditures of $582,000, $1.7 million and $1.0 million in
fiscal 1999, 1998 and 1997, respectively.

     The Company's initial public offering of 4.3 million shares of Common Stock
was closed on October 6, 1999 and the Company realized proceeds of $70.6
million, net of underwriting discounts and commissions and issue costs.
Subsequently, the underwriters exercised the over-allotment option of 645,000
shares of Common Stock and the Company realized proceeds of $10.8 million, net
of underwriting discounts and commissions and issue costs upon closing on
October 15, 1999.

     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

                                       23
<PAGE>   24

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.

YEAR 2000 COMPLIANCE

     The impact of the Year 2000 on our technology systems to date has been
insignificant. We have obtained documentation from third party vendors as to
their Year 2000 compliance testing and recommendations. To date, we have not
experienced any significant impact on our operations as a result of Year 2000
issues with our third party vendors. The total cost of our Year 2000 remediation
effort has not been material and is not expected to be material in future
periods.

RECENTLY ISSUED ACCOUNTING STANDARDS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133, which will be effective for the Company for fiscal years and quarters
beginning after June 15, 2000, requires than an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. Management believes that the impact of
SFAS No. 133 would have no material effect on the Company's financial position,
results of operations and cash flows.

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition", which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the impact of
SAB 101 would have no material effect on the financial position or results of
operations of the Company.

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 and expect to incur
losses in the future. As of January 2, 2000, we had an accumulated deficit of
$78.6 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, timing, terms and fluctuations of customer orders, particularly
       large orders from a limited number of OEMs;

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

                                       24
<PAGE>   25

     - 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 manufacturers 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 your expectations or those of public market analysts.

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

     Our GBIC transceivers manufactured prior to March 1999, and our GLM
transceivers manufactured prior to September 1999, incorporate a compact disk,
or CD, laser manufactured by a third party. We have observed, and some customers
have confirmed, that in certain applications our GBIC and GLM transceivers
manufactured prior to March 1998 that incorporate this CD laser have experienced
an abnormally high failure rate. Although we recorded a warranty reserve of $3.6
million in the fourth quarter of fiscal 1998 as a result of these problems,
there is a risk that this reserve will be inadequate to implement a remedy that
is satisfactory to our customers. 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 have reduced their purchases of our transceiver products. In
addition, if we are unable to resolve this matter to our customers'
satisfaction, or if failure rates in transceiver products increase, our
reputation and relationships with current and prospective customers could be
damaged and adversely affect the sales of all of our products.

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 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.
Also, we typically generate a large percentage of our quarterly revenue in the
last month of the quarter.

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. Sun Microsystems and Compaq represented
29.9% and 24.5% of our total revenue, respectively, for year ended January 2,
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 OEMs.

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

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

     - our OEM and reseller agreements are not exclusive and contain no renewal
       obligation; 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
                                       25
<PAGE>   26

product lines. If we were to lose one or more important 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 has begun to develop only recently and is evolving rapidly.
Because this market is new, it is difficult to predict its potential size or
future growth rate. SANs are often implemented in connection with deployment of
new storage systems and servers. Potential end-user customers that have invested
substantial resources in their existing data storage and management systems may
be reluctant or slow to adopt a new approach, such as SANs. 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;

     - 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.

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. We expect that revenue from these products
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, our revenue will decline significantly. Some of these
products have been introduced and shipped in volume only recently. Accordingly,
the demand for and market acceptance of these products are uncertain. Factors
that may affect the market acceptance of our products include the continued
growth of the market for SAN interconnect products, the performance, price and
total cost of ownership of our products, the availability, functionality and
price of competing products and technologies, and the success and development of
our OEMs and resellers. Many of these factors are beyond our control.

WE EXPECT THAT A GROWING PERCENTAGE OF OUR FUTURE REVENUE WILL BE DERIVED FROM
OUR SWITCH AND MANAGED HUB PRODUCTS, AND OUR SUCCESS WILL DEPEND ON WIDESPREAD
ACCEPTANCE OF THESE PRODUCTS.

     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 do not successfully develop, introduce and market new products,
especially our switch and managed hub products, our revenue may decline. In
particular, our future revenue growth will depend on the success of new product
launches of our switch and managed hub products and 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.

                                       26
<PAGE>   27

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 fabric switch sales, we compete primarily with Ancor Communications,
Brocade Communications and McDATA. For hub sales, we compete primarily with
Emulex Corporation and Gadzoox Networks. For transceiver sales, we compete
primarily with Cielo Communications, Finisar, Hewlett-Packard and IBM. Although
we do not believe that any other vendor offers comprehensive SAN interconnect
management software that directly competes with ours, other vendors, such as
Brocade and Gadzoox, provide single point-device managers for either fabric
switch or hub products, but not across multiple interconnect devices, including
fabric switches, hubs and transceivers. 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. Product development delays may cause our revenue to
decrease and the price of our stock to fall. We may not be able to develop,
manufacture and market new products or product enhancements in a timely manner
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;

     - 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.
                                       27
<PAGE>   28

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 manage our reseller relationships or their failure
to sell our products could reduce our revenue.

     In order to support and develop opportunities for our indirect distribution
channels, we plan to expand our field sales and support staff significantly. We
cannot assure you that this expansion will be successfully completed, 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 our distribution channels or manage the expansion of our
field sales and support staff would have a material adverse effect on our
ability to grow and 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, a division of Kent Electronics, an outside
contract manufacturing firm, to manufacture, store and ship our products. In
September 1999 we completed the transition of our transceiver manufacturing to
K*TEC from Solectron. 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.

     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.

                                       28
<PAGE>   29

     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 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 from a third party software 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 delay delivery of our products to our customers. Any of these
occurrences would negatively impact our business and operating results.

A DECREASE IN THE SELLING PRICES OF PRODUCTS WOULD REDUCE OUR REVENUE AND GROSS
MARGINS.

     As the markets for SAN interconnect products mature, it is likely that the
average unit prices of our products will decrease in response to competitive
pricing pressures, increased sales discounts, new product introductions by us or
our competitors or other factors. If our efforts to reduce the cost of our
products through manufacturing efficiencies, design improvements and cost
reductions, as well as through increased sales of higher margin products are not
successful, our revenue and gross margins will decline, significantly harming
our operating results and financial condition which may cause our stock price to
drop.

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

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

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. Our failure to
successfully develop our brand may prevent us from growing our revenue, which
could cause the price of our stock to fall. We intend to increase our spending
on programs, including advertising campaigns and

                                       29
<PAGE>   30

marketing events, to create and maintain brand loyalty among our customers. If
we do not generate a corresponding increase in our revenue as a result of our
branding efforts or otherwise 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.

OUR MANAGEMENT TEAM IS NEW AND MAY NOT BE ABLE TO WORK TOGETHER SUCCESSFULLY
WHICH COULD HARM OUR BUSINESS.

