<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             ----------------------

                                    FORM 10-Q

                             ----------------------

 (Mark One)

        [X]     Quarterly Report Pursuant to Section 13 or 15(d) of the
                Securities Exchange Act of 1934

                   For the quarterly period ended July 2, 2000

                                       OR

        [ ]     Transition Report Pursuant to Section 13 or 15(d) of the
                Securities Exchange Act of 1934

                          Commission File No. 000-27221

                             ----------------------

                                VIXEL CORPORATION
             (Exact name of registrant as specified in its charter)


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


                         11911 North Creek Parkway South
                            Bothell, Washington 98011
                                 (425) 806-5509

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


        Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed 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 [ ]

        The number of shares outstanding of the Registrant's common stock,
$.0015 par value, as of August 11, 2000 was 23,675,720.


<PAGE>   2

                                VIXEL CORPORATION

                INDEX TO FORM 10-Q FOR QUARTER ENDED JULY 2, 2000

<TABLE>
<CAPTION>
                                                                                                   Page
                                                                                                   ----
<S>                                                                                                <C>
Part I.  FINANCIAL INFORMATION

     Item 1.  Financial Statements

         Condensed Balance Sheet as of July 2, 2000 (unaudited) and January 2, 2000..........       3

         Condensed Statement of Operations for the three month and six month periods
         ended July 2, 2000 (unaudited) and July 4, 1999 (unaudited).........................       4

         Condensed Statement of Cash Flows for the six month periods ended
         July 2, 2000 (unaudited) and July 4, 1999 (unaudited)...............................       5

         Notes to Condensed Financial Statements.............................................       6

     Item 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations..................................................       7

     Item 3.  Quantitative and Qualitative Disclosures About Market Risk.....................      20

Part II.  OTHER INFORMATION

     Item 2.  Changes in Securities and Use of Proceeds......................................      21

     Item 4.  Submission of Matters to a Vote of Security Holders............................      21

     Item 6.  Exhibits and Reports on Form 8-K...............................................      21

Signature....................................................................................      22
</TABLE>



                                       2
<PAGE>   3

                          PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                   July 2,        January 2,
                                                                    2000             2000
                                                                  ---------       ---------
                                                                 (unaudited)

<S>                                                              <C>              <C>
Assets
     Current assets:
        Cash and cash equivalents                                 $  44,581       $  16,706
        Short-term investments                                        7,788          44,650
        Accounts receivable, net of allowance for doubtful
           accounts of $321 and $250, respectively                    6,049           5,344
        Inventories                                                   1,748           3,321
        Prepaid expenses and other current assets                     2,493           2,779
                                                                  ---------       ---------
              Total current assets                                   62,659          72,800

     Property and equipment, net                                      7,695           6,915
     Goodwill and other intangibles, net                              2,759           3,838
     Other assets                                                       511             528
                                                                  ---------       ---------
              Total assets                                        $  73,624       $  84,081
                                                                  =========       =========

Liabilities and stockholders' equity
     Current liabilities:
        Current portion of long-term debt and capital leases      $   3,064       $   2,894
        Accounts payable                                              3,511           4,480
        Accrued liabilities                                           8,318           6,606
                                                                  ---------       ---------
              Total current liabilities                              14,893          13,980

     Long-term debt and capital leases                                2,468           3,406
     Other long-term liabilities                                         --           1,000
                                                                  ---------       ---------

              Total liabilities                                      17,361          18,386
                                                                  ---------       ---------

     Commitments and contingencies
     Stockholders' equity:
        Common stock, $.0015 par value;  60,000,000 shares
           authorized; 23,653,974 (unaudited) and 23,213,588
           shares issued and outstanding, respectively                   35              35
        Additional paid-in capital                                  156,045         155,070
        Deferred compensation                                        (3,364)         (5,525)
        Notes receivable from stockholders                           (5,222)         (5,246)
        Treasury stock, at cost; 66,666 shares                          (50)            (50)
        Accumulated deficit                                         (91,181)        (78,589)
                                                                  ---------       ---------
              Total stockholders' equity                             56,263          65,695
                                                                  ---------       ---------

              Total liabilities and stockholders' equity          $  73,624       $  84,081
                                                                  =========       =========
</TABLE>