     Our success depends to a significant degree upon the continued joint
contributions of our key management, many of whom we only recently hired. In
April 1999, we hired a new president and chief executive officer, James M.
McCluney and in July 1999, we hired a vice president of worldwide sales, Ronald
G. von Trapp and a vice president of marketing, Arun K. Taneja. Other members of
our management team also joined us only recently. Because of the limited time in
which our management team has been working together, we cannot assure you that
management will be able to work effectively as a team.

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

     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. In particular, we will need to increase the
number of technical staff members with experience in high-speed networking
applications 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.

     We are seeking additional sales and marketing personnel. Competition for
qualified sales and marketing personnel is intense and we might not be able to
hire the kind and number of sales and marketing personnel we are targeting.
Unless we expand our sales and marketing force, we may not be able to increase
our revenue or extend our brand awareness. We also have a small customer service
and support organization and will need to increase our staff to support new OEMs
and resellers and the expanding needs of our existing customers. Hiring customer
service and support personnel is very competitive in our industry due to the
limited number of people available with the necessary technical skills and
understanding of SAN interconnect products.

     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.

                                       30
<PAGE>   31

WE HAVE EXPERIENCED A PERIOD OF RAPID GROWTH, AND IF WE ARE NOT ABLE TO
SUCCESSFULLY MANAGE THIS AND FUTURE GROWTH, OUR BUSINESS MAY SUFFER.

     We have experienced a period of rapid growth, which has placed and
continues to place a significant strain on our resources. Unless we manage our
growth effectively, we may make mistakes in operating our business, such as
inaccurate sales forecasting, material planning and financial reporting, which
may result in fluctuations in our operating results and cause the price of our
stock to decline. We plan to continue to expand our operations significantly.
This growth will place a significant demand on our management and operational
resources. In order to manage growth effectively, we must implement and improve
our operational systems, procedures and controls on a timely basis. Our key
personnel have limited experience managing this type of growth. If we cannot
manage growth effectively, our business could suffer.

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. The failure of these providers to support these
industry standards could negatively impact market acceptance of our products.

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

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

     Our revenue from international sales represented 20.7% of our total revenue
for the fiscal year 1999 and 17.9% for fiscal 1998. Prior to 1998, we derived
less than 5% of our total annual revenue from international sales. We plan to
expand our international sales activities significantly, 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;

     - 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 we nor our customers may export those
products without obtaining an export license.
                                       31
<PAGE>   32

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 we or our
customers. The U.S. government may not approve any pending or future export
license requests. In addition, the list of products and countries for which
export approval is required, and the regulatory policies with respect thereto,
could be revised. The sale of our SAN interconnect products could be harmed by
our failure or the failure of our customers to obtain the required government
licenses or by the costs of compliance.

OUR 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. 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. For example, we recently settled claims of patent infringement
related to our transceivers, which require us to make future payments. We
established a reserve for these payments in the fourth quarter of fiscal 1998.
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 the following factors, some of which are beyond our control:

     - actual or anticipated fluctuations in our operating results;

     - losses of our key OEMs;

     - changes in financial estimates by securities analysts;

     - 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 common stock.
                                       32
<PAGE>   33

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

     We expect to 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 PRINCIPAL STOCKHOLDERS EXERCISE SIGNIFICANT CONTROL OVER VIXEL AND MAY TAKE
ACTIONS THAT MAY NOT BE IN THE BEST INTEREST OF OUR OTHER STOCKHOLDERS.

     As of January 2, 2000, our executive officers and directors and their
affiliates beneficially own, in the aggregate, approximately 29.4% of our
outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent someone from acquiring or merging
with us.

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL OF VIXEL AND MAY REDUCE THE MARKET PRICE OF OUR COMMON STOCK.

     Provisions in our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:

     - authorizing the issuance of preferred stock without stockholder approval;

     - providing for a classified board of directors with staggered, three-year
       terms;

     - prohibiting cumulative voting in the election of directors;

     - requiring super-majority voting to effect certain amendments to our
       certificate of incorporation and bylaws;

     - limiting the persons who may call special meetings of stockholders; and

     - prohibiting stockholder actions by written consent.

Other provisions of Delaware law also may discourage, delay or prevent someone
from acquiring or merging with us.

                                       33
<PAGE>   34

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

     We believe that our existing cash balances, credit facilities and the cash
flow we expect to generate from future operations, 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.

SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS
OUR STOCK PRICE.

     Sales of a substantial number of shares in the public market after our
October 1999 initial public offering could negatively affect the market price of
our common stock and could impair our ability to raise capital through the sale
of additional equity securities. For a full discussion of the number of shares
subject to restrictions on trading and lock-up agreements see our Registration
Statement on Form S-1, as amended, filed with the Securities and Exchange
Commission, SEC File No. 333-81347.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Substantially all of our cash equivalents and investment securities are at
fixed interest rates and, as such, the fair value of these instruments is
affected by changes in market interest rates. However, all of our cash
equivalents and investment securities at January 2, 2000 mature within one year.
As a result, we believe that the market risk arising from our holdings of these
financial instruments is immaterial. In addition, all of our sales are made in
U.S. dollars and, consequently, we believe our foreign currency exchange rate
risk is immaterial. We do not have any derivative instruments and do not engage
in hedging-transactions.

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 concerning the Company's directors and nominees is
incorporated by reference to the Company's 2000 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

     Incorporated by reference to the Company's 2000 Proxy Statement under the
section titled "Executive Compensation."

                                       34
<PAGE>   35

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Incorporated by reference to the Company's 2000 Proxy Statement under the
sections titled "Record Date and Voting Securities" and "Security Ownership."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Incorporated by reference to the Company's 2000 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 Stockholders' (Deficit) Equity......  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
January 28, 2000 appearing in this Report on Form 10-K also included an audit of
the financial statement schedules listed in item 14(a)(2) of this Form 10-K. In
our opinion, these financial statement schedules present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.

PricewaterhouseCoopers LLP
Seattle, Washington
January 28, 2000

                                       35
<PAGE>   36

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

     For the Years Ended December 28, 1997, January 3, 1999 and January 2, 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 December 28, 1997........................    $   --       $   36       $    --        $   36
Year ended January 3, 1999..........................        36          400          (205)          231
Year ended January 2, 2000..........................       231          171          (152)          250
ALLOWANCE FOR WARRANTIES
Year ended December 28, 1997........................       100          298          (104)          294
Year ended January 3, 1999..........................       294        4,333          (237)        4,390
Year ended January 2, 2000..........................     4,390        3,252        (4,693)        2,949
ALLOWANCE FOR INVENTORY OBSOLESCENCE
Year ended December 28, 1997........................        --          414            --           414
Year ended January 3, 1999..........................       414          214          (145)          483
Year ended January 2, 2000..........................       483          139           (57)          565
</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
    -------                             -----------
    <S>         <C>
     3.1(1)     Amended and Restated Certificate of Incorporation of
                Registrant (Exhibit 3.2)
     3.2(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
    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)     Secured Promissory Note between Registrant and Western
                Digital Corporation dated March 29, 1996, as amended March
                30, 1999
    10.4(1)     Master Lease Agreement between Registrant and Transamerica
                Business Credit Corporation dated May 23, 1997
    10.5(1)     Master Lease Agreement between Registrant and Comdisco, Inc.
                dated January 18, 1996, together with addendum dated January
                18, 1996
    10.6(1)     Term Loan and Security Agreement with Greyrock Capital, a
                division of Nations Credit Corporation, with Registrant
                dated November 26, 1997, as amended October 2, 1998
    10.7(1)     Turnkey Manufacturing Agreement with K*TEC Electronics, a
                division of Kent Electronics Company, dated May 5, 1997
    10.8(1)     Employment Agreement between Registrant and Jay R. O'Donald
                dated February 17, 1998
    10.9(1)     Employment Agreement between Registrant and Stuart B. Berman
                dated February 17, 1998
    10.10(1)    Employment Agreement between Registrant and Gregory R.
                Olbright dated November 30, 1998
</TABLE>

                                       36
<PAGE>   37

<TABLE>
<CAPTION>
    EXHIBIT
     NUMBER                             DESCRIPTION
    -------                             -----------
    <S>         <C>
    10.11(1)    Employment Agreement between Registrant and Stanley Reese
                dated December 29, 1998
    10.12(1)    Employment Agreement between Registrant and James McCluney
                dated April 26, 1999
    10.13(1)    Restricted Stock Purchase Agreement between Registrant and
                James M. McCluney dated April 26, 1999
    10.14(1)    Restricted Stock Purchase Agreement between Registrant and
                Gregory R. Olbright dated April 30, 1999
    10.15(1)    Restricted Stock Purchase Agreement between Registrant and
                Kurtis L. Adams dated May 20, 1999
    10.16(1)    Full Recourse Promissory Note between Registrant and Stuart
                B. Berman dated April 16, 1999
    10.17(1)    Form of Full Recourse Promissory Note between Registrant and
                its executive officers
    10.18(1)    Form of Full Recourse Promissory Note between Registrant and
                its directors
    10.19(1)    Lease Agreement between Registrant and Sun Life Assurance
                Company of Canada (U.S.) dated December 5, 1996, as amended
                January 22, 1997
    10.20(1)    Lease Agreement between Arcxel Technologies, Inc. and Aetna
                Life Insurance Company, dated November 1, 1997, assigned to
                Registrant August 24, 1998
    10.21(1)    Amendment to Term Loan and Security Agreement with Greyrock
                Capital, dated June 21, 1999
    10.22(1)    Vixel Corporation 1999 Employee Stock Purchase Plan and
                forms of agreements thereunder
    10.23(1)    Vixel Corporation 1999 Equity Incentive Plan and forms of
                agreements thereunder
    10.24(1)    Form of Stock Pledge Agreement between the Registrant and
                its directors
    10.25(1)    Warrant, dated November 25, 1998, issued to Greyrock Capital
                (Exhibit 4.9)
    10.26(1)    Warrant, dated December 18, 1998, issued to Comdisco, Inc.
                (Exhibit 4.10)
    10.27(1)    Warrant, dated March 30, 1999, issued to Western Digital
                Corp. (Exhibit 4.11)
    10.28(1)    Warrant, dated August 30, 1999, issued to Sun Microsystems,
                Inc. (Exhibit 4.12)
    23.1        Consent of PricewaterhouseCoopers LLP, Independent
                Accountants
    24.1        Power of Attorney. Reference is made to the signature page
    27.1        Financial Data Schedule
</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.

(b) Reports on Form 8-K.

     No reports on Form 8-K were filed in the fourth quarter of 1999.

(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).

                                       37
<PAGE>   38

                                   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 31st day of March, 2000.

                                          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
                      ---------                                     -----                    ----
<C>                                                    <C>                              <S>
                /s/ JAMES M. MCCLUNEY                     Chief Executive Officer,      March 31, 1999
-----------------------------------------------------   President and Chairman of the
                  James M. McCluney                     Board of Directors (Principal
                                                             Executive Officer)

                 /s/ KURTIS L. ADAMS                    Chief Financial Officer, Vice   March 31, 1999
-----------------------------------------------------  President of Finance, Secretary
                   Kurtis L. Adams                        and Treasurer (Principal
                                                          Financial and Accounting
                                                                  Officer)

                  /s/ KEVIN A. FONG                               Director              March 31, 1999
-----------------------------------------------------
                    Kevin A. Fong

               /s/ CHARLES A. HAGGERTY                            Director              March 31, 1999
-----------------------------------------------------
                 Charles A. Haggerty

                /s/ JUAN A. RODRIGUEZ                             Director              March 31, 1999
-----------------------------------------------------
                  Juan A. Rodriguez

                /s/ TIMOTHY M. SPICER                             Director              March 31, 1999
-----------------------------------------------------
                  Timothy M. Spicer

                /s/ WERNER F. WOLFEN                              Director              March 31, 1999
-----------------------------------------------------
                  Werner F. Wolfen
</TABLE>

                                       38
<PAGE>   39

                       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 stockholders' (deficit) equity and of cash flows present
fairly, in all material respects, the financial position of Vixel Corporation at
January 3, 1999 and January 2, 2000, and the results of its operations and its
cash flows for each of the three years in the period ended January 2, 2000, in
conformity with accounting principles generally accepted in the United States.
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 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 the opinion expressed above.