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



                                       3
<PAGE>   4

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

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED             SIX MONTHS ENDED
                                                 -----------------------       -----------------------
                                                  July 2,        July 4,        July 2,        July 4,
                                                   2000           1999           2000           1999
                                                 --------       --------       --------       --------
<S>                                              <C>            <C>            <C>            <C>
Revenue:
      SAN systems                                $  6,988       $  6,500       $ 12,886       $ 10,806
      Components                                      793          5,037          2,672         11,253
                                                 --------       --------       --------       --------
          Total revenue                             7,781         11,537         15,558         22,059
Cost of revenue                                     5,284          8,144         10,839         15,673
                                                 --------       --------       --------       --------

Gross profit                                        2,497          3,393          4,719          6,386
                                                 --------       --------       --------       --------

Operating expenses:
      Research and development                      3,845          3,132          7,289          6,233
      Selling, general and administrative           4,531          3,619          8,637          6,664
      Amortization of goodwill
          and intangibles                             540            340          1,079            680
      Amortization of deferred compensation           647          1,671          1,815          1,783
                                                 --------       --------       --------       --------
          Total operating expenses                  9,563          8,762         18,820         15,360
                                                 --------       --------       --------       --------

Loss from operations                               (7,066)        (5,369)       (14,101)        (8,974)
      Other income (expense), net                     741           (439)         1,509           (882)
                                                 --------       --------       --------       --------
Net loss                                         $ (6,325)      $ (5,808)      $(12,592)      $ (9,856)
                                                 ========       ========       ========       ========

Net loss available to common stockholders        $ (6,325)      $ (5,857)      $(12,592)      $ (9,954)
                                                 ========       ========       ========       ========

Basic and diluted net loss per share             $  (0.28)      $  (1.42)      $  (0.56)      $  (2.83)
                                                 ========       ========       ========       ========

Weighted-average shares outstanding                22,663          4,124         22,383          3,518
                                                 ========       ========       ========       ========
</TABLE>


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



                                       4
<PAGE>   5

                                VIXEL CORPORATION
                        CONDENSED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                           SIX MONTHS ENDED
                                                                       -----------------------
                                                                        July 2,        July 4,
                                                                         2000           1999
                                                                       --------       --------
<S>                                                                    <C>            <C>
Cash flows from operating activities
     Net loss                                                          $(12,592)      $ (9,856)
     Adjustments to reconcile net loss to net cash used in
        operating activities
        Depreciation                                                      1,517          1,161
        Amortization of goodwill and intangibles                          1,079            952
        Amortization of debt discount                                        --            115
        Amortization of deferred compensation                             1,815          1,847
        Amortization of debt issuance costs                                   8             10
        Loss on disposal of property and equipment                           --              7
        Changes in:
           Accounts receivable, net                                        (705)          (731)
           Inventories                                                    1,573            865
           Prepaid expenses and other assets                                303         (1,388)
           Accounts payable and accrued liabilities                        (258)         1,701
                                                                       --------       --------
              Net cash used in operating activities                      (7,260)        (5,317)
                                                                       --------       --------

Cash flows from investing activities
     Purchase of short-term investments                                 (12,117)           (73)
     Sale of short-term investments                                      48,979             --
     Purchase of property and equipment                                  (1,599)          (372)
                                                                       --------       --------

              Net cash provided by (used in) investing activities        35,263           (445)
                                                                       --------       --------

Cash flows from financing activities
     Proceeds from line of credit, net                                       --          2,825
     Receipt of payment on stockholder note receivable                       24             --
     Principal payments on long-term debt and capital leases             (1,473)          (411)
     Proceeds from exercise of stock options                              1,321            102
                                                                       --------       --------

              Net cash (used in) provided by financing activities          (128)         2,516
                                                                       --------       --------

Net increase (decrease) in cash and cash equivalents                     27,875         (3,246)
Cash and cash equivalents, beginning of period                           16,706          3,841
                                                                       --------       --------
Cash and cash equivalents, end of period                               $ 44,581       $    595
                                                                       ========       ========

Cash paid for interest                                                 $    455       $  1,049
Equipment purchased under capital leases                               $    698       $    662
Issuance of detachable stock warrants                                  $     --       $      9
Accretion of mandatorily redeemable stock                              $     --       $     98
</TABLE>

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



                                       5
<PAGE>   6

                                VIXEL CORPORATION

                     Notes to Condensed Financial Statements
                 (Information for the three and six months ended
                         July 2, 2000 and July 4, 1999)
                                   (Unaudited)


NOTE 1. BASIS OF PRESENTATION

        The accompanying unaudited condensed financial statements as of July 2,
2000 and for the three and six month periods ended July 2, 2000 and July 4, 1999
are unaudited; however, in the opinion of management, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. Certain
information and note disclosures normally included in financial statements,
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Results of operations for the three and six month periods
ended July 2, 2000 are not necessarily indicative of future financial results.