PricewaterhouseCoopers LLP
Seattle, Washington
January 28, 2000

                                       F-1
<PAGE>   40

                               VIXEL CORPORATION
                                 BALANCE SHEET
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                              JANUARY 3,    JANUARY 2,
                                                                 1999          2000
                                                              ----------    ----------
<S>                                                           <C>           <C>
Current assets
  Cash and cash equivalents.................................   $  3,841      $ 16,706
     Investments............................................      2,490        44,650
     Accounts receivable, net of allowance for doubtful
      accounts of $231 and $250, respectively...............      4,781         5,344
     Inventory..............................................      1,546         3,321
     Prepaid expenses and other current assets..............      1,867         2,779
                                                               --------      --------
          Total current assets..............................     14,525        72,800
     Property and equipment, net............................      7,378         6,915
     Goodwill and intangibles, net..........................      5,579         3,838
     Other assets...........................................        683           528
                                                               --------      --------
          Total assets......................................   $ 28,165      $ 84,081
                                                               ========      ========
                   LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
                  PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
  Current liabilities
     Current portion of long-term debt and capital leases...   $  1,564      $  2,894
     Accounts payable.......................................      4,821         4,480
     Accrued liabilities....................................      7,855         6,606
                                                               --------      --------
          Total current liabilities.........................     14,240        13,980
  Long-term debt and capital leases.........................     12,856         3,406
  Other long-term liabilities...............................      1,000         1,000
                                                               --------      --------
          Total liabilities.................................     28,096        18,386
                                                               --------      --------
  Commitments and contingencies (Note 9)
  Mandatorily redeemable convertible preferred stock Series
     E; $.001 par value; 5,000,000 shares authorized;
     4,529,221 and no shares issued and outstanding,
     respectively; redemption and liquidation value of
     $20,382, plus unpaid dividends as of January 3, 1999...     19,993            --
                                                               --------      --------
  Stockholders' (deficit) equity
     Convertible preferred stock............................         14            --
     Common stock, $.0015 par value; 60,000,000 shares
      authorized; 2,898,379 and 23,213,588 shares issued and
      outstanding, respectively.............................          5            35
     Additional paid-in capital.............................     36,349       155,070
     Deferred compensation..................................         --        (5,525)
     Notes receivable from stockholders.....................         --        (5,246)
     Treasury stock, at cost; 66,666 shares.................        (50)          (50)
     Accumulated deficit....................................    (56,242)      (78,589)
                                                               --------      --------
          Total stockholders' (deficit) equity..............    (19,924)       65,695
                                                               --------      --------
          Total liabilities, mandatorily redeemable
            convertible preferred stock and stockholders'
            (deficit) equity................................   $ 28,165      $ 84,081
                                                               ========      ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-2
<PAGE>   41

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

<TABLE>
<CAPTION>
                                                                   FISCAL YEAR ENDED
                                                        ----------------------------------------
                                                        DECEMBER 28,   JANUARY 3,    JANUARY 2,
                                                            1997          1999          2000
                                                        ------------   -----------   -----------
<S>                                                     <C>            <C>           <C>
Revenue
  SAN systems.........................................    $  3,282     $    13,389   $    22,937
  Components and other................................      19,501          26,056        15,890
                                                          --------     -----------   -----------
          Total revenue...............................      22,783          39,445        38,827
Cost of revenue.......................................      19,047          36,199        28,211
                                                          --------     -----------   -----------
Gross profit..........................................       3,736           3,246        10,616
                                                          --------     -----------   -----------
Operating expenses
  Research and development............................       9,360          11,110        12,788
  Acquired in-process technology......................          --           5,118            --
  Selling, general and administrative.................       7,629          14,521        13,643
  Amortization and writedown of goodwill and
     intangibles......................................         222           2,057         1,362
  Amortization of deferred compensation...............          50              --         4,368
                                                          --------     -----------   -----------
          Total operating expenses....................      17,261          32,806        32,161
                                                          --------     -----------   -----------
Loss from operations..................................     (13,525)        (29,560)      (21,545)
Interest expense......................................        (920)         (1,256)       (2,039)
Interest income.......................................         620             414         1,267
Gain on sale of division..............................          --           9,061            --
Other income (loss), net..............................          66             108           (30)
                                                          --------     -----------   -----------
Net loss..............................................    $(13,759)    $   (21,233)  $   (22,347)
                                                          ========     ===========   ===========
Net loss applicable to common stockholders............    $(13,955)    $   (21,424)  $   (22,495)
                                                          ========     ===========   ===========
Basic and diluted net loss per share..................    $ (18.90)    $     (8.77)  $     (2.97)
                                                          ========     ===========   ===========
Weighted-average shares outstanding...................     738,318       2,443,769     7,572,389
                                                          ========     ===========   ===========
Pro forma net loss applicable to common stockholders
  (unaudited).........................................                               $   (22,347)
                                                                                     ===========
Pro forma basic and diluted net loss per share
  (unaudited).........................................                               $     (1.30)
                                                                                     ===========
Pro forma weighted-average shares outstanding
  (unaudited).........................................                                17,174,255
                                                                                     ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-3
<PAGE>   42

                               VIXEL CORPORATION

             STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>

                                                 CONVERTIBLE
                                               PREFERRED STOCK        COMMON STOCK       ADDITIONAL   TREASURY STOCK    DEFERRED
                                             -------------------   -------------------    PAID-IN     ---------------   COMPEN-
                                               SHARES     AMOUNT     SHARES     AMOUNT    CAPITAL     SHARES   AMOUNT    SATION
                                             ----------   ------   ----------   ------   ----------   ------   ------   --------
<S>                                          <C>          <C>      <C>          <C>      <C>          <C>      <C>      <C>
Balance, December 29, 1996.................  12,706,474    $12        377,352    $ 1      $ 21,036    66,666    $(50)   $   (50)
Stock options exercised....................                           634,100      1           136
Stock options granted to third parties.....                                                     39
Amortization of deferred compensation......                                                                                  50
Accretion of mandatorily redeemable
 convertible preferred stock...............                                                   (196)
Net loss...................................
                                             ----------    ---     ----------    ---      --------    ------    ----    -------
Balance, December 28, 1997.................  12,706,474     12      1,011,452      2        21,015    66,666     (50)        --
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    66,666     (50)        --
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
Deferred compensation......................                                                  9,753                       (9,753)
Amortization of deferred 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    66,666    $(50)   $(5,525)
                                             ==========    ===     ==========    ===      ========    ======    ====    =======

<CAPTION>
                                               NOTES                      TOTAL
                                             RECEIVABLE                  STOCK-
                                                FROM                    HOLDERS'
                                               STOCK-     ACCUMULATED   (DEFICIT)
                                              HOLDERS       DEFICIT      EQUITY
                                             ----------   -----------   ---------
<S>                                          <C>          <C>           <C>
Balance, December 29, 1996.................   $    --      $(21,250)    $   (301)
Stock options exercised....................                                  137
Stock options granted to third parties.....                                   39
Amortization of deferred compensation......                                   50
Accretion of mandatorily redeemable
 convertible preferred stock...............                                 (196)
Net loss...................................                 (13,759)     (13,759)
                                              -------      --------     --------
Balance, December 28, 1997.................        --       (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...................        --       (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.........    (5,246)                         2
Deferred compensation......................                                   --
Amortization of deferred 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...................   $(5,246)     $(78,589)    $ 65,695
                                              =======      ========     ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       F-4
<PAGE>   43