        Investors should read these interim statements in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto for the fiscal year
ended January 2, 2000 (audited) included in our Annual Report on Form 10-K, as
amended, originally filed with the Securities and Exchange Commission on March
31, 2000.


NOTE 2. INVENTORIES

        Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                     July 2,     January 2,
                                      2000          2000
                                    -------       -------
<S>                                 <C>          <C>
Raw materials                       $ 1,553       $ 1,258
Finished goods                        1,137         2,628
Less:  write-down to
     expected realizable value         (942)         (565)
                                    -------       -------
                                    $ 1,748       $ 3,321
                                    =======       =======
</TABLE>

NOTE 3.  NET LOSS PER SHARE

        Basic net loss per share represents the net loss available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period. 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 and convertible preferred stock. Common stock options and warrants
are converted using the treasury stock method. Basic and diluted net loss per
share are equal for the periods presented as potentially dilutive securities are
anti-dilutive. The effect of potentially dilutive securities totaling 4,467,479
and 17,943,853 shares for the three and six months ended July 2, 2000 and July
4, 1999, respectively, were excluded from diluted net loss per share due to
their anti-dilutive effect.



                                       6
<PAGE>   7

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

<TABLE>
<CAPTION>
                                           Three Months Ended            Six Months Ended
                                        -----------------------       -----------------------
                                         July 2,        July 4,        July 2,        July 4,
                                          2000           1999           2000           1999
                                        --------       --------       --------       --------
<S>                                     <C>            <C>            <C>            <C>
Numerator:
      Net loss                          $ (6,325)      $ (5,808)      $(12,592)      $ (9,856)
      Accretion of mandatorily
          redeemable convertible
          preferred stock                     --            (49)            --            (98)
                                        --------       --------       --------       --------

      Net loss available to common
          stockholders                  $ (6,325)      $ (5,857)      $(12,592)      $ (9,954)
                                        ========       ========       ========       ========

Denominator:
      Weighted-average shares
          outstanding                     22,663          4,124         22,383          3,518
                                        ========       ========       ========       ========
</TABLE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

        The following discussion should be read in conjunction with the
condensed financial statements in Item 1 of this Quarterly Report and with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K, as amended, originally
filed with the Securities and Exchange Commission on March 31, 2000.

        This document contains forward-looking statements that involve risk and
uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" 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. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under 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.

        References to dollar amounts are in thousands unless otherwise
specified.

                                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, switches, hubs and transceivers, is fully
interoperable and designed to perform in concert to address a wide variety of
data and storage needs.

        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



                                       7
<PAGE>   8

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 customers. Compaq
Computer, Sun Microsystems and Bell Microproducts represented 22.6%, 21.2% and
11.6% of revenue, respectively for the three months ended July 2, 2000. Sun
Microsystems, Compaq Computer and Interphase represented 29.5%, 23.6% and 11.3%
of revenue, respectively for the three months ended July 4, 1999. No other
individual customer represented more than 10.0% of our total revenue in those
periods. During the three months ended July 2, 2000 and July 4, 1999, 21.3% and
3.9%, respectively, of our total revenue was derived from sales to distribution
channel customers. We plan to continue to expand our sales channels to include
systems integrators, value added resellers, or 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 agreements with
our North American distributors provide 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 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
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.



                                       8
<PAGE>   9

                              RESULTS OF OPERATIONS

        The following table sets forth the percentage of total revenue
represented by selected items from the unaudited Condensed Statement of
Operations. This table should be read in conjunction with the unaudited
Condensed Financial Statements included elsewhere herein.