                               VIXEL CORPORATION

                            STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        FISCAL YEAR ENDED
                                                              --------------------------------------
                                                              DECEMBER 28,   JANUARY 3,   JANUARY 2,
                                                                  1997          1999         2000
                                                              ------------   ----------   ----------
<S>                                                           <C>            <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss..................................................    $(13,759)     $(21,233)    $(22,347)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation...........................................       1,962         2,334        2,473
     Acquired in-process technology.........................          --         5,118           --
     Amortization of goodwill and intangibles...............         449         3,061        1,741
     Writedown of impaired assets...........................          --         1,564           --
     Amortization of debt discount..........................          77           192          172
     Stock-based compensation...............................          89           303        4,369
     Loss (gain) on disposal of property and equipment......        (264)           --           42
     Gain on sale of division...............................          --        (9,061)          --
     Changes in:
       Accounts receivable, net.............................      (3,069)         (857)        (563)
       Inventory............................................        (470)         (667)      (1,775)
       Prepaid expenses and other assets....................        (752)          (82)        (748)
       Accounts payable and accrued liabilities.............       2,156        10,100         (762)
                                                                --------      --------     --------
          Net cash used in operating activities.............     (13,581)       (9,228)     (17,398)
                                                                --------      --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of short term investments........................          --        (2,490)     (44,650)
  Maturities of short term investments......................          --            --        2,490
  Purchase of property and equipment........................      (1,022)       (1,663)        (582)
  Proceeds from disposal of property and equipment..........          92            --           --
  Cash paid for acquisition of Arcxel Technologies, Inc.....          --           (16)          --
  Proceeds from sale of division............................          --         6,865           --
                                                                --------      --------     --------
          Net cash (used in) provided by investing
            activities......................................        (930)        2,696      (42,742)
                                                                --------      --------     --------
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...      (1,743)       (1,308)     (10,489)
  Amortization of debt issuance costs.......................          10            27           16
  Proceeds from exercise of stock options...................         137           378          751
  Proceeds from exercise of preferred stock warrants........          --            --          650
  Proceeds from issuance of common stock, net...............          --            --       81,365
                                                                --------      --------     --------
          Net cash (used in) provided by financing
            activities......................................      (1,596)        6,597       73,005
                                                                --------      --------     --------
Net (decrease) increase in cash and cash equivalents........     (16,107)           65       12,865
Cash and cash equivalents, beginning of period..............      19,883         3,776        3,841
                                                                --------      --------     --------
Cash and cash equivalents, end of period....................    $  3,776      $  3,841     $ 16,706
                                                                ========      ========     ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid for interest....................................    $    397      $    922     $  2,039
                                                                ========      ========     ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
  ACTIVITIES
  Equipment purchased under capital leases..................    $  3,513      $  3,187     $  1,470
                                                                ========      ========     ========
  Issuance of detachable stock warrants.....................    $     89      $    279     $    838
                                                                ========      ========     ========
  Issuance of common stock for notes receivable.............    $     --      $     --     $  5,246
                                                                --------      --------     --------
  Accretion of mandatorily redeemable preferred stock.......    $    196      $    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>   44

                               VIXEL CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

     Vixel Corporation (the "Company") is a leading 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 December 28, 1997, January 3, 1999 and
January 2, 2000 were 52, 53 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 future obligation is met by the Company. 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.

     During the fiscal year ended December 28, 1997, revenue from government
funded research and development arrangements was recognized and recorded as an
offset to the related research and development expenses at the time specified
milestones were met. The Company did not perform any government funded research
and development during fiscal 1998 or 1999. The Company performed government
funded research and development of $993,000 during fiscal year 1997.

CONCENTRATION OF MANUFACTURING AND CREDIT RISK AND SALES TO MAJOR CUSTOMERS

     Financial instruments which 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 investment policy which 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 30%
and 25% of revenue, respectively, for fiscal 1999. In fiscal 1998, Sun
Microsystems and Hewlett-Packard represented 54% and 12% of revenue,
respectively. In fiscal 1997, Sun Microsystems, Compaq, Hewlett-Packard and
Nissho represented 50%, 13%, 13%, and 10%, 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.

                                       F-6
<PAGE>   45
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company's financial instruments consist of cash and cash equivalents,
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 3, 1999 and January 2, 2000 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.

INVESTMENTS

     Investments consist of highly rated commercial paper and corporate bonds
which have original maturities between three and six months. These investments
are classified as available-for-sale and are recorded at market value, which
approximates cost. There were no material unrealized gains or losses at January
3, 1999 or January 2, 2000.

INVENTORY

     Inventory is 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 equipment..............................      5 years
Computer equipment and software.............................      3 years
</TABLE>

     The cost of equipment held under capital lease 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 expense and income.

COMPREHENSIVE INCOME

     The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective
January 1, 1998. SFAS No. 130 requires the disclosure of comprehensive income
and its components in a full set of general-purpose financial statements.
Comprehensive income is the change in equity from transactions and other events
and circumstances other than those resulting from investments by owners and
distributions to owners. SFAS No. 130 had no impact on the Company and,
accordingly, a separate statement of comprehensive income has not been
presented.

                                       F-7
<PAGE>   46
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 INTANGIBLES

     Intangibles include goodwill, which represents costs in excess of net
assets of businesses acquired, acquired technology and other intangible assets.
Goodwill and 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 intangibles in the statement of operations.

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
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 an 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.

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.

                                       F-8
<PAGE>   47
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 December 28,
1997, January 3, 1999 and January 2, 2000, warranty expense was $298,000,
$4,333,000 and $3,252,000, respectively.

RESEARCH AND DEVELOPMENT

     Research and development costs are expensed as incurred.

NET LOSS PER SHARE

     Basic net loss per share represents net loss available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period, excluding shares of restricted stock subject to repurchase.
Diluted net loss per share represents 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 9,307,007, 8,748,029, and 4,947,658
shares for the years ended December 28, 1997, January 3, 1999 and January 2,
2000, respectively, were excluded from diluted net loss per share due to their
anti-dilutive effect.

     Pro forma net loss per share is computed using the weighted-average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's convertible preferred stock into shares of the
Company's common stock effective upon the closing of the Company's initial
public offering as if such conversion occurred on the date the shares were
originally issued.

                                       F-9
<PAGE>   48
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

<TABLE>
<CAPTION>
                                                             FISCAL YEAR ENDED
                                                  ----------------------------------------
                                                  DECEMBER 28,   JANUARY 3,    JANUARY 2,
                                                      1997          1999          2000
                                                  ------------   -----------   -----------
<S>                                               <C>            <C>           <C>
Numerator:
  Net loss......................................    $(13,759)    $   (21,233)  $   (22,347)
  Accretion of mandatorily redeemable
     convertible preferred stock................        (196)           (191)         (148)
                                                    --------     -----------   -----------
          Net loss applicable to common
            stockholders........................    $(13,955)    $   (21,424)      (22,495)
                                                    ========     ===========
  Effect of pro forma conversion of securities:
  Accretion of mandatorily redeemable
     convertible preferred stock................                                       148
                                                                               -----------
  Pro forma net loss applicable to common
     stockholders (unaudited)...................                               $   (22,347)
                                                                               ===========
Denominator:
  Weighted-average shares outstanding...........     738,318       2,443,769     7,572,389
                                                    ========     ===========
Dilutive effect of pro forma securities:
  Preferred stock -- Series A...................                                 2,472,494
  Preferred stock -- Series B...................                                 2,650,715
  Preferred stock -- Series C...................                                   288,854
  Preferred stock -- Series D...................                                 1,010,989
  Preferred stock -- Series E...................                                 2,289,496
  Preferred stock -- Series F...................                                   889,318
                                                                               -----------
Pro forma weighted average shares outstanding
  (unaudited)...................................                                17,174,255
                                                                               ===========
</TABLE>

STOCK OPTIONS

     The Company's stock option plans are 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 intangibles and the
allowances for doubtful accounts receivable and product warranty costs.

                                      F-10
<PAGE>   49
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133, which will be effective for the Company for fiscal years and quarters
beginning after June 15, 2000, requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. Management believes that the impact of
SFAS No. 133 will have no material impact on the Company's financial position,
results of operations and cash flows.

     In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the impact of
SAB 101 will have no material effect on the financial position or results of
operations of the Company.

RECLASSIFICATION

     Certain items in the December 28, 1997 and January 3, 1999 financial
statements have been reclassified to conform to the January 2, 2000
presentation.

 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>

     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

                                      F-11
<PAGE>   50
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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.

     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, except per share
amounts):

<TABLE>
<CAPTION>
                                                       DECEMBER 28,    JANUARY 3,
                                                           1997           1999
                                                       ------------    ----------
<S>                                                    <C>             <C>
Revenue..............................................    $ 22,783       $ 39,497
Net loss.............................................     (17,836)       (21,875)
Basic and diluted net loss per share.................      (24.42)         (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 periods 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
                                      F-12
<PAGE>   51
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

to this accelerated vesting. The Company also recorded cash expenses of $385,000
in connection with this sale. Revenue and net loss of the Colorado division were
$133,000 and $7,530,000, respectively, for the fiscal year ended December 28,
1997. 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. INVENTORY

     Inventory consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                         JANUARY 3,    JANUARY 2,
                                                            1999          2000
                                                         ----------    ----------
<S>                                                      <C>           <C>
Raw materials..........................................    $  606        $1,258
Finished goods.........................................     1,423         2,628
Less: Writedown to expected realizable value...........      (483)         (565)
                                                           ------        ------
                                                           $1,546        $3,321
                                                           ======        ======
</TABLE>

 5. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                         JANUARY 3,    JANUARY 2,
                                                            1999          2000
                                                         ----------    ----------
<S>                                                      <C>           <C>
Test equipment.........................................   $ 5,034       $ 5,814
Furniture and office and computer equipment............     3,414         3,956
Software...............................................     1,763         1,979
Leasehold improvements.................................       233           252
                                                          -------       -------
                                                           10,444        12,001
Less: accumulated depreciation and amortization........    (3,066)       (5,086)
                                                          -------       -------
                                                          $ 7,378       $ 6,915
                                                          =======       =======
</TABLE>

     Assets underlying capital leases included above are $7,408,000 and
$9,025,000 at January 3, 1999 and January 2, 2000, respectively, and accumulated
depreciation and amortization thereon aggregates $2,038,000 and $3,499,000 at
January 3, 1999 and January 2, 2000, respectively.

 6. GOODWILL AND INTANGIBLES

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

<TABLE>
<CAPTION>
                                                         JANUARY 3,    JANUARY 2,
                                                            1999          2000
                                                         ----------    ----------
<S>                                                      <C>           <C>
Goodwill...............................................   $ 4,917       $ 4,917
Developed technology...................................     3,344         3,344
Core technology........................................     2,183         2,183
Covenants not to compete...............................       166           166
Workforce..............................................       381           381
                                                          -------       -------
                                                           10,991        10,991
Less: accumulated amortization.........................    (3,156)       (4,897)
      impairment write-down............................    (2,256)       (2,256)
                                                          -------       -------
                                                          $ 5,579       $ 3,838
                                                          =======       =======
</TABLE>

                                      F-13
<PAGE>   52
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. ACCRUED LIABILITIES

     Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                              JANUARY 3,    JANUARY 2,
                                                                 1999          2000
                                                              ----------    ----------
<S>                                                           <C>           <C>
Accrued warranty costs......................................    $4,390        $2,949
Accrued payroll and related benefits........................     1,152         2,002
Accrued business taxes......................................       301           726
Accrued interest............................................       334            --
Accrued professional fees...................................       272           160
Accrued legal costs.........................................       600            --
Other.......................................................       806           769
                                                                ------        ------
                                                                $7,855        $6,606
                                                                ======        ======
</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. At January 3,
1999, no borrowings were outstanding under this facility. 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.

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

<TABLE>
<CAPTION>
                                                              JANUARY 3,    JANUARY 2,
                                                                 1999          2000
                                                              ----------    ----------
<S>                                                           <C>           <C>
Note payable, interest rate of 8.69%, due the earlier of
  March 31, 2000 or the occurrence of certain corporate
  events; collateralized by certain assets..................   $ 1,649       $    --
Note payable, interest rate of 9.86%, due September 30,
  2000; net of unamortized discount of $172.................     7,328            --
Note payable, interest rate of 6.15%, due in equal monthly
  installments through February 2001........................        --           712
Capital lease obligations, net of unamortized discount of
  $34 and $18, respectively.................................     5,443         5,588
                                                               -------       -------
                                                                14,420         6,300
Less: Current portion.......................................    (1,564)       (2,894)
                                                               -------       -------
                                                               $12,856       $ 3,406
                                                               =======       =======
</TABLE>

                                      F-14
<PAGE>   53
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     Maturities of long-term debt and capital leases at January 2, 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>
2000...............................................  $ 2,824      $ 657         $ 3,481
2001...............................................    2,403         55           2,458
2002...............................................    1,178         --           1,178
                                                     -------      -----         -------
          Total minimum payments...................    6,405        712           7,117
Less: Portion representing interest................     (799)        --            (799)
Less: Unamortized discount.........................      (18)        --             (18)
                                                     -------      -----         -------
Present value of long-term debt obligations........    5,588        712           6,300
Less: Current portion..............................   (2,237)      (657)         (2,894)
                                                     -------      -----         -------
Long-term debt, net of current portion.............  $ 3,351      $  55         $ 3,406
                                                     =======      =====         =======
</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.

     The following table summarizes the future minimum lease payments under all
noncancelable operating lease obligations at January 2, 2000 (in thousands):

<TABLE>
<CAPTION>
                        FISCAL YEAR
                        -----------
<S>                                                           <C>
2000........................................................  $  713
2001........................................................     658
2002........................................................     220
                                                              ------
                                                              $1,591
                                                              ======
</TABLE>

     Total rent expense was approximately $897,000, $1,235,000 and $1,191,000
during the years ended December 28, 1997, January 3, 1999 and January 2, 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 indemnitor. 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.

     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.

                                      F-15
<PAGE>   54
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 130,558 vested shares, the Company recognized compensation
expense of $251,000 for the excess of the initial stock subscription price over
the 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.