<TABLE>
<CAPTION>
                                                 THREE MONTHS ENDED         SIX MONTHS ENDED
                                                --------------------      --------------------
                                                July 2,      July 4,      July 2,      July 4,
                                                 2000         1999         2000         1999
                                                -------      -------      -------      -------
<S>                                             <C>          <C>          <C>          <C>
Revenue:
      SAN systems                                 89.8%        56.3%        82.8%        49.0%
      Components                                  10.2         43.7         17.2         51.0
                                                 -----        -----        -----        -----
          Total revenue                          100.0        100.0        100.0        100.0
Cost of revenue                                   67.9         70.6         69.7         71.1
                                                 -----        -----        -----        -----

Gross profit                                      32.1         29.4         30.3         28.9
                                                 -----        -----        -----        -----

Operating expenses:
      Research and development                    49.4         27.1         46.9         28.3
      Selling, general and administrative         58.2         31.4         55.5         30.2
      Amortization of goodwill
          and intangibles                          7.0          2.9          6.9          3.0
      Amortization of deferred compensation        8.3         14.5         11.7          8.1
                                                 -----        -----        -----        -----
          Total operating expenses               122.9         75.9        121.0         69.6
                                                 -----        -----        -----        -----

Loss from operations                             (90.8)       (46.5)       (90.7)       (40.7)
      Other income (expense), net                  9.5         (3.8)         9.7         (4.0)
                                                 -----        -----        -----        -----
Net loss                                         (81.3)%      (50.3)%      (81.0)%      (44.7)%
                                                 =====        =====        =====        =====
</TABLE>

THREE MONTHS ENDED JULY 2, 2000 COMPARED WITH THREE MONTHS ENDED JULY 4, 1999

        Revenue. Total revenue was $7,781 and $11,537 for the three months ended
July 2, 2000 and July 4, 1999, respectively. Our SAN systems revenue was $6,988
and $6,500 for the three months ended July 2, 2000 and July 4, 1999,
respectively. The 7.5% increase in SAN systems revenue in the second quarter
2000 compared with second quarter 1999 was the result of increased sales of our
switch products.

        Component revenue was $793 and $5,037 for the three months ended July 2,
2000 and July 4, 1999, respectively. Performance issues with our CD based
transceiver products sold primarily in 1997 were identified in late 1998 and
early 1999 and, we believe is the primary reason for the 84.3% decrease in
sales of our transceiver products in the second quarter of 2000 compared
with the second quarter of 1999. For a more complete discussion of the
performance problems with our transceivers, see "Factors that may Affect Results
of Operations and Financial condition - A component in our transceivers has
experienced an abnormally high failure rate, which has adversely affected and
could in the future affect our sales." We anticipate that our component revenue
will continue to decrease in the future as a result of our decision to focus our
resources on the development, sales and marketing of our SAN systems 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, customer order
fulfillment, and provisions for warranty expenses and inventory obsolescence.
Gross profit was $2,497 and $3,393 for the three months ended July 2, 2000 and
July 4, 1999, respectively, representing 32.1% and 29.4% of total revenue,
respectively. The decrease in gross profit dollars reflects the decrease in
component revenue in 2000 compared with 1999. Gross profit as a percentage of
revenue increased as a higher percentage of our revenue in 2000 resulted from
SAN systems products, which generally have higher gross margins than component
products.



                                       9
<PAGE>   10

        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 $3,845, or 49.4% of total revenue, in the
three months ended July 2, 2000 compared with $3,132, or 27.1% of total revenue
in the three months ended July 4, 1999. The $713, or 22.8% increase in expenses
during the three months ended July 2, 2000 was primarily attributable to
increased personnel, outside services and costs for prototype and test units and
other expenses related to the design, development, testing and enhancement of
our products. We believe that continued investment in research and development
is an essential element of our strategic objectives to design quality products
while reducing costs. As a result, we expect these expenses to increase in the
future.

        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, provision for
doubtful accounts receivable, trade shows and other marketing activities.
Selling, general and administrative expenses were $4,531, or 58.2% of total
revenue, in the three months ended July 2, 2000 compared with $3,619, or 31.4%
of total revenue in the three months ended July 4, 1999. The $912, or 25.2%
increase in expenses during the three months ended July 2, 2000 was primarily
attributable to additional personnel and related salaries and expenses in sales,
customer services, marketing and administration, as well as increased expenses
related to marketing activities.

        Amortization of goodwill and intangibles. Amortization of goodwill and
intangibles for the three months ended July 2, 2000 and July 4, 1999 were $540
and $340, respectively, representing 7.0% and 2.9%, respectively, of total
revenue. This increase is the result of an increase in the amortization of the
intangible assets capitalized in conjunction with our purchase of Arcxel
Technologies in February 1998.

        Amortization of deferred compensation. In connection with the grant of
certain stock options, we recorded deferred compensation of $9,753 during fiscal
1999. Deferred compensation is presented as a reduction of stockholders' equity
and amortized using an accelerated vesting method over the vesting period of the
options, which is generally four years. We amortized deferred compensation of
$647 and $1,671 for the three months ended July 2, 2000 and July 4, 1999,
respectively, representing 8.3% and 14.5%, respectively, of total revenue.

        Other income (expense), net. Other income (expense), net consists of
interest income, interest expense and other miscellaneous income or expense.
Other income, net was $741 for the three months ended July 2, 2000, which
consisted primarily of interest income and represented 9.5% of total revenue.
Other expense, net of $439 for the three months ended July 4, 1999 represented
3.8% of total revenue and consisted primarily of interest expense on notes
payable and capital lease obligations.


    SIX MONTHS ENDED JULY 2, 2000 COMPARED WITH SIX MONTHS ENDED JULY 4, 1999

        Revenue. Total revenue for the six months ended July 2, 2000 was
$15,558, a decrease of $6,501, compared with $22,059 in the six months ended
July 4, 1999. SAN systems revenue for the six months ended July 2, 2000 was
$12,886, an increase of $2,080 compared with $10,806 for the six months ended
July 4, 1999. The 19.2% increase in SAN systems revenue in the six months ended
July 2, 2000 compared with the prior year comparable period was the result of
increased sales of our switch and managed hub products.

        Component revenue for the six months ended July 2, 2000 was $2,672, a
decrease of $8,581, compared with $11,253 for the six months ended July 4, 1999.
Performance issues with our CD based transceiver products sold primarily in 1997
were identified in late 1998 and early 1999, and we believe is the primary
reason for the 76.3% decrease in sales of our transceiver products in the
first six months of 2000 compared with the first six months of 1999. For a more
complete discussion of the performance problems with our transceivers, see
"Factors that may Affect Results of Operations and Financial condition - A
component in our transceivers has experienced an abnormally high failure rate,
which has adversely affected and could in the future affect our sales." We
anticipate that our component revenue will continue to decrease in the future as
a result of our decision to focus our resources on the development, sales and
marketing of our SAN systems products.



                                       10
<PAGE>   11

        Gross profit. Gross profit in the six months ended July 2, 2000 was
$4,719, a decrease of $1,667, compared with $6,386 for the six months ended July
4, 1999. Gross profit as a percentage of sales was 30.3% in the six months ended
July 2, 2000 compared to 28.9% in the six months ended July 4, 1999. The
decrease in gross profit dollars reflects the decrease in component revenue in
2000 as compared with 1999. Gross profit as a percentage of revenue increased as
a higher percentage of our revenue in 2000 resulted from SAN systems products,
which generally have higher gross margins than component products.

        Research and development expenses. Research and development expenses
were $7,289, or 46.9% of total revenue, in the six months ended July 2, 2000
compared with $6,233, or 28.3% of total revenue in the six months ended July 4,
1999. The $1,056, or 16.9% increase in expenses during the six months ended July
2, 2000 was primarily attributable to increased personnel, outside services and
costs for prototype and test units and other expenses related to the design,
development, testing and enhancement of our products.

        Selling, general and administrative expenses. Selling, general and
administrative expenses were $8,637, or 55.5% of total revenue, in the six
months ended July 2, 2000 compared with $6,664, or 30.2% of total revenue in the
six months ended July 4, 1999. The $1,973, or 29.6% increase in expenses during
the six months ended July 2, 2000 was primarily attributable to additional
personnel and related salaries and expenses in sales, customer services,
marketing and administration, as well as increased expenses related to marketing
activities.

        Amortization of goodwill and intangibles. Amortization of goodwill and
intangibles for the six months ended July 2, 2000 and July 4, 1999 were $1,079
and $680, respectively, representing 6.9% and 3.0%, respectively, of total
revenue. This increase is the result of an increase in the amortization of the
intangible assets capitalized in conjunction with our purchase of Arcxel
Technologies in February 1998.