                                      F-16
<PAGE>   55
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     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, the Company has authorized
5,000,000 shares of preferred stock and has no preferred stock outstanding.

     As of January 3, 1999 convertible preferred stock consisted of the
following (in thousands, except share amounts):

<TABLE>
<CAPTION>
                                                              JANUARY 3,
                                                                 1999
                                                              ----------
<S>                                                           <C>
Series A, $.001 par value, $1.25 liquidation value;
  5,785,573 shares authorized, 4,891,239 shares issued and
  outstanding...............................................     $ 4
Series B, $.001 par value, $1.75 liquidation value;
  5,243,806 shares authorized, 5,243,806 shares issued and
  outstanding...............................................       5
Series C, $.001 par value, $1.75 liquidation value; 747,143
  shares authorized, 571,429 and issued and outstanding.....       1
Series D, $.001 par value, $4.00 liquidation value;
  2,000,000 shares authorized, 2,000,000 shares issued and
  outstanding...............................................       2
Series F, $.001 par value, $4.00 liquidation value;
  1,760,000 shares authorized, 1,759,303 shares issued and
  outstanding...............................................       2
                                                                 ---
                                                                 $14
                                                                 ===
</TABLE>

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.

     Under both plans, 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.
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 January 2, 2000, 174,990 and 753,882 options were available for grant
under the 1995 Plan and 1999 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

                                      F-17
<PAGE>   56
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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.

     The following table summarizes stock option activity for the three fiscal
years in the period ended January 2, 2000:

<TABLE>
<CAPTION>
                                                                  WEIGHTED-    WEIGHTED-
                                                                   AVERAGE      AVERAGE
                                                                  EXERCISE       FAIR
                                                      SHARES        PRICE        VALUE
                                                    ----------    ---------    ---------
<S>                                                 <C>           <C>          <C>
Outstanding at December 29, 1996..................   2,548,067     $ 0.30
  Granted.........................................   1,358,950     $ 1.98        $0.57
  Exercised.......................................    (634,100)    $ 0.26
  Canceled........................................    (712,564)    $ 0.35
                                                    ----------
Outstanding at December 28, 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 more than the fair value of
       the stock at the date of grant.............     606,242     $10.99        $0.67
  Exercised.......................................  (2,097,227)    $ 2.85
  Canceled........................................    (766,221)    $ 2.87
                                                    ----------
Outstanding at January 2, 2000....................   2,927,707     $ 5.84
                                                    ==========
Options exercisable at:
  December 28, 1997...............................     516,301     $ 0.36
  January 3, 1999.................................     645,947     $ 1.61
  January 2, 2000.................................     682,338     $ 2.05
</TABLE>

     Options granted in the years ended December 28, 1997 and January 3, 1999
were granted with strike prices equal to the fair market value of the stock.

                                      F-18
<PAGE>   57
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     The following summarizes information about stock options outstanding and
exercisable at January 2, 2000:

<TABLE>
<CAPTION>
                     OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
  ---------------------------------------------------------   ---------------------
                                     WEIGHTED-AVERAGE
                                ---------------------------               WEIGHTED-
                                   REMAINING                               AVERAGE
     RANGE OF       NUMBER OF   CONTRACTUAL LIFE   EXERCISE   NUMBER OF   EXERCISE
  EXERCISE PRICES    SHARES        (IN YEARS)       PRICE      SHARES       PRICE
  ---------------   ---------   ----------------   --------   ---------   ---------
  <S>               <C>         <C>                <C>        <C>         <C>
  $ 0.11 - $ 0.30     277,314         7.32          $ 0.17     203,290     $ 0.19
  $ 0.45 - $ 0.98     333,307         7.66          $ 0.84     199,701     $ 0.84
  $ 3.08 - $ 4.35     914,157         8.79          $ 3.22     196,884     $ 3.42
  $ 4.59 - $ 9.00     596,811         9.40          $ 8.10      77,629     $ 6.05
  $ 9.75 - $21.00     792,118         9.70          $10.71       4,834     $11.00
  $33.88 - $38.50      14,000         9.86          $37.11          --     $   --
                    ---------                                  -------
  $ 0.11 - $38.50   2,927,707         8.90          $ 5.84     682,338     $ 2.05
                    =========                                  =======
</TABLE>

     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 deemed 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, and is being amortized over the vesting period of the options, generally
four years. Amortization of deferred compensation costs of $4,228,000 was
recorded in the fiscal year ended January 2, 2000. Additionally, during the
fiscal years ended December 28, 1997, January 3, 1999 and January 2, 2000, the
Company recorded $39,000, $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 recorded using the
Black-Scholes valuation model.

     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>
                                                       DECEMBER 28,   JANUARY 3,   JANUARY 2,
                                                           1997          1999         2000
                                                       ------------   ----------   ----------
<S>                                                    <C>            <C>          <C>
Net loss
  As reported........................................    $(13,759)     $(21,233)    $(22,347)
  Pro forma..........................................    $(13,837)     $(21,487)    $(23,523)

Basic and diluted net loss per share
  As reported........................................    $ (18.90)     $  (8.77)    $  (2.97)
  Pro forma..........................................    $ (19.01)     $  (8.87)    $  (3.11)
</TABLE>

     The pro forma information has been determined as if the Company had
accounted for its stock options under the minimum value method for all periods
prior to the Company becoming a public entity

                                      F-19
<PAGE>   58
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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>
                                                                          PERIOD FROM
                                                                -------------------------------
                                    FISCAL YEAR ENDED             JANUARY 4,       OCTOBER 1,
                              ------------------------------       1999 TO           1999 TO
                              DECEMBER 28,      JANUARY 3,      SEPTEMBER 30,      JANUARY 2,
                                  1997             1999              1999             2000
                              -------------    -------------    --------------    -------------
<S>                           <C>              <C>              <C>               <C>
Expected term...............     5 years          5 years          5 years           4 years
Risk-free interest rate.....  5.71% - 6.75%    4.22% - 5.64%    4.66% - 5.62%     5.42% - 5.93%
Dividend yield..............       0%               0%                0%               0%
Volatility..................       0%               0%                0%               80%
</TABLE>

     The December 14, 1998 option-repricing event is considered a modification
of an existing option. For determination of the pro forma amounts, this
modification is treated as if a new option had been issued and any additional
incremental value recorded in the year of repricing is immediately recognized
for vested options and amortized 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 have an exercise price of $1.25 per share and expire on October 6,
2000. 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 expire on
October 16, 2001. As of January 3, 1999, 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 expires on July 6, 2000.

     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 are exercisable through the earlier of (i) October 6, 2000 or (ii) the
effective date of a merger of the Company or sale of substantially all of the
Company's assets. 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.

     During December 1998, the Company issued warrants to purchase shares of
Series E preferred stock with an exercise price of $8.25. These warrants are
exercisable at any time after issuance for a period of five years. These
warrants 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 the term of the lease line. 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.