        Amortization of deferred compensation. In connection with the grant of
certain stock options we recorded deferred compensation of $9,753 during fiscal
1999. Deferred compensation is presented as a reduction of stockholders' equity
and amortized using an accelerated vesting method over the vesting period of the
options, which is generally four years. We amortized deferred compensation of
$1,815 and $1,783 for the six months ended July 2, 2000 and July 4, 1999,
respectively, representing 11.7% and 8.1%, respectively, of total revenue.

        Other income (expense), net. Other income, net was $1,509 for the six
months ended July 2, 2000, which consisted primarily of interest income and
represented 9.7% of total revenue. Other expense, net of $882 for the six months
ended July 4, 1999 represented 4.0% of total revenue and consisted primarily of
interest expense on notes payable and capital lease obligations.

                         LIQUIDITY AND CAPITAL RESOURCES

        Our principal sources of liquidity at July 2, 2000 consisted of $44.6
million in cash and cash equivalents, and $7.8 million in short-term
investments.

        Since inception, we have financed our operations primarily through the
sale of common stock and preferred stock with aggregate proceeds of
approximately $113.8 million. Additionally, we have financed our operations
through capital equipment lease lines, working capital credit facilities, notes
payable and $6.9 million in net cash received from the sale of our laser diode
fabrication facility and gigabit Ethernet product line in 1998.

        Cash utilized by operating activities was $7.3 million in the six months
ended July 2, 2000, and $5.3 million in the six months ended July 4, 1999. The
cash utilized in each of these periods was due to net losses, as well as working
capital required to fund our operations. Cash flows from investing activities
consisted of short-term investment transactions and capital expenditures of
$1,598 in the six months ended July 2, 2000 and $372 in the six months ended
July 4, 1999.

        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



                                       11
<PAGE>   12

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 introductions of new products, and
market acceptance of our products. We cannot assure you that additional equity
or debt financing, if required, will be available on acceptable terms or at all.

                        RECENT ACCOUNTING PRONOUNCEMENTS

        In June 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, as amended, 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
SFAS No. 133 will not have a material impact on the Company's financial
position, results of operations or 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, provides guidance for disclosures related
to revenue recognition policies and will be effective for our quarter ending
December 31, 2000. Management is currently assessing the impact of SAB 101.

      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 July 2, 2000, we had an accumulated deficit of $91.2
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 original
             equipment manufacturers, or 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;

        -    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.



                                       12
<PAGE>   13

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 stopped purchasing our transceiver products and we have
seen our component revenue decrease from $5.0 million for the three months ended
July 4, 1999 to $0.8 million for the three months ended July 2, 2000. We
anticipate that component revenue will continue to decrease in the future as we
have decided to focus our resources on our SAN systems products. In addition, if
we are unable to resolve these warranty issues 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 in part on revenue projections derived from our OEMs'
forecasts. Because most of our expenses are fixed in the short term or incurred
in advance of anticipated revenue, we may not be able to decrease our expenses
in a timely manner to offset any unexpected shortfall in revenue. These order
habits cause our backlog to fluctuate significantly. Moreover, our backlog is
not necessarily indicative of actual sales for any succeeding period, as orders
are subject to cancellation or delay by our OEMs with limited or no penalty.
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. Compaq Computer, Sun Microsystems, and
Bell Microproducts represented 22.6%, 21.2%, and 11.6% of our total revenue,
respectively, for the three months ended July 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 customers.

        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 product lines. If we were to lose
one or more OEMs or resellers to a competitor, our business, results of
operations and financial condition could be significantly harmed.



                                       13
<PAGE>   14

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.

WE EXPECT THAT A GROWING PERCENTAGE OF OUR FUTURE REVENUE WILL BE DERIVED FROM
OUR SWITCH AND MANAGED HUB PRODUCTS AND OUR SAN MANAGEMENT SOFTWARE 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 software 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.

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

        We currently derive a significant portion of our revenue from sales of
our entry-level hubs and transceivers. Although we anticipate our transceiver
revenue will continue to decline, we expect that revenue from our entry level
hubs and transceivers will continue to account for a substantial portion of our
total revenue for the foreseeable future. If the market does not continue to
accept our entry-level hubs and transceivers, our revenue will decline
significantly. 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.

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



                                       14
<PAGE>   15

of market share, any of which would have a material adverse effect on our
business, results of operations and financial condition.

        For switch sales, we compete primarily with QLogic Corporation, Brocade
Communications and McDATA. For hub sales, we compete primarily with Emulex
Corporation and Gadzoox Networks. For transceiver sales, we compete primarily
with 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 switch or hub products, but not across multiple
interconnect devices, including 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.

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



                                       15
<PAGE>   16

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 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. 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.

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

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

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



                                       16
<PAGE>   17

        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 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. 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 AND INTEGRATE 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. The loss of services of any of our key
personnel could have a negative impact on our business. Many of our employees
have only recently joined us. If we



                                       17
<PAGE>   18

are unable to integrate new employees in a timely and cost-effective manner, our
operating results may suffer. We also need to increase the number of technical
staff members with experience in high-speed networking applications 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
customers 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.

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

        Our revenue from international sales represented 33.2% of our total
revenue for the three months ended July 2, 2000 and 19.6% for the three months
ended July 4, 1999. 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. 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.



                                       18
<PAGE>   19

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.

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. 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 or reduction in their purchases of our
             products;

        -    changes in financial estimates by securities analysts;

        -    changes in market valuations of other technology companies;



                                       19
<PAGE>   20

        -    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.

        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.

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

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

ITEM 3. QUALITATIVE AND QUANTITATIVE 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 July 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.



                                       20
<PAGE>   21

                           PART II - OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

        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 July 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, $2.0 million was used to repay capital
lease obligations, $1.7 million was used to purchase property and equipment and
$12.0 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.

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

        The Company's Annual Meeting of Stockholders was held on May 24, 2000 in
Bellevue, Washington. Of the 23,357,643 shares outstanding as of the record
date, 12,956,153 were present or represented by proxy at the meeting. The
results of the voting on the matters submitted to the stockholders are as
follows:

        1.      To elect one (1) class one director to serve until the 2003
                Annual Meeting of Stockholders and until a successor is duly
                elected and qualified.

<TABLE>
<CAPTION>
                   Name                 For                Withheld
                   ----                 ---                --------
<S>                                 <C>                    <C>
                Kevin A. Fong       12,826,502              129,651
</TABLE>

        2.      Appointment of PricewaterhouseCoopers LLP as independent
                auditors of the Company for its fiscal year ending December 31,
                2000.

                Votes for:             12,930,327
                Votes against:              6,196
                Votes abstaining:          19,630

        Directors continuing in office until the 2001 Annual Meeting were
Messrs. Charles A. Haggerty and Werner F. Wolfen. Directors continuing in office
until the 2002 Annual Meeting were Messrs. James M. McCluney and Timothy M.
Spicer.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)     Exhibits:

<TABLE>
<CAPTION>

   Exhibit
    Number        Description
   --------       -----------
   <S>            <C>

   3.1(1)         Amended and Restated Certificate of Incorporation (Exhibit 3.2)

   3.2(1)         Bylaws (Exhibit 3.4)

   4.1(1)         Form of Registrant's Common Stock Certificate

  10.1(2)         2000 Non-Officer Equity Incentive Plan (Exhibit 99.1)

  27.1            Financial Data Schedule
  ---------
</TABLE>

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

(2)     Incorporated by reference to designated exhibit to Company's
        Registration Statement on Form S-8 (SEC File No. 333-39000) filed on
        June 9, 2000.

(b)     Reports on Form 8-K:

        The Company filed no reports on Form 8-K during the reporting period.



                                       21
<PAGE>   22

                                   SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated:  August 16, 2000                 VIXEL CORPORATION
                                       (Registrant)


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



                                       22
<PAGE>   23

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

   Exhibit
    Number        Description
   --------       -----------
 <S>              <C>

   3.1(1)         Amended and Restated Certificate of Incorporation (Exhibit 3.2)

   3.2(1)         Bylaws (Exhibit 3.4)

   4.1(1)         Form of Registrant's Common Stock Certificate

  10.1(2)         2000 Non-Officer Equity Incentive Plan (Exhibit 99.1)

  27.1            Financial Data Schedule
  ---------
</TABLE>

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

(2)     Incorporated by reference to designated exhibit to Company's
        Registration Statement on Form S-8 (SEC File No. 333-39000) filed on
        June 9, 2000.