                                      F-20
<PAGE>   59
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     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.

     Warrants outstanding as of January 2, 2000 are summarized below:

<TABLE>
<CAPTION>
NUMBER OF SHARES        EXERCISE PRICE                   EXPIRATION DATE
----------------        --------------                   ---------------
<C>                     <C>                   <S>
     60,000                 $5.25             October 6, 2004
     16,667                  8.43             October 6, 2000
     46,174                  8.45             October 16, 2001
    150,000                 11.00             September 30, 2002
     11,111                 12.38             December 18, 2003
     77,660                 15.00             November 25, 2003 to March 31, 2004
    -------
    361,612
    =======
</TABLE>

     The following summarizes stock warrant activity:

<TABLE>
<S>                                                           <C>
Outstanding at December 28, 1997............................   733,589
Warrants issued.............................................    77,778
                                                              --------
Outstanding at January 3, 1999..............................   811,367
Warrants issued.............................................   160,993
Warrants canceled...........................................   (51,488)
Warrants exercised..........................................  (559,260)
                                                              --------
Outstanding at January 2, 2000..............................   361,612
                                                              ========
</TABLE>

15. INCOME TAXES

     At January 2, 2000, the Company has net operating loss carryforwards of
approximately $51,475,000, which may be used to offset future taxable income.
These carryforwards expire beginning in 2010 through 2019. 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.

                                      F-21
<PAGE>   60
                               VIXEL CORPORATION

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

     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>
                                                    DECEMBER 28,    JANUARY 3,    JANUARY 2,
                                                        1997           1999          2000
                                                    ------------    ----------    ----------
<S>                                                 <C>             <C>           <C>
Tax at statutory rate.............................    $(4,678)       $(7,219)      $(7,598)
Nondeductible items...............................         57          2,236           243
Effect of state taxes.............................       (688)          (734)       (1,119)
Change in tax credits.............................        (50)          (990)         (918)
Change in valuation allowance.....................      5,466          6,718         9,646
Other.............................................       (107)           (11)         (254)
                                                      -------        -------       -------
                                                      $    --        $    --       $    --
                                                      =======        =======       =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                              JANUARY 3,    JANUARY 2,
                                                                 1999          2000
                                                              ----------    ----------
<S>                                                           <C>           <C>
Net operating loss carryforward.............................   $ 12,144      $ 20,075
Goodwill and intangibles....................................      2,263         2,397
Credit carryforwards........................................      1,340         2,258
Accrued warranty costs......................................      1,712         1,150
Amortization of deferred compensation.......................         --         1,704
Other accruals..............................................      1,213           510
Other.......................................................        508           732
                                                               --------      --------
Gross deferred tax assets...................................     19,180        28,826
Less: Valuation allowance...................................    (19,180)      (28,826)
                                                               --------      --------
Net deferred tax asset......................................   $     --      $     --
                                                               ========      ========
</TABLE>

     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 $252,000, $398,000 and $447,000 to
the plan in fiscal years ended December 28, 1997, January 3, 1999 and January 2,
2000, respectively.

                                      F-22
<PAGE>   61

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
     NUMBER                             DESCRIPTION
    -------                             -----------
    <S>         <C>
     3.1(1)     Amended and Restated Certificate of Incorporation of
                Registrant (Exhibit 3.2)
     3.2(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
    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)     Secured Promissory Note between Registrant and Western
                Digital Corporation dated March 29, 1996, as amended March
                30, 1999
    10.4(1)     Master Lease Agreement between Registrant and Transamerica
                Business Credit Corporation dated May 23, 1997
    10.5(1)     Master Lease Agreement between Registrant and Comdisco, Inc.
                dated January 18, 1996, together with addendum dated January
                18, 1996
    10.6(1)     Term Loan and Security Agreement with Greyrock Capital, a
                division of Nations Credit Corporation, with Registrant
                dated November 26, 1997, as amended October 2, 1998
    10.7(1)     Turnkey Manufacturing Agreement with K*TEC Electronics, a
                division of Kent Electronics Company, dated May 5, 1997
    10.8(1)     Employment Agreement between Registrant and Jay R. O'Donald
                dated February 17, 1998
    10.9(1)     Employment Agreement between Registrant and Stuart B. Berman
                dated February 17, 1998
    10.10(1)    Employment Agreement between Registrant and Gregory R.
                Olbright dated November 30, 1998
    10.11(1)    Employment Agreement between Registrant and Stanley Reese
                dated December 29, 1998
    10.12(1)    Employment Agreement between Registrant and James McCluney
                dated April 26, 1999
    10.13(1)    Restricted Stock Purchase Agreement between Registrant and
                James M. McCluney dated April 26, 1999
    10.14(1)    Restricted Stock Purchase Agreement between Registrant and
                Gregory R. Olbright dated April 30, 1999
    10.15(1)    Restricted Stock Purchase Agreement between Registrant and
                Kurtis L. Adams dated May 20, 1999
    10.16(1)    Full Recourse Promissory Note between Registrant and Stuart
                B. Berman dated April 16, 1999
    10.17(1)    Form of Full Recourse Promissory Note between Registrant and
                its executive officers
    10.18(1)    Form of Full Recourse Promissory Note between Registrant and
                its directors
    10.19(1)    Lease Agreement between Registrant and Sun Life Assurance
                Company of Canada (U.S.) dated December 5, 1996, as amended
                January 22, 1997
    10.20(1)    Lease Agreement between Arcxel Technologies, Inc. and Aetna
                Life Insurance Company, dated November 1, 1997, assigned to
                Registrant August 24, 1998
</TABLE>
<PAGE>   62

<TABLE>
<CAPTION>
    EXHIBIT
     NUMBER                             DESCRIPTION
    -------                             -----------
    <S>         <C>
    10.21(1)    Amendment to Term Loan and Security Agreement with Greyrock
                Capital, dated June 21, 1999
    10.22(1)    Vixel Corporation 1999 Employee Stock Purchase Plan and
                forms of agreements thereunder
    10.23(1)    Vixel Corporation 1999 Equity Incentive Plan and forms of
                agreements thereunder
    10.24(1)    Form of Stock Pledge Agreement between the Registrant and
                its directors
    10.25(1)    Warrant, dated November 25, 1998, issued to Greyrock Capital
                (Exhibit 4.9)
    10.26(1)    Warrant, dated December 18, 1998, issued to Comdisco, Inc.
                (Exhibit 4.10)
    10.27(1)    Warrant, dated March 30, 1999, issued to Western Digital
                Corp. (Exhibit 4.11)
    10.28(1)    Warrant, dated August 30, 1999, issued to Sun Microsystems,
                Inc. (Exhibit 4.12)
    23.1        Consent of PricewaterhouseCoopers LLP, Independent
                Accountants
    24.1        Power of Attorney. Reference is made to the signature page
    27.1        Financial Data Schedule
</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